U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
Check the appropriate box:
[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required]
For the fiscal year ended June 30, 2000.
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
[No Fee Required]
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
(802) 985-3001
(Address of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.05 per share NASDAQ Smallcap Market
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, per value $.05 per share
(Title of class)
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 .
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year ended June 30, 2000 were
$33,332,475
The aggregate market value of the voting stock held by non-affiliates of the
issuer, based on the average high and low prices of such stock on September 13,
2000, as reported on NASDAQ, was $13,698,148.
As of September 13, 2000, there were 6,780,996 shares of the issuer's common
stock issued and 6,757,976 shares outstanding.
Documents Incorporated By Reference
The following documents, in whole or in part, are specifically incorporated by
reference in the indicated part of this Annual Report on Form 10-KSB:
Proxy Statement for 2000 Annual Meeting of the issuer's stockholders: Part III,
Items 9, 10, 11 and 12. Transitional Small Business Disclosure Format (check
one): Yes ; No X .
<PAGE>
The Vermont Teddy Bear Co., Inc.
2000 Form 10-KSB Annual Report
Table of Contents
Part I Page
Item 1. Description of Business 3
Item 2. Description of Property 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security
Holders 12
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters 12
Item 6. Management's Discussion and Analysis or Plan
of Operation 15
Item 7. Financial Statements 20
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 20
Part III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section 16(a)
of the Exchange Act 20
Item 10. Executive Compensation 20
Item 11. Security Ownership of Certain Beneficial Owners
and Management 20
Item 12. Certain Relationships and Related Transactions 21
Item 13. Exhibits and Reports on Form 8-K 21
Signatures 28
Index to Financial Statements 28
Part I.
Item 1. Description of Business
Founded in 1981 and incorporated in 1984, The Vermont Teddy Bear Co., Inc.
(the "Company"), with its principal offices located at 6655 Shelburne Road,
Shelburne, Vermont, is a designer, manufacturer, and direct marketer of teddy
bears and related products.
Principal Business Segments and Distribution Methods
In accordance with new accounting rules adopted for the fiscal year ended
June 30, 2000, the Company has identified the following segments within its
business on which it will separately report certain financial results. The
largest of the Company's business segments is the Bear-Gram gift delivery
service comprising 85.3 percent of the Company's net revenue for the fiscal year
ended June 30, 2000. The Company's retail store operations represented 8.4
percent of net revenues, and wholesale, corporate affinity, and licensing
programs together were 6.3 of net revenues for the fiscal year ended June 30,
2000.
Primary Business Segments
(12 months ended June 30)
2000 1999 1998 1997 1996
Bear-Gram Service* 85.3% 84.0% 81.2% 80.9% 83.0%
Retail Store Operations 8.4% 11.2% 18.0% 17.7% 12.9%
Wholesale/Corporate 6.3% 4.8% 0.8% 1.4% 4.1%
* Excludes Bear-Gram revenues from retail operations.
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. Through this service the Company offers teddy bears
in a variety of sizes and colors, as well as approximately 100 different teddy
bear outfits to further customize the teddy bear. Every Bear-Gram gift includes
a customized teddy bear made in its Shelburne, Vermont factory, which can be
further personalized with embroidery on the outfit, a candy treat, and a
personal message on a card all delivered in a colorful box with an "airhole".
Orders for the Bear-Gram delivery service are generally placed by calling a
toll-free telephone number (1-800-829-BEAR) and speaking with Company sales
representatives, called Bear Counselors. An increasing number of orders,
however, are being placed by customers online at the Company's website with
forty-one percent of total orders in the Bear-Gram gift delivery service segment
placed on line during the month of June 2000, versus twenty-five percent in June
1999. Orders placed by 4:00 p.m. can be shipped the same day; packages are
delivered primarily via Federal Express and other carriers by next-day air, two
day air or United States Postal Service Priority Mail.
The Company's Bear-Gram segment sales are heavily seasonal, with
Valentine's Day, Mother's Day and Christmas as the Company's largest sales
seasons.
The Company uses primarily the direct response radio distribution channel
supported visually by the internet to market its Bear-Gram gift delivery
service. Every radio advertisement is now tagged with the Company's website
address in addition to its toll free telephone number. The combination of direct
response radio and the internet represent 90.2 percent of net revenues in the
Bear-Gram segment for the fiscal year ended June 30, 2000. Other avenues of
distribution for marketing the Bear-Gram delivery service are direct mail
catalogs and print advertisements primarily in magazines which together
represent 9.8 percent of net revenues for the same twelve-month period.
Primary Distribution Methods for the Bear-Gram Segment
(12 months ended June 30)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Radio/Internet 90.2% 87.6% 88.7% 86.5% 91.3%
Direct Mail/Print 9.8% 12.4% 11.3% 13.5% 8.7%
The Bear-Gram delivery service was first introduced on a small scale in
1985. Throughout the 1980's, however, the Company's marketing efforts focused
primarily on wholesaling teddy bears to specialty stores and direct retail
through its own outlets. Shortly before Valentine's Day in 1990, the Company
introduced radio advertising of its Bear-Gram delivery service on radio station
WHTZ ("Z-100") in New York City, positioning it as a novel gift for Valentine's
Day, and offering listeners a toll-free number for customers to order from the
Company's facility in Vermont. This test proved to be successful, and the
service was expanded to other major radio markets across the country. Primarily
through the Bear-Gram delivery service, the Company has increased its net
revenues from approximately $351,000 in 1989 (the year prior to the initial New
York City Bear-Gram campaign) to a peak of $33,332,000 in 2000.
Since 1990, the Company has expanded the radio advertising of its Bear-Gram
delivery service beyond New York City, to include other metropolitan areas and
syndicated radio programs carried by stations across the United States, with
significant expansion occurring in the past two years. During its fiscal year
ended June 30, 2000, the Company regularly placed advertising on 314 radio
stations in eighty radio market areas in the United States. For Valentine's Day
in fiscal years ended June 30, 1999 and 2000, the Company advertised on
approximately 253 radio stations in 49 different markets, and 513 radio stations
in 119 different markets, respectively.
The Company began taking orders on its website in March of 1997 recognizing
that the website provided visual support to the Company's radio advertising
campaign across the country and a convenient way for customers to place orders.
In December 1997, online orders presented seven percent of total Bear-Gram
orders. The percentage has trended upward reaching forty-one percent of total
Bear-Gram orders in June 2000.
The Company includes sales from orders placed on its internet website, www.
vermontteddybear.com, with sales generated by direct response radio as it
believes that the majority of traffic to the website is generated by radio
advertising. All radio advertisements are tagged once with the website address
in addition to three mentions of its toll-free number. A total of 2,205,000
unique visitors were recorded during the twelve months ended June 30, 2000, up
183 percent from the 1,206,000 unique visitors received during the twelve months
ended June 30, 1999.
In the year ahead, the Company plans to expand its Bear-Gram radio
advertising into more new radio markets as well as to extend its advertising
campaigns within its developing markets to periods of the year additional to
Valentines' Day and Mother's Day. The goal continues to be to efficiently and
cost-effectively maximize the number of radio listeners reached with a message
that positions the Bear-Gram gift delivery service as a creative alternative to
flowers and other gifts which are typically sent by a sender to a receiver. The
website will continue to provide visual support to an increasing number of
potential customers hearing the Company's advertising.
The Company also generates Bear-Gram revenues from direct mail initiatives
and print advertising. The Company introduced its first catalog for Christmas of
1992, and has an in-house mailing list in excess of 1,200,000 names. During the
twelve months ended June 30, 2000, more than 20.8 million circulated pages were
mailed to prospective customers. The Company intends to increase the number of
circulated pages in the year ahead, primarily by mailing to the increasing names
on the in-house mailing list accumulated from orders placed both online and by
telephone primarily in response to radio advertising.
The retail operations business segment was second only to the Bear-Gram
delivery service segment in its contribution to the Company's net revenues in
the fiscal year ended June 30, 2000, at 8.4 percent of net revenues. The
contribution of all retail operations was 11.2% of net revenues for the fiscal
year ended June 30, 1999.
Due to continued unprofitability in the satellite stores, the Company began
to reverse its retail expansion strategy during its fiscal year ended June 30,
1998, closing its New York City store on December 7, 1997. The remaining
satellite stores were closed during the fiscal year ended June 30, 1999. The
Freeport, Maine store was closed in August 1998 and the North Conway, New
Hampshire store was closed in October 1998. The Company's very successful
factory retail store is the only retail location which remains in operation. The
Company actively promotes family tours of its teddy bear factory and store at
the factory location in Shelburne, located ten miles south of Burlington,
Vermont. The factory drew over 117,000 visitors in the twelve-month period
ended June 30, 2000, and has drawn more than 610,000 visitors since moving to
its new location in July 1995. In an effort to make a visit to the factory more
entertaining and draw additional traffic, the Company has implemented the Make
A-Friend-For-Life bear assembly area, where visitors can participate in the
creation of their own teddy bear.
The following table shows the Company's largest markets and most frequent
reasons given by customers for purchasing the Company's Bear-Gram gifts:
Percentage of Bear-Gram revenues
(12 months ended June 30)
2000 1999 1998 1997 1996
Markets
New York City 28.4% 37.6% 37.8% 40.8% 35.5%
Boston 11.0% 12.1% 13.4% 13.2% 9.5%
Philadelphia 8.7% 9.4% 8.9% 11.6% 8.9%
Chicago 6.8% 6.0% 6.5% 8.9% 7.3%
Detroit 6.2% 5.1% 4.0% 3.3% 0.0%
Los Angeles 4.4% 4.8% 6.3% 5.8% 4.0%
Percentage of Bear-Gram orders
(12 months ended June 30)
Reasons for Purchases
Valentine's Day 26.2% 25.2% 27.7% 22.1% 20.8%
Mother's Day 14.5% 12.7% 9.3% 6.0% 7.4%
Birthdays 11.1% 11.5% 11.8% 11.6% 13.4%
New Births 9.0% 10.4% 11.6% 10.3% 12.8%
Get Wells 9.6% 10.4% 11.0% 9.7% 12.0%
Christmas 7.0% 8.7% 8.4% 5.6% 8.6%
During its fiscal year 1998, the Company began pro-actively developing
opportunities in the corporate affinity market and certain wholesale markets as
a business segment. The Wholesale/Corporate business segment accounted for 6.3%
of net revenues for fiscal year ended June 30, 2000. While numerous corporate
affinity programs involve the Company's Vermont Teddy Bear brand bear,
manufactured at the Shelburne Vermont factory, the largest orders involve teddy
bear products which were designed by the Company and manufactured off shore. The
Company also sells wholesale its Make-A Friend for Life teddy bears designed and
imported by the Company to Zany Brainy, Inc., an educational toy store chain
based in King of Prussia, Pennsylvania. Zany Brainy's retail customers
participate in the making of their own teddy bear in the Make-A-Friend-for-Life
kiosks in select Zany Brainy locations. It is the Company's intention to
terminate this arrangement effective on or before November 30, 2000 due to Zany
Brainy's inability to achieve certain minimum purchases called for under an
agreement with the Company.
Each corporate and wholesale program varies to meet the needs of the
Company's corporate or wholesale customer but every teddy bear labeled by the
Company carries a lifetime guarantee. The Company has partnered with several
factories in China that meet the Company's stringent quality and fair labor
standards. All imported teddy bears are identified with a co-branded label and a
tag that reads "designed and imported by The Vermont Teddy Bear Company."
Recently, the Company has further adjusted its positioning relative to off-shore
products by identifying them as products of "VTBC Design, an import division of
The Vermont Teddy Bear Co."
Competitive Business Conditions
The Company competes with a number of sellers of flowers, balloons, candy,
cakes, and other gift items, which can be ordered by telephone for special
occasions and delivered by express service in a manner similar to Bear-Gram
gifts. The Company positions its Bear-Gram gifts as a "creative alternative" to
these products and competes with these products by providing convenient customer
service and reliable expedited delivery options. The Company also competes to a
lesser degree with a number of companies that sell teddy bears in the United
States, including, but not limited to, Steiff of Germany, Dakin, North American
Bear, and Gund. Many of these competitors have greater financial, sales, and
marketing resources than the Company.
The Company also competes with businesses that market and sell teddy bears
in a manner similar to Bear-Grams, including "Pooh-Grams" by certain
subsidiaries of Disney Enterprises, Inc. On May 16, 1997, the Company filed
suit against the Disney subsidiaries alleging that "Pooh-Grams" infringed on the
Company's marks and sought to enjoin the sale of "Pooh-Grams." On September 9,
1997, the two companies entered into an agreement to resolve their dispute,
whereby Disney will continue to offer its Pooh-Gram products and services but
will voluntarily limit its use of the Pooh-Gram mark in certain advertising.
With the advent of the Internet, many small companies have started web
sites that allow customers to order bears and have them delivered in a manner
similar to Bear-Gram gifts. The Company vigorously defends trademark
infringement when it appears on these web-sites, and continues to police the
Internet for such infringement.
There are no material barriers to entry into this market, and accordingly,
there can be no assurance that additional companies will not seek to compete
directly with the Company, including those with greater resources than the
Company.
Principal Products
From its inception, the Company's primary focus has been to design,
manufacture and market the best teddy bears made in America. Until recently, the
Company manufactured its bears exclusively in the United States. Beginning in
its fiscal year 1998, the Company began importing certain of its products from
China for its corporate and wholesale business segment. However, convinced that
its identity as an American manufacturer of teddy bears is a key element of its
brand positioning, the Company remains committed to preserving and growing its
Shelburne, Vermont based manufacturing operation to make the classic Vermont
Teddy Bear brand bear for the Bear-Gram gift delivery service. On November 1,
1999, the Company opened an additional manufacturing facility in Newport,
Vermont, which now employs 74 people in all aspects of teddy bear manufacturing.
The Company sources plush fabric and other materials from China and other
offshore suppliers for its Shelburne-based teddy bear manufacturing operations,
in an effort to lower the Company's cost of goods sold and to broaden its
available sources of supply. Previously the Company has relied on a single
domestic source of supply for plush fabric.
The move offshore represents a significant departure from the Company's
historical position as an American manufacturer using almost exclusively
American materials. The Company's strategic repositioning involves a commitment
to ensuring that our partners adhere to stringent quality standards and provide
decent, lawful working environments to their employees. The Company obtains a
written statement to that effect from each offshore vendor prior to any
transaction. Company management has visited the factories of its established
partners in China and will continue to visit its offshore partners periodically.
With this repositioning, the Company also commits to differentiate imported
product from its Vermont-made bears to preserve the Company's Vermont Teddy Bear
brand identity and to clearly label its imported products so as not to deceive
or confuse our customers. The "butt tag" of each imported teddy bear clearly
specifies that it is "made in China" and that it is "designed and imported by
The Vermont Teddy Bear Company."
The Company produces many different sizes of its Vermont Teddy Bear brand
bears, ranging from 11" to 36" tall, in six standard colors. In addition,
certain limited edition bears are produced of mohair which vary in size.
Virtually all of the Company's Vermont Teddy Bear brand bears have moveable
joints and faux-suede paw pads, features associated with traditional, high
quality teddy bears.
Approximately 100 different bear outfits are manufactured, including
ballerina bears, birthday bears, bride and groom bears, business bears, nurse
bears, and sports bears. Eight-one percent of the outfits were out-sourced to
overseas contractors during the twelve months ended June 30, 2000.
In addition to its own manufactured product, the Company sells items
related to teddy bears, as well as merchandise from other manufacturers
featuring the logo of The Vermont Teddy Bear Company available primarily in the
Company's factory retail store.
Sources and Availability of Materials, Supplies, and Production
Raw materials for the Company's bears and outfits are obtained from several
suppliers. The Company presently purchases certain of its raw materials from
single suppliers, but believes that alternate sources of supply are available at
competitive prices, should conditions warrant.
Fabric for all teddy bears is cut at the Company's Shelburne and Newport
factories prior to being sewn. Sewing of bear parts (arms, legs, bodies, and
heads) is done by employees in both locations, as well as by homeworkers and
other domestic subcontractors. Once individual parts are sewn, they are
returned to the factory for mechanical stuffing. The bears are assembled by
attaching the stuffed parts to the bears with plastic joints, hand-stuffing the
bodies, and hand-stitching the backs. Each bear is finally outfitted and
accessorized in Shelburne by the Company's Bear Dressers(tm) to meet customer
requests.
Patents, Trademarks, and Licenses
The Company's name and its various logos, are in combination registered
trademarks and servicemarks in the United States. In addition, the Company also
owns the registered trademarks in the United States for "The Vermont Teddy Bear
Company," "Make-A-Friend-For-Life," "Teddy Grams," "Racer Ted" and "BearAnimal."
The Company also owns the registered service marks "Bear-Gram", "Bear
Counselor," "Vermont Bear-Gram", "Teddy Bear-Gram," and has applications
pending to register "Coffee Cub," "The Great American Teddy Bear," "All-American
Teddy Bear," "Huffin' Puffin'," "Ted Ex," and "Teddy Express," "Love is in the
Bear," "Making the world a better place one bear at a time," "Nothing says you
care like a bear," "The creative alternative to flowers," "SendAMERICA," and
"SendVERMONT." The Company also owns the registered trademark "Vermont Teddy
Bear" in Japan.
The Company also claims copyright, service mark or trademark protection for
its teddy bear designs, its marketing slogans, and its advertising copy, web
site pages and promotional literature.
Employees
As of June 30, 2000, the Company employed 354 individuals, of whom 166 were
employed in production-related functions, 159 were employed in sales and
marketing positions, and 29 were employed in general and administrative
positions. As of June 30, 2000, 278 of the Company's employees were full time.
No employees are members of a union, and the Company believes it enjoys
favorable relations with all employees.
The Company supplements its regular in-house work force with homeworkers
who perform production functions at their homes. The level of outsourced work
fluctuates with Company production targets; at June 30, 2000, there were 14
homeworkers producing products for the Company. Homeworkers are treated by the
Company as independent contractors for all purposes, except for withholding of
federal employment taxes. As independent contractors, homeworkers are free to
accept or reject work offered by the Company. This working relationship allows
the Company to adapt to fluctuations in production requirements.
Item 2. Description of Property
In July 1995, to consolidate the Company's disparate locations and improve
manufacturing flow, the Company moved its principal offices, along with its
factory retail store, manufacturing, sales, and fulfillment operations to its
newly-constructed 62,000 square foot building, located on a 57-acre site along
U.S. Route 7 in Shelburne, Vermont. The new site is two miles south of the
Company's former location, and ten miles south of Burlington, Vermont. The
Company purchased the site for approximately $817,000, and the cost of improving
the site and constructing the new facility totaled approximately $7.1 million.
On September 26, 1995, the Company entered into a $3.5 million commercial loan
with the Vermont National Bank, secured by a first mortgage on the new facility,
as well as general business assets. Repayment of the mortgage loan was based on
a thirty-year fixed principal payment schedule, with a balloon payment due on
September 26, 1997.
On July 18, 1997, the Company completed a sale-leaseback transaction with
W.P. Carey, involving its factory headquarters and a portion of its property
located in Shelburne, Vermont. The Company entered into the sale-leaseback to
pay off a maturing mortgage, pay down a line of credit, and improve its
liquidity. This financing replaced the Company's mortgage loan 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 associated
with the sale-leaseback. The lease obligation, secured by the business assets
of the Company, is repayable on a twenty-year amortization schedule through July
2017.
On May 30, 1996 the Company entered into a five-year operating lease for a
retail location in North Conway, New Hampshire. On July 29, 1998 in accordance
with the provisions of its lease, the Company formally notified its landlord of
the North Conway, New Hampshire location of its intent to close its retail
store, and as a result, had no further lease obligation effective February 1,
1999.
On January 17, 1997, the Company entered into a ten-year operating lease
for a retail location in Freeport, Maine. The Company reached an agreement on
June 12, 1998 with The Town of Freeport to terminate its lease obligation for
its retail location in Freeport, Maine. The Company closed the Freeport store in
August 1998, and its lease obligation terminated on August 6, 1998.
On September 29, 1999 the Company entered into a one year lease with four
one year renewal options for a new manufacturing facility in Newport, Vermont
for 12,000 square feet. Annual lease payments are $42,000. On November 1,
1999, the Company began operation of the facility with 25 skilled sewers
stitching teddy bear parts. As of June 12, 2000 there were 69 full time
employees in the Newport facility manufacturing complete teddy bears, from
cutting to stitching, to stuffing, pinning and assembly, and back sealing. The
bears are then shipped back to the Shelburne plant for order fulfillment.
On November 30, 1999 the Company entered into an eight month lease for
20,000 square feet of warehouse space in Williston, Vermont. Lease payments
over the term of the lease total $70,000. This lease replaced a lease for
10,000 square feet of off-site warehouse space in Shelburne, Vermont.
On August 3, 1999 the Company entered into a twelve month lease for 4,000
square feet of warehouse space in Shelburne, Vermont. Lease payments over the
term of the lease total $28,000.
On July 19, 2000, to consolidate remote warehouse locations, the Company
entered into a ten year lease with three five year renewal options for a new
60,400 square foot warehouse and fulfillment center in Shelburne, Vermont. This
facility is on property that is contiguous to the property on which the
Company's factory headquarters are located. Annual lease payments are $393,000.
The lease begins on September 1, 2000 and will replace the lease for 20,000
square feet of off-site space in Williston, Vermont and the lease for 4,000
square feet in Shelburne, Vermont.
Item 3. Legal Proceedings
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 disputes the landlord's position and believes it is not obligated 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 seeks 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, the lease, itself. That motion
was denied by order entered April 12, 2000. The parties have unsuccessfully
attempted to resolve their disputes and after engaging in document discovery,
the Company has moved for summary judgement on its claims and dismissing the
landlord's claims. That motion has been fully briefed and will be argued on
October 10, 2000. The parties are conducting depositions during the month of
September. 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 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.
On July 15, 1998, the Company filed a lawsuit against Tyco Industries,
Inc., entitled The Vermont Teddy Bear Co., Inc. vs. Tyco Industries, Inc., in
the United States District Court for the Northern District of New York, alleging
that Tyco failed to make minimum royalty payments totaling $300,000 as required
by its contract with the Company dated September 11, 1995. Tyco denied liability
for the minimum royalties in its answer to the Company's complaint and filed a
counter claim for unspecified relief. The Company has denied any liability on
the counter claim and is vigorously pursuing this claim to collect amounts due,
however no assurances can be made that the amounts will be received from Tyco.
The Company recorded $125,000 as a receivable in 1997 for the second installment
of royalties owed which is included in other assets as of June 30, 1999 in the
accompanying financial statements. At that time, the Company had no notice or
knowledge that payment of the royalty was disputed by Tyco. After notice of a
dispute, the Company did not record any further receivables. On June 14, 2000 a
settlement was reached for $225,000. The Company will recognize a gain in the
first quarter of fiscal year 2001 when the cash settlement was received.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
At the time of the initial public offering of 1,172,500 shares of the
Company's Common Stock in November 1993, the Company's Common Stock had been
approved for quotation on NASDAQ and the Pacific Stock Exchange under the
symbols "BEAR" and "VTB," respectively. To date, NASDAQ has been the principal
market for the exchange of the freely tradable shares of the Company's Common
Stock. On July 31, 1996, the Company voluntarily de-listed from the Pacific
Stock Exchange as a result of minimal trading volume. Between July 1, 1997 and
June 30, 2000, the high and low closing bid and closing sales prices for a share
of the Company's Common Stock as quoted on NASDAQ were as follows:
Quarter Ended High Bid Low Bid High Sales Low Sales
------------- -------- ------- ---------- ---------
June 30, 2000 $3.75 $2.50 $3.75 $2.56
March 31, 2000 $4.75 $3.00 $4.81 $3.13
December 31, 1999 $5.09 $3.75 $5.22 $3.69
September 30, 1999 $4.88 $3.13 $5.00 $3.25
June 30, 1999 $3.97 $1.88 $3.97 $1.94
March 31, 1999 $3.81 $1.50 $3.81 $1.44
December 31, 1998 $3.25 $0.50 $3.25 $ .50
September 30, 1998 $1.28 $0.75 $1.44 $ .69
June 30, 1998 $1.53 $1.13 $1.56 $1.13
March 31, 1998 $1.50 $0.88 $1.56 $ .88
December 31, 1997 $2.00 $0.88 $2.13 $ .88
September 30, 1997 $2.06 $1.06 $2.13 $1.13
Description of Securities
Immediately prior to the Company's initial public offering, there were
4,000,000 shares of the Company's Common Stock outstanding, held of record by
nine shareholders. As a result of the 1,000,000 share initial public offering
and the Underwriters' purchase of 172,500 additional shares to cover over
allotments in connection therewith, there were 5,172,500 shares of the Company's
Common Stock outstanding immediately following the offering. On March 8, 1995,
the Company purchased 12,000 common shares in the open market and continues to
hold these shares as treasury stock. On November 4, 1998, the company purchased
11,020 additional common shares from dissenting shareholders and continues to
hold these shares as treasury stock. From March 1, 1996 to June 30, 2000,
438,546 shares of the Company's Common Stock were issued pursuant to the
exercise of employee Incentive Stock Options. On February 3, 1999, 10 holders
of Series B Preferred Stock exercised conversion rights of 176,970 preferred
shares into 474,989 shares of common stock. On July 19, 1999, the remaining
27,942 shares of Series B Preferred Convertible Stock were converted into 74,996
shares of the Company's Common Stock. On July 29, 1999, 215,157 warrants
associated with the Series B Preferred Stock were exercised and converted into
519,715 shares of the Company's Common Stock. On December 20, 1999 warrants
associated with a loan from Green Mountain Capital were exercised and converted
into 100,000 shares of the Company's Common Stock. As a result of these
activities, there were 6,757,726 shares of the Company's Common Stock
outstanding, held of record by 1622 shareholders as of June 30, 2000.
There are 90 shares of non-voting Series A Preferred Stock, held of record
by one shareholder, with a liquidation value of $10,000 per share plus
cumulative dividends of eight percent per annum. There has been no change in
the number of Series A Preferred shares and the original shareholder remains the
sole shareholder of Series A Preferred Stock.
On July 12, 1996, the Company privately placed $550,000 of Series B
convertible Preferred Stock. The 204,912 shares, $.05 par value, of Series B
Convertible Preferred Stock were issued to twelve individuals. Series B
stockholders are not entitled to any dividends or voting rights, but each share
was originally convertible into one share of the Company's Common Stock at any
time on or after July 14, 1997, subject to certain anti-dilution rights. As the
result of subsequent financing transactions, the anti-dilution provisions of the
Series B agreement were activated, and on February 3, 1999, 176,970 shares of
Series B Convertible Preferred Stock was converted into 474,989 shares of the
Company's Common Stock. On July 19, 1999, the remaining 27,942 shares of Series
B Preferred Convertible Stock were converted into 74,996 shares of the Company's
Common Stock.
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 aggregate
value of $272,449 was applied as a discount to the face value of the Series C
Preferred Stock on the Company's balance sheet. The Company will accrete this
discount, with charges to retained earnings over a five-year period.
Each of the 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. For the fiscal year ended June 30, 2000 $60,000 of dividends
were accrued and for the fiscal year June 30 ,1999 $24,000 of dividends were
accrued. 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.
Dividends
The Company has never paid cash dividends on any shares of its Common
Stock, and the Company's Board of Directors intends to continue this policy for
the foreseeable future. Earnings, if any, will be used to finance the
development and expansion of the Company's business. The Company's ability to
pay dividends on its Common Stock is limited by the preferences of certain
classes of Preferred Stock, as well as certain indebtedness, and may be further
limited by the terms of Preferred Stock issued or other indebtedness incurred by
the Company in the future. Future dividend policy will depend upon the
Company's earnings, capital requirements, financial condition and other factors
considered relevant by the Company's Board of Directors.
The Series A Preferred Stock is entitled to receive cumulative dividends of
eight percent per annum, which are payable before any dividend may be paid upon,
or set apart for, the Common Stock outstanding. The Series B Preferred Stock
was not entitled to receive dividends. The Series C Preferred Stock is entitled
to a six percent dividend, to be paid in additional shares of Series C Preferred
Stock for the first two and one-half years and thereafter either in cash or
Series C Preferred Stock, at the Company's discretion.
Item 6. Management's Discussion and Analysis or Plan of Operation
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, as well as the 10-KSB filing for the fiscal
year ending June 30, 1999. 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
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 Fiscal Year 2000 and Fiscal Year 1999
Net revenues for the fiscal year ended June 30, 2000 totaled $33,332,000,
an increase of $11,748,000 from net revenues of $21,584,000 for the fiscal year
ended June 30, 1999. By business segment, Bear-Gram gift delivery service
revenues, which include radio, internet, and direct mail revenues, increased
$10,291,000 attributable to increased sales from the expansion of the Company's
direct response radio advertising campaign in to new markets around the country
and www.vermontteddybear.com web-site. Net revenues from retail store operations
increased by $406,000. Increases in net revenue at the Shelburne, Vermont
factory retail location of $607,000 more than offset revenues of $201,000 lost
due to the closing of the Company's satellite retail store location in North
Conway, New Hampshire and Freeport, Maine, which were in operation during a
portion of the fiscal year ended June 30, 1999. Net revenues from the
Wholesale/Corporate segment, which includes licensing revenues, increased
$1,051,000 as the Company added several new customers in the wholesale and
corporate affinity markets.
Gross margin increased by $7,865,000 to $21,016,000 for the fiscal year
ended June 30, 2000, from $13,151,000 for the fiscal year ended June 30, 1999.
As a percentage of net revenues, gross margin increased to 63.1 percent for the
fiscal year ended June 30, 2000, from 60.9 percent for the fiscal year ended
June 30, 1999. The increase in gross margin percent resulted primarily from the
increased revenues and higher margins in the Bear-Gram, Retail, and
Corporate/Wholesale segments as the company introduced products with higher unit
margins, and lower costs associated with imported teddy bear outfits.
Selling expenses increased to $12,759,000, or 38.3 percent of net revenues,
for the fiscal year ended June 30, 2000, from $7,647,000, or 35.4 percent of net
revenues, for the comparable period ending June 30, 1999. This $5,112,000
increase was attributable to an increase in Bear-Gram advertising costs, which
includes radio, catalog, Internet and print costs of $3,747,000, increases to
call center and customer service costs of $1,159,000 associated with higher
volume, increases to the design and selling costs associated with the company's
expanded wholesale/corporate business segment of $137,000, and increases to
retail operations costs of $69,000.
General and administrative expenses were $3,966,000 for the fiscal year
ended June 30, 2000, compared to $3,083,000 for the twelve-month period ended
June 30, 1999. As a percentage of net revenues, general and administrative
expenses were 11.9 percent for the fiscal year ended June 30, 2000, compared to
14.3 percent for the fiscal year ended June 30, 1999. This increase to general
and administrative costs was primarily due to officer and employee bonus
accruals of $290,000, increased order processing fees from higher net revenues
of $273,000, increased Information Technology support costs of $175,000,
increased accounting and finance consulting fees of $52,000, and increased
building/maintenance costs of $94,000 due to increased utilization of the
Company's Shelburne facility and the start up of its Newport, Vermont
manufacturing facility.
Interest expense decreased to $553,000 for fiscal year ended June 30, 2000,
compared to $614,000 for the comparable period ending June 30, 1999. Interest
income increased to $206,000 as a result of larger average cash balances in the
fiscal year ended June 30, 2000, compared to $72,000 for fiscal year ended June
30, 1999.
The company has recorded a tax provision of approximately $125,000 for
current income taxes after utilizing substantially all of the remainder of its
net operating loss carryforward (NOL).
As a result of the foregoing factors, the net income to Common Stockholders
for the fiscal year ended June 30, 2000 was $3,683,000, compared to a net income
to Common Stockholders of $1,711,000 for the twelve months ended June 30, 1999.
Liquidity and Capital Resources
As of June 30, 2000, the Company's cash position increased to $8,738,000,
from $5,342,000 at June 30, 1999. Of the $8,738,000, $366,000 is classified as
restricted cash; there was $363,000 of restricted cash at June 30, 1999. The
largest component of the restricted cash is $302,000 restricted by a debt
service reserve, which was required as part of the Company's loan agreement with
the Chittenden Bank (formerly Vermont National Bank) and was required to be
maintained as part of the Company's sale-leaseback transaction. Cash increases
provided by net income, an increase to accounts payable and accrued expenses,
and issuances of common stock more than offset increases in inventory, equipment
purchases, and payment on long term debt. Inventories increased as a result of
quantities of materials and teddy bear outfits and accessories from overseas to
maintain sufficient inventory levels associated with increased net revenues.
The increase in payment of long-term debt is attributed to the early retirement
of debt owed to Green Mountain Capital. On November 5, 1999 the loan together
with all other remaining indebtedness to Green Mountain Capital in the amount of
$259,000 was paid in full.
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 value of
$272,449 was applied as a discount to the face value of the Series C Preferred
Stock on the Company's balance sheet. The Company will accrete this discount,
with charges to retained earnings over a five year period.
The following table shows the shares and dollar amounts of changes to the Series
C Preferred Stock Account:
Share Amount
Balance Series C, Preferred Stock
as of June 30, 1999 62.4 $ 387,879
Add: Series C Preferred Stock Dividend 3.6 36,000
Add: Accretion of Discount Related to
Warrant Issuance 54,492
--------
Balance Series C, Preferred Stock
as of June 30, 2000 66.0 $478,371
Each of the 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. As of June 30, 2000, $60,000 of dividends were accrued and
for the fiscal year June 30, 1999 $24,000 of dividends were accrued. 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 or about July 3, 1999, 215,157 warrants associated with the Series B
Preferred Stock were exercised and converted into 519,715 shares of the
Company's Common Stock. The Company received $524,164 in consideration for
these shares and $493,508 was classified as advances from Series B Stockholders
in the Company's balance sheet for the year ending June 30, 1999 and is
classified as equity in common stock in the year ending June 30, 2000.
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.
Contingencies
On January 13, 2000 the Company along with Zany Brainy, Inc. and in
cooperation with the Consumer Product Safety Commission voluntarily recalled
15,500 miniature skateboard key chains attached to Z.Z. Jamboarder teddy bears
which were designed and imported by the Company exclusively for Zany Brainy. The
Company determined after shipping that the skateboards' wheels can come off,
posing a choking hazard to young children. The Company is aware of two reports
of wheels coming off these skateboards, but no injuries have been reported.
Zany Brainy sold the teddy bears with key chains nationwide through their
stores, website and catalog from November 1999 through December 1999.
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, after the Company terminated the lease on
written notice to the landlord, 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 disputes the landlord's position and believes it is not obligated 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 seeks 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, the lease, itself. That motion
was denied by order entered April 12, 2000. The parties have unsuccessfully
attempted to resolve their disputes and after engaging in document discovery,
the Company has moved for summary judgement on its claims and dismissing the
landlord's claims. That motion has been fully briefed and will be argued on
October 10, 2000. The parties are conducting depositions during the month of
September. 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 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.
On July 15, 1998, the Company filed a lawsuit against Tyco Industries,
Inc., entitled The Vermont Teddy Bear Co., Inc. vs. Tyco Industries, Inc., in
the United States District Court for the Northern District of New York, alleging
that Tyco failed to make minimum royalty payments totaling $300,000 as required
by its contract with the Company dated September 11, 1995. Tyco denied liability
for the minimum royalties in its answer to the Company's complaint and filed a
counter claim for unspecified relief. The Company has denied any liability on
the counter claim and is vigorously pursuing this claim to collect amounts due,
however no assurances can be made that the amounts will be received from Tyco.
On January 10, 2000, motions for summary judgement by the Company and Tyco were
denied and the case will be scheduled for a trial of disputed factual issues.
No trial date is set. The Company recorded $125,000 as a receivable in 1997 for
the second installment of royalties owed which is included in other assets as of
March 31, 2000 in the accompanying financial statements. At that time, the
Company had no notice or knowledge that payment of the royalty was disputed by
Tyco. After notice of a dispute, the Company did not record any further
receivables. On June 14, 2000 a settlement was reached for $225,000. The
Company will recognize a gain in the first quarter of fiscal year 2001 when the
cash settlement was received.
Year 2000 Disclosure
The Company has been addressing computer software modifications or
replacements to enable transactions to process properly in the year 2000. Key
financial, information processing and operating systems, including accounting,
point of sale, phone, manufacturing, shipping and facilities systems were
updated to year 2000 compliance in the fiscal year ended June 30, 1999.
Virtually all of these modifications or replacements were made in order for
the Company to handle increased order volume in addition to enabling
transactions to process properly in the year 2000. Therefore, the cost of
changes directly related to addressing year 2000 compliance, were not
significant to the financial statements.
The company experienced no adverse effects from the year 2000 change,
however no assurance can be given with respect to any potential adverse effects
on the Company of any failure by other parties due to future year 2000 related
problems.
Item 7. Financial Statements
The list of financial statements set forth under the caption "Index to
Financial Statements" on page 28 below is incorporated herein by reference.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
Not applicable.
Part III.
Item 9. Directors, Executive Officers, Promoters and Control
Persons;Compliance With Section 16(a) of the Exchange Act
Information concerning the directors and executive officers of the Company,
their terms of office, the periods during which they have served, their personal
business experiences is included in the Company's definitive Proxy Statement for
its 2000 Annual Meeting and is specifically incorporated herein by reference.
Item 10. Executive Compensation
Information regarding compensation of the Company's directors and officers
is included in the Company's definitive Proxy Statement for its 2000 Annual
Meeting and is specifically incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Information with respect to the beneficial ownership of the outstanding
shares of the Company's Common Stock by (i) all persons owning of record, or
beneficially to the knowledge of the Company, more than five percent of the
outstanding shares, (ii) each director and executive officer of the Company
individually, and (iii) all directors and officers of the Company as a group, is
included in the Company's definitive Proxy Statement for its 2000 Annual Meeting
and is specifically incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information regarding certain relationships and transactions between the
Company and its directors, director-nominees, executive officers, and the family
members of these individuals is included in the Company's definitive Proxy
Statement for its 2000 Annual Meeting and is specifically incorporated herein by
reference.
Item 13. Exhibits and Reports on Form 8-K
Exhibits
3.3 Restated Certificate of Incorporation of the Company (filed with the
Securities and Exchange Commission as exhibit 3.3 to the Company's 1996 Annual
Report on Form 10-KSB (File No. 33-69898) and incorporated herein by reference).
3.4 Amended and Restated By-Laws of the Company (filed with the Securities
and Exchange Commission as exhibit 3.4 to the Company's 10-QSB for the quarter
ended December 31, 1996 and incorporated herein by reference).
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).
4.2 Form of Common Stock Certificate (filed with the Securities and Exchange
Commission as exhibit 4.2 to the Company's Registration Statement on Form SB-2
(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 1998 Annual Report 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.)
4.9 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).
4.10 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).
10.11 Securities Purchase Agreement, dated June 10, 1987 between the Company and
VTB Investment Group and Joan Hixon Martin (filed with the Securities and
Exchange Commission as exhibit 10.11 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).
10.13 Employment Agreement and Loan Arrangement, dated July 31, 1995, between
the Company and R. Patrick Burns providing the terms of Mr. Burns' employment
with the Company as Chief Executive Officer (filed with the Securities and
Exchange Commission as exhibit 10.13 to the Company's 10-KSB for the transition
period ended June 30, 1995 and incorporated herein by reference).
10.14 Employment Agreement, dated November 1, 1993, between the Company and
Spencer C. Putnam (filed with the Securities and Exchange Commission as exhibit
10.14 to the Company's Registration Statement on Form SB-2 (File No.33-69898)
and incorporated herein by reference).
10.17 Commitment Letter issued by Vermont National Bank, Burlington, Vermont,
dated September 18, 1995, in connection with a Commercial Mortgage Loan and a
Line of Credit Loan (filed with the Securities and Exchange Commission as
exhibit 10.17 to the Company's 10-KSB for the transition period ended June 30,
1995 and incorporated herein by reference).
10.18 Loan Agreement, dated September 26, 1995, between the Company and Vermont
National Bank regarding $3,500,000 Term Loan and $1,000,000 Line of Credit Loan
(filed with the Securities and Exchange Commission as exhibit 10.18 to the
Company's 10-KSB for the transition period ended June 30, 1995 and incorporated
herein by reference).
10.19 Commercial Term Note, dated September 26, 1995, issued in connection with
the $3,500,000 Term Loan of Vermont National Bank (filed with the Securities and
Exchange Commission as exhibit 10.19 to the Company's 10-KSB for the transition
period ended June 30, 1995 and incorporated herein by reference).
10.20 Commercial Time Note, dated September 26, 1995, issued in connection with
the $1,000,000 Line of Credit Loan of Vermont National Bank (filed with the
Securities and Exchange Commission as exhibit 10.20 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 September 30, 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).
10.46 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 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 10-QSB for the quarter ended September 30, 1998 and incorporated
herein by reference).
10.48 Amendment to Employment Agreement, dated June 11, 1999, between the
Company and Elisabeth B. Robert (as exhibit 10.48 to the Company's 1999 Annual
Report 10-KSB (File No. 33-69898) and incorporated herein by reference).
23.1 Consent of Arthur Andersen, LLP, dated September 13, 2000` (filed herein)
24 Power of Attorney (filed with the Securities and Exchange Commission as
exhibit 24 to the Company's Registration Statement on Form SB-2 (File No. 33
69898) and incorporated herein by reference).
Reports on Form 8-K
There were no reports filed on form 8 K during fourth quarter ended June
30, 2000.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE VERMONT TEDDY BEAR CO., INC.
Dated: September 14, 2000 By:/s/ Elisabeth B. Robert,
--------------------------
Elisabeth B. Robert, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
Dated: September 14, 2000 By:/s/ Jason Bacon,
---------------
Jason Bacon, Director
Dated: September 14, 2000 By:/s/ Robert Hamilton,
--------------------
Robert Hamilton, Director
Dated: September 14, 2000 By:/s/ Fred Marks,
--------------
Fred Marks, Director and
Chairman of the Board
Dated: September 14, 2000 By:/s/ Barbara Johnson,
-------------------
Barbara Johnson, Director
Dated: September 14, 2000 By:/s/ Spencer C. Putnam,
---------------------
Spencer C. Putnam, Director
Dated: September 14, 2000 By:/s/ Elisabeth B. Robert,
-----------------------
Elisabeth B. Robert,
Director, President, Treasurer,
Chief Executive Officer and
Chief Financial Officer
Dated: September 14, 2000 By:/s/ Thomas Shepherd,
-------------------
Thomas R. Shepherd,Director
Dated: September 14, 2000 By:/s/ T. Nathanael Shepherd,
-------------------------
T. Nathanael Shepherd, Director
The Vermont Teddy Bear Co., Inc.
Amendment A to Form 10-KSB Annual Report
Index To The Consolidated Financial Statements
Page
Report of Independent Public Accountants 30
Consolidated Balance Sheets as of June 30, 2000 and 1999 31
Consolidated Statements of Operations for the Years
Ended June 30, 2000 and 1999 32
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 2000 and 1999 33
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000 and 1999 34
Notes to Consolidated Financial Statements 35
Report of Independent Public Accountants
To the Stockholders and Board of Directors of
The Vermont Teddy Bear Co., Inc.:
We have audited the accompanying consolidated balance sheets of The Vermont
Teddy Bear Co., Inc. (a New York corporation) as of June 30, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Vermont Teddy Bear Co.,
Inc. as of June 30, 2000 and 1999, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
Boston, Massachusetts
August 11, 2000
<TABLE>
THE VERMONT TEDDY BEAR CO., INC.
Consolidated Balance Sheets
June 30, 2000 and 1999
<S> <C> <C>
2000 1999
ASSETS
Cash, cash equivalents(includes restricted $ 8,737,397 $ 5,342,483
cash of $366,000 and $363,000 respectively)
Accounts receivable, trade 90,901 338,285
Inventories 3,619,836 2,036,074
Prepaid expenses and other current assets 600,420 469,928
Deferred income taxes 165,363 150,405
------------ ------------
Total Current Assets 13,213,917 8,337,175
Property and equipment, net 8,192,839 8,157,784
Deposits and other assets 913,589 1,002,769
Note receivable 27,500 57,500
------------ ------------
Total Assets $ 22,347,845 $17,555,228
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of:
Long-term debt $ - $ 162,302
Capital lease obligations 133,019 217,884
Accounts payable 3,181,921 2,603,109
Accrued expenses 1,192,801 810,493
Income taxes payable 103,356 35,000
------------ -----------
Total Current Liabilities 4,611,097 3,828,788
Long-term debt, net of current portion - 167,644
Capital lease obligations, net of current portion 5,410,220 5,530,298
Deferred income taxes 95,363 150,405
------------ -----------
Total Liabilities $ 10,116,680 $ 9,677,135
Advances from Series B Preferred stockholders $ - $ 493,508
Series C Convertible Redeemable Preferred Stock
Authorized 110 shares; 66 shares issued and outstanding,
$660,000 liquidation value as of June 30, 2000 and 62.4
shares issued and outstanding, $624,000 liquidation value
as of June 30, 1999. 478,371 387,879
Stockholders' Equity:
Preferred stock, $.05 par value:
Authorized 1,000,000 shares Series A; issued and
outstanding, 90 shares at June 30, 2000 and June
30, 1999. 1,188,000 1,116,000
Authorized 375,000 shares Series B; 204,912 shares issued,
No shares outstanding June 30, 2000 and 27,942 shares
outstanding June 30, 1999. - 1,397
Common stock, $.05 par value:
Authorized 20,000,000 shares: issued 6,780,746 shares,
outstanding 6,757,726 shares and issued 5,719,638
shares, outstanding 5,696,618 shares at June 30, 2000
and 1999 respectively. 339,037 285,982
Additional paid-in capital 11,846,363 10,891,616
Treasury stock at cost: 23,020 shares at
June 30, 2000 and 1999 (117,500) (117,500)
Accumulated deficit (1,503,106) (5,180,789)
------------ -----------
Total Stockholders' Equity $ 11,752,794 $ 6,996,706
Total Liabilities and Stockholders' Equity $ 22,347,845 $17,555,228
============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
THE VERMONT TEDDY BEAR CO., INC.
Consolidated Statements of Operations
For the Years Ended June 30, 2000 and 1999
<S> <C> <C>
2000 1999
---- ----
Net Revenues $33,332,473 $21,583,885
Cost of Goods Sold 12,316,569 8,432,829
----------- -----------
Gross Profit 21,015,904 13,151,056
Selling, General and Administrative Expenses:
Selling Expenses 12,759,338 7,646,996
General and Administrative Expenses 3,965,585 3,082,935
---------- -----------
16,724,923 10,729,931
---------- -----------
Operating Income 4,290,981 2,421,125
Interest Income 206,289 71,828
Interest Expense (553,456) (614,390)
Other Income 21,361 (443)
---------- -----------
Income Before Income Taxes 3,965,175 1,878,120
Income Tax Provision (125,000) (35,000)
---------- -----------
Net Income 3,840,175 1,843,120
Series A Preferred Stock Dividends (72,000) (72,000)
Series C Preferred Stock Dividends (36,000) (24,000)
Accretion of Original Issue Discount in connection with
Series C preferred stock warrants (54,492) (36,328)
---------- ----------
Net Income-Common Stockholders 3,677,683 1,710,792
========== ==========
Basic Net Income Per Common Share $0.57 $0.32
========== ==========
Diluted Net Income Per Common Share $0.44 $0.22
========== ==========
Weighted Average Number of Common
Shares Outstanding 6,415,825 5,396,148
Weighted Average Number of Diluted
Common Shares Outstanding 8,395,463 7,846,926
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
THE VERMONT TEDDY BEAR CO., INC.
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 2000 and 1999
<S> <C> <C> <C> <C>
Preferred Stock "A" Preferred Stock "B"
Shares Amount Shares Amount
Balance at June 30, 1998 90 $1,044,000 204,912 $10,245
Exercise of Common Stock Options -- -- -- --
Series B Conversion to Common -- -- (176,970) ($8,848)
Original Issue Discount-
Series C Preferred -- -- -- --
Accretion of Original Issue Discount-
Series C Preferred -- -- -- --
Preferred Stock Dividends -- $72,000 -- --
Treasury Stock Purchase -- -- -- --
Net Income -- -- -- --
-------------------- ----------------------
Balance at June 30, 1999 90 $1,116,000 27,942 $1,397
Exercise of Common Stock Options -- -- -- --
Series B Conversion to Common -- -- (27,942) ($1,397)
Exercise of Common Stock Warrants -- -- -- --
Original Issue Discount-
Series C Preferred -- -- -- --
Accretion of Original Issue Discount-
Series C Preferred -- -- -- --
Preferred Stock Dividends -- $72,000 -- --
Net Income -- -- -- --
-------------------- ----------------------
Balance at June 30, 2000 90 $1,188,000 0 $0
<C> <C> <C> <C>
Common Stock Additional Treasury
Shares Amount Paid-in Capital Stock
------ -------- --------------- --------
Balance at June 30, 1998 5,195,733 $259,787 $10,587,316 ($106,824)
Exercise of Common Stock Options 48,916 $2,446 $ 46,752 --
Series B Conversion to Common 474,989 $ 23,749 ($14,901) --
Original Issue Discount-
Series C Preferred -- -- $272,449 --
Accretion of Original Issue Discount-
Series C Preferred -- -- -- --
Preferred Stock Dividends -- -- -- --
Treasury Stock Purchase -- -- -- ($10,676)
Net Income -- -- -- --
------------------- -----------------------
Balance at June 30, 1999 5,719,638 $285,982 $10,891,616 ($117,500)
Exercise of Common Stock Options 366,397 $18,319 $363,922 --
Series B Conversion to Common 74,996 $3,750 ($2,353) --
Exercise of Common Stock Warrants 619,715 $30,986 $593,178 --
Original Issue Discount-
Series C Preferred -- -- -- --
Accretion of Original Issue Discount-
Series C Preferred -- -- -- --
Preferred Stock Dividends -- -- -- --
Net Income -- -- -- --
------------------- -----------------------
Balance at June 30, 2000 6,780,746 $339,037 $11,846,363 ($117,500)
<C> <C>
Accumulated Stockholders'
Deficit Equity
Balance at June 30, 1998 ($6,891,581) $4,902,943
Exercise of Common Stock Options -- $49,198
Series B Conversion to Common -- $0
Original Issue Discount-
Series C Preferred -- $272,449
Accretion of Original Issue Discount-
Series C Preferred ($36,328) ($36,328)
Preferred Stock Dividends ($96,000) ($24,000)
Treasury Stock Purchase -- ($10,676)
Net Income $1,843,120 $1,843,120
----------- ----------
Balance at June 30, 1999 ($5,180,789) $6,996,706
Exercise of Common Stock Options -- $382,241
Series B Conversion to Common -- $0
Exercise of Common Stock Warrants -- $624,164
Original Issue Discount-
Series C Preferred -- $0
Accretion of Original Issue Discount-
Series C Preferred ($54,492) ($54,492)
Preferred Stock Dividends ($108,000) ($36,000)
Net Income $3,840,175 $3,840,175
------------ ----------
Balance at June 30, 2000 ($1,503,106) $11,752,794
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<TABLE>
THE VERMONT TEDDY BEAR CO., INC.
Consolidated Statements of Cash Flows
For the Twelve Months Ended June 30, 2000 and 1999
<S> <C> <C>
2000 1999
Cash flows from operating activities
Net Income $ 3,840,175 $ 1,843,120
Adjustments to reconcile net income to net cash
provided by(used for) operating activities:
Depreciation and amortization 795,836 906,174
(Gain)/Loss on disposal of fixed assets (957) 30,975
Changes in assets and liabilities:
Accounts receivable,trade 247,384 (286,747)
Inventories (1,583,762) 360,171
Prepaid and other current assets (130,492) (25,699)
Deposits and other assets 37,646 (145,603)
Accounts payable 578,812 757,067
Accrued expenses and other liabilities 382,308 (105,698)
Income Taxes 68,356 35,000
Deferred Income Taxes (70,000) -
----------- -----------
Net cash provided by operating activities 4,165,306 3,368,760
Cash flows from investing activities:
Purchase of property and equipment (802,600) (214,265)
Proceeds from sale of fixed assets 24,200 9,751
Note Receivable 30,000 30,000
----------- ----------
Net cash used for investing activities (748,400) (174,514)
Cash flows from financing activities:
Payments of short-term debt - (45,603)
Payments of long-term debt (329,946) (239,504)
Additions to capital lease obligations 13,975 -
Principal payments on capital lease obligations (218,918) (225,738)
Issuance of common stock, exercise of stock options 382,241 49,198
Issuance of common stock, exercise warrants 100,000 -
Issuance of common stock, Series B warrant exercise 30,656 -
Advance from Series B Preferred stockholders for
warrant exercise - 493,508
Issuance of preferred stock - 600,000
Purchase of Treasury Stock - (10,676)
----------- ----------
Net cash provided by(used for) financing activities (21,992) 621,185
Net increase in cash and cash equivalents for the year 3,394,914 3,815,431
Cash and cash equivalents, beginning of year 5,342,483 1,527,052
---------- ----------
Cash and cash equivalents, end of year $8,737,397 $5,342,483
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest 545,955 612,290
Cash paid for taxes 127,900 -
Supplemental Disclosures of Non-cash Investing and Financing Activities:
Other capital leases 13,975 -
Conversion of preferred stock to common stock 1,397 8,848
Series B Warrant exercise for common stock 493,508 -
Series C preferred stock dividends 36,000 24,000
Accretion of original issue discount in connection with
Series C preferred stock 54,492 36,328
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
The Vermont Teddy Bear Co., Inc.
Notes to the Consolidated Financial Statements
June 30, 2000
(1) Summary of Significant Accounting Policies
Description of Business and Operations
The Vermont Teddy Bear Co., Inc. (the Company), which was incorporated
under the laws of the State of New York in 1984, is a designer, manufacturer and
direct marketer of teddy bears and related products. Principal geographic
markets include New York, Boston, Philadelphia, Detroit, Los Angeles, and
Chicago. The Company's sales are heavily seasonal, with Valentine's Day,
Mother's Day, and Christmas as the Company's largest sales seasons.
Basis of Consolidation
The consolidated financial statements include the accounts of The
Vermont Teddy Bear Co., Inc. and it's wholly owned subsidiary. All material
inter-company balances and transactions have been eliminated in consolidation.
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. As discussed in Note 6, the Company has accrued the estimated
loss under a lease obligation as of June 30, 2000. Actual results could differ
from those estimates.
Revenue Recognition
Product sales are recorded at the time of shipment and when collectability
is reasonably assured. The Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
on December 3, 1999. This SAB provides additional guidance on the accounting
for revenue recognition, including both broad conceptual discussions as well as
certain industry-specific guidance. The guidance is effective for the fourth
fiscal quarter of their first fiscal year beginning after December 15, 1999,
retroactive to the begining of their fiscal year, and would be adopted by
recording the effect of any prior revenue transaction affected as a "cumulative
effect of a change in accounting principle" as of January 3, 2000. The Company
does not expect this new guidance to have a material effect on the Company's
results of operations or financial position.
Cash and Cash Equivalents
All highly liquid investments with initial maturities of three months or
less are considered cash equivalents. At June 30, 2000 and 1999, approximately
$366,000 and $363,000 of the Company's cash was restricted, respectively. The
largest component of the restricted cash is $302,000 restricted by a debt
service reserve, which was required as part of the Company's loan agreement with
Merchant's Bank (formerly the Vermont National Bank) and was required to be
maintained as part of the Company's sale-leaseback transaction.
Inventories
Inventories are stated at the lower of cost or market using the
first-in, first-out method.
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Equipment acquired under capital leases is stated at the lower of
the present value of future minimum lease payments or fair value at the
inception of the lease.
Depreciation, including amortization of assets covered by capital
leases, is calculated using both the straight-line and accelerated methods over
the estimated useful lives of the assets, as follows:
Building 37 years
Equipment 3-7 years
Furniture and fixtures 3-7 years
Vehicles 5 years
Amortization of leasehold improvements is provided over their estimated
useful lives or the remaining lease term, whichever is shorter. Renewals and
improvements that extend the useful lives of the assets are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred.
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 1998 and previous year's 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.
Advertising
The Company expenses the production costs of radio and print advertising
the first time the advertising takes place. Catalog advertising, consisting
primarily of catalogs for the Company's products, is capitalized and amortized
over its expected period of future benefits, usually over the four-month period
following the initial mailing of the catalog.
At June 30, 2000 and June 30, 1999, capitalized advertising costs were
approximately $49,000 and $53,000, respectively, consisting primarily of trade
credits and unamortized direct-response catalogs. Advertising expenses were
$7,791,000 and $4,499,000 for the twelve months ended June 30, 2000 and 1999,
respectively.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with SFAS No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. The Company continually reviews its long-lived assets for events
or changes in circumstances that might indicate the carrying amount of the
assets may not be recoverable. The Company assesses the recoverability of
assets by determining whether the depreciation of such assets over their
remaining lives can be recovered through projected undiscounted cash flows. The
amount of impairment, if any, is measured based on projected discounted future
cash flows using a discount rate reflecting the Company's average cost of funds.
At June 30, 2000, no such impairment of assets was indicated.
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, the Company has determined the estimated fair
value of its financial instruments using appropriate market information and
valuation methodologies. Considerable judgment is required to develop the
estimates of fair value; thus, the estimates are not necessarily indicative of
the amounts that could be realized in a current market exchange. The Company's
financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable and debt. The carrying value of these assets and liabilities
is a reasonable estimate of their fair market value at June 30, 2000 and 1999.
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:
Years Ended
6/30/00 6/30/99
------- -------
Weighted average number of shares
used in basic EPS calculation 6,415,825 5,396,148
Add: Common Shares Issuable Upon
Exercise of:
Stock Options 1,630,663 1,907,724
Warrants 738,109 1,308,245
Convertible Preferred Stock 628,518 1,144,271
--------- ---------
Total Common Shares Issuable 2,997,290 4,360,240
Less: Shares repurchased under treasury
Stock method (1,017,652) (1,909,462)
Weighted average number of shares
used in diluted EPS calculation 8,395,463 7,846,926
========= =========
Diluted weighted average shares outstanding for 2000 and 1999 exclude
12,440 and 118,963 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.
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 comprehensive income
and loss is the same as net income and loss for each period presented.
Segments and Related Information
During fiscal year 1999, the Company adopted the provisions of SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information. 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.
Start-Up Activities
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. This
statement requires a change in the method of accounting for start-up costs on
major projects to expense these costs as incurred. Prior to this accounting
change, these costs could be capitalized. The impact of this accounting change
did not have a material effect on the Company's results of operations or
financial position.
New Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 137, Accounting
For Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of SFAS No. 133, in July 1999. SFAS No. 133 is now effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000; earlier
adoption is allowed. The statement requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The Company currently expects that, due to its limited
use of derivative instruments, the adoption of SFAS No. 133 will not have a
material effect on the Company's results of operations or financial position.
(2) Inventories
Inventories consist of the following at June 30, 2000 and 1999:
2000 1999
---- ----
Raw materials $ 483,086 $ 390,082
Work-in-process 189,480 195,908
Finished goods 2,947,270 1,450,084
---------- ----------
$3,619,836 $2,036,074
Inventories include material, labor, and overhead.
(3) Property and Equipment
Property and equipment consist of the following at June 30, 2000 and
1999:
2000 1999
Land and land improvements $ 1,398,528 $ 1,398,528
Building 6,668,134 6,668,134
Equipment 4,191,065 3,667,851
Furniture and fixtures 421,270 375,452
Vehicles 84,230 103,515
Leasehold improvements 195,904 46,265
------------ ------------
$ 12,959,131 $ 12,259,745
Less - Accumulated depreciation
and amortization 4766,292 4,101,961
------------ ------------
$ 8,192,839 $ 8,157,784
============ ============
Depreciation and amortization expense for the years ended June 30, 2000,
and 1999 was $795,836 and $906,174, respectively.
(4) Related Party Transactions
As of June 30, 1996, R. Patrick Burns, the former President of the Company,
signed a new agreement with the Company which, at the time, provided for his
continued employment through June 30, 2000. In addition to cash compensation
and stock options, the Company also increased the amount available to be loaned
to Mr. Burns to $116,818, and revised the forgiveness schedule on the loan
agreement such that all outstanding amounts and related interest charges would
have been forgiven on July 29, 2000, provided that Mr. Burns would remain
continuously employed by the Company until that date. As of June 30, 1997, the
Company had reserved for all loans due from Mr. Burns. On October 10, 1997, Mr.
Burns resigned as President and entered into a consulting agreement with the
Company. As of December 31, 1997, the Company accrued and expensed the entire
amount due to Mr. Burns under this consulting agreement and did not seek any
services from him in his capacity as a Director of the Company. As of June 30,
2000 all amounts related to this severance agreement have been paid and no
accrual is necessary.
(5) Indebtedness
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. On
November 5, 1999, the Company settled in full, all outstanding notes payable
with Green Mountain Capital through a combination of a cash and stock
transaction. All 100,000 warrants were exercised in a cashless transaction
valued at $100,000 and the remainder of $159,393 of outstanding notes payable
was paid in cash.
The Company's long-term debt consists of the following at June 30, 2000 and
1999:
2000 1999
---- ----
12.0% Green Mountain Capital L.P. notes payable --- $310,204
(see detailed discussion above)
8.5% Note payable to financing services, due
in monthly installments through June 2003,
secured by a vehicle --- 13,972
9.8% Note payable to financing services, due in
monthly installments through December 1999,
secured by a vehicle --- 5,770
-------- -------
$ --- $329,946
Less - Current portion --- 162,302
-------- --------
Long-term debt, net of current portion $ --- $167,644
======== ========
Certain debt agreements contain covenants that require the Company to,
among other things, restrict certain activities, meet certain financial
covenants, and periodically submit financial information. As of June 30, 2000,
the Company was in compliance with the covenants or had obtained waivers for all
covenants for the year ended June 30, 2000.
As of June 30, 2000 and 1999, the Company had no outstanding letters of
credit.
(6) Commitments and Contingencies
Leases
On May 30, 1996 the Company entered into a five-year operating lease for a
retail location in North Conway, New Hampshire. On July 29, 1998 in accordance
with the provisions of its lease, the Company formally notified its landlord of
the North Conway, New Hampshire location of its intent to close its retail
store, and as a result, terminated its lease obligation effective February 1,
1999.
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, after the Company terminated the lease on
written notice to the landlord, 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 disputes the landlord's position and believes it is not obligated 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 seeks 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, the lease, itself. That motion
was denied by order entered April 12, 2000. The parties have unsuccessfully
attempted to resolve their disputes and after engaging in document discovery,
the Company has moved for summary judgement on its claims and dismissing the
landlord's claims. That motion has been fully briefed and will be argued on
October 10, 2000. The parties are conducting depositions during the month of
September. 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 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.
On January 17, 1997, the Company entered into a ten-year operating lease
for a retail location in Freeport, Maine. The Company reached an agreement on
June 12, 1998 with The Town of Freeport to terminate its lease obligation for
its retail location in Freeport, Maine. The Company closed the Freeport store in
August 1998, and its lease obligation terminated on August 6, 1998.
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 (now the Chittenden 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 for associated transaction costs of $679,000, which have been
capitalized and recorded as a component of other assets as of June 30, 2000.
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." The book value
of the building and apportioned land and land improvements was $6,147,221 as of
June 30, 2000 and $6,331,546 as of June 30, 1999.
On September 29, 1999 the Company entered into a one year lease with four
one year renewal options for a new manufacturing facility in Newport, Vermont
for 12,000 square feet. Annual lease payments are $42,000. On November 1,
1999, the Company began operation of the facility with 25 skilled sewers
stitching teddy bear parts. As of June 12, 2000 there were 69 full time
employees in the Newport facility manufacturing complete teddy bears, from
stitching to stuffing, pinning and assembly, and back sealing. The bears are
then shipped back to the Shelburne plant for order fulfillment.
On November 30, 1999 the Company entered into an eight month lease for
20,000 square feet of warehouse space in Williston, Vermont. Lease payments
over the term of the lease total $70,000. This lease replaces the lease for
10,000 square feet of off-site warehouse space in Shelburne, Vermont.
On August 3, 1999 the Company entered into a twelve month lease for 4,000
square feet of warehouse space in Shelburne, Vermont. Lease payments over the
term of the lease total $28,000.
On July 19, 2000, to consolidate remote warehouse locations, the Company
entered into a ten year lease with three five year renewal options for a new
60,400 square foot warehouse and fulfillment center in Shelburne, Vermont. This
facility is on property that is contiguous to the property on which the
Company's factory headquarters are located. Annual lease payments are $393,000.
The lease begins on September 1, 2000 and will replace the lease for 20,000
square feet of off-site space in Williston, Vermont and the lease for 4,000
square feet in Shelburne, Vermont.
In addition, the Company leases various equipment under noncancelable
capital lease agreements. Capital leases and noncancelable operating leases at
June 30, 2000 require the following annual minimum lease payments:
Capital Operating
Leases Leases
----------- ---------
2001 $ 704,420 $ 998,985
2002 702,924 964,457
2003 701,601 975,935
2004 697,632 981,607
2005 697,632 948,385
Thereafter 8,429,720 2,612,475
----------- ---------
Total minimum lease payments $11,933,929 $7,481,844
==========
Less-Amounts representing interest $ 6,390,690
-----------
Present value of lease payments $ 5,543,239
Less-Current installments 133,019
-----------
Long-term portion $ 5,410,220
===========
The original cost and net book value of assets under capital lease at June
30, 2000 and 1999 was $7,073,686 and $6,163,017 and $7,494,680 and $6,371,084,
respectively. Rental expense under operating leases for the years ended June 30,
2000 and 1999 was $158,816 and $114,575, respectively.
Contingencies
On July 15, 1998, the Company filed a lawsuit against Tyco Industries,
Inc., entitled The Vermont Teddy Bear Co., Inc. vs. Tyco Industries, Inc., in
the United States District Court for the Northern District of New York, alleging
that Tyco failed to make minimum royalty payments totaling $300,000 as required
by its contract with the Company dated September 11, 1995. Tyco denied liability
for the minimum royalties in its answer to the Company's complaint and filed a
counter claim for unspecified relief. The Company has denied any liability on
the counter claim and is vigorously pursuing this claim to collect amounts due,
however no assurances can be made that the amounts will be received from Tyco.
The Company recorded $125,000 as a receivable in 1997 for the second installment
of royalties owed which is included in other assets as of June 30, 1999 in the
accompanying financial statements. At that time, the Company had no notice or
knowledge that payment of the royalty was disputed by Tyco. After notice of a
dispute, the Company did not record any further receivables. On June 14, 2000 a
settlement was reached for $225,000. The Company will recognize a gain in the
first quarter of fiscal year 2001 when the cash settlement was received.
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, after the Company terminated the lease on
written notice to the landlord, 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 disputes the landlord's position and believes it is not obligated 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 seeks 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, the lease, itself. That motion
was denied by order entered April 12, 2000. The parties have unsuccessfully
attempted to resolve their disputes and after engaging in document discovery,
the Company has moved for summary judgement on its claims and dismissing the
landlord's claims. That motion has been fully briefed and will be argued on
October 10, 2000. The parties are conducting depositions during the month of
September. 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 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.
(7) Income Taxes
The provision for income taxes for the years ended June 30, 2000 and 1999
was comprised of the following:
Year Ended Year Ended
June 30, 2000 June 30, 1999
Current -
Federal $150,000 $35,000
State 45,000 -
-------- -------
$195,000 $35,000
Deferred -
Federal $(59,500) -
State (10,500) -
-------- -------
$(70,000) -
Income tax provision(benefit) $125,000 $35,000
The components of the net deferred tax asset as of June 30, 2000 and 1999
are presented below:
Deferred tax assets -
AMT Credit $ 29,136 $ -
Vacation accrual 80,498 58,130
Net operating loss carryforwards 110,592 1,680,000
Inventories 48,892 48,892
Severance accrual - 10,000
Contribution carryforwards 6,874 97,346
Deferred rent 37,891 37,891
Other 58,978 52,916
Valuation Allowance (207,498) (1,834,770)
-------- ----------
Total deferred tax assets 165,363 $150,405
Deferred income taxes -
Depreciation (75,827) (129,385)
Prepaid Expenses (19,536) (21,020)
-------- ---------
Total deferred tax liabilities (95,363) (150,405)
-------- ---------
Net deferred tax asset (liabilities) $ 70,000 $ -
The provision for income taxes varies from the amounts computed by
applying the U.S. federal income tax rate of 34% as follows for the years ended
June 30, 2000 and 1999:
Year Ended Year Ended
June 30, 2000 June 30, 1999
Computed "expected tax
expense (benefit) 34 % 34%
Increase (reduction) resulting from:
Alternative Minimum Taxes 0 % 2%
NOL Utilization (30 %) (34%)
State taxes - net of Federal benefits .7% 0%
Other 0 % 0%
Decrease in deferred asset
valuation allowance (1.8%) 0%
Meals and Penalties .1% 0%
------ ------
Income tax provision (benefit) 3.2% 2%
The Company has been limited in its utilization of the NOL as a result of
the change in tax reporting year-end to June 30, 1995. Because of the change in
the year-end approximately $1.7 million of the NOL carryforwards were available
to use ratably over a six year period beginning June 30, 1996. At June 30, 2000,
the Company has a remaining Federal Income Tax Net Operating Loss (NOL)
carryforwards of approximately $ .3 million. The NOL carryforwards expire in
varying amounts through 2013. The deferred tax asset valuation allowance was
reduced in 2000 as a result of net changes in temporary differences and the
reversal of a portion of the valuation allowance, based on improved operating
results in 1999 and 2000 and projected operating results in 2001.
(8) Preferred Stock
Series A
The Company has issued 90 shares, $.05 par value, of Series A Cumulative
Preferred Stock to one individual. The Series A stockholder is entitled to
accrued dividends on the stated values of the shares at a rate of 8% per annum.
The dividends accrue regardless of whether dividends have been declared, profits
exist, or funds are legally available for payment. Dividends are payable
quarterly, in arrears. For the fiscal years ended June 30, 2000 and 1999,
$72,000 of dividends were accrued. The Series A Preferred Stock carries a
liquidation preference value equal to the stated value per share plus all
accrued and unpaid dividends. The stated value is equal to $10,000 per share.
Series B
On July 12, 1996, the Company privately placed $550,000 of Series B
convertible Preferred Stock. The 204,912 shares, $.05 par value, of Series B
Convertible Preferred Stock were issued to twelve individuals. Series B
stockholders are not entitled to any dividends or voting rights, but each share
was originally convertible into one share of the Company's Common Stock at any
time on or after July 14, 1997, subject to certain anti-dilution rights. As the
result of subsequent financing transactions, the anti-dilution provisions of the
Series B agreement were activated, and on February 3, 1999, 176,970 shares of
Series B Convertible Preferred Stock was converted into 474,989 shares of the
Company's Common Stock. On July 19, 1999, the remaining 27,942 shares of Series
B Preferred Convertible Stock were converted into 74,996 shares of the Company's
Common Stock. On or about July 3, 1999 the Company notes that 215,157 warrants
associated with the Series B Preferred Stock were exercised and converted into
519,715 shares of the Company's Common Stock. The Company received $524,164 in
consideration for these shares and $493,508 was received in cash and classified
as advances from Series B Stockholders in the Company's balance sheet for the
year ending June 30, 1999 and is classified as equity in common stock in the
year ending June 30, 2000.
Series C
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. The Company has valued the warrants
using the Black Scholes valuation model. The aggregate value of $272,449 was
applied as a discount to the face value of the Series C Preferred Stock on the
Company's balance sheet. The Company will accrete this discount, with charges
to retained earnings over a five-year period ending on the redemption date
described below.
The following table shows the shares and dollar amounts of changes to the
Series C Preferred Stock Account during fiscal year 2000.
Shares Amount
Balance Series C, Preferred Stock
as of June 30, 1999 62.4 $ 387,879
Add: Series C Preferred Stock Dividend 3.6 36,000
Add: Accretion of Discount Related to
Warrant Issuance 54,492
--------
Balance Series C, Preferred Stock as of
June 30, 2000 66.0 $478,371
Each of the 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. For the fiscal year ended June 30, 2000 $60,000 of dividends
were accrued and for the fiscal year ended June 30, 1999 $24,000 of dividends
were accrued. 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.
(9) Warrants
At June 30, 2000, there were several warrants outstanding for shares of the
Company's Common Stock. Substantially all of the warrant agreements contain
certain anti-dilution provisions which, if triggered, can result in additional
shares being available to the warrant holder and/or a reduction in the exercise
price for each share. Certain anti-dilution provisions were triggered in fiscal
1999 as the result of the issuance of warrants and employee stock options. The
following table summarizes the Company's outstanding warrants at June 30, 2000
and 1999, inclusive of the effects of anti-dilution provisions:
June 30, 2000 June 30,1999
Warrant Exercise Expiration Warrant Exercise Expiration
Shares Price Date Shares Price Date
------- -------- ---------- ------- -------- ----------
49,130 2.565 4/21/2001 519,265 1.000 7/2/99
150,611 1.310 7/18/2004 49,130 2.565 4/21/2001
495,868 1.050 11/3/2005 150,611 1.310 7/18/2004
42,500 1.050 11/3/2005 100,000 1.000 12/26/2004
495,868 1.050 11/3/2005
42,500 1.050 11/3/2005
(10) Stock Options
1993 Incentive Stock Option Plan
On August 16, 1993, the stockholders approved a 1993 incentive stock option
plan ("1993 Plan"), which provided for the granting of 200,000 stock options to
employees. Options granted may be either incentive stock options within the
meaning of Section 422 of the Internal Revenue Code, or non-qualified options.
Under the 1993 Plan, the Option Committee of the Board of Directors is
authorized to grant both non-qualified and incentive stock options to full-time
employees of the Company only, including officers of the Company. The Committee
will determine the provisions and terms of any stock option grant. No option
may terminate later than ten years from the date the option is granted. The
Committee may provide for termination of the option in the case of termination
of employment with the Company or any other reason. No stock option can be
transferred except by will or by the laws of descent and distribution. The 1993
Plan terminates on August 16, 2003, however, the 1993 Plan may be terminated
earlier by decision of the Board. The Board may amend the 1993 Plan; however,
any amendment that would (1) materially increase the benefits accruing to
participants under the 1993 Plan, (2) materially increase the number of
securities that may be issued under the 1993 Plan, or (3) materially modify the
requirements of eligibility for participation in the 1993 Plan must be approved
by the Stockholders of the Company.
The majority of options under the 1993 Plan vest ratably over a five-year
period, and a minority vest based on performance of the market price of the
Company's Common Stock. All stock options are granted at an exercise price
equal to the fair market value of the common stock on the date of grant and
expire ten years after the date they are granted. At various intervals, the
stockholders of the Company have ratified changes to the 1993 Plan, which have
increased the number of shares available under the plan to 2,000,000.
Exercise Weighted Average
Number of Price Remaining Contractual
Shares Range Average Life
--------- ----- ---------- -----------
Outstanding June 30, 1998 1,577,265 $1.00 - $6.50 $1.09 7.9 years
Granted 440,000 $1.00 - $3.56 1.38
Exercised (48,916) $1.00 - $1.25 1.01
Cancelled (37,125) $1.00 - $6.50 3.84
--------- -----
Outstanding June 30, 1999 1,931,224 $1.00 - $3.56 1.10 7.5 years
Granted 94,000 $1.00 - $4.31 3.52
Exercised (336,397) $1.00 - $1.53 1.04
Cancelled (334,988) $1.00 - $1.25 1.00
--------- -----
Outstanding June 30, 2000 1,323,839 $1.00 - $4.31 1.31 6.9 years
The following table summarizes information for options outstanding and
exercisable at June 30, 2000:
Options Outstanding Options Exercisable
Range of Number of Wtd. Avg. Wtd. Avg. Number of Wtd. Avg.
Prices Shares remaining exercise Shares exercise
-------- --------- Life price --------- price
--------- --------- --------
1.00 - 1.38 1,107,339 6.51 1.02 1,034,214 1.02
1.66 - 1.81 68,000 8.69 1.66 33,875 1.66
3.19 - 4.31 148,500 9.05 3.40 3,500 3.30
1.00 - 4.31 1,323,839 6.9 1.31 1,071,589 1.05
On June 3, 1997, the Company offered to grant options with an exercise
price of $1.00 per share (the fair market value of the Company's Common Stock on
that date) in exchange for the surrender of all outstanding qualified employee
incentive stock options at that date. The repriced options had original
exercise prices ranging from $1.50 to $3.13 per share.
As of June 30, 2000, options to purchase 1,071,589 shares of the Company's
Common Stock were exercisable under the 1993 Plan with an average weighted
average exercise price of $1.05, and options to purchase 237,865 shares of the
Company's Common Stock were available for grant under the 1993 Plan. As of June
30, 1999, options to purchase 882,016 shares of the Company's Common Stock were
exercisable under the 1993 Plan with an average weighted average exercise price
of $1.01, and options to purchase 68,776 shares of the Company's Common Stock
were available for grant under the 1993 Plan.
Non-Employee Director Stock Option Plan
On November 22, 1996, the stockholders approved the Non-Employee Director
Stock Option Plan ("NEDSO Plan"), which provides for the granting of 400,000
shares of the Common Stock of the Company in exchange for their participation as
a Director of the Company. Pursuant to the NEDSO Plan, amended on January 22,
1998, each participating Director will receive an option to purchase 2,000
shares of Common Stock as an annual retainer. The Chairman of the Board of
Directors, if eligible, is also entitled to receive an additional annual
retainer to purchase 8,000 shares of the Company's Common Stock. In addition to
the annual retainer options, each participating director shall receive an option
to purchase up to 1,500 shares of Common Stock per quarter for actual attendance
at each regular meeting of the Board of Directors. Directors are eligible to
participate in the plan only if they receive no other cash compensation from the
Company. All options have an exercise price equal to the fair market value of
the Common Stock on the date of grant, vest immediately, and are exercisable for
a period of ten years.
Exercise Weighted
Number of Average
Shares Price
--------- --------
Outstanding June 30, 1998 66,500 1.53
Granted 10,833 2.01
Exercised (14,000) -
Cancelled - -
--------- --------
Outstanding June 30, 1999 63,333 1.64
Granted 29,500 3.98
Exercised - -
Cancelled - -
--------- --------
Outstanding June 30, 2000 92,833 2.38
As of June 30, 2000, options to purchase 92,833 shares of the Company's
Common Stock were exercisable under the NEDSO Plan, and options to purchase
307,167 shares of the Company's Common Stock were available for grant under the
NEDSO Plan. As of June 30, 1999, options to purchase 63,333 shares of the
Company's Common Stock were exercisable under the NEDSO Plan, and options to
purchase 336,667 shares of the Company's Common Stock were available for grant
under the NEDSO Plan.
Statement of Financial Accounting Standards No. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock Based Compensation, which defines a fair value based method
of accounting for an employee stock option or similar equity instruments and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans.
The Company has elected to account for its stock based compensation plans
for employees under APB Opinion No. 25, under which no compensation cost has
been recognized. However, the Company has computed for pro-forma disclosure
purposes the value of all options granted during fiscal years 1999 and 1998,
using the Black-Scholes option pricing model as prescribed by SFAS No. 123 and
the following weighed average assumptions used for grants:
2000 1999
---- ----
Risk-free interest rate 6.4% 5.6%
Expected dividend yield 0% 0%
Expected volatility 153% 131.0%
Expected lives 10 years 10 years
Because the Statement 123 method of accounting has not been applied to
options granted prior to July 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years. Adjustments
are made for options forfeited prior to vesting. The total value of options
granted was computed and would be amortized on a straight-line basis over the
vesting period of the options. The weighted average fair value of options
granted during fiscal years 2000 and 1999 was $3.59 and $1.18, respectively. If
the Company had accounted with these plans in accordance with SFAS No. 123, the
Company's net income and earnings per share would have been reported as follows:
2000 1999
---- ----
Net Income (Loss) As Reported $3,694,039 $1,710,792
Pro Forma 3,042,521 833,797
Basic EPS As Reported .58 .32
Pro Forma .47 .15
Diluted EPS As Reported .44 .22
Pro Forma .36 .11
(11) Segment Information
Operating segments represent components of the Company's business that are
evaluated regularly by key management in assessing performance and resource
allocation. The Company has determined that its reportable segments consist of
Bear-Gram Gift Delivery Service, Retail Operations, and Wholesale/Corporate
(including licensing).
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, or through the catalog.
The retail operation segment involves one retail location and family tours
of its teddy bear factory and store at the factory location in Shelburne,
located ten miles south of Burlington, Vermont. In an effort to make a visit to
the factory more entertaining and draw additional traffic, the Company has
implemented the Make-A-Friend-For-Life bear assembly area, where visitors can
participate in the creation of their own teddy bear.
The Wholesale/Corporate segment was begun during the Company's fiscal year
1998. The Company began pro-actively developing opportunities in the corporate
affinity market and certain wholesale markets as a business segment, which is
the fastest growing segment of the Company's business.
The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements and described in the summary of
significant accounting policies. Management evaluates a segment's performance
based upon gross margin and gross margin percentage.
Bear-Gram Retail Wholesale/
Service Operations Corporate
FY 2000
Net Revenues $28,427,337 $2,812,151 $2,092,985
Cost of Goods Sold 10,106,377 1,070,807 1,139,385
Gross Margin 18,320,960 1,741,344 953,600
Gross Margin % 64.5% 61.9% 45.6%
FY 1999
Net Revenues $18,136,195 $2,406,163 $1,041,527
Cost of Goods Sold 6,751,217 1,067,657 613,955
Gross Margin 11,384,978 1,338,506 427,572
Gross Margin % 62.8% 55.6% 41.1%
Revenues from individual customers, revenues between business segments, and
revenues, operating profit and identifiable assets of foreign operations are not
significant.
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
of our report included in this form 10-KSB into the Company's previously filed
Registration Statement on Form S-8 No. 33-84586 (filed on September 26, 1995).
It should be noted that we have not audited any financial statements of the
Company subsequent to June 30, 2000.
Arthur Andersen LLP
Boston, Massachusetts
September 13, 2000
