Joyce P. Vincelette, Ellie A. Fogarty, Thomas M. Patrick, and Thomas
teddy bear is almost a lOO-year-old product that has been made in every
conceivable size, style, fabric, and price combined with a saturated
market. Yet the teddy bear indus
try stands as a model of strength and durability. Every year, bear
makers create and market
hundreds of original models."1 ,
Vermont Teddy Bear Company was founded in 1981 by John Sortino seiiing
h~mdsewn teddy bears out of a pushcart in the streets of Burlington,
Vermont. Since this time, the ,company's focus has been to design,
manufacture, and direct market the best teddy bears made in America
using quality American materials and labor.
Until 1994, Vermont Teddy Bear experienced a great deal of success and
profitability. Problems arose in 1995. Since 1995, the company has had
two CEOs. It changed its name, to The Great American Teddy Bear Company
and then changed it back to The Vermont Teddy Bear Company when
customers got confused. From its inception, Vermont Teddy Bear had been
known for its Bear-Gram delivery service. In 1996, the company decided
to shift emphasis away from Bear-Grams to other distribution channels.
By 1998, the company decided to renew its emphasis on Bear-Grams.
Vermont Teddy has always been proud of the fact that its teddy bears
were made in America with American materials and craftsmanship. In 1998,
the company changed this philosophy by exploring the offshore sourcing
of materials, outfits, and manufacturing in an effort to lower costs.
Elisabeth Robert assumed the titles of President and Chief Executive
Officer in October 1997 and began to cut costs and position the company
for future growth. According to Robert, there were many reasons to
invest in The Vermont Teddy Bear Company. "I believe that there is
growth potential in this company. We are going to regain our balance
this year. This is a rebuilding year. We are taking key steps to
reposition the company. The move offshore is going to provide this
company an opportunity to become more profitable. We will gain
additional flexibility with price points. There is opportunity for tis
to expand from a regional brand to a national brand. While we continue
to emphasize the premium teddy bear gift business, we intend to expand
into larger markets. There is now a whole new opportunity for us in the
corporate incentives and promotions market as well as the wholesale
market. We have weekly inquiries from companies who recognize our
brands. These companies would love to buy and resell our product or use
our product as a corporate gift. Our growth will come not only from
This case was prepared by Professor Joyce P. Vincelette, Ellie A.
Fogarty, Business Librarian, and Professor Thomas M. Patrick of the
College of NewJersey, and Professor Thomas L. Wheelen of the University
of South Florida. They would also like to thank Matthew Tardougno for
his assistance on this project. This case was edited for 5MBP-9th
Edition. This case may not be reproduced in any form without written
permission of the copyright holder, Thomas L. Wheelen. Copyright @ 1998
by Thomas L. Wheelen. Reprinted by permission.
expansion of our radio markets but in the corporate and wholesale
markets as we use offshore manufacturing alternatives to move to broader
price points."2
According to Robert, "our competitors are the people who sell
chocolates, flowers, and greeting cards. We target the last minute
shopper who wants almost instant delivery."3 Gift purchases account for
90% of the Company's sales.4 "We thought we were in the teddy bear
business;' said Robert. "In fact we are in the gift and personal
communications business. Our competition isn't Steiff [the German toy
manufacturer]: it's 1-800 Flowers:'5
On one beautiful June day in Vermont, Elisabeth Robert reflected on the
enormous tasks to be accomplished. She wondered if she could
successfully reposition her company and return it to profitability. Was
she making the correct strategic decisions?
History: Why a Bear Company?
The Vermont Teddy Bear Co., Inc., was founded in 1981 by John Sortino.
John got the inspiration for the teddy bear business shortly after his
son Graham was born. While playing with his son, he noticed that Graham
had many stuffed animals, but they were all made in other countries.
Sortino "decided that there should be a bear made in the United
States."6
He decided to design and manufacture his own premium-quality teddy
bears. To turn his concept into reality, Sortino taught himself to sew
and enrolled in drawing classes. In 1981, his first creation, Bearcho,
was a bear whose thick black eyebrows and mustache resembled those of
Groucho Marx. His first bear line included Buggy, Fuzzy, Wuzzy, and
Bearazar, the bear
with super powers. In 1982, Vermont Teddy Bear Company began limited
production of Sortino's early designs using five Vermont homesewers. In
1983, Sortino took his operation to the streets where he sold his
handmade bears from a pushcart on the Church Street Marketplace in
downtown Burlington, Vermont. Four days later he sold his first bear. By
the end of 1983, 200 bears were sold. He concluded from his selling
experiences that customers "want bears that are machine washable and
dryable. They want bears with joints. They want bears that are cuddly
and safe for children. They want bears with personality:'?
In 1984, Vermont Teddy was incorporated under the laws of the State of
New York and Sortino's pushcart business had turned into a full-time
job. To facilitate bear manufacturing, local homeworkers were contracted
to produce an assortment of the founder's original designs. Even though
the company opened a retail store in Burlington, Vermont, in 1985, the
majority of the company's products were sold through department stores
such as Macy's and Nieman Marcus during the 1980s. As the retail
industry consolidated through mergers and store closings during the late
1980s, Sortino realized that a new market needed to be found for his
bears. In search of a new customer base, Sortino turned to a local radio
station and began advertising the company's products. This advertising
strategy paved the way for the "Bear-Gram;' where customers could send
the gift of a Vermont Teddy Bear by placing an order through the
company's 800 number.
The company initiated its Bear-Gram marketing strategy in 1985 in the
Burlington, Vermont area. Local radio advertisements aired on WXXX in
Burlington and customers called an 800 number to order the product. It
was not until shortly before Valentine's Day in 1990 that the company
introduced radio advertising of its Bear-Gram product on radio station
WHTZ ("Z-lOO") in New York City, positioning the Bear-Gram as a novel
gift for Valentine's Day and offering listeners a toll-free number to
order from the company's facility in Vermont. The test proved to be
successful, and the Bear-Gram concept was expanded to other major radio
markets across the country. These radio advertisements were generally
read live by popular radio personalities. John Sortino believed that the
radio had been a successful medium for the Bear-Gram for several
reasons. He believed that the use of popular radio personalities lent
credibility to the product. In addition, because the disk jockey could
give away a few bears, more air-time was spent on the product than
the paid "60 seconds:'8 He also believed that radio advertising allowed
for flexibility in the use of advertising copy, which could be adjusted
as the company changed its marketing focus.
THE VERMONT TEDDY BEAR CO., INC.: CHALLENGES FACING A NEW CEO (REVISED)
Due to the success of the Bear-Gram concept, Vermont Teddy's
total sales of $400,000 in 1989 rose to $1.7 million in 1990 and over $5
million in 1991.9 As sales increased, a larger manufacturing facility
was needed. In 1991, the company leased and moved into a new factory
space and guided factory tours began. The larger production facilities
made it possible for Vermont Teddy Bear to begin producing bears in bulk
and to enter into larger sales agreements with retail establishments. In
1992, Inc. magazine listed Vermont Teddy as the eightieth fastest
growing company in the United States with sales totaling $10.6
million.l0
Vermont Teddy Bear went public on November 23, 1993. By this time, sales
totaled $17 million.ll In 1993, the company was named the first national
winner of the Dun & Bradstreet "Best of America" Small Business Award
and was ranked as the fifty-eighth fastest growing company in the United
States by Inc. magazine. 12 Also in 1993, the company was the recipient
of the Heritage of New England Customer Service Award. Previous
recipients of the award included 1.1. Bean, Inc., Boston Beer Company,
and Ben & Jerry's Homemade, Inc.13
In 1994, construction began on a new factory and retail store in
Shelburne, Vermont, which opened for business in the summer of 1995. In
1994, Inc. magazine listed Vermont Teddy Bear, with sales totaling $20.5
million, as the twenty-first fastest growing small, publicly owned
company in the United States and named the company "Small Business of
the Year." 14
Prior to 1994, Vermont Teddy Bear had experienced a great deal of
success and profitability, with sales growth in excess of 50% for three
consecutive years. IS However, 1994 marked the beginning of the
company's financial troubles. The company's expenses increased in
accordance with its anticipated growth, but sales did not increase as
rapidly.
Vermont Teddy Bear's rapid growth during the 1990s taxed the
organizational structure and efficiency of the company's operations. Due
to the company's declining financial situation, on June 20, 1995, the
company's Founder, President, and Chief Executive Officer, John Sortino,
resigned. Sortino recognized that the future success of the company
"depends on the transition from an entrepreneurial company to a
professionally managed organization." He further stated, "I wanted to
assist the company in positioning itself for the arrival of a new CEO. I
will provide guidance to the company in a consulting role, and I will
retain my position on the Board of Directors." 16
On August 2, 1995, R. Patrick Burns was appointed as President and CEO.
Also in 1995 Elisabeth Robert joined the company as Chief Financial
Officer. Outside observers wondered if the company could successfully
make the transition to a new CEO and generate enough sales to pull
itself out of debt and remain profitable.
In its attempts to turn the company around, the new management team
eliminated several unprofitable marketing ventures (such as its
sponsorship of a NASCAR circuit race car and driver) and reduced general
and administrative cost. By 1996, the new team had generated a profit of
$152,000.17
During the later part of 1996, Vermont Teddy Bear took on a new
trademarked name, "The Great American Teddy Bear Company:' in an attempt
to broaden brand appeal and take advantage of national and international
distribution opportunities. Even though the "Vermont" name gave good
name recognition in the Northeast, the company felt that it had less
impact in other parts of the country. They were wrong. Customers became
confused, and Disney's entry into the personalized teddy bear gift
market with their "Pooh-Grams" added to the confusion. The confusion
contributed to a decrease in Bear-Gram sales. By Valentine's Day, the
company returned to its established mark, The Vermont Teddy Bear
Company.
Late in 1996, the new management team began to explore opportunities for
growth. They believed that the emphasis of the company should shift from
the Bear-Gram business to other distribution channels. Their new
five-year plan included opening new retail stores and expanding the
catalog.
By 1997, retail sales were the fastest growing part of Vermont Teddy's
business. Sales for
the factory retail store in Shelburne for the fiscal year ending June
30,1996, were 19% ahead of 1995, 18. It appeared obvious to top
management that retail was a growing profit center for the
. The company's factory store had become a major Vermont tourist
destination and had averaged 130,000 visitors a year since opening in
July 1995.19 As a result, the company became interested in high tourist
traffic areas for retail expansion, hoping to duplicate this success at
other retail locations. 20
The location for the company's second retail store was North Conway, New
Hampshire, a major tourist destination in both winter and summer months.
The store opened in July 1996. The third retail location opened at 538
Madison Avenue in New York City in February 1997. The New York City
location was chosen because it had been the number one market for
BearGrams since the company began advertising on radio in 1990. The
company believed that the New York store would benefit from the millions
of dollars of radio advertising that the company had invested in this
market. The fourth store opened in Freeport, Maine, on August 16, 1997,
two doors down from 1.1. Bean.
Fiscal 1997 was a disappointing year for Vermont Teddy. After a year of
controlling costs and a return to profitability in 1996, they had set
out in pursuit of revenue growth in 1997. The 1997 initiatives included
an expanded catalog and the new retail stores. As part of the shift away
from Bear-Grams, the company downsized their radio media buying
department. The company lost money on their catalog programs, and the
new retail stores were not as profitable as expected. Resources diverted
to expanding secondary marketing channels, coupled with accelerating
changes in the radio industry, contributed to a decline in Bear-Gram
sales. The end result was a loss of $1,901,795 in fiscal 1997.21
Because of Vermont Teddy Bear's declining performance, R. Patrick Burns
chose to step down as President and CEO in October 1997. Elisabeth
Robert assumed the title of President and CEO and retained the title of
Chief Financial Officer.
According to CEO Robert, "When we made the decision to expand our
distribution channels in the areas of retail and catalog, our focus was
on being a teddy bear category killer. We thought we were in the teddy
bear business. Now what I believe is that we are in the BearGram
business, the gift business, and the impulse business. This is a
completely different marketplace. Our competitors are the people who
sell chocolates, flowers, and greeting cards. We target the last-minute
shopper who wants almost instant delivery."22 She further stated that
"the primary focus of the company would return to maximizing returns in
the radio BearGram business, which constituted the majority of the
company's annual revenue."23
In 1998, the management team began seriously looking at the
profitability of their various retail locations. They also began looking
at the catalog, intending to optimize its size and product offerings to
ensure its future profitability.
Corporate Governance
As of June 30, 1998, The Vermont Teddy Bear Co., Ine., had a total of
seven Board members and two Executive Officers, both of whom were also
members of the Board of Directors.
The Board members, Executive Officers, and their experience and
qualifications were as follows.
R. Patrick Burns (53) had been President and CEO of Vermont Teddy Bear
from 1995 until 1997. He had been a Director of the company since 1995.
He planned to remain active as a consultant to the company focusing on
developing strategic marketing partnerships for the next two years.
Prior to joining the company, he was the Chief Executive Officer of
Disney Direct Marketing. He had also held senior management positions at
J. Crew, Inc., and at L.L. Bean, Ine. Joan H. Martin (74) was a private
investor who had been a Director of the company since 1991. Martin had
no business experience during the past eight years apart from managing
her private investment portfolio.
Fred Marks (70) became a Director of the company in 1987 and became its
Treasurer and Chairman of the Board in 1989. He served as the company's
Chief Financial Officer until January 1995 and Treasurer until 1996.
Previously Marks had served as Chairman of the Board of two privately
held companies: Selection, Ltd., a manufacturer of remote controls for
computers and televisions; and Contaq Technologies, a manufacturer of
ultrasonic instruments.
Elisabeth B. Robert (43), Director, Chief Executive Officer, President,
Treasurer and Chief Financial Officer, joined the company in 1995 as the
Chief Financial Officer replacing Stephen Milford. She was appointed a
Director of the company in January 1996 and Treasurer of the company in
April 1996. She assumed the titles of CEO and President from R. Patrick
Burns who stepped down from the positions in October 1997. Before
joining Vermont Teddy, Robert served as the Chief Financial Officer for
a high-tech start-up company specializing in remote control devices,
where she was also a founding partner.
Spencer C. Putnam (52), Director, Vice President, and Secretary, joined
the company as its Chief Operating Officer in June 1987 and continued in
this role. He had been a Director of the company and Secretary of its
Board since 1989. Before joining the company, Putnam was the director of
the Cooperative Education Program at the University of Vermont.
David W. Garrett (55) had been a Director of the company since 1987. He
was a Vice President of First Albany Corporation, an investment banking
and brokerage firm. Garrett was also President of the Garrett Hotel
Group, a private hotel development and management firm and President of
The Black Willow Group, Ltd., a private company which owned and operated
The Point, a luxury hotel in Saranac Lake, New York.
Jason Bacon (64) became a Director of the company in 1997. He was a
consultant to nonprofit organizations and a private investor focusing on
real estate and securities with international perspective. Prior to his
involvement with Vermont Teddy Bear, he served as a Managing Director at
Kidder, Peabody & Company
OWNERSHP
As of June 30, 1998, there were 5,183,733 shares of the company's common
stock outstanding held by 1,553 shareholders.25 Approximately 2,551,300
shares or approximately 49.2% of the stock was owned beneficially by the
current directors and officers of the company. These figures did not
include options or warrants held by current directors and officers,
their spouses or minor children to purchase shares of the company's
Common Stock or Series B Preferred Stock.26
In November 1993, the company made an Initial Public Offering (IPO) of
5,172,500 shares of common stock. The stock ranged from $17.19 to $11.44
from offering to December 31,1993. Prior to the IPO, 4,000,000 shares of
common stock were outstanding and held by nine shareholders. Ninety
shares of nonvoting Series A Preferred Stock were held by shareholder
Joan H. Martin. This preferred stock had an 8% cumulative dividend and
liquidation value of $10,000 per share. On July 12, 1996, the company
privately placed 204,912 share of Series B preferred stock. This stock
was held by 12 shareholders and was not entitled to any dividends or
voting rights. The 204,912 Series B shares were convertible into 482,441
shares of common stock.27
The following individuals owned more than 5% of the company's stock as
of June 30, 1998.28
Beneficial Owner
Number of Shares
Percent Owned
Joan H. Martin
1,840,975
35.5
Fred Marks
600,500
11.6
Margret H. Martin
267,000
5.2
Spencer C. Putnam
84,000
1.6
R. Patrick Burns
17,625
0.3
Jason Bacon
5,500
0.1
Elisabeth G. Robert
2,700
0.1
Vermont Teddy has never paid cash dividends on any of its shares of
common stock. The high and low stock prices for 1998 were29
Quarter Ending High
Low
June 30,1998 $1.63
$1.06
March 31,1998 $1.63
$0.75
December 31,1997 $2.13
$0.88
September 30,1997 $2.56
$1.06
Company Philosophy
From its founding by John Sortino in the early 1980s until 1998, the
company's focus has been to design and manufacture the best teddy bears
made in America, using American materials and labor. The company
believed that apart from its own products, most of the teddy bears sold
in the United States were manufactured in foreign countries, and that
the company was the largest manufacturer of teddy bears made in the
United States. The company's Mission Statement can be seen in Exhibit 1.
This philosophy was modified significantly in 1998 with the company's
decision to explore the offshore sourcing of materials and manufacturing
alternatives in an effort to lower the company's cost of goods sold and
to broaden its available sources of supply. Company customer surveys
revealed that price was more important to potential customers than the
"Made in America" labepo During 1998, the company began purchasing raw
materials for bear production and some teddy bear outfits from offshore
manufacturers. Vermont Teddy felt that plush materials from offshore
were of better quality and less costly than those produced in the United
States. They felt that importing these materials would enable them to
produce a better, lower cost product and would provide the flexibility
to meet a broader range of price points in response to customer needs.31
The company planned to continue to handcraft the IS-inch "classic" teddy
bear in Vermont for those customers interested in an American-made
product. The new label read, "Made in America, of domestic and foreign
materials:'32 The company also planned to explore opportunities to
introduce new teddy bear products made offshore to their design
specifications at significantly lower cost points for sale initially
into the wholesale and corporate channels.
With this change in philosophy, the company was committed to
understanding its potential offshore partners and to ensuring that its
partners provided decent, lawful working conditions. It required that
all offshore vendors sign a written statement to this effect prior to
any business dealings.33
Exhibit 1
Mission Statement: The Vermont Teddy Bear Co., Inc.
.
Exhibit 2
Stakeholder Beliefs: The Vermont Teddy Bear Co., Inc.
Our customers are the foundation of our business. Exceeding their
expectations evel}'ii~ will f()~f11 the b~(:kborl~i()t our corporate
culture.Z~alous pursuit ofuworld;(:lass" custom~r servige will build a
self-fulfilling cycle of pride, partners.hip, team spirit, and person?1
commitment in every player in our company.
Our employees are our internal customers. The philosophy that applies to
our, external customers extends also to our internal associates. We will
cultivate a results-oriented environment that encourages fairness,
cpllaboration, mutual respect, and pride in our organization.
Pro-active, positive, open-minded confrontation among well-intentioned
coll~1i~~~s will.ensure Ipnovatj(~.!)Ii reject complacency, a!)l~
stimulate indiv.idual 9f1)'lVth.
Our cOmpany sopports employe~ diversity and provides clear opportunities
for each of us to reach our full personal and professional potential.
Our investors provide capital in good faith, and we are accountable for
creating a realistic return \'Jhile protecting t/)e assets of our
cOmpany. Our financial strength and profitability ar~ essential to
fulfilling-altof our $takeholper commitments,
O~rv,~pdors pr()vide~H;P!3~tner$hip()pportunitY for inn$vative product
~eveloPment,
unsurpassed external 'customer service, and mutual prosperity. This is
based on exceeding our customers' expectations for unique, innovative,
high-quality communications and p,toducts. delivered to our customers
where and when they want them at a price that reinforces our reputation
for perceived value.
Our ~.ommun~ deserves our commitment to being ethica!ly, legally, and
environmentally
respq~,~i8Ie wh.ile re(f,!ai~!~g '" sound. We willsuppo~torganizations
and ihdivi~uals
with values similar to, cmrs an participate actively in those
enterprises that seek to improve local and world conditions for future
generations. We will seek to maintain a dynamic balance between meeting
our commitment to our community and maintaining the viability of our own
enterprise.
Exhibit 2 details Vermont Teddy's statement of Stakeholder Beliefs. The
company believed that the quality, variety, and creativity of the
company's products, and its commitment to customer service, wete
essential to its business. Its manufacturing practices were
environmentally sound. The company sought to use the best available
materials for its bears. Customer service policies rivaled those of L.L.
Bean. Each bear was sold with a "Guarantee for Life;' under which the
company undertook to repair or replace any damaged or defective bear at
any time even if eaten by the family dog or destroyed by a lawn mower.34
Products and Services
Vermont Teddy Bear made old-fashioned, handmade, jointed teddy bears
ranging from 11 to 72 inches tall, in 6 standard color selections
including tan, honey, brown, and black. More than 100 different bear
outfits were available for customers to outfit and individualize their
bears or to emphasize certain relevant characteristics of the receiver
such as policewoman, gardener, doctor, or racing car driver. Some of the
more popular outfits included tutus, wedding gowns,
hlredCl~J;-\JЈi5U'&'"S'3U:f'''1-a.rlu'3pU['L3.tlifm:mfl''?
m;"'cCl:n.ulda 1.,m;J- De'aress~o'm a Mae varfery or
outfits that personalized the bear for significant life events, such as
a new baby, get well, birthdays, graduations, weddings, and "I love
you:' A collection of bears could also be designed for schools, sports
teams, businesses, and other organizations. New "edgier" products were
added
in 1997 such as "Shredder, the Snowboarder Bear;' targeted primarily at
radio customers. As of June 30, 1998,40% of the outfits were outsourced
to overseas contractors.35 Prices for the bears in standard outfits
ranged from $40 to more than $200. Custom-made clothing was available at
an additional cost.
Until 1997, bear materials were mostly American made, though mohair fur
used for the premium bears came from Europe. All other fur was
hypoallergenic, plush polyester. Bears were stuffed with virgin Dacron
91, a fire retardant filler for safety. Vermont teddy bears had movable
joints, a feature associated with traditional, high-quality teddy bears.
These joints were made from recycled Ben & Jerry's ice cream containers.
In keeping with the company's attempt to produce the bears with domestic
materials, the bears' eyes had come from the only eye maker left in
America. Noses and paw pads were ultrasuede, also 100% American made.36
Using American-made materials had been one of the methods by which
Vermont Teddy Bear differentiated its products from those of its
competitors. The company's 1998 move to the offshore sourcing of raw
materials represented a significant departure from the company's
historical position as an American manufacturer using almost exclusively
American materials.37
In addition to the products it manufactured, Vermont Teddy Bear sold
items related to teddy bears, as well as merchandise from other
manufacturers featuring the logo of Vermont Teddy Bear. It did a small
amount of licensing with Tyco, Landmark, and a manufacturer of
children's and women's sleepwear. Some items such as clothing, jewelry,
and accessory ornaments were available primarily at the company's retail
stores and through its direct mail catalog. The company also sold
stuffed toys that had been manufactured by other companies, such as Gund
and Steiff.38 Vermont Teddy Bear planned to alter this strategy in 1999
to focus more attention on the sale of the company's own manufactured
products, including those manufactured offshore.
In addition to manufacturing and selling bears and bear-related
merchandise to individual consumers, the company's Corporate Division
provided unique and original customized products for corporations.
Vermont Teddy also silk-screened or embroidered bears on clothing with
the customer's logo, slogan, or team name. In 1998, the company planned
to offer a line of offshore-manufactured ancillary products for
corporate customers and outlets such as QVc.39 Information about
products offered through the company's Corporate and Wholesale Programs
could be found on the company's Web site.
I Marketing Strategies and Distribution Methods
Vice President of Sales was Katie Camardo. Robert D. Delsandro was
appointed Vice President of Marketing and Design in May 1998. He had
been employed by The Vermont Teddy Bear Company as Creative Director
since 1996 and had been responsible for developing a completely new look
for the company's products, retail stores, printed promotional
materials, and catalog. He was credited with creating the new "edgier"
look of Vermont Teddy Bear.4o
Although many teddy bear producers defined their product as a toy and
marketed solely to children, Vermont Teddy Bear marketed its bears as an
attractive gift or collectible for both children and adults. The company
defined its target market as "children between the ages of 1 to 100."41
The company was primarily known for its Bear-Gram delivery service.
Bear-Grams were personalized teddy bears that were delivered directly to
recipients as gifts for holidays and special occasions. Bear-Grams were
gift boxed in unique containers complete with "air-holes" for the bear.
The bears were accompanied by a personal greeting from the sender.
Orders for Bear-Grams were generally placed by calling a toll-free
number (1-800-829BEAR) and speaking with company sales representatives
called "Bear Counselors." Customers could also visit the company's Web
site
entered an order on a computer, which was part of the company's computer
network of approximately 250 workstations that linked order entry with
sales and accounting systems. The company had plans to upgrade, expand,
and integrate its computer systems, including the purchase of an
inventory control system. In 1994, the company installed a new telephone
system, which improved its telemarketing operations and was designed to
accommodate future growth in telephone call volume. The company strove
to provide rapid response to customer orders. Orders placed by 4 P.M.
EST (3 P.M. on the Internet) could be shipped the same day. Packages
were delivered primarily by UPS and other carriers by next day air or
ground delivery service.42 The company also sought to respond promptly
to customer complaints. The company believed that, as a result of the
quality of its products and service, it had established a loyal customer
base.
The company attributed its success to this direct-marketing strategy.
Since 1990, when the Bear-Gram was introduced to prime-time and
rush-hour audiences in the New York City market, the company had
continued to rely primarily on Bear-Gram advertising. It had also
continued to focus its advertising on morning rush-hour radio spots,
with well-known personalities such as Don Imus and Howard Stern,
promoting the bears.
For the fiscal year ending June 30,1998, Bear-Grams accounted for 70.2%
of net revenues of $17.2 million. The percent of net revenues for the
company's primary distribution methods can be seen in Exhibit 3.
Included in Bear-Gram revenues were sales from the company's Internet
Web site. Other principal avenues of distribution included company-owned
retail stores, direct mail catalogs, and licensing and wholesale
agreements. The company's sales were heavily seasonal, with Valentine's
Day, Christmas, and Mother's Day as the company's largest sales
seasons.43 For Valentine's Day 1998, more than 47,000 bears were sent
out by people across the country who wished to say "I love you."44
During the summer of 1997, Vermont Teddy Bear Company began doing
business on the Internet with a new Web site designed to inform and
entertain Internet subscribers. The Web site provided a low-cost visual
presence and was developed for the purpose of supporting the radio
advertising of Bear-Grams. Pictures of the product and other information
could be accessed. A total of 396,000 hits to the Web site were recorded
during fiscal 1998, more than double the 195,000 hits recorded during
fiscal 1997.45 By August 1998, 10 to 20% of Vermont Teddy's business was
being handled online.46 All radio advertisements were tagged with a ref
erence to the Web site, which, in turn, provided visual support for the
radio advertising and the opportunity for customers to place orders
onlineY
Since 1990, the company had extended its Bear-Gram marketing strategy
beyond New York City to include other metropolitan areas and syndicated
radio programs across the United States. During the fiscal year 1998,
the company regularly placed advertising on a total of 44 radio stations
in 12 of the 20 largest market areas in the United States.48 Exhibit 4
shows the company's largest markets. Exhibit 5 shows the most frequent
reasons given by customers for purchasing a Vermont Teddy Bear-Gram. The
company was featured on Dateline NBC, Tuesday, December 17, 1996. News
broadcaster Stone Phillips interviewed R. Patrick Burns, President and
CEO, on the subject of American companies that manufactured products in
the United States.49
Exhibit 3
Primary Distribution Methods: The Vermont Teddy Bear Co., Ine.
Note:
1. Excludes Bear-Gram revenues from retail operations.
Source: The Vermont Teddy Bear Co., Inc., 1998 Annual Report, p. 3.
INDUSTRY EIGHT: MANUFACTURING
Exhibit 4
Vermont Teddy Bear's Largest Markets
(Percentage of Bear-Grams for the 12 months ending June 30)
Markets 1998 1997 1996 1995
New York City 37.8% 40.8% 35.5% 38.6%
Boston 13.4% 13.2% 9.5% 9.5%
Philadelphia 8.9% 11.6% 8.9% 7.3%
Chicilgo 6.5% 8.9% 7.3 % 8.5%
Los Angeles 6.3% 5.8% 4.0% 3.8%
Source: The Vermont Teddy Bear Company, Inc., 1998 Annual Report, p. 4.
In 1998, the company was planning to expand its radio advertisements
into new markets including Minneapolis, Dallas, and Milwaukee and to
examine opportunities to consolidate radio advertising buys through
annual contracts with major stations. 50
The company had explored additional methods to market Bear-Grams and to
publicize its toll-free telephone number. In June 1993? the company's
toll-free number was listed for the first time in the AT&T toll-free
telephone directory. Before then, the toll-free number was not readily
available to customers, except in radio advertisements. Vermont Teddy
Bear also expanded its listings in metropolitan phone book Yellow Pages
and initiated the use of print advertising in magazines and newspapers,
as well as advertising on billboards and mass transit panels.
Vermont Teddy Bear believed that the popularity of Bear-Grams created an
opportunity for catalog sales. For the fiscal year ending June 30,1998,
direct mail accounted for 9.2% of net revenues. 51 In addition, repeat
buyers represented 33% of sales, giving the company an opportunity to
use its customer database in excess of 1,500,000 names. 52 The company
introduced its first catalog for Christmas in 1992. By 1994, catalog
sales accounted for 16.7% of sales.53 Vermont Teddy planned to prepare
three catalogs in 1995, but the management shakeup that resulted in
Patrick Burns's becoming CEO caused the company to scale back its plans.
Instead it mailed just 165,000 copies of an eight-page book to previous
customers. The small-size book kept up the company's presence but did
not have the pages nor the product range to boost holiday sales.
Quarterly sales dropped 24% below December 1994 levels. 54
In 1996, to compensate for the decline in radio advertisement
effectiveness, the company increased December 1996 catalog circulation
to approximately one million. To increase its catalog circulation,
Vermont Teddy Bear acquired additional mailing lists from prominent
catalog companies, including Disney, FAa Schwarz, Hammacher-Schlemmer,
Saks Fifth Avenue,
Exhibit 5
Most Frequent Reasons for Purchasing Bear-Grams: Vermont Teddy Bear Co.,
Inc. (Percentage of Bear-Grams for the 12 months ending June 30)
Reasons for RUrchases 1998 1997 1996 1995
Valentine's Day 27.7% 22.1 % 20.8% 19.2%
Birthdays 11.8% 11.6% 13.4% 15.9%
New Births 11.6% 10.3% 12.8% 9.9%
Get Wells 11.0% 9.7% 12.0% 10.4%
Christmas 8.4% 5.6% 8.6% 10.4%
and Harry & David. To strengthen its retail and catalog offerings,
Vermont Teddy broadened the scope of its product line. New items
included lower priced teddy bears, company-designed apparel, toys,
books, and jewelry, as well as plush animals from other manufacturers
such as Gund and Steiff.
Its Valentine mailing in 1997 amounted to 600,000 catalogs. Direct mail
revenues
increased from 1996, but they did not meet expectations due to the poor
performance of rented mailing lists. In addition, the company incurred
higher than anticipated costs due to the outsourcing of the order
fulfillment process and was left with inflated inventories due to lower
than expected sales.
During fiscal 1998, more than 15 million circulated pages were mailed to
prospective customers. CEO Robert believed that Vermont Teddy's in-house
list, which stood at 1.4 million names, would be a profitable future
source of business. The company planned to increase the number of
circulated pages during 1999, primarily though renting and exchanging of
additional names from other catalogs and mailing to more names on the
in-house mailing list. 55 It planned to handle all catalog fulfillment
at company facilities in Shelburne. It also planned to continue to
develop its own internal systems to adapt to the requirements of its
catalog customers as the catalog business grew. 56
During fiscal 1998, sales from retail operations accounted for 18.0% of
net revenuesY Due to the continued unprofitability in its retail stores,
the company reversed its retail expansion strategy in fiscal 1998.
Vermont Teddy Bear's New York City retail outlet was closed to the
public on December 7, 1997, due to structural problems. A sales profile
for the store reaffirmed the company's core market. Bear-Grams accounted
for 60 to 70% of the store's purchase~the same product that was being
sold through the radio advertisements, without the overhead of New York
rents. 58
The company planned to close its retail location in Freeport, Maine, in
August 1998 and its North Conway, New Hampshire, store in October 1998.
CEO Robert commented, "After two successful holidays at Valentine's Day
and Mother's Day, it is more clear than
ever, that focusing on radio Bear-Grams is the right strategy. Retail
apart from our highly successful factory store here in Shelburne, is not
a distribution channel that fits our current business. We are in the
Bear-Gram business, offering a convenient, creative and expressive gift
delivery service. It makes no sense to ship out a Bear-Gram from an
expensive retail store front."59
The Shelburne factory store had continued to be successful as the
company added new merchandise. To make the store more entertaining and
interactive, the company invested $100,000 in its renovation in 1996.60
Programs such as "Make a Friend for Life;' which enabled customers to
stuff, dress, and personalize their own bear and "virtual" factory
tours, using video and theatrical demonstrations of teddy bear making
received favorable responses from customers.61
In November 1996, the company announced that it had joined forces with
Gary Burghoff to produce a video that promoted the company's new "Make a
Friend for Life" products.62 Burghoff was known for playing the
character Radar O'Reilly in the M*A *S*H television show and was famous
for his relationship with his teddy bear.
Vermont Teddy Bear had also targeted chilclrpn'~ litpr,>hwo ~o ~
'''~'.-&.r ~~ ~_'>:"~'U>5 mUU\.
recognition. A children's book, How Teddy Bears Are Made: A Visit to the
Vermont Teddy Bear Factory, was available for purchase and could be
found at libraries. The company also began to publish other children's
books in order to develop characters for their teddy bears.
Beginning September I, 1997, The Vermont Teddy Bear Co., Inc.,
introduced nationally a line of officially licensed NFL Teddy Bears. The
NFL Bear was offered in 14 different teams and wore NFL Properties'
uniforms and gear, including officially licensed jerseys, pants, and
Riddell helmets.63 NFL Properties, Inc., was the licensing and
publishing arm of the National Football League. To advertise this new
product, Vermont Teddy enlisted Wayne Chrebet, wide receiver for the NY
Jets, and Mark Chmura, tight end for the Green Bay Packers, to be
spokespeople for the NFL Teddy Bears. Chrebet and Chmura were featured
in radio and print advertisements in New York and Milwaukee,
respectively. The company believed that officially licensed NFL Bears
would be a popular choice for sports fans, especially during the
football and Christmas seasons. The company advertised the bear on
sports-talk radio in metropolitan areas around the co untry. 64
Vermont Teddy Bear conducted business almost exclusively in the United
States. Bears could be shipped abroad, but it was very expensive. Some
bears were shipped into Canada, and some radio advertising was done in
Montreal. The added shipping charges>calong with unfavorable exchange
rates, caused price resistance to the products in Canada. In 1995, the
company test marketed both the Bear-Gram and the use of the 800 number
via radio advertising in the United Kingdom. Test results indicated that
both were successful, but the program had to be eliminated because the
company did not have the corporate infrastructure or the financial
resources to support it.65 The company had some trademarks registered in
Great Britain and Japan and had discussions with companies in both of
these countries. According to Robert, "These are the two countries that
seem to have the most interest in Vermont Teddy's products."66
Vermont Teddy Bear's management believed that there were a number of
opportunities to increase company sales. The company's strategy for
future growth included increasing sales of
Bear-Grams in existing markets, expanding sales of Bear-Grams in new
market areas, increasing direct-mail marketing of teddy bears through
mail-order catalogs and similar marketing techniques, increasing sales
of premium teddy bears through wholesale channels to unaffiliated retail
stores, and increasing the company's retail store sales through
increased factory tours and visits.67 Management was also interested in
expanding sales through its Corporate Division.
I Facilities and Operations
In the summer of 1995, in an effort to consolidate locations and improve
manufacturing efficiency, the company relocated its offices, retail
store, and manufacturing, sales, and distribution facilities to a newly
constructed 62,000-square-foot building on 57 acres in Shelburne,
Vermont. The new site was approximately 10 miles south of Burlington,
the state's largest city. The new buildings were designed as a small
village, the Teddy Bear Common, to promote a warm and friendly
atmosphere for customers as well as employees. The new facility was
estimated to have cost $7,900,00.68 The company intended to minimize
lease costs by subleasing any unused space. On September 26,1995, the
company had entered into a $3.5 million commercialloan with the Vermont
National Bank. Repayment of the mortgage loan was based on a 30-year
fixed-principal payment schedule, with a balloon payment due on
September 26, 1997.69
On July 18,1997, Vermont Teddy completed a sale-leaseback transaction
with W. P. Carey and Co., Inc., a New York-based investment banking
firm, involving its factory headquarters and a portion of its property
located in Shelburne. W. P. Carey bought the 62,000-square- foot
headquarters facility and its IS-acre site, leaving the company with
ownership of the additionalland. W. P. Carey was not interested in
acquiring the other building lots on the site due
to their zoning restrictions. This financing replaced the company's
mortgage and line of credit, which was about to come due on September
26,1997.7°
The company had a three-year lease on 10,000 square feet of inventory
space at a separate location in Shelburne for $56,000 annually.71 The
company also had the following lease agreements for its retail stores:72
Square Annual 1999 Rent
Location Footage Rent Obligation Obligation
North Conway, NH 6,000 $ 49,608 $ 28,938 1/3111999
New York City, NY 2,600 $300,000 $300,000 10/23/2006
Freeport, ME 6,000 $240,000 $ 25,644 8/611998
For in-house manufacturers, all production occurred in the Shelburne
manufacturing space, which included state-of-the-art packing and
shipping equipment. The plant manager was Brad Allen. Visitors and
guests were given the opportunity to take guided or self-directed tours
that encompassed the entire teddy bear making process. The factory tour
had become such a popular tourist attraction that approximately 129,000
visitors toured the factory and retail store in fiscal 1998. Since
moving to its new location in 1995, more than 390,000 visitors had
toured the facilities.73
In 1994, when the company was looking for a new location, it purchased
only the IS-acre parcel it built on in Shelburne. Then the company
bought the surrounding property because it wanted some control in the
kind of neighbors it would have. As of June 30, 1998, plans to sell or
lease the other lots had not been successful due to stringent zoning
restrictions on the site. The zoning restrictions required that less
than a quarter of the space be devoted to retail, effectively ruling out
any kind of direct retail or outlet mall approach, which is the kind of
business that could take advantage of the visitor traffic to the teddy
bear factory. The company proposed a project for this unused space
involving an attempt to bring together up to 50 Vermont manufacturers in
a cooperative manufacturing, demonstration, and marketing setting-a
made-in-Vermont manufacturing/exhibition park. Investors expressed
concerns about the capital investment requirement.74
Vermont Teddy Bear began using Sealed Air Corp's Rapid Fill air-filled
packaging (air bags) system to protect its teddy bears from damage
during shipping in 1997. Previously it had used corrugated cardboard
seat belt inserts to package the bears during shipping, but found
that there were drawbacks, including minor damage to the products and
the high cost of postage. Sealed Air's inflatable plastic bags were
lighter than the corrugated inserts resulting in savings in postage
costs and the plastic bags did not damage the bears with plush fur.
Vermont Teddy Bear saved $150,000 in postage costs in 1997 and could
realize $30,000 to $40,000 in additional savings in 1998.75
Vice President of Data Processing was Bonnie West. According to CEO
Robert, Vermont Teddy Bear's desktop computers were in need of updating.
However, West believed the company's call centers had state-of-the-art
technologies, including PC terminals and very-high-tech telephone
switching equipment that allowed the company to handle significant call
volume. The company also had a high-tech shipping system, including
state-of-the-art multicarrier software so that if a major carrier like
UPS went on strike, it could immediately make adjustments.
I Human Resource Management
Vermont Teddy Bear employees were known as the "Bear People;' a term
that expressed man
agement's appreciation and respect for their dedication. Beth Peters was
Vice President of Human Resources. As of June 30, 1998, the company
employed 181 individuals, of whom 94 were employed in production-related
functions, 67 were employed in sales and marketing positions, and 20
were employed in administrative and management positions.76 None of the
employees belonged to a union. Overall, the company believed that
favorable relations existed with all employees.77
The company supplemented its regular in-house workforce with home
workers who performed production functions at their homes. The level of
outsourced work fluctuated with company production targets. As of June
30, 1998, there were 21 home workers producing product for the company.
Home workers were treated as independent contractors for all purposes,
except for withholding of federal employment taxes. As independent
contractors, home workers were free to reject or accept any work offered
by the company.78 Independent contractors allowed the company
flexibility in meeting heavy demand at holiday periods such as
Christmas, Valentine's Day, and Mother's Day. This relationship also
allowed the home workers flexibility in scheduling their hours of work.
Bear Market
The teddy bear was first created in the United States in 1902. The
Steiff Company of Grengen/Brenz, Germany, displayed one at a fair in
Leipzig in 1903. Thomas Michton of Brooklyn, New York, was credited with
creating the name "Teddy Bear" in honor of President Theodore Roosevelt.
At the time of the naming, President Roosevelt had been on a
wellpublicized hunting trip in Mississippi while negotiating a border
dispute with Louisiana. When he came up empty-handed from his hunting,
his aides rounded up a bear cub for the President to shoot. His
granddaughter, Sarah Alden "Aldie" Gannett, said, "I think he felt he
could never face his children again if he shot anything so small. So he
let it go."79
The incident was popularized in cartoons by Clifford Berryman of the
Washington Post. Michton and his wife stitched up a couple of
honey-colored bears and then displayed them in their novelty store
window along with a copy of Berryman's cartoon.
The bears sold in a day. Michton made another stuffed bear and sent it
to President Roosevelt requesting his permission to use his name.
Roosevelt replied with a handwritten note: "I doubt if my name will mean
much in the bear business, but you may use it if you wish." It was
simply signed "T. R."80
Teddy bears today fall into one of two broad categories: either to a
subsegment of the toy industry, plush dolls and animals, or are part of
the collectibles industry. Although no one knows exactly how many teddy
bears are sold each year, it is known that teddy bears accounted for 70
to 80% of the $1 billion plush toy industry in 1997.81 "Bears sell
across every season, occasion, and holiday," said Del Clark, Director of
Merchandising for Fiesta, a Verona, California, maker of stuffed
animals.82 Not only have bears historically been a steady seller, but
returns of teddy bears are almost nonexistent.83
The U.S. toy industry (including teddy bears, dolls, puzzles, games,
action figures and vehicles, and preschool activity toys) was estimated
to be worth $25 billion in sales and had been growing at an annual rate
of more than 3%.84 With its combination of a large demographic base of
children and a population with a high level of disposable income, the
U.S. toy market was larger than those of Japan (the number two market)
and Western Europe combined.85 Most toys that are sold in the United
States were made in foreign countries. Chinese-produced toys represented
about 30% of all U.S. toy sales due to inexpensive labor and favorable
duty rates on imports.86 The big toy manufacturers were buying each
other's operations and those of smaller toy makers. In 1997, the number
one toy manufacturer, Mattei (maker of Fisher-Price toys and Barbie
dolls), bought Tyco Toys, formerly ranked number three. Hasbro (maker of
G.!. Joe, Monopoly, and Milton Bradley toys) was the number two toy
maker. Some games and toys maintained popularity over time, others were
passing fads. It was difficult to predict which
would remain popular over time. In the 1990s, marketing appeared to be
the key to success. Toy production and marketing were regularly
integrated with movies and television programs. For example, Star Wars
action figures and other merchandise accounted for about one third of
number 3 toy make Galoob Toys' 1997 sales of $360 million.87 Small toy
makers found it difficult to compete with the multimillion-dollar
marketing campaigns and the in-depth market research of companies like
Mattei, although there was always an exception such as Beanie Babies.
During 1997, manufacturers' shipments of plush products rose 37.5%, from
$984 million to $1.4 billion, largely as a result of the Beanie Baby
craze.88 Designed by Ty Warner, the owner of Ty, Inc., Beanie Babies had
been the big sales item since 1996 when they generated sales of $250
million. The $5 toys were produced in limited numbers and sold through
specialty toy stores rather than through mass-market retailers. Beanie
Baby characters no longer in production fetched up to $3,000 among
collectors. Some retailers reported a decline in the sales of other
plush toys due to the demand for Beanie Babies.89
Competitors of Vermont Teddy Bear were of various types. Major plush
doll manufacturers such as Mattel and Hasbro were considered competition
in this sub segment of the toy industry. More direct competition for
Vermont Teddy came from other bear manufacturers including Steiff of
Germany, Dakin, Applause, Fiesta, North American Bear, and Gund, the
leading maker of toy bears. Information about some of these direct
competitors is presented in Exhibit 6.
In general, these competitors relied on sales though retail outlets and
had much greater financial resources to drive sales and marketing
efforts than did Vermont Teddy Bear. Unlike Vermont Teddy Bear, these
companies depended on foreign manufacturing and sources of raw
materials, enabling them to sell comparable products at retail prices
below those currently offered by Vermont Teddy. In addition, small craft
stores had begun to sell locally produced all-American-made teddy bears,
and publications had been developed to teach people to craft their own
bears.
The collectible market in bears had recently been booming with people
seeking bears as financial investments. Collectible bears are those that
are meant to be displayed, not drooled or spit up on by their owners.
"In the past 5 to 10 years we've seen a tremendous growth in the
Exhibit 6
Competition: The Vermont Teddy Bear Co., lne.
Steiff
High-quality bears are manufactured in Germany and the Far East. The
bears are not individually customized. The company's trademark is a
button sewn into the' ear of each bear. Prices of Steiff bears range
from $50 for a 6-inch-tall bear to several thousand dollars for a
life-size model. Th\3 bears are sold in a variety of outlets from
discount stores and supermarkets to high-end specialty shops and antique
stores.
Gund
This mass producer of a wide range of plush animals established an
Internet Web site, allowing users to view and purchase products. Bears
are manufactured overseas, primarily in Korea. Appearance of the bears
is different from Vermont Teddy Bears', with shorter noses and limbs.
They offer a broad range of styles and prices.
Teddy Bear Factory
This is the only other American manufacturer of teddy bears. The company
is located in San Francisco and highly regional in its sales and
marketing efforts. Vermont Teddy Bear advertises in the San Francisco
Bay area but does not consider the Teddy Bear Factory to be strong
competition because of the size arid because its market is so regional.
North American Bear Company
This middle-sized company manufactures all of its bears in the Orient,
primarily in Korea. Appearance of the bears is different from Vermont
Teddy Bears, with shorter noses and limbs. The' company advertises in
trade magazines and has begun to do consumer advertising. It sells to
retailers in Europe and Japan and collectors and gift shops in the
United States.
Applause Enterprises, Inc.
This company focuses on manufacturing plush toy versions of Sesame
Street, Looney Tunes, Star Wars, Muppets, and Disney characters as well
as nonplush toys. Company was formed by the 1995 merger of plush toy
maker Dakin and a company founded by Wallace Berrie.
upscale bear, the limited editions, and the artist-designed bears;' said
George B. Black, Jr., director of the Teddy Bear Museum in Naples,
Florida.9o The "collectible" segment of the plush market generated $441
million in consumer sales for 1996, up from $354 million in 1995.
Collectible plush sales for 1997 were expected to reach nearly $700
million. This would make plush one of the fastest growing categories in
the $9.2 billion collectibles industry.91 Collectible bears started at
about $25 but could cost $1,000 or more. This number was somewhat
misleading, considering that the value of a collectible bear can be in
excess of $50,000. A 1904 Steiff"Teddy Girl" bear sold at a Christie's
auction in 1994 for a record $171,380.92
Two trade magazines, Teddy Bear and Friends and Teddy Bear Review,
targeted the collectibles market. These magazines tell bear collectors
where they can buy and sell old bears. In 1998, major bear shows and
jamborees were held in at least 25 states, as well as hundreds of
bear-making retreats and workshops.93
The concept of Bear-Grams lent itself to two distinct groups of
competitors. Vermont Teddy Bear competed not only with soft plush
stuffed animals, especially teddy bears, but also with a variety of
other special occasion greetings such as flowers, candy, balloons,
cakes, and other gift items that could be ordered by phone for special
occasions and delivered the next day. Many of these competitors had
greater financial, sales, and marketing resources than Vermont Teddy
Bear.94
I Patents, Trademarks, and Licenses
The company's name in combination with its original logo was a
registered trademark in the United States. In addition, the company
owned the registered trademarks in the United States for "The Vermont
Teddy Bear Company," "Bear-Gram," "Teddy Bear-Gram;' and "Make A Friend
For Life." The company also owned the registered service marks "Bear
Counselor;' "Vermont Bear-Gram;' and "Racer Ted;' and had applications
pending to register the company's second and third company logos, "Bear
animal;' "Coffee Cub;' "Vermont Bear-Gram;' "Vermont Baby Bear;' "The
Great American Teddy Bear;' "All-American Teddy Bear;' "Beau and
Beebee;' "Teddy-Grams;' and "Vermont Teddy Wear."95
Vermont Teddy Bear also owned the registered trademark "Vermont Teddy
Bear" in Japan and had an application pending to register "The Great
American Teddy Bear" in Japan.96
Although the company had continuously used the "Bear-Gram" trademark
since April 1985, its initial application to register the mark on June
13, 1990, was rejected by the U.S. Patent and Trademark Office due to
prior registration of the mark "Bear-A-Grams," by another company on
June 7, 1988. The company reapplied to register "Bear-Gram;' and its
application was approved on November 5, 1996.
The company also claimed copyright, service mark, or trademark
protection for its teddy bear designs, its marketing slogans, and its
advertising copy and promotional literature.
On May 16, 1997, Vermont Teddy Bear sued Disney Enterprises, Inc., for
injunctive relief and unspecified damages claiming that Disney copied
its bear-by-mail concept with Pooh Grams based on Disney's Winnie the
Pooh character. The complaint accused Disney of unfair competition and
trademark infringement saying the Pooh-Gram is "confusingly similar" to
Bear-Grams in name, logo, how it is personalized, how it is delivered,
and even how it is marketed.97 Disney introduced Pooh-Grams in its fall
1996 catalog and escalated its promotion of the product using the
Internet, print, and radio advertising. Disney disagreed saying that the
Vermont Teddy lawsuit was without merit because Winnie the Pooh has been
a well-known Disney character for 25 years and there are all kinds of
grams--mail-grams, candy-grams, money-grams, telegrams, flower-grams-not
just Bear-Grams.
On September 9,1997, Vermont Teddy announced that it had entered into an
agreement to resolve its dispute with Walt Disney Co. Under the
agreement, 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 and will adequately distinguish its trademarks and
service marks from those of Vermont Teddy Bear. Vermont Teddy in turn
will be allowed to offer certain Winnie-the-Pooh merchandise for sale in
its mail order catalogs but cannot offer the merchandise with its
Bear-Gram program.98
I Finance
On November 23,1993, Vermont Teddy Bear Co., Inc., sold 1.15 million
shares of stock at $10 a share through an underwriting group led by
Barrington Capital Group L.P. The stock rose as high as $19 before
closing the day at $16.75, an increase of 67.5% in its first day of
trading. The market's reaction to the IPO signaled that investors
thought the stock was undervalued at $10 and that the company had a
great deal of growth potential. During fiscal 1998, the company's stock
price fluctuated between $2.56 and $0.75 a share. This was an indication
that investors reconsidered the growth potential of Vermont Teddy Bear.
Vice President of Finance was Mark Sleeper. Exhibits 7 and 8 detail
Vermont Teddy Bear's financial situation. Prior to 1994, Vermont Teddy
Bear had experienced a great deal of success and profitability. The
company's net sales increased 61 % from $10,569,017 in 1992 to
$17,025,856 in 1993, while the cost of goods sold decreased from 43.1 %
of sales to 41.8% during the same time period. Net income increased 314%
from $202,601 in 1992 to $838,955 in 1993.
Sales reached a peak in 1994 at $20,560,566. This represented a 21 %
growth over 1993. Unfortunately profits did not experience similar
growth. Had it not been for an almost $70,000 tax refund, the company
would have experienced a net loss in 1994. The company's net profit fell
to $17,523 after taxes in 1994 due to a substantial increase in both
selling expense and general and administrative expenses. These two items
combined for an increase of 35% over comparable figures for 1993.
In 1995, sales fell to $20,044,796. Although this represented only a
2.5% decline, this decline in sales painted a picture for the next two
years. while sales were decreasing, selling and general and
administrative expenses continued to climb. These expenses grew by 10%
to $13,463,631 in 1995. These two items represented 67% of sales in
1996, whereas they were 53% of sales in 1993.
After three years of declining sales, Vermont Teddy Bear's sales grew by
4.4% in 1998 to $17,207,543. Vermont Teddy Bear experienced a loss of
$2,422,477 in 1995. It returned to profitability in 1996, earning
$151,953. Unfortunately that was the last profitable year for the
company. Losses were $1,901,745 in 1997 and $1,683,669 in 1998. Interest
expense had risen dramatically for the company from $35,002 in 1995 to
$608,844 in 1998.
The company included in its quarterly report to the SEC (Filing Date:
5/14/98) that it had been operating without a working capital line of
credit since July 18, 1997. On that date, 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. The company received
$5.9 million from this transaction. Of this amount, $3.3 million was
used to payoff the mortgage and $600,000 was used to payoff the line of
credit. A $591,000 transactions cost was associated with the
sale-leaseback. The lease obligation was repayable on a 20-year
amortization schedule through July 2017.
On October 10, 1997, Vermont Teddy received a commitment from Green
Mountain Capital L.P. whereby it agreed to lend the company up to
$200,000 for up to five years at 12% interest. The loan was secured by
security interest in the company's real and personal property.
Green Mountain Capital also received warrants to purchase 100,000 shares
of common stock at an exercise price of $1.00. The warrants could be
exercised anytime from two years from the date of the loan to seven
years from the date of the loan.
Exhibit 7
Consolidated Balance Sheets: The Vermont Teddy Bear Co., Inc.
Year Ending June 30
'1998
19941
1997
19931
1996
19921
1995
Assets
Current assets
Cash
Prepaid expenses
Due from officer
Deferred income taxes
Total current assets Propertyandequipmellt Constructioll in progress
Due from officer
Deposits and other assets
Notes receivable
Total assets
Liabilities and shareholders' equity
Current liabilities
Cash overdraft
Line of credit Notes"payable"bank
Current installments of
Long"term debt
Capital lease obligations
Accounts payable
Accrued expellses
$ 1,527,052 $ 4,41,573 $ 1,121,500 $ 1,070,862 $ 2,379,760 $ 8,561,525 $
51,538
46,304
131,550
122,679
14;2;029
103,762 77,815
2,396,245
3,302,313
1,974,731
3,042,484
4,024,247
2,425,233 1,135,940
444,229
386,947
277,502
213,236
568,680
123,886 10,681
-
-
-
-
' 565,714
-
233,203
259,016
240,585
126,393
322,106
