bbw20140927_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 


 

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 For the quarterly period ended September 27, 2014

 OR

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from              to              

 Commission file number: 001-32320  


 BUILD-A-BEAR WORKSHOP, INC.

(Exact Name of Registrant as Specified in Its Charter)  


Delaware

43-1883836

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)

 

1954 Innerbelt Business Center Drive

St. Louis, Missouri

63114

(Address of Principal Executive Offices)

(Zip Code)

 

(314) 423-8000

(Registrant’s Telephone Number, Including Area Code)

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  ☒    No   ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☐

 

Accelerated filer ☒

     

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No   ☒

 

As of November 3, 2014, there were 17,395,493 issued and outstanding shares of the registrant’s common stock.

 



 

 
1

 

 

BUILD-A-BEAR WORKSHOP, INC.

INDEX TO FORM 10-Q

 

 

Page

Part I Financial Information

 

     

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

     

Item 4.

Controls and Procedures

20

 

Part II Other Information

     

Item 1A.

Risk Factors

20

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

     

Item 6.

Exhibits

21

   

Signatures

22

 

 
2

 

 

PART I-FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)

 

 

   

September 27,

   

December 28,

   

September 28,

 
   

2014

   

2013

   

2013

 
   

(Unaudited)

           

(Unaudited)

 

ASSETS

 

Current assets:

                       

Cash and cash equivalents

  $ 40,451     $ 44,665     $ 13,802  

Inventories

    45,712       50,248       56,671  

Receivables

    10,144       14,542       10,515  

Prepaid expenses and other current assets

    12,188       11,547       14,602  

Deferred tax assets

    998       81       269  

Total current assets

    109,493       121,083       95,859  
                         

Property and equipment, net of accumulated depreciation of $183,841; $177,512 and $179,915, respectively

    61,031       70,163       69,562  

Other intangible assets, net

    365       518       571  

Other assets, net

    3,976       3,847       3,025  

Total Assets

  $ 174,865     $ 195,611     $ 169,017  
                         

LIABILITIES AND STOCKHOLDERS' EQUITY 

 

Current liabilities:

                       

Accounts payable

  $ 28,369     $ 34,977     $ 33,517  

Accrued expenses

    13,145       16,380       9,162  

Gift cards and customer deposits

    25,869       33,786       23,092  

Deferred revenue

    4,173       4,687       4,935  

Deferred tax liability

    856       900       -  

Total current liabilities

    72,412       90,730       70,706  
                         

Deferred franchise revenue

    1,004       905       1,000  

Deferred rent

    13,716       19,357       19,050  

Other liabilities

    1,367       229       492  
                         

Stockholders' equity:

                       

Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at September 27, 2014, December 28, 2013 and September 28, 2013

    -       -       -  

Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 17,383,428; 17,386,920 and 17,364,772 shares, respectively

    174       174       174  

Additional paid-in capital

    68,749       69,094       68,460  

Accumulated other comprehensive loss

    (7,524 )     (7,303 )     (7,843 )

Retained earnings

    24,967       22,425       16,978  

Total stockholders' equity

    86,366       84,390       77,769  

Total Liabilities and Stockholders' Equity

  $ 174,865     $ 195,611     $ 169,017  

 

See accompanying notes to condensed consolidated financial statements.

 

 
3

 

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands, except share and per share data)

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

September 27,

   

September 28,

   

September 27,

   

September 28,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Revenues:

                               

Net retail sales

  $ 85,561     $ 83,580     $ 257,752     $ 266,906  

Franchise fees

    558       781       1,716       2,399  

Commercial revenue

    542       451       1,384       1,674  

Total revenues

    86,661       84,812       260,852       270,979  
                                 

Costs and expenses:

                               

Cost of merchandise sold

    48,424       50,197       149,422       161,837  

Selling, general and administrative

    36,217       35,819       108,062       116,455  

Interest expense (income), net

    (38 )     (60 )     (36 )     (166 )

Total costs and expenses

    84,603       85,956       257,448       278,126  
                                 

Income (loss) before income taxes

    2,058       (1,144 )     3,404       (7,147 )

Income tax expense

    238       210       862       412  

Net income (loss)

  $ 1,820     $ (1,354 )   $ 2,542     $ (7,559 )
                                 

Foreign currency translation adjustment

    (1,009 )     1,106       (221 )     (160 )

Comprehensive income (loss)

  $ 811     $ (248 )   $ 2,321     $ (7,719 )
                                 

Earnings (loss) per common share:

                               

Basic

  $ 0.10     $ (0.08 )   $ 0.15     $ (0.46 )

Diluted

  $ 0.10     $ (0.08 )   $ 0.14     $ (0.46 )
                                 

Shares used in computing common per share amounts:

                               

Basic

    16,971,416       16,531,240       16,899,245       16,407,668  

Diluted

    17,132,206       16,531,240       17,108,910       16,407,668  

 

See accompanying notes to condensed consolidated financial statements.

 

 
4

 

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

   

Thirty-nine weeks ended

 
   

September 27, 2014

   

September 28, 2013

 
                 

Cash flows from operating activities:

               

Net income (loss)

  $ 2,542     $ (7,559 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

               

Depreciation and amortization

    13,385       14,399  

Stock-based compensation

    1,619       2,308  

Deferred taxes

    (924 )     (26 )

Impairment of store assets

    433       649  

Trade credit utilization

    460       354  

Loss on disposal of property and equipment

    64       499  

Change in assets and liabilities:

               

Inventories

    4,397       (9,656 )

Receivables

    4,355       (781 )

Prepaid expenses and other assets

    180       (197 )

Accounts payable and accrued expenses

    (8,162 )     (7,165 )

Lease related liabilities

    (5,653 )     (1,870 )

Gift cards and customer deposits

    (7,904 )     (7,705 )

Deferred revenue

    (407 )     (41 )

Net cash provided by (used in) operating activities

    4,385       (16,791 )

Cash flows from investing activities:

               

Purchases of property and equipment

    (5,604 )     (14,490 )

Purchases of other assets and other intangible assets

    (77 )     (203 )

Purchases of short term investments

    (899 )     -  

Cash used in investing activities

    (6,580 )     (14,693 )

Cash flows from financing activities:

               

Proceeds from the exercise of employee stock options, net of withholding tax payments

    1,253       655  

Purchases of Company's common stock

    (3,220 )     -  

Net cash (used in) provided by financing activities

    (1,967 )     655  

Effect of exchange rates on cash

    (52 )     (540 )

Net decrease in cash and cash equivalents

    (4,214 )     (31,369 )

Cash and cash equivalents, beginning of period

    44,665       45,171  

Cash and cash equivalents, end of period

  $ 40,451     $ 13,802  

 

See accompanying notes to condensed consolidated financial statements.

 

 
5

 

 

 

Notes to Condensed Consolidated Financial Statements

 

1. Basis of Presentation

 

The condensed consolidated financial statements included herein are unaudited and have been prepared by Build-A-Bear Workshop, Inc. and its subsidiaries (collectively, the Company) pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ( the SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations.  The condensed consolidated balance sheet of the Company as of December 28, 2013 was derived from the Company’s audited consolidated balance sheet as of that date.  All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented.  All of these adjustments are of a normal recurring nature.  All significant intercompany balances and transactions have been eliminated in consolidation.  Because of the seasonal nature of the Company’s operations, results of operations of any single reporting period should not be considered as indicative of results for a full year.  These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended December 28, 2013, which were included in the Company’s annual report on Form 10-K filed with the SEC on March 13, 2014.

 

In the first quarter of fiscal 2014, the Company adopted new accounting guidance with regard to the presentation and disclosure of unrecognized tax benefits, according to the provisions of Accounting Standards Update (ASU) 2013-11. The adoption of this guidance did not have a material impact on the financial statements.

 

 

2. Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following (in thousands):

 

   

September 27,

   

December 28,

   

September 28,

 
   

2014

   

2013

   

2013

 

Prepaid rent

  $ 4,044     $ 4,608     $ 8,347  

Other

    8,144       6,939       6,255  
    $ 12,188     $ 11,547     $ 14,602  

 

 

3. Property and Equipment

 

In 2012, the Company initiated a turnaround plan that includes the closure of a number of stores. The Company considers a more likely than not assessment that an individual location will close as a triggering event to review the store asset group for recoverability. As a result of this review for the first and second quarters of fiscal 2014, it was determined that certain stores would not be able to recover the carrying value of store leasehold improvements through expected undiscounted cash flows over the shortened remaining life of the related assets. Accordingly, the carrying value of the assets was reduced to fair value, calculated as the estimated future cash flows for each asset group, and asset impairment charges of $0.4 million were recorded in the thirty-nine weeks ended September 27, 2014, which are included in selling, general and administrative expenses as a component of income (loss) before income taxes in the Retail segment. The inputs used to determine the fair value of the assets are Level 3 inputs as defined by ASC section 820-10. Any remaining net book value is depreciated over the shortened expected life. The thirty-nine weeks ended September 28, 2013, included similar impairment charges of $0.6 million. There were no such charges in the thirteen weeks ended September 27, 2014 or September 28, 2013.

 

 
6

 

 

4. Accrued Expenses

 

Accrued expenses consist of the following (in thousands):

 

   

September 27,

   

December 28,

   

September 28,

 
   

2014

   

2013

   

2013

 
                         

Accrued wages, bonuses and related expenses

  $ 6,511     $ 9,745     $ 6,422  

Sales tax payable

    3,149       5,979       2,212  

Accrued rent and related expenses

    3,294       429       328  

Current income taxes payable

    191       227       200  
    $ 13,145     $ 16,380     $ 9,162  

 

 

5. Stock-based Compensation

 

The following table is a summary of the balances and activity for restricted stock and stock options for the thirty-nine weeks ended September 27, 2014:

 

   

Restricted

         
   

Stock

   

Options

 

Outstanding, December 28, 2013

    720,198       1,065,012  

Granted

    201,458       103,776  

Vested

    343,473        

Exercised

          322,427  

Forfeited

    116,763       6,750  

Canceled or expired

          80,862  

Outstanding, September 27, 2014

    461,420       758,749  

 

For the thirteen and thirty-nine weeks ended September 27, 2014 selling, general and administrative expenses includes $0.4 million and $1.6 million, respectively, of stock-based compensation expense. For the thirteen and thirty-nine weeks ended September 28, 2013, selling, general and administrative expenses includes $0.7 million and $2.3 million, respectively, of stock-based compensation expense. As of September 27, 2014, there was $3.8 million of total unrecognized compensation expense related to nonvested restricted stock and option awards which is expected to be recognized over a weighted-average period of 1.5 years.

 

The total fair value of shares vested during the thirty-nine weeks ended September 27, 2014 and September 28, 2013 was $3.6 million and $2.2 million, respectively.

 

 

6. Income Taxes

 

In prior years, the Company recorded a valuation allowance on substantially all of its deferred tax assets.  The effective tax rate was 11.6% and 25.3% for the thirteen and thirty-nine weeks ended September 27, 2014, respectively compared to (18.4)% and (5.8)% for the thirteen and thirty-nine weeks ended September 28, 2013, respectively. The income tax expense recorded in the thirteen weeks ended September 27, 2014 represents state and withholding taxes, return-to-provision adjustments, adjustments to uncertain tax position reserves, and tax expense recorded in foreign jurisdictions. The income tax expense recorded in the thirty-nine weeks ended September 27, 2014 represents state and withholding taxes, return-to-provision adjustments and adjustments to uncertain tax position reserves, partially offset by tax benefits recorded in foreign jurisdictions.

 

 
7

 

 

7. Net Income (Loss) per Share

 

The Company uses the two-class method to compute basic and diluted net income or loss per common share. In periods of net loss, no effect is given to the Company’s participating securities as they do not contractually participate in the losses of the Company. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except share and per share data):

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

September 27,

   

September 28,

   

September 27,

   

September 28,

 
   

2014

   

2013

   

2014

   

2013

 
                                 
NUMERATOR:                                

Net income (loss) before allocation of earnings to participating securities

  $ 1,820     $ (1,354 )   $ 2,542     $ (7,559 )

Less: Earnings allocated to participating securities

    49       -       82       -  

Net income (loss) after allocation of earnings to participating securities

  $ 1,771     $ (1,354 )   $ 2,460     $ (7,559 )
                                 
DENOMINATOR:                                

Weighted average number of common shares outstanding - basic

    16,971,416       16,531,240       16,899,245       16,407,668  

Dilutive effect of share-based awards

    160,790       -       209,665       -  

Weighted average number of common shares outstanding - dilutive

    17,132,206       16,531,240       17,108,910       16,407,668  

Basic income (loss) per common share attributable to Build-A-Bear Workshop, Inc. stockholders

  $ 0.10     $ (0.08 )   $ 0.15     $ (0.46 )

Diluted income (loss) per common share attributable to Build-A-Bear Workshop, Inc. stockholders

  $ 0.10     $ (0.08 )   $ 0.14     $ (0.46 )

 

For the thirteen and thirty-nine weeks ended September 27, 2014, options to purchase 136,168 shares of common stock were excluded from the denominator for diluted loss per common share because of their anti-dilutive effect. For the thirteen and thirty-nine weeks ended September 28, 2013, options to purchase 1,152,800 shares of common stock were excluded from the denominator for diluted loss per common share because of their anti-dilutive effect.

 

Due to the net loss for thirteen and thirty-nine weeks ended September 28, 2013, the denominator for diluted loss per common share is the same as the denominator for basic loss per common share for those periods because the inclusion of stock options and unvested restricted shares would be anti-dilutive.

 

8. Comprehensive Income (Loss)

 

The difference between comprehensive income or loss and net income or loss results from foreign currency translation adjustments on the balance sheets of subsidiaries whose functional currency is not the US Dollar.  The accumulated other comprehensive loss balance at September 27, 2014, December 28, 2013 and September 28, 2013 is comprised entirely of foreign currency translation.  For the thirteen and thirty-nine weeks ended September 27, 2014 and September 28, 2013, there were no reclassifications out of accumulated other comprehensive loss.

 

9. Segment Information

 

The Company’s operations are conducted through three operating segments consisting of retail, international franchising and commercial. The retail segment includes the operating activities of company-owned stores in the United States, Canada, the United Kingdom and Ireland and other retail delivery operations, including the Company’s store-commerce sites, pop-up stores and non-traditional store locations such as a baseball park. The international franchising segment includes the licensing activities of the Company’s franchise agreements with store locations in Europe, outside of the United Kingdom and Ireland, Asia, Australia, the Middle East, Africa and Mexico. The commercial segment includes the Company’s transactions with other businesses, mainly comprised of licensing the Company’s intellectual properties for third party use and wholesale activities. The operating segments have discrete sources of revenue, different capital structures and different cost structures. These operating segments represent the basis on which the Company’s chief operating decision maker regularly evaluates the business in assessing performance, determining the allocation of resources and the pursuit of future growth opportunities. Accordingly, the Company has determined that each of its operating segments represent one reportable segment. The reportable segments follow the same accounting policies used for the Company’s consolidated financial statements.

 

 
8

 

 

Following is a summary of the financial information for the Company’s reportable segments (in thousands):

 

           

International

                 
   

Retail

   

Franchising

   

Commercial

   

Total

 

Thirteen weeks ended September 27, 2014

                               

Net sales to external customers

  $ 85,561     $ 558     $ 542     $ 86,661  

Income before income taxes

    1,584       216       258       2,058  

Capital expenditures, net

    2,494       17       -       2,511  

Depreciation and amortization

    4,386       36       -       4,422  

Thirteen weeks ended September 28, 2013

                               

Net sales to external customers

  $ 83,580     $ 781     $ 451     $ 84,812  

Income (loss) before income taxes

    (1,817 )     396       277       (1,144 )

Capital expenditures, net

    5,657       20       -       5,677  

Depreciation and amortization

    4,677       45       -       4,722  

Thirty-nine weeks ended September 27, 2014

                               

Net sales to external customers

  $ 257,752     $ 1,716     $ 1,384     $ 260,852  

Income (loss) before income taxes

    2,782       (62 )     684       3,404  

Capital expenditures, net

    5,655       26       -       5,681  

Depreciation and amortization

    13,274       111       -       13,385  

Thirty-nine weeks ended September 28, 2013

                               

Net sales to external customers

  $ 266,906     $ 2,399     $ 1,674     $ 270,979  

Income (loss) before income taxes

    (8,695 )     646       902       (7,147 )

Capital expenditures, net

    14,600       93       -       14,693  

Depreciation and amortization

    14,263       136       -       14,399  
                                 

Total Assets as of:

                               

September 27, 2014

  $ 166,403     $ 2,849     $ 5,613     $ 174,865  

September 28, 2013

  $ 159,529     $ 3,118     $ 6,370     $ 169,017  

 

The Company’s reportable segments are primarily determined by the types of products and services that they offer. Each reportable segment may operate in many geographic areas. The Company allocates revenues to geographic areas based on the location of the customer or franchisee. The following schedule is a summary of the Company’s sales to external customers and long-lived assets by geographic area (in thousands):

 

   

North

                         
   

America (1)

   

Europe (2)

   

Other (3)

   

Total

 

Thirteen weeks ended September 27, 2014

                               

Net sales to external customers

  $ 68,067     $ 18,247     $ 347     $ 86,661  

Property and equipment, net

    54,284       6,747       -       61,031  

Thirteen weeks ended September 28, 2013

                               

Net sales to external customers

  $ 66,870     $ 17,484     $ 458     $ 84,812  

Property and equipment, net

    61,341       8,221       -       69,562  
                                 

Thirty-nine weeks ended September 27, 2014

                               

Net sales to external customers

  $ 209,400     $ 50,422     $ 1,030       260,852  

Property and equipment, net

    54,284       6,747       -       61,031  

Thirty-nine weeks ended September 28, 2013

                               

Net sales to external customers

  $ 219,776     $ 49,820     $ 1,383     $ 270,979  

Property and equipment, net

    61,341       8,221       -       69,562  

 

For purposes of this table only:

(1)  North America includes the United States, Canada, Puerto Rico and franchise business in Mexico

(2)  Europe includes the United Kingdom, Ireland and franchise businesses in Europe

(3)  Other includes franchise businesses outside of North America and Europe

 

 
9

 

 

10. Contingencies

 

In the normal course of business, the Company is subject to regular examination by various taxing authorities for years not closed by the statute of limitations, including an ongoing customs audit in the United Kingdom in which the Company is contesting audit findings. The Company accrues a liability for this type of contingency when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. In 2012, the Company received notification from the customs authority that it intended to make an assessment for unpaid duty, penalties and interest. The assessment was made in 2013. The Company has appealed this determination and continues to believe that the ultimate outcome of these matters will not have a material adverse impact on the results of operations, liquidity or financial position of the Company. However, if one or more of these examinations has an unfavorable resolution, it is possible that the results of operation, liquidity or financial position of the Company could be materially affected in any particular period. Since the date of the notification in the third quarter of fiscal 2012, the Company has been required to pay the disputed duty, pending resolution of the appeal. As of September 27, 2014, $3.2 million had been paid in respect of the disputed duty and is included in receivables in the Retail segment.

 

11. Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for the Company beginning January 1, 2017, and allows for both retrospective and modified retrospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on its consolidated financial statements.

 

12. Subsequent Event

 

In the period from September 27, 2014 through November 3, 2014, the Company repurchased approximately 12,000 shares of its common stock for an aggregate amount of $145,000, leaving $3.8 million of availability under the Board approved share repurchase program.

 

 
10

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Notice Regarding Forward-Looking Statements

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties, and we undertake no obligation to update these statements except as required by federal securities laws.  Our actual results may differ materially from the results discussed in the forward-looking statements. These risks and uncertainties include, without limitation, those detailed under the caption “Risk Factors” in the Company’s annual report on Form 10-K for the year ended December 28, 2013, as filed with the SEC, and the following:

 

  

general global economic conditions may deteriorate, which could lead to disproportionately reduced consumer demand for the Company’s products, which represent relatively discretionary spending;

  

customer traffic may decrease in the shopping malls where the Company’s stores are located, and which it depends on to attract guests to its stores;

  

the Company may be unable to generate interest in and demand for its interactive retail experience, or to identify and respond to consumer preferences in a timely fashion;

  

the Company’s marketing and on-line initiatives may not be effective in generating sufficient levels of brand awareness and guest traffic;

  

the Company may be unable to generate comparable store sales growth;

  

the Company is subject to a number of risks related to disruptions, failures or security breaches of its information technology infrastructure and we may improperly obtain, or fail to protect, its data or violate privacy or security laws or expectations;

  

the Company may be unable to effectively operate or manage the overall portfolio of its company-owned stores;

  

the Company may be unable to renew or replace its store leases, or enter into leases for new stores on favorable terms or in favorable locations, or may violate the terms of its current leases;

  

the Company may not be able to operate its company-owned stores in the United Kingdom and Ireland profitably;

  

the availability and costs of the Company’s products could be adversely affected by risks associated with international manufacturing and trade, including foreign currency fluctuation;

  

the Company’s products could become subject to recalls or product liability claims that could adversely impact its financial performance and harm its reputation among consumers;

  

the Company may lose key personnel, be unable to hire qualified additional personnel, or experience turnover of its management team;

  

the Company is susceptible to disruption in its inventory flow due to its reliance on a few vendors;

  

the Company may be unable to effectively manage its international franchises or laws relating to those franchises may change;

  

the Company may fail to renew, register or otherwise protect its trademarks or other intellectual property or may be sued by third parties for infringement or misappropriation of their proprietary rights;

  

the Company is subject to risks associated with technology and digital operations;

  

the Company may suffer negative publicity or be sued due to violations of labor laws or unethical practices by manufacturers of its merchandise;

  

the Company may be unable to operate its company-owned distribution center efficiently or its third-party distribution center providers may perform poorly;

  

high petroleum products prices could increase the Company’s inventory transportation costs and adversely affect its profitability;

  

the Company’s market share could be adversely affected by a significant, or increased, number of competitors;

  

the Company may suffer negative publicity or negative sales if the non-proprietary toy products it sells in its stores do not meet its quality or sales expectations;

  

poor global economic conditions could have a material adverse effect on the Company’s liquidity and capital resources;

  

fluctuations in the Company’s quarterly results of operations could cause the price of its common stock to substantially decline; and

  

the Company may be unable to repurchase shares of its common stock at the times or in the amounts it currently anticipates, or the results of the share repurchase program may not be as beneficial as it currently anticipates.

 

Overview

 

We are the only global company that offers an interactive “make your own stuffed animal” retail entertainment experience under the Build-A-Bear Workshop brand, in which our guests stuff, fluff, dress, accessorize and name their own teddy bears and other stuffed animals. As of September 27, 2014, we operated 241 traditional stores and 13 non-traditional stores in the United States, Canada and Puerto Rico (collectively, North America), 57 traditional stores and two non-traditional stores in the United Kingdom and Ireland (collectively, Europe) and had 70 franchised stores operating internationally under the Build-A-Bear Workshop brand.

 

 
11

 

 

We operate in three segments that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:

 

 

Retail - Company-owned retail stores located in the United States, Canada, Puerto Rico, the United Kingdom and Ireland, and e-commerce sites;

 

 

International Franchising – Other international stores operated under franchise agreements; and

 

 

Commercial - Transactions with other business partners, mainly comprised of wholesale product sales and licensing our intellectual property, including entertainment properties, for third-party use.

 

Our 2013 performance demonstrated progress toward our objective to achieve sustainable, profitable growth as we hired a new chief executive, executed a significant real estate strategy and implemented stringent cost controls throughout the organization. Our 2014 plan built on the progress we made in 2013 in implementing our key strategies. Through the first three quarters of 2014, we have continued to improve store productivity and profitability through our real estate optimization efforts, repositioning our marketing programs to refine the consumer value equation and building on core competencies to lay the groundwork to further leverage the strength of our Build-A-Bear brand. Additionally, we have worked aggressively on expense rationalization as we continue to align our cost structure with our smaller store base and enhance product margins by value engineering our product designs, along with an end to end review of our supply chain.

 

Selected financial data attributable to each segment for the thirteen and thirty-nine weeks ended September 27, 2014 and September 28, 2013 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.

 

We use comparable store sales as one of the performance measures for our business. Comparable store sales percentage changes are based on net retail sales, excluding our store-commerce sites and seasonal and event-based locations.  Stores are considered comparable beginning in their thirteenth full month of operation. Stores with relocations or remodels that result in a significant change in square footage are excluded from the comparable stores sales calculation until the thirteenth full month of operation after the change. The percentage change in comparable store sales for the periods presented below is as follows:

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

September 27,

   

September 28,

   

September 27,

   

September 28,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

North America

    1.0 %     7.6 %     (1.6 )%     9.1 %

Europe

    0.0 %     2.3 %     (3.6 )%     4.6 %

Consolidated

    0.8 %     6.4 %     (2.0 )%     8.2 %

 

We believe the changes in comparable store sales for the periods presented are primarily attributable to the following factors:

 

 

We believe that the thirteen week period was positively impacted by high-impact product launches supported by well-executed, elevated marketing programs which led to robust sales of key licensed products, continued strength in our core collections and a successful early launch of our proprietary Halloween program;

 

 

We believe that comparable store sales were positively impacted in both the thirteen and thirty-nine week periods by strategic store closures, primarily in North American multi-store markets, which have transferred approximately 16% of their sales to remaining stores in the market;

 

 

We improved key operational levers by driving increases in dollars per transaction, units per transaction and average unit selling price in both the thirteen and thirty-nine week periods;

 

 

We believe the thirty-nine week period was negatively impacted by a decrease in traffic partially attributable to the extreme weather patterns in the first quarter of 2014 in North America and its lingering effects. In the first quarter of 2014, extreme weather decreased overall mall traffic for many markets in North America impacting the retail sector overall. In the second quarter of 2014, we saw the lingering effect of the first quarter weather patterns as school vacations were cancelled and the school year was extended in many markets impacting experiential children’s retail such as ours whose traffic benefits when kids are out of school; and

 

 
12

 

 

 

We also believe that traffic was negatively impacted in the second quarter of 2014 as a result of our strategic decision to eliminate a gift-with-purchase promotion, along with its supporting marketing, that had run for several years in the second quarter but had failed to deliver a profitable return.

 

 

  We are working to continue to improve comparable store sales through the following key initiatives:

 

 

Refining product planning to align with consumer demand driven by consistent execution of high-impact licensed and proprietary product launches supported by elevated marketing programs that focus on repositioning the consumer value equation and elevating the Build-A-Bear brand;

 

 

Continuing to reset the consumer value equation by shifting marketing focus to brand-building versus discounting. The Company has demonstrated that well-executed marketing programs can positively impact consumer awareness and demand for high-impact product launches; and

 

 

Continuing to drive increases in key operational metrics including average transaction value, units per transaction, average unit selling price and consumer conversion.

 

 

Stores

 

 

Company-owned:

 

The table below sets forth the number of Build-A-Bear Workshop company-owned stores in North America and Europe for the periods presented:

 

   

2014

 
   

Thirty-nine Weeks

   

Fifty-three Weeks - Projected

 
   

December 28,

                   

September 27,

   

December 28,

                   

January 3,

 
   

2013

   

Opened

   

Closed

   

2014

   

2013

   

Opened

   

Closed

   

2015

 

North America

                                                               

Traditional

    252       2       (13 )     241       252       5       (13 )     244  

Non-traditional

    11       3       (1 )     13       11       11       (1 )     21  
      263       5       (14 )     254       263       16       (14 )     265  
                                                                 

Europe

                                                               

Traditional

    58       -       (1 )     57       58       -       (1 )     57  

Non-traditional

    2       -       -       2       2       -       -       2  
      60       -       (1 )     59       60       -       (1 )     59  

Total

    323       5       (15 )     313       323       16       (15 )     324  

 

   

2013

 
   

Thirty-nine Weeks

   

Fifty-two Weeks

 
   

December 29,

                   

September 28,

   

December 29,

                   

December 28,

 
   

2012

   

Opened

   

Closed

   

2013

   

2012

   

Opened

   

Closed

   

2013

 

North America

                                                               

Traditional

    283       3       (32 )     254       283       3       (34 )     252  

Non-traditional

    8       -       (2 )     6       8       5       (2 )     11  
      291       3       (34 )     260       291       8       (36 )     263  
                                                                 

Europe

                                                               

Traditional

    58       -       -       58       58       1       (1 )     58  

Non-traditional

    2       -       -       2       2       -       -       2  
      60       -       -       60       60       1       (1 )     60  

Total

    351       3       (34 )     320       351       9       (37 )     323  

 

We currently intend to close approximately 15 locations in fiscal 2014, primarily in North America. We also expect to opportunistically open new traditional stores and expand non-traditional locations, including shop-in-shops and seasonal pop-up locations.

 

 
13

 

 

International Franchise Locations:

 

Our first franchised location opened in November 2003. The number of international, franchised stores for the periods presented below are summarized as follows:

 

   

Thirty-nine weeks ended

 
   

September 27,

   

September 28,

 
   

2014

   

2013

 
                 

Beginning of period

    86       91  

Opened

    3       7  

Closed

    (19 )     (13 )

End of period

    70       85  

 

As of September 27, 2014, we had master franchise agreements, which typically grant franchise rights for a particular country or group of countries. With the Turkish franchise added in the 2014 first quarter and the expansion to Austria and Switzerland with the new German franchise agreement in the third quarter, we now have agreements covering an aggregate of 19 countries. The closures in 2014 are primarily the result of our franchisees implementing real estate optimization plans, similar to what we have undertaken in North America. In the ordinary course of business, we anticipate signing additional master franchise agreements in the future and terminating other such agreements. In the long term, we believe there is a market potential for approximately 300 franchised stores outside of the United States, Canada, Puerto Rico, the United Kingdom and Ireland, which we expect to be operated primarily by new and existing franchisees.

 

 

Results of Operations

 

The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of total revenues, except where otherwise indicated:

 

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Thirteen weeks ended

   

Thirty-nine weeks ended

 
   

September 27,

   

September 28,

   

September 27,

   

September 28,

 
   

2014

   

2013

   

2014

   

2013

 

Revenues:

                               

Net retail sales

    98.7 %     98.5 %     98.8 %     98.5 %

Franchise fees

    0.6       0.9       0.7       0.9  

Commercial revenue

    0.6       0.5       0.5       0.6  

Total revenues

    100.0       100.0       100.0       100.0  
                                 

Costs and expenses:

                               

Cost of merchandise sold (1)

    56.2       59.7       57.7       60.3  

Selling, general and administrative

    41.8       42.2       41.4       43.0  

Interest expense (income), net

    (0.0 )     (0.0 )     (0.0 )     (0.1 )

Total costs and expenses

    97.6       101.3       98.7       102.6  
                                 

Income (loss) before income taxes

    2.4       (1.3 )     1.3       (2.6 )

Income tax expense

    0.3       0.2       0.3       0.2  

Net income (loss)

    2.1       (1.6 )     1.0       (2.8 )
                                 

Retail Gross Margin % (2)

    43.7 %     40.1 %     42.3 %     39.6 %
  

 

(1)

Cost of merchandise sold is expressed as a percentage of net retail sales and commercial revenue.

 

(2)

Retail gross margin represents net retail sales less cost of retail merchandise sold, which excludes cost of wholesale merchandise sold.  Retail gross margin was $37.4 million and $109.0 million for the thirteen and thirty-nine weeks ended September 27, 2014, respectively and $33.5 million and $105.8 million for the thirteen and thirty-nine weeks ended September 28, 2013, respectively. Retail gross margin percentage represents retail gross margin divided by net retail sales.

 

 
14

 

 

Thirteen weeks ended September 27, 2014 compared to thirteen weeks ended September 28, 2013

 

Revenues

 

Net retail sales. Net retail sales increased to $85.6 million for the thirteen weeks ended September 27, 2014 from $83.6 million for the thirteen weeks ended September 28, 2013, an increase of $2.0 million, or 2.4%. The components of this increase are as follows:

 

   

Thirteen weeks ended

 
   

September 27,

 
   

2014

 
   

(dollars in millions)

 

Impact of store closures

  $ (2.9 )

Increase from new stores

    1.2  

Increase in non-comparable stores, primarily remodels and relocations

    1.1  

Impact of foreign currency translation

    1.1  

Increase from non-traditional locations, including e-commerce sales

    0.9  

Increase in comparable store sales

    0.6  
    $ 2.0  

 

 

We believe the changes in comparable store sales for the thirteen weeks ended September 27, 2014 are primarily attributable to the following factors:

 

 

We believe that the third quarter was positively impacted by high-impact product launches supported by well-executed, elevated marketing programs which led to robust sales of key licensed products, continued strength in our core collections and a successful early launch of our proprietary Halloween program;

 

 

We believe that comparable store sales were positively impacted in the third quarter by strategic store closures, primarily in North American multi-store markets, which have transferred approximately 16% of their sales to remaining stores in the market; and

 

 

In the third quarter, we improved key operational levers by driving increases in dollars per transaction, units per transaction and average unit selling price.

 

Franchise fees and commercial revenue. Revenue from franchise fees was $0.6 million for the thirteen weeks ended September 27, 2014 compared to $0.8 million for the thirteen weeks ended September 28, 2013 a decrease of $0.2 million, primarily attributable to a decline in the number of franchise stores in operation during the quarter. Commercial revenue was $0.5 million for both the thirteen weeks ended September 27, 2014 and September 28, 2013.

 

Costs and expenses

 

Gross margin. Total gross margin increased to $37.7 million for the thirteen weeks ended September 27, 2014 from $33.8 million for the thirteen weeks ended September 28, 2013, an increase of $3.8 million, or 11.4%. Retail gross margin increased to $37.4 million for the thirteen weeks ended September 27, 2014 from $33.5 million for the thirteen weeks ended September 28, 2013, an increase of $3.9 million, or 11.5%. As a percentage of net retail sales, retail gross margin was 43.7% for the thirteen weeks ended September 27, 2014 compared to 40.1% for the thirteen weeks ended September 28, 2013. This 360 basis points as a percentage of net retail sales (bps) increase was primarily driven by a 290 bps improvement in merchandise margin driven by a combination of selected price increases and reduced product costs and 70 bps of improvement from reduced packaging costs and improved leverage of fixed occupancy costs.   

 

 
15

 

 

Selling, general and administrative. Selling, general and administrative expenses were $36.2 million for the thirteen weeks ended September 27, 2014 as compared to $35.8 million for the thirteen weeks ended September 28, 2013, an increase of $0.4 million, or 1.1%. As a percentage of total revenues, selling, general and administrative expenses decreased to 41.8% for the thirteen weeks ended September 27, 2014 as compared to 42.2% for the thirteen weeks ended September 28, 2013, a decrease of 40 bps. The 2014 third quarter included $0.7 million in management transition costs and $0.1 million in store closing costs. The 2013 third quarter included $0.4 million in management transition costs and $0.2 million in store closing costs. Excluding these costs, selling, general and administrative expenses as a percent of revenue decreased 70 bps, primarily due to timing of marketing expenses and other operational cost savings resulting from store closures that were partially offset by increased costs for outside services.

 

Interest expense (income), net. Interest income, net of interest expense, was $40,000 for the thirteen weeks ended September 27, 2014 as compared to $60,000 for the thirteen weeks ended September 28, 2013.

 

Provision for income taxes. The income tax expense was $0.2 million for both the thirteen weeks ended September 27, 2014 and September 28, 2013. The effective tax rate was 11.6% for the thirteen weeks ended September 27, 2014 compared to (18.4)% for the thirteen weeks ended September 28, 2013. The change in the effective rate is primarily attributable to state and withholding taxes, return-to-provision adjustments, adjustments to uncertain tax position reserves, and tax expense recorded in foreign jurisdictions.

 

Thirty-nine weeks ended September 27, 2014 compared to thirty-nine weeks ended September 28, 2013

 

Revenues

 

Net retail sales. Net retail sales were $257.8 million for the thirty-nine weeks ended September 27, 2014 compared to $266.9 million for the thirty-nine weeks ended September 28, 2013, a decrease of $9.2 million, or 3.4%. The components of this decrease are as follows:

 

   

Thirty-nine weeks ended

 
   

September 27,

 
   

2014

 
   

(dollars in millions)

 

Impact of store closures

  $ (12.9 )

Decrease in comparable store sales

    (4.8 )

Increase from new stores

    3.8  

Impact of foreign currency translation

    3.0  

Increase from non-traditional locations, including e-commerce sales

    2.0  

Increase in non-comparable stores, primarily remodels and relocations

    (0.3 )
    $ (9.2 )

 

We believe the changes in comparable store sales for the thirty-nine weeks ended September 27, 2014 are primarily attributable to the following factors:

 

 

We believe that the thirty-nine week period was positively impacted by high-impact product launches supported by well-executed, elevated marketing programs which lead to robust sales of key licensed products and continued strength in our core collections;

 

 

We believe that fiscal 2014 comparable store sales were positively impacted by strategic store closures, primarily in North American multi-store markets, which have transferred approximately 16% of their sales to remaining stores in the market;

 

 

We improved key operational levers by driving increases in dollars per transaction, units per transaction and average unit selling price in 2014;

 

 

We believe the thirty-nine week period was negatively impacted by a decrease in traffic partially attributable to the extreme weather patterns in the first quarter of 2014 in North America and its lingering effects. In the first quarter of 2014, extreme weather decreased overall mall traffic for many markets in North America impacting the retail sector overall. In the second quarter of 2014, we saw the lingering effect of the first quarter weather patterns as school vacations were cancelled and the school year was extended in many markets impacting experiential children’s retail such as ours whose traffic benefits when kids are out of school; and

 

 

We also believe that traffic was negatively impacted in the second quarter of 2014 as a result of our strategic decision to eliminate a gift-with-purchase promotion, along with its supporting marketing, that had run for several years in the second quarter but had failed to deliver a profitable return.

 

 
16

 

 

Franchise fees and commercial revenue. Revenue from franchise fees was $1.7 million for the thirty-nine weeks ended September 27, 2014 compared to $2.4 million for the thirty-nine weeks ended September 28, 2013 a decrease of $0.7 million, primarily attributable to a decline in the number of franchise stores in operation in 2014. Commercial revenue was $1.4 million for the thirty-nine weeks ended September 27, 2014 compared to $1.7 million for the thirty-nine weeks ended September 28, 2013, a decrease of $0.3 million. This decrease was primarily attributable to an overall decline in licensing activities.

 

Cost and expenses

 

Gross margin. Total gross margin increased to $109.7 million for the thirty-nine weeks ended September 27, 2014 from $106.7 million for the thirty-nine weeks ended September 28, 2013, an increase of $3.0 million, or 2.8%. Retail gross margin increased to $109.0 million for the thirty-nine weeks ended September 27, 2014 from $105.8 million for the thirty-nine weeks ended September 28, 2013, an increase of $3.2 million, or 3.0%. As a percentage of net retail sales, retail gross margin increased to 42.3% for the thirty-nine weeks ended September 27, 2014 from 39.6% for the thirty-nine weeks ended September 28, 2013. This 270 bps increase was primarily driven by a 300 bps improvement in merchandise margin driven by a combination of selected price increases and reduced product costs slightly offset by deleverage of fixed occupancy costs.

 

 Selling, general and administrative. Selling, general and administrative expenses decreased to $108.1 million for the thirty-nine weeks ended September 27, 2014 as compared to $116.5 million for the thirty-nine weeks ended September 28, 2013, a decrease of $8.4 million, or 7.2%. As a percentage of total revenues, selling, general and administrative expenses decreased to 41.4% for the thirty-nine weeks ended September 27, 2014 as compared to 43.0% for the thirty-nine weeks ended September 28, 2013, a decrease of 160 bps. The dollar decrease was primarily due to decreases in store payroll costs and other operational cost savings resulting from store closures, a decrease in management transition and store closing costs and our cost reduction efforts as compared to the prior year. As a percent of revenue, these decreases were partially offset by decreased leverage on fixed costs. Excluding the management transition and store closing costs, selling, general and administrative expenses as a percent of revenue decreased 60 bps, primarily due to the overall decrease in expenses from store closures and our ongoing cost reduction efforts and the elimination of certain marketing in the second quarter associated with a promotion in the prior year.

 

Interest expense (income), net. Interest income, net of interest expense, was $40,000 and $0.2 million for the thirty-nine weeks ended September 27, 2014 and September 28, 2013, respectively.

 

Provision for income taxes. The income tax expense was $0.9 million for the thirty-nine weeks ended September 27, 2014 compared to $0.4 million for the thirty-nine weeks ended September 27, 2014. The effective tax rate was 25.3% for the thirty-nine weeks ended September 27, 2014 compared to (5.8)% for the thirty-nine weeks ended September 28, 2013. The change in the effective rate is primarily attributable to state and withholding taxes, return-to-provision adjustments and adjustments to uncertain tax position reserves, partially offset by tax benefits recorded in foreign jurisdictions.

 

Seasonality and Quarterly Results

 

Our operating results for one period may not be indicative of results for other periods, and may fluctuate significantly because of a variety of factors, including, but not limited to: (1) changes in general economic conditions and consumer spending patterns; (2) increases or decreases in our comparable store sales; (3) fluctuations in the profitability of our stores; (4) changes in foreign currency exchange rates; (5) the timing and frequency of our marketing initiatives, including national media and other public relations events; (6) the timing of our store openings and closings and related expenses; (7) changes in consumer preferences; (8) the effectiveness of our inventory management; (9) the actions of our competitors or mall anchors and co-tenants; (10) seasonal shopping patterns and holiday and vacation schedules; and (11) weather conditions.

 

The timing of store openings, closures and remodels may result in fluctuations in quarterly results as a result of the revenues and expenses associated with each store location. We typically incur most preopening costs for a new store in the three months immediately preceding the store’s opening. Expenses related to store closings are typically incurred in stages: when the decision is made to close the store, when the closure is communicated to store associates and at the time of closure.

 

As a toy retailer, our sales are highest in our fourth quarter, followed by the first quarter. The timing of holidays and school vacations can impact our quarterly results. We cannot ensure that this will continue to be the case. In addition, for accounting purposes, the quarters of each fiscal year consist of 13 weeks, although we will have a 14-week quarter approximately once every six years. The 2008 fiscal fourth quarter had 14 weeks, and the 2014 fiscal fourth quarter will have 14 weeks.

 

Liquidity and Capital Resources

 

Our cash requirements are primarily for the relocation and remodeling of existing stores in our new design, opening of new stores, information systems and working capital. Over the past several years, we have met these requirements through capital generated from cash flow provided by operations. We have access to additional cash through our revolving line of credit that has been in place since 2000.

 

 
17

 

 

Operating Activities. Cash provided by operating activities was $4.4 million for the thirty-nine weeks ended September 27, 2014, compared to cash used in operating activities of $16.8 million for the thirty-nine weeks ended September 28, 2013, an increase of $21.2 million. Generally, changes in cash from operating activities are driven by changes in net income or loss and changes in operating assets and liabilities. This increase in cash provided by operating activities over the year ago period was primarily due to improved store contribution and the timing of inventory receipts and payments.

 

Investing Activities. Cash used in investing activities was $6.6 million for the thirty-nine weeks ended September 27, 2014 as compared to $14.7 million for the thirty-nine weeks ended September 28, 2013, a decrease of $8.1 million. Cash used in investing activities during the thirty-nine weeks ended September 27, 2014 primarily related to construction costs for new and remodeled stores, investments in central office information technology systems and purchases of short-term investments. Cash used in investing activities during the thirty-nine weeks ended September 28, 2013 primarily related to construction costs for new and remodeled stores, investments in central office information technology systems and the acquisition of trademarks and other intellectual property.

 

Financing Activities. Financing activities used cash of $2.0 million in the thirty-nine weeks ended September 27, 2014, as purchases of our common stock used cash of $3.2 million partially offset by cash provided from the exercises of employee stock options, net of shares used for withholding tax payments of $1.3 million. Cash provided by financing activities in the thirty-nine weeks ended September 28, 2013 was $0.7 million resulting from exercises of employee stock options, net of shares used for withholding tax payments. No borrowings were made under our line of credit in either the thirty-nine weeks ended September 27, 2014 or September 28, 2013.

 

Capital Resources. As of September 27, 2014, we had a consolidated cash balance of $40.5 million over half of which was domiciled outside of the United States. We also have a line of credit, which we can use to finance capital expenditures and working capital needs throughout the year. The bank line provides availability of up to $35 million. Borrowings under the credit agreement are secured by our assets and a pledge of 65% of our ownership interest in our foreign subsidiaries. The credit agreement expires on December 31, 2015 and contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of assets, loans, transactions with affiliates and investments. It also prohibits us from declaring dividends without the bank’s prior consent, unless such payment of dividends would not violate any terms of the credit agreement. We are also prohibited from repurchasing shares of our common stock unless such repurchase of shares would not violate any terms of the credit agreement; we may not use the proceeds of the line of credit to repurchase shares. Borrowings bear interest at LIBOR plus 1.8%. Financial covenants include maintaining a minimum tangible net worth, maintaining a minimum fixed charge coverage ratio (as defined in the credit agreement) and not exceeding a maximum funded debt to earnings before interest, depreciation and amortization ratio. As of September 27, 2014: (i) we were in compliance with these covenants; (ii) there were no borrowings under our line of credit; (iii) there was a standby letter of credit of approximately $1.1 million outstanding under the credit agreement; and (iv) there was approximately $33.9 million available for borrowing under the line of credit.

 

Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases. Our leases in North America typically have a ten-year term and contain provisions for base rent plus percentage rent based on defined sales levels. Many of the leases contain a provision whereby either we or the landlord may terminate the lease after a certain time, typically in the third to fourth year of the lease, if a certain minimum sales volume is not achieved. In addition, some of these leases contain various restrictions relating to change of control of our Company. Our leases also subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on various matters, including rights of termination in some cases.

 

Our leases in the U.K. and Ireland typically have terms of 10 to 15 years and generally contain a provision whereby every fifth year the rental rate can be adjusted to reflect the current market rates. The leases typically provide the lessee with the first right for renewal at the end of the lease. Real estate taxes also change according to government time schedules to reflect current market rental rates for the locations we lease. Rents are charged quarterly and paid in advance.

 

In fiscal 2014, we expect to spend a total of $12 to $14 million on capital expenditures. Capital spending through the thirty-nine weeks ended September 27, 2014 totaled $5.7 million. Capital spending in fiscal 2014 is primarily to support the refresh and repositioning of stores and investment in infrastructure.

 

We believe that cash generated from operations and available borrowings under our credit agreement will be sufficient to fund our working capital and other cash flow requirements for the near future. Our credit agreement expires on December 31, 2015.

 

On February 24, 2014, we announced that our share repurchase program had been extended to March 31, 2015. We currently intend to purchase up to an aggregate of $50 million of our common stock in the open market (including through 10b5-1 plans), through privately negotiated transactions or through an accelerated repurchase transaction. The primary source of funding for the program has been and is expected to continue to be cash on hand. The timing and amount of share repurchases, if any, will depend on price, market conditions, applicable regulatory requirements, and other factors. The program does not require us to repurchase any specific number of shares and may be modified, suspended or terminated at any time without prior notice. Shares repurchased under the program have been, and will continue to be, subsequently retired. As of November 3, 2014, approximately 6.2 million shares at an average price of $7.40 per share have been repurchased under this program for an aggregate amount of $46.2 million, leaving $3.8 million of availability under the program.

 

 
18

 

 

Off-Balance Sheet Arrangements

 

None

 

Critical Accounting Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires the appropriate application of certain accounting policies, which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.

 

We believe the application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates, including those related to inventory, long-lived assets, goodwill and revenue recognition, are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

 

Our critical accounting policies and estimates are discussed in and should be read in conjunction with our annual report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on March 13, 2014, which includes audited consolidated financial statements for our 2013, 2012 and 2011 fiscal years. There have been no material changes to the critical accounting estimates disclosed in the 2013 Form 10-K.

 

 Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for us beginning January 1, 2017, and allows for both retrospective and prospective methods of adoption. We are in the process of determining the method of adoption and assessing the impact of this ASU on our consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Our market risks relate primarily to changes in interest rates, and we bear this risk in two specific ways. First, our revolving credit facility carries a variable interest rate that is tied to market indices and, therefore, our results of operations and our cash flows can be impacted by changes in interest rates. Outstanding balances under our credit facility bear interest at LIBOR plus 1.8%. We had no borrowings outstanding during the first nine months of fiscal 2014. Accordingly, a 100 basis point change in interest rates would result in no material change to our annual interest expense. The second component of interest rate risk involves the investment of excess cash in short term, investment grade interest-bearing securities. These investments are considered to be cash equivalents or short-term investments, based on their original maturity and are classified accordingly on our balance sheet. If there are changes in interest rates, those changes would affect the investment income we earn on these investments and, therefore, impact our cash flows and results of operations.

 

We conduct operations in various countries, which expose us to changes in foreign exchange rates. The financial results of our foreign subsidiaries and franchisees may be materially impacted by exposure to fluctuating exchange rates. Reported sales, costs and expenses at our foreign subsidiaries, when translated into U.S. dollars for financial reporting purposes, can fluctuate due to exchange rate movement. While exchange rate fluctuations can have a material impact on reported revenues, costs and expenses, and earnings, this impact is principally the result of the translation effect and does not materially impact our short-term cash flows.

 

Although we enter into a significant amount of purchase obligations outside of the U.S., these obligations are settled primarily in U.S. dollars and, therefore, we believe we have only minimal exposure at present to foreign currency exchange risks for our purchase obligations. Historically, we have not hedged our currency risk and do not currently anticipate doing so in the future.

 

We do not engage in financial transactions for trading or speculative purposes.

 

 
19

 

 

Item 4. Controls and Procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief President Bear and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this report.  Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our certifying officers, as appropriate to allow timely decisions regarding required disclosure.  Based on the foregoing evaluation, our management, including the Chief Executive Officer and Chief President Bear and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 27, 2014, the end of the period covered by this Quarterly Report.

 

It should be noted that our management, including the Chief Executive Officer and Chief President Bear and the Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls will prevent all error and all fraud.  A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Changes in Internal Control Over Financial Reporting.  The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief President Bear and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.

 

 

PART II – OTHER INFORMATION

 

Item 1A. Risk Factors

 

There have been no material changes to our Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended December 28, 2013 as filed with the SEC on March 13, 2014. 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

(a)

Total Number of Shares (or Units) Purchased (1)

   

(b)

Average Price Paid Per Share (or Unit)

   

(c)

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)

   

(d)

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

 

Jun. 29, 2014 – Jul. 26, 2014

    143,917     $ 11.45       143,749     $ 4,779,675  

Jul. 27, 2014 – Aug. 23, 2014

    81,443     $ 10.46       81,443     $ 3,928,059  

Aug. 24, 2014 – Sep. 27, 2014

    188     $ 13.28       -     $ 3,928,059  

Total

    225,548     $ 11.09       225,192          
 

  

(1)

Includes shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of restricted shares which vested during the applicable period.  Our equity incentive plans provide that the value of shares delivered to us to pay the withheld to cover tax obligations is calculated at the closing trading price of our common stock on the date the relevant transaction occurs.

(2)

On February 24, 2014, we announced the further extension of our $50 million share repurchase program of our outstanding common stock until March 31, 2015. The program was authorized by our board of directors. Purchases may be made in the open market or in privately negotiated transactions, with the level and timing of activity depending on market conditions, applicable regulatory requirements, and other factors. Purchase activity may be increased, decreased or discontinued at any time without notice. Shares purchased under the program are subsequently retired.

 

 
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Item 6. Exhibits

 

The following is a list of exhibits filed as a part of the quarterly report on Form 10-Q:

 

Exhibit No.

 

Description 

     

2.1

 

Agreement and Plan of Merger dated April 3, 2000 between Build-A-Bear Workshop, L.L.C. and the Registrant (incorporated by reference from Exhibit 2.1 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142)

     

3.1

 

Third Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 of our Current Report on Form 8-K, filed on November 11, 2004)

     

3.2

 

Amended and Restated Bylaws (incorporated by reference from Exhibit 3.4 to our Registration Statement on Form S-1, filed on August 12, 2004, Registration No. 333-118142)

     

4.1

 

Specimen Stock Certificate (incorporated by reference from Exhibit 4.1 to Amendment No. 3 to our Registration Statement on Form S-1, filed on October 1, 2004, Registration No. 333-118142)

     

10.1*

 

Employment, Confidentiality and Noncompete Agreement dated as of August 12, 2014 between Jennifer Kretchmar and the Registrant

     

10.2*

 

Employment, Confidentiality and Noncompete Agreement dated as of September 15, 2014 between Vojin Todorovic and the Registrant (incorporated by reference from Exhibit 10.1 of our Current Report on Form 8-K, filed on September 15, 2014)

     

10.3*

 

Separation Agreement and General Release, dated September 15, 2014, by and between Tina Klocke and Build-A-Bear Workshop, Inc. (incorporated by reference from Exhibit 10.2 to our Current Report on Form 8-K, filed on September 15, 2014)

     

10.4*

 

Separation Agreement and General Release, dated October 10, 2014, by and between Kenneth Wine and Build-A-Bear Workshop, Inc. (incorporated by reference from Exhibit 10.1 to our Current Report on Form 8-K, filed on October 14, 2014)

     

31.1

 

Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Officer and Chief President Bear)

     

31.2

 

Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Officer)

     

32.1

 

Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Officer and Chief President Bear)

     

32.2

 

Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Officer)

     

101.INS

 

XBRL Instance

     

101.SCH

 

XBRL Extension Schema

     

101.CAL

 

XBRL Extension Calculation

     

101.DEF

 

XBRL Extension Definition

     

101.LAB

 

XBRL Extension Label

     

101.PRE

 

XBRL Extension Presentation

 

 

 

*

Management contract or compensatory plan or arrangement.

 

 
21

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 6, 2014

 

BUILD-A-BEAR WORKSHOP, INC.

(Registrant)

  

  

By:

/s/ Sharon John 

 

Sharon John

 

Chief Executive Officer and Chief President Bear

(on behalf of the registrant and as principal executive officer)

  

  

By:

/s/ Voin Todorovic 

 

Voin Todorovic

 

Chief Financial Officer

(on behalf of the registrant and as principal financial officer)

 

 

22

ex10-1.htm

Exhibit 10.1

 

EMPLOYMENT, CONFIDENTIALITY AND NONCOMPETE AGREEMENT

 

This Employment, Confidentiality and Noncompete Agreement (“Agreement”) is entered into effective as of the 12th day of August, 2014, by and between Build-A-Bear Workshop, Inc., a Delaware corporation (“Company”), and Jennifer Kretchmar (“Employee”).

 

WHEREAS, Company desires to employ and Employee desires to be employed as the Chief Product Officer and Innovation Bear of Company.

 

WHEREAS, Company has pioneered the retail concept of “make your own” stuff plush toys, including animals and dolls, and is engaged in, among other things, the business of production, marketing, promotion and distribution of plush stuff toys, clothing, accessories and similar items, including without limitation, the ownership, management, franchising, leasing and development of retail stores in which the basic operation is the selling of such items, and the promotion of the related concepts and characters through merchandising and mass media. Company is headquartered and its principal place of business are located in, and this Agreement is being signed in, St. Louis, Missouri.

 

WHEREAS, Company conducts business in selected locations throughout the United States and internationally directly and through franchise arrangements.

 

WHEREAS, Company has expended a great deal of time, money and effort to develop and maintain its proprietary Confidential Information (as defined herein) which is material to Company and which, if misused or disclosed, could be very harmful to Company’s business.

 

WHEREAS, the success of Company depends to a substantial extent upon the protection of its Confidential Information and goodwill by all of its employees.

 

WHEREAS, Company compensates its employees to, among other things, develop and preserve goodwill with its customers, landlords, suppliers and partners on Company’s behalf and business information for Company’s ownership and use.

 

WHEREAS, if Employee were to leave Company, Company, in all fairness, would need certain protections in order to prevent competitors of Company from gaining an unfair competitive advantage over Company or diverting goodwill from Company, or to prevent Employee from misusing or misappropriating the Confidential Information.

 

NOW, THEREFORE, in consideration of the compensation and other benefits of Employee’s employment by Company and the recitals, mutual covenants and agreements hereinafter set forth, Employee and Company agree as follows:

 

1.     Employment Services.

 

(a)     Employee is hereby employed by Company, and Employee hereby accepts such employment, upon the terms and conditions hereinafter set forth. Employee shall serve as Chief Product Officer and Innovation Bear throughout the Employment Period, and agrees to do so on a full-time basis. Employee shall carry out such duties as are assigned to her by Company’s Chief Executive Officer.

 

 
1

 

 

(b)     Employee agrees that throughout Employee’s employment with Company, Employee will (i) faithfully render such services as may be delegated reasonably to Employee by Company, (ii) devote substantially all of Employee’s entire business time, good faith, best efforts, ability, skill and attention to Company’s business, and (iii) follow and act in accordance with all of the rules, policies and procedures of Company which are applicable to its senior executives, including but not limited to working hours, sales and promotion policies, and specific Company rules.

 

(c)     “Company” means Build-A-Bear Workshop, Inc. or one of its Subsidiaries. The term “Subsidiary” means any corporation, joint venture or other business organization in which Build-A-Bear Workshop, Inc. now or hereafter, directly or indirectly, owns or controls more than fifty percent (50%) interest.

 

2.     Term of Employment. The term of this Agreement shall commence on the date first set forth above, and shall end on the third anniversary hereof, unless sooner terminated as provided in Section 4 hereof (the “Initial Term”). Following the Initial Term, this Agreement shall renew for successive one-year periods (each a “Renewal Period”; collectively, the Initial Term and each Renewal Period, the “Employment Period”), unless either party notifies the other party of its decision not to renew the Agreement at least 30 days prior to the third anniversary date or the expiration of any Renewal Period, or unless the Agreement is sooner terminated as provided in Section 4 hereof. For the avoidance of doubt, if either party provides notice of non-renewal of the Agreement at least 30 days prior to the end of the Initial Term or the end of any Renewal Period, then the Agreement shall expire.

 

3.     Compensation.

 

(a)     Base Salary. Throughout the Employment Period, Company shall pay Employee as compensation for her services an annual base salary of not less than Three Hundred Seventy Five Thousand Dollars ($375,000), payable in accordance with Company’s usual practices. Employee’s annual base salary rate shall be reviewed by the Compensation Committee of the Board of Directors (the “Compensation Committee”) at least annually and may be subject to adjustment following each fiscal year so that Employee’s salary will be commensurate with similarly situated executives with firms similarly situated to Company. However, Employee’s annual base salary rate shall not be subject to decrease at any time during the Employment Period.

 

(b)     Bonus. Should Company meet or exceed the sales, profits and other objectives established by Compensation Committee for any fiscal year, Employee shall be eligible to receive a bonus for such fiscal year in the amount as determined by the Compensation Committee; provided however the potential bonus opportunity for Employee in any given fiscal year will be set by the Compensation Committee such that, if Company exceeds its objectives, Company will pay Employee not less than forty percent (40%) of Employee’s earned annual base pay for such fiscal year. Any bonus payable to Employee will be payable in cash, stock or stock options, or combination thereof, all as determined by the Board of Directors or any duly authorized committee thereof, and unless (to the extent consistent with Section 409A of the Code) a different payout schedule is applicable for all executive employees of Company, any such bonus payment will be payable in a single, lump sum payment in the calendar year following such fiscal year but no later than April 30th of such following year. In the event of termination of this Agreement because of Employee’s death or disability (as defined by Section 4.1(b)), termination by Company without Cause pursuant to Section 4.1(c), or pursuant to Employee’s right to terminate this Agreement for Good Reason under Section 4.1(d), the bonus criteria shall not change and any bonus shall be pro-rated based on the number of full calendar weeks during the applicable fiscal year during which Employee was employed hereunder and shall be paid at the time and in the form such bonus would have been paid had Employee’s employment continued. Notwithstanding anything herein to the contrary, no bonus shall be payable hereunder in the event that Employee’s employment terminates for any other reason prior to the date on which any bonus is actually paid. Notwithstanding anything herein to the contrary, Employee shall be entitled to receive a bonus for the 2014 fiscal year in such amount as determined by the Compensation Committee but not less than forty percent (40%) of Employee’s bonus eligible earnings for such fiscal year.

 

 
2

 

 

Such bonus, if any, shall be payable after Company’s accountants have determined the sales and profits and have issued their audit report with respect thereto for the applicable fiscal year, which determination shall be binding on the parties. Any such bonus shall be paid in the calendar year following the applicable fiscal year but no later than April 30th of such following year.

 

(c)     Equity Awards. Employee may in the future be granted, a certain number of restricted shares and/or stock options to purchase shares of Company’s common stock (the “Common Stock”) and/or other awards, pursuant to the terms set forth more particularly in the stock option and/or restricted stock and/or other award agreements (“Stock Agreement”) used in connection with the Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan (or any successor plan) (the “Plan”). The Plan and applicable Stock Agreement(s) shall govern any grants of restricted shares and/or stock options to purchase shares of Company’s Common Stock and/or such other awards.

 

(d)     Discounts. Employee and her immediate family will be entitled to a minimum 20% discount for all merchandise purchased at Company’s stores.

 

(e)     Vacation. Employee shall be entitled to paid vacation and paid sick leave on the same basis as may from time to time apply to other Company executive employees generally. Vacations will be scheduled with the approval of Company’s Chief Executive Officer. One-third of one year’s vacation (or any part of it) may be carried over to the next year; provided that such carry over is used in the first calendar quarter of the next year. Unless otherwise approved by Company’s Chief Executive Officer, all unused vacation shall be forfeited. No more than two weeks of vacation can be taken at one time. Employee shall also be entitled to one (1) additional day per calendar year of paid vacation to be taken in the month of her birthday.

 

(f)     Other. Employee shall be eligible for such other perquisites as may from time to time be awarded to Employee by Company payable at such times and in such amounts as Company, in its sole discretion, may determine. All compensation under this Agreement shall be subject to customary withholding taxes and other employment taxes as required with respect thereto. Throughout the Employment Period, Employee shall also qualify for all rights and benefits for which Employee may be eligible under any benefit plans including group life, medical, health, dental and/or disability insurance or other benefits (“Welfare Benefits”) which are provided for employees generally at her then current location of employment.

 

 
3

 

 

(g)     Signing Bonus. Employee shall receive a lump sum cash bonuses in the amount of (i) Twenty Five Thousand Dollars ($25,000) paid on the Company’s first regular pay date following execution of this Agreement, and (ii) Ten Thousand Dollars ($10,000) paid on the February 12, 2015 provided Employee has remained employed by the Company for such six month period, each such bonus subject to withholding and other employment taxes as required.

 

4.     Termination Provisions.

 

4.1     Termination of Employment. Prior to the expiration of the Employment Period, this Agreement and Employee’s employment may be terminated as follows:

 

(a)     Upon Employee’s death;

 

(b)     By Company upon thirty (30) days’ prior written notice to Employee in the event Employee, by reason of permanent physical or mental disability (which shall be determined by a physician selected by Company or its insurers and acceptable to Employee or Employee’s legal representative (such agreement as to acceptability not to be withheld unreasonably)), following such time as Employee has been unable to perform the essential functions of her position, with or without reasonable accommodation, for the longer of: (i) six (6) consecutive months or (ii) the maximum health leave provided under Company’s Health Leave of Absence policy for Employee’s length of service with Company; provided, however, Employee shall not be terminated due to permanent physical or mental disability unless or until said disability also entitles Employee to benefits under such disability insurance policy as is provided to Employee by Company, provided however that continued entitlement to disability benefits coverage shall be not required where Employee fails to qualify for benefits coverage continuation due to an act or omission by Employee.

 

(c)     By Company with or without Cause. For the purposes of this Agreement, “Cause” shall mean: (i) Employee’s engagement in any conduct which, in Company’s reasonable determination, constitutes gross misconduct, or is illegal, unethical or improper provided such conduct brings detrimental notoriety or material harm to Company; (ii) gross negligence or willful misconduct; (iii) any act which results in a conviction for a felony involving moral turpitude, fraud or misrepresentation; (iv) a material breach of a material provision of this Agreement by Employee, or (v) failure of Employee to follow a written directive of the Chief Executive Officer or the Board of Directors within thirty (30) days after receiving such notice, provided that such directive is reasonable in scope and is otherwise within the Chief Executive Officer’s or the Board’s reasonable business judgment, and is reasonably within Employee’s control; provided Employee does not cure said conduct or breach as set forth in (i)-(v)(to the extent curable) within thirty (30) days after the Chief Executive Officer or the Board of Directors provides Employee with reasonably-detailed written notice of said conduct or breach accompanied by a clear written statement of Company’s intent to terminate the Employee’s employment for Cause in the absence of a cure. Cause shall not exist unless and until the Employee (and her counsel if she wishes) has been afforded an opportunity prior to the actual date of termination to discuss the matter with the Board of Directors at a duly-called Board meeting at which the matter is timely placed on the agenda and the Board subsequently votes to terminate the relationship for Cause.

  

(d)     By the Employee with or without Good Reason. For purposes of this Agreement, “Good Reason” shall mean (i) a material breach of a material provision of this Agreement by Company, (ii) Company’s issuance of a notice of non-renewal of this Agreement under Section 2, (iii) a material diminution in Employee’s base compensation, (iv) a material diminution in Employee’s authority, duties or responsibilities, or (v) a change in the geographic location at which Employee must perform services hereunder of more than twenty-five (25) miles; provided, that, Employee provides the Board of Directors with written notice of Good Reason within thirty (30) days of the date on which Employee becomes aware of the condition alleged to give rise to Good Reason, Company does not cure such condition within thirty (30) days after such notice (to the extent curable), and Employee terminates her employment within ninety (90) days following the onset of one or more conditions giving rise to Good Reason.

 

 
4

 

 

4.2     Impact of Termination.

 

(a)     Survival of Covenants. Upon termination of this Agreement, all rights and obligations of the parties hereunder shall cease, except termination of employment pursuant to Section 4 or otherwise shall not terminate or otherwise affect the rights and obligations of the parties pursuant to Sections 5 through 13 hereof.

 

(b)     Severance. In the event during the Employment Period (i) Company terminates Employee’s employment without Cause pursuant to Section 4.1(c) or (ii) the Employee terminates her employment for Good Reason pursuant to Section 4.1(d), subject to the execution and non-revocation of a release and waiver of all claims described below, Company shall continue her base salary in accordance with its regular payroll practices for a period of (A) twelve (12) months, commencing on the date that is thirty (30) days after the termination in the case of a termination of employment either prior to a Change in Control or following a period of twelve (12) months after a Change in Control or (B) eighteen (18) months, commencing on the date that is thirty (30) days after the termination in the case of a termination of employment during the twelve (12) month period immediately following a Change in Control. Notwithstanding anything herein to the contrary, receipt of any payment in connection with a termination of employment shall be conditioned on Employee signing a release and waiver of all claims against Company and its affiliates within thirty (30) days after her termination of employment, in such form and manner as Company shall reasonably prescribe, which release shall become effective and irrevocable within thirty (30) days after Employee’s termination of employment. Employee shall accept these payments in full discharge of all obligations of any kind which Company has to her except obligations, if any (i) for post-employment benefits expressly provided under this Agreement and/or at law, (ii) to repurchase any capital stock of Company owned by Employee (as may or may not be set forth in the applicable stock agreement); or (iii) for indemnification under separate agreement by virtue of Employee’s status as a director/officer of Company. Employee shall also be eligible to receive a bonus with respect to the year of termination to the extent provided in Section 3(b).

 

Notwithstanding anything herein to the contrary, in the event that Employee is determined to be a specified employee within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), for purposes of any payment on termination of employment hereunder, payment(s) shall be made or begin, as applicable, on the first payroll date which is more than six months following the date of separation from service, to the extent required to avoid any adverse tax consequences under Section 409A of the Code. Any payments that would have been made during such 6-month period shall be made in a lump sum on the first payroll date which is more than six months following the date Employee separates from service with Company. Each payment under this Agreement shall be treated as a separate payment for purposes of Section 409A of the Code. In no event may Employee, directly or indirectly, designate the calendar year of any payment to be made under this Agreement. This Agreement shall be interpreted and administered in a manner consistent with Section 409A of the Code.

 

 
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For purposes of this Agreement, “Change in Control” shall mean: (i) the purchase or other acquisition (other than from Company) by any person, entity or group of persons, within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (“Act”) (excluding, for this purpose, Company or its subsidiaries or any employee benefit plan of Company or its subsidiaries), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 20% or more of either the then-outstanding shares of common stock of Company or the combined voting power of Company’s then-outstanding voting securities entitled to vote generally in the election of directors; (ii) individuals who, as of the date hereof, constitute Company’s Board of Directors (and, as of the date hereof, the “Incumbent Board”) cease for any reason to constitute at least a majority of Company’s Board of Directors, provided that any person who becomes a director subsequent to the date hereof whose election, or nomination for election by Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Act) shall be, for purposes of this Section, considered as though such person were a member of the Incumbent Board; (iii) a reorganization, merger or consolidation involving Company, in each case with respect to which persons who were the stockholders of Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of, respectively, the common stock and the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated corporation’s then-outstanding voting securities; or (iv) a liquidation or dissolution of Company, or the sale of all or substantially all of the assets of Company.

 

(c)     Termination due to Employee Non-Renewal of Term or Termination by Employee without Good Reason. If the Agreement expires either at the end of the Initial Term or at the end of any Renewal Period, due to the issuance of notice of non-renewal by Employee under Section 2, then no severance under Section 4.2(b) shall be paid to the Employee and her employment shall terminate upon the anniversary date. If Employee terminates her employment without Good Reason, then no severance under Section 4.2(b) shall be paid to Employee and her employment shall terminate on the effective date of such termination. For the avoidance of doubt, if Company ends the employment relationship either at the end of the Initial Term or at the end of any Renewal Period without Cause under Section 4.1(c), Company shall remit to Employee the severance specified in Section 4.2(b) provided Company has received the release and waiver referred to in Section 4.2(b).

 

(d)     Welfare Benefits. Upon termination or expiration of this Agreement for any reason, Employee shall be provided with such Welfare Benefits continuation notices, rights and obligations as may be required under federal or state law (including COBRA). In the event that Employee becomes entitled to any severance under Section 4.2(b) above, during the period that Welfare Benefits are continued under COBRA, Company shall continue to pay Company’s portion of the medical, dental, and vision plan premiums for the benefit of Employee.

 

 
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5.     Confidential Information.

 

(a)     Employee agrees to keep secret and confidential, and not to use or disclose to any third parties, except as directly required for Employee to perform Employee’s employment responsibilities for Company, any of Company’s proprietary Confidential Information.

 

(b)     Employee acknowledges and confirms that certain data and other information (whether in human or machine readable form) that comes into her possession or knowledge (whether before or after the date of this Agreement) and which was obtained from Company, or obtained by Employee for or on behalf of Company, and which is identified herein (the “Confidential Information”) is the secret, confidential property of Company. This Confidential Information includes, but is not limited to:

 

(1)     lists or other identification of customers or prospective customers of Company;

 

(2)     lists or other identification of sources or prospective sources of Company’s products or components thereof, its landlords and prospective landlords and its current and prospective alliance, marketing and media partners (and key individuals employed or engaged by such parties);

 

(3)     all compilations of information, correspondence, designs, drawings, files, formulae, lists, machines, maps, methods, models, studies, surveys, scripts, screenplays, artwork, sketches, notes or other writings, plans, leases, records and reports;

 

(4)     financial, sales and marketing data relating to Company or to the industry or other areas pertaining to Company’s activities and contemplated activities (including, without limitation, leasing, manufacturing, transportation, distribution and sales costs and non-public pricing information);

 

(5)     equipment, materials, designs, procedures, processes, and techniques used in, or related to, the development, manufacture, assembly, fabrication or other production and quality control of Company’s products, stores and services;

 

(6)     Company’s relations with its past, current and prospective customers, suppliers, landlords, alliance, marketing and media partners and the nature and type of products or services rendered to, received from or developed with such parties or prospective parties;

 

(7)     Company’s relations with its employees (including, without limitation, salaries, job classifications and skill levels); and

 

(8)     any other information designated by Company to be confidential, secret and/or proprietary (including without limitation, information provided by customers, suppliers and alliance partners of Company).

 

Notwithstanding the foregoing, the term Confidential Information shall not consist of any data or other information which has been made publicly available or otherwise placed in the public domain other than by Employee in violation of this Agreement.

 

 
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(c)     During the Employment Period, Employee will not copy, reproduce or otherwise duplicate, record, abstract, summarize or otherwise use, any papers, records, reports, studies, computer printouts, equipment, tools or other property owned by Company except as expressly permitted by Company in writing or required for the proper performance of her duties on behalf of Company.

 

6.     Post-Termination Restrictions. Employee recognizes that (i) Company has spent substantial money, time and effort over the years in developing and solidifying its relationships with its customers, suppliers, landlords and alliance, marketing and media partners and in developing its Confidential Information; (ii) long-term customer, landlord, supplier and partner relationships often can be difficult to develop and require a significant investment of time, effort and expense; (iii) Company has paid its employees to, among other things, develop and preserve business information, customer, landlord, vendor and partner goodwill, customer, landlord, vendor and partner loyalty and customer, landlord, vendor and partner contacts for and on behalf of Company; and (iv) Company is hereby agreeing to employ and pay Employee based upon Employee’s assurances and promises not to divert goodwill of customers, landlords, suppliers or partners of Company, either individually or on a combined basis, or to put herself in a position following Employee’s employment with Company in which the confidentiality of Company’s Confidential Information might somehow be compromised. Accordingly, Employee agrees that during the Employment Period and for the period of time set forth below following termination of employment, provided termination is in accordance with the terms of Section 4.1(b), (c), or (d), or due to expiration of the Agreement due to non-renewal by either party, Employee will not, directly or indirectly (whether as owner, partner, consultant, employee or otherwise):

 

(a)     for one (1) year, engage in, assist or have an interest in, or enter the employment of or act as an agent, advisor or consultant for, any person or entity which is engaged in, or will be engaged in, the development, manufacture, supplying or sale of a product, process, service or development which is competitive with a product, process, service or development on which Employee worked or with respect to which Employee has or had access to Confidential Information while at Company (“Restricted Activity”), and which is located within the United States or within any country where Company has established a retail presence either directly or through a franchise arrangement; or

 

(b)     for one (1) year, induce or attempt to induce any employee, consultant, partner or advisor of Company to accept employment or an affiliation with any entity engaged in a Restricted Activity; provided, however, that following termination of her employment, Employee shall be entitled to be an employee of an entity that engages in Restricted Activity so long as: (i) the sale of stuffed plush toys is not a material business of the entity; (ii) Employee has no direct or personal involvement in the sale of stuffed plush toys; and (iii) neither Employee, her relatives, nor any other entities with which she is affiliated own more than 1% of the entity. As used in this Section 6, “material business” shall mean that either (A) greater than 10% of annual revenues received by such entity were derived from the sale of stuffed plush toys and related products, or (B) the annual revenues received or projected to be received by such entity from the sale of stuffed plush toys and related products exceeded $10 million, or (C) or the entity otherwise annually derives or is projected to derive annual revenues in excess of $5 million from a retail concept that is similar in any material regard to Company.

 

 
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7.     Acknowledgment Regarding Restrictions. Employee recognizes and agrees that the restraints contained in Section 6 (both separately and in total), including the geographic scope thereof in light of Company’s marketing efforts, are reasonable and enforceable in view of Company’s legitimate interests in protecting its Confidential Information and customer goodwill and the limited scope of the restrictions in Section 6.

 

8.     Inventions.

 

(a)     Any and all ideas, inventions, discoveries, patents, patent applications, continuation-in-part patent applications, divisional patent applications, technology, copyrights, derivative works, trademarks, service marks, improvements, trade secrets and the like (collectively, “Inventions”), which are developed, conceived, created, discovered, learned, produced and/or otherwise generated by Employee, whether individually or otherwise, during the time that Employee is employed by Company, whether or not during working hours, that relate to (i) current and anticipated businesses and/or activities of Company, (ii) the current and anticipated research or development of Company, or (iii) any work performed by Employee for Company, shall be the sole and exclusive property of Company, and Company shall own any and all right, title and interest to such Inventions. Employee assigns, and agrees to assign to Company whenever so requested by Company, any and all right, title and interest in and to any such Invention, at Company’s expense, and Employee agrees to execute any and all applications, assignments or other instruments which Company deems desirable or necessary to protect such interests, at Company’s expense.

 

(b)     Employee acknowledges that as part of her work for Company she may be asked to create, or contribute to the creation of, computer programs, documentation and other copyrightable works. Employee hereby agrees that any and all computer programs, documentation and other copyrightable materials that she has prepared or worked on for Company, or is asked to prepare or work on by Company, shall be treated as and shall be a “work made for hire,” for the exclusive ownership and benefit of Company according to the copyright laws of the United States, including, but not limited to, Sections 101 and 201 of Title 17 of the U.S. Code (“U.S.C.”) as well as according to similar foreign laws. Company shall have the exclusive right to register the copyrights in all such works in its name as the owner and author of such works and shall have the exclusive rights conveyed under 17 U.S.C. §§ 106 and 106A including, but not limited to, the right to make all uses of the works in which attribution or integrity rights may be implicated. Without in any way limiting the foregoing, to the extent the works are not treated as works made for hire under any applicable law, Employee hereby irrevocably assigns, transfers, and conveys to Company and its successors and assigns any and all worldwide right, title, and interest that Employee may now or in the future have in or to the works, including, but not limited to, all ownership, U.S. and foreign copyrights, all treaty, convention, statutory, and common law rights under the law of any U.S. or foreign jurisdiction, the right to sue for past, present, and future infringement, and moral, attribution, and integrity rights. Employee hereby expressly and forever irrevocably waives any and all rights that she may have arising under 17 U.S.C. §§ 106A, rights that may arise under any federal, state, or foreign law that conveys rights that are similar in nature to those conveyed under 17 U.S.C. §§ 106A, and any other type of moral right or droit moral.

 

9.          Company Property. Employee acknowledges that any and all notes, records, sketches, computer diskettes, training materials and other documents relating to Company obtained by or provided to Employee, or otherwise made, produced or compiled during the Employment Period, regardless of the type of medium in which they are preserved, are the sole and exclusive property of Company and shall be surrendered to Company upon Employee’s termination of employment and on demand at any time by Company.

 

 
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10.     Nondisparagement. Employee agrees that she will not in any way disparage Company or its affiliated entities, officers, or directors; and the officers and directors shall not in any way disparage Employee. Further, Employee agrees that she will neither make nor solicit any comments, statements, or the like to the media or to third parties that may be considered to be derogatory or detrimental to the good name or business reputation of Company or any of its affiliated entities, officers or directors; and the officers and directors will neither make nor solicit any comments, statements, or the like to the media or to third parties that may be considered to be derogatory or detrimental to the good name or business reputation of Employee.

 

11.     Non-Waiver of Rights. Either party’s failure to enforce at any time any of the provisions of this Agreement or to require at any time performance by the other party of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect either the validity of this Agreement, or any part hereof, or the right of the non-breaching party thereafter to enforce each and every provision in accordance with the terms of this Agreement.

 

12.     Company’s Right to Injunctive Relief. In the event of a breach or threatened breach of any of Employee’s duties and obligations under the terms and provisions of Sections 5, 6, or 8 hereof, Company shall be entitled, in addition to any other legal or equitable remedies it may have in connection therewith (including any right to damages that it may suffer), to seek temporary, preliminary and permanent injunctive relief restraining such breach or threatened breach, without the necessity of posting any bond. Employee hereby expressly acknowledges that the harm which might result to Company’s business as a result of any noncompliance by Employee with any of the provisions of Sections 5, 6 or 8 would be largely irreparable.

 

13.     Judicial Enforcement. If any provision of this Agreement is adjudicated to be invalid or unenforceable under applicable law in any jurisdiction, the validity or enforceability of the remaining provisions thereof shall be unaffected as to such jurisdiction and such adjudication shall not affect the validity or enforceability of such provisions in any other jurisdiction. To the extent that any provision of this Agreement is adjudicated to be invalid or unenforceable because it is overbroad, that provision shall not be void but rather shall be limited only to the extent required by applicable law and enforced as so limited. The parties expressly acknowledge and agree that this Section is reasonable in view of the parties’ respective interests.

 

14.     Employee Representations. Employee represents that the execution and delivery of the Agreement and Employee’s employment with Company do not violate any previous employment agreement or other contractual obligation of Employee. Employee further represents and agrees that she will not, during her employment with Company, improperly use or disclose any proprietary information or trade secrets of former employers and will not bring on to the premises of Company any unpublished documents or any property belonging to her former employers unless consented to in writing by such employers.

 

15.     Amendments. No modification, amendment or waiver of any of the provisions of this Agreement shall be effective unless in writing specifically referring hereto, and signed by the parties hereto. This Agreement supersedes all prior agreements and understandings between Employee and Company to the extent that any such agreements or understandings conflict with the terms of this Agreement.

 

 
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16.     Assignments. This Agreement shall be freely assignable by Company to and shall inure to the benefit of, and be binding upon, Company, its affiliates, successors and assigns and/or any other entity which shall succeed to the business presently being conducted by Company. Being a contract for personal services, neither this Agreement nor any rights hereunder shall be assigned by Employee.

 

17.     Choice of Forum and Governing Law. In light of Company’s substantial contacts with the State of Missouri, the parties’ interests in ensuring that disputes regarding the interpretation, validity and enforceability of this Agreement are resolved on a uniform basis, and Company’s execution of, and the making of, this Agreement in Missouri, the parties agree that: (i) any litigation involving any noncompliance with or breach of the Agreement, or regarding the interpretation, validity and/or enforceability of the Agreement, shall be filed and conducted in the state or federal courts in St. Louis City or County, Missouri; and (ii) the Agreement shall be interpreted in accordance with and governed by the laws of the State of Missouri, without regard for any conflict of law principles.

 

18.     Notices. Except as otherwise provided for herein, any notices to be given by either party to the other shall be affected by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Mailed notices shall be addressed as follows:

 

(a)     If to Company:

 

Sharon Price John

Chief Executive Officer and Chief President Bear

1954 Innerbelt Business Center

St. Louis, MO 63114

 

With copy to:

 

Eric Fencl

Chief Bearrister—General Counsel

1954 Innerbelt Business Center

St. Louis, MO 63114

 

 

(b)     If to Employee:

Jennifer Kretchmar


                         
                    

19.     Arbitration.     Any controversy or claim arising out of, or relating to this Agreement, the breach thereof, or Employee’s employment by Company, shall, at Company’s sole option, be settled by binding arbitration in the County of St. Louis in accordance with the employment rules then in force of the American Arbitration Association, and judgment upon the award rendered may be entered and enforced in any court having jurisdiction thereof. The controversies or claims subject to arbitration at Company’s option under this Agreement include, without limitation, those arising under Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 1981, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the Worker Adjustment and Retraining Notification Act, the Missouri Human Rights Act, local laws governing employment, and the statutory and/or common law of contract and tort. In the event Employee commences any action in court which Company has the right to submit to binding arbitration, Company shall have sixty (60) days from the date of service of a summons and complaint upon Company to direct in writing that all or any part of the dispute be arbitrated. Any remedy available in any court action shall also be available in arbitration.

 

 
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20.     Reduction.     Any provision of this Agreement to the contrary notwithstanding, if any payments or benefits which Employee has the right to receive (“Payments”), whether provided hereunder or under a different arrangement, are subject to the excise tax imposed by Section 4999 of the Code (“Excise Tax”), then the Payments shall be reduced (but not below zero) to the greatest amount which may be paid without Employee becoming subject to the Excise Tax. The determinations as to the Payments to be reduced and the amount of reduction shall be made by Company in good faith, and such determinations shall be conclusive and binding on Employee. If a reduced payment is made and through error or otherwise that payment, when aggregated with other Payments used in determining if a “parachute payment” exists, would trigger an Excise Tax, Employee shall immediately repay such excess to Company upon notification that an overpayment has been made. In the event that Employee receives reduced payments and benefits as a result of the application of this paragraph, reduction shall be made from payments and benefits which are determined not to be nonqualified deferred compensation for purposes of Section 409A of the Code first, and then shall be made (to the extent necessary) out of payments and benefits which are subject to Section 409A of the Code and which are due at the latest future date, to the extent such reduction would not trigger adverse tax consequences under Section 409A of the Code.

 

21.     Headings. Section headings are provided in this Agreement for convenience only and shall not be deemed to substantively alter the content of such sections.

 

 
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PLEASE NOTE: BY SIGNING THIS AGREEMENT, EMPLOYEE IS HEREBY CERTIFYING THAT EMPLOYEE (A) HAS RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW AND STUDY BEFORE EXECUTING IT; (B) HAS READ THIS AGREEMENT CAREFULLY BEFORE SIGNING IT; (C) HAS HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING THE AGREEMENT TO ASK ANY QUESTIONS EMPLOYEE HAS ABOUT THE AGREEMENT AND HAS RECEIVED SATISFACTORY ANSWERS TO ALL SUCH QUESTIONS; AND (D) UNDERSTANDS EMPLOYEE’S RIGHTS AND OBLIGATIONS UNDER THE AGREEMENT.

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of August 12, 2014.

 

THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY COMPANY.

 

 

 

 

/s/ Jennifer Kretchmar

 
 

Jennifer Kretchmar

 

 

 

 

 

BUILD-A-BEAR WORKSHOP, INC.

 
       
       
       
 

By:

/s/ Sharon John

 
       
 

Name:

Sharon John

 
       
 

Title:

Chief Executive Officer

 

 

 

 

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