THE VERMONT TEDDY BEAR CO., INC.
NOTICE OF 1996 ANNUAL MEETING OF SHAREHOLDERS
AND
PROXY STATEMENT
<PAGE>
THE VERMONT TEDDY BEAR CO., INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of the Stockholders of The Vermont Teddy Bear
Co., Inc. will be held at 10:00 a.m. EST on November 22, 1996, at the
Company's retail/manufacturing facility, 2236 Shelburne Road, Route
Seven, Shelburne, Vermont, for the following purposes:
1. To elect six (6) individuals to the Company's Board of
Directors for the ensuing year.
2. To ratify the selection of Arthur Andersen, L.L.P., as the
Company's independent public accountants for the 1997 fiscal
year.
3. To approve Amendment No. 2 to The Vermont Teddy Bear Co., Inc.
1993 Incentive Stock Option Plan, authorizing an increase in
the number of shares for which options to purchase the
Company's Common Stock may be issued from 1,000,000 shares
to 2,000,000 shares.
4. To approve Amendment No. 3 to The Vermont Teddy Bear Co., Inc.
1993 Incentive Stock Option Plan, authorizing the grant of
non-qualified stock options with an exercise price less than
the fair market value per share of the Company's Common
Stock on the date of the grant.
5. To approve an amendment of the Company's Bylaws, authorizing
compensation of the Company's directors upon prior approval
of the Company's Stockholders.
6. To approve the adoption of the Company's Non-employee Directors
Stock Option Plan.
7. To approve the grant of an option to David W. Garrett to
purchase 30,000 shares of the Company's Common Stock at an
exercise price equal to fair market value of the Company's
Common Stock as of the date of the Annual Meeting.
8. To approve the grant of an option to Joan H. Martin to purchase
30,000 shares of the Company's Common Stock at an exercise
price equal to fair market value of the Company's Common
Stock as of the date of the Annual Meeting.
9. To transact such other business that may properly come before
the meeting or adjournment thereof.
BY ORDER OF THE BOARD OF DIRECTORS
Spencer C. Putnam, Secretary
Shelburne, Vermont
October 7, 1996
<PAGE>
THE VERMONT TEDDY BEAR CO., INC.
2236 Shelburne Road
P.O. Box 965
Shelburne, Vermont 05482
October 7, 1996
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 22, 1996
This proxy statement is furnished to the stockholders of The Vermont
Teddy Bear Co., Inc. (the "Company"), a New York corporation, in connection
with the Annual Meeting of Stockholders of the Company to be held at 10:00
a.m. on Friday, November 22, 1996, at the Company's retail/manufacturing
facility located at 2236 Shelburne Road, Route Seven, Shelburne, Vermont.
The enclosed proxy card is furnished by the Company. This proxy is being
solicited by the Company's Board of Directors for use at the Annual Meeting or
at any adjournment thereof. A proxy duly executed and returned by a
stockholder will be voted as directed by the proxy, and, if no choice is
specified, the proxy will be voted in accordance with the recommendations of
the Board of Directors contained herein. As to other matters, if any, to be
voted upon, the persons named in the proxy will take such action as the Board
of Directors may deem advisable.
All expenses of soliciting proxies are being borne by the Company. It
is expected that solicitations will be made primarily by mail, but regular
employees or representatives of the Company may also solicit proxies by
telephone or other communication methods and arrange for nominees, custodians
and fiduciaries to forward proxies and proxy material to their principals at
the Company's expense.
A proxy may be revoked at any time before it is exercised by notifying
the Company's Secretary in writing at the address set forth above or by
attending the Annual Meeting and voting the shares covered by the proxy in
person.
It is expected that this Proxy Statement will be mailed on or about
October 17, 1996, to stockholders of record on October 14, 1996.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The Board of Directors has fixed the close of business on October 14,
1996, as the record date for the determination of Stockholders entitled to
receive notice of and to vote at the Annual Meeting. Each share of the
Company's Common Stock outstanding on the record date is entitled to one vote.
As of the close of business on September 18, 1996, there were 5,160,750
shares of the Company's Common Stock outstanding and entitled to vote, of
which 2,780,625 shares, or approximately 53.9% were owned beneficially by the
current directors and officers of the Company as a group.(1)
The following table presents information about those persons known by
the Company to own beneficially, as of September 18, 1996, more than five
percent of the shares of the Company's Common Stock outstanding, as well as
the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name and Address Number of Percent of
of Beneficial Owner Shares Owned Shares
Outstanding
------------------- ------------ ------------
<S> <C> <C>
R. Patrick Burns................. 32,950(2) 0.6
c/o The Vermont Teddy Bear Co., Inc.
2236 Shelburne Road
P.O. Box 965
Shelburne, VT 05482
David W. Garrett................. 198,000(3) 3.8
c/o The Garrett Hotel Group
166 Battery Street
Burlington, VT 05401
Fred Marks....................... 600,500(4) 11.6
c/o The Vermont Teddy Bear Co., Inc.
2236 Shelburne Road
P.O. Box 965
Shelburne, VT 05482
Joan H. Martin................... 1,840,975(5) 35.7
34 Woodbury Hill
Woodbury, CT 06798
Margaret H. Martin............... 300,000 5.8
500 Lovell Avenue
Mill Valley, CA 94941
Spencer C. Putnam................ 105,500(6) 2.0
c/o The Vermont Teddy Bear Co., Inc.
2236 Shelburne Road
P.O. Box 965
Shelburne, VT 05482
Elisabeth B. Robert............. 2,700(7) 0.1
c/o The Vermont Teddy Bear Co., Inc.
2236 Shelburne Road
P.O. Box 965
Shelburne, VT 05482
<FN>
(1) These figures include a total of 517,445 shares held of record as a group
by spouses and minor children of the Company's current directors and officers.
These figures do not include any options granted under the Company's
Incentive Stock Option Plan to all current directors and officers as a group
to purchase 656,342 shares of the Company's Common Stock, of which 144,121
shares have vested as of September 18, 1996. These figures do not include a
total of 59,800 shares held by Raymond C. Pecor, who served as the Company's
Acting Chief Executive Officer from June 19, 1995 to July 31, 1995.
(2) This figure includes 9,450 shares held of record by Mr. Burns' wife, as to
which beneficial ownership is disclaimed. This figure does not include
options granted under the Company's Incentive Stock Option Plan to Mr. Burns
to purchase 450,000 shares of the Company's Common Stock, of which 112,500
shares have vested as of September 18, 1996.
(3) This figure includes 11,000 shares held of record by Mr. Garrett's
children. This figure also includes 30,000 shares held of record by Mr.
Garrett's wife, as to which beneficial ownership is disclaimed.
(4) This figure includes 500 shares held of record by Mr. Marks' wife, as to
which beneficial ownership is disclaimed. This figure does not include
options granted under the Company's Incentive Stock Option Plan to Mr. Marks
to purchase 3,000 shares of the Company's Common Stock, of which 1,500 shares
have vested as of September 18, 1996.
(5) This figure includes 1,120,000 shares held of record by the Joan Hixon
Martin Trust. This figure also includes 720,975 shares acquired on the
foreclosure of a stock pledge securing an $800,000 loan by Ms. Martin to Mr.
John N. Sortino. This figure does not include 152,995 shares of the Company's
Common Stock held of record by Ms. Martin's son, Franc Sloan, and 300,000
shares of the Company's Common Stock held of record by Ms. Martin's daughter,
Margaret H. Martin. Ms. Martin disclaims beneficial ownership of shares owned
by Mr. Franc Sloan and Ms. Margaret H. Martin.
(6) This figure includes 10,000 shares held of record by Mr. Putnam's
children. This figure also includes 2,500 shares held of record by Mr.
Putnam's wife, as to which beneficial ownership is disclaimed. This figure
does not include options granted under the Company's Incentive Stock Option
Plan to Mr. Putnam to purchase 47,832 shares of the Company's Common Stock, of
which 8,916 shares have vested as of September 18, 1996.
(7) This figure includes 1,000 shares held of record by Ms. Robert's minor
children. This figure does not include options granted under the Company's
Incentive Stock Option Plan to Ms. Robert to purchase 155,510 shares of the
Company's Common Stock, of which 21,505 shares have vested as of September 18,
1996.
</FN>
</TABLE>
As of June 30, 1996, the Directors and Executive Officers of the Company
were as follows:
<TABLE>
<CAPTION>
Name Age Office
- ------------------- --- ------------------------------------------------
<S> <C> <C>
R. Patrick Burns 52 Director, President, and Chief Executive Officer
David W. Garrett 53 Director
Joan H. Martin 72 Director
Fred Marks 68 Director, Chairman of the Board
James Mitarotonda 42 Director
Spencer C. Putnam 50 Director, Vice President, Secretary and Chief
Operating Officer
Elisabeth B. Robert 41 Director, Senior Vice President, Treasurer, and
Chief Financial Officer
</TABLE>
Subsequent to June 30, 1996, Mr. Mitarotonda resigned from the Board of
Directors, effective July 3, 1996.
All of the Company's directors hold office until the 1996 Annual Meeting
of Stockholders and until their successors are elected and qualified. The
Board of Directors has an Audit Committee, on which Mr. Burns, Mr. Garrett and
Ms. Martin serve; an Executive Committee, on which Mr. Burns, Mr. Marks, and
Mr. Putnam serve; and an Option Committee, on which Mr. Garrett and Ms. Martin
serve. The Chief Operating Officer of the Company, Mr. Putnam, serves under
an agreement with the Company, dated November 1, 1993, providing for
continuous employment through November 1, 1996. The Chief Executive Officer,
Mr. Burns, serves under an agreement with the Company dated June 30, 1996,
providing for continuous employment through June 30, 2000. The Chief
Financial Officer, Ms. Robert, serves under an agreement with the Company,
dated July 1, 1996, providing for continuous employment through June 30, 2001.
MEETINGS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors held four meetings during the fiscal year ended
June 30, 1996, and took all other action by unanimous consent in lieu of
actual meetings. During the fiscal year ended June 30, 1996, no director
attended less than 75% of the aggregate of the total number of meetings of the
Board of Directors and the total number of meetings held by all committees of
the Board on which such director is a member.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
In accordance with its Bylaws, the Company has not paid any compensation
to directors, as such, for their services, but reimburses outside directors up
to $1,000 per meeting for their expenses of attendance. The Company has made
proposals to amend its Bylaws to authorize the payment of compensation to its
directors (see Item 5 of this Proxy Statement), and to adopt a stock option
plan to compensate non-employee directors (see Item 6 of this Proxy
Statement.) If the Bylaws are amended as proposed, the Company intends to
compensate the Chairman of the Board $5,000 per calendar quarter, beginning
January 1, 1997.
None of the Company's executive officers received cash compensation
exceeding $100,000 during the Company's fiscal year ended June 30, 1996.
Pursuant to the Company's Bylaws, the salaries of the Company's executive
officers are fixed from time to time by the Board of Directors.
On June 19, 1995, Mr. Sortino resigned as the Chief Executive Officer
and President of the Company. The Company entered into a separation agreement
with Mr. Sortino on that date. Under this separation agreement, Mr. Sortino
is entitled to receive: i) cash compensation of $100,000 in calendar year 1995
(including compensation paid to Mr. Sortino as Chief Executive Officer of the
Company), $120,000 in calendar year 1996 and $150,000 in calendar year 1997;
ii) a bonus of $100,000; iii) the forgiveness of amounts due t Company
totalling $193,000; and iv) health insurance benefits generally available to
employees of the Company. The Company accrued and expensed the entire amount
due Mr. Sortino under the agreement during the six month Transition Period
ending June 30, 1995, and will not seek any services from him in the future.
Ray Pecor, a former director of the Company, served as Acting Chief
Executive Officer between June 19, 1995 and July 31, 1995, and received no
compensation.
On July 31, 1995, the Company and Mr. Burns signed an agreement
providing for his employment as Chief Executive Officer of the Company for a
term ending February 1, 1997. Under this employment agreement, Mr. Burns was
entitled to receive: i) a base salary of $150,000 per year, commencing April
1, 1996; ii) reimbursement for necessary and reasonable expenses incurred by
him in the performance of his duties as CEO; iii) an annual bonus for fiscal
year 1996 of 10% of the amount by which the Company's operating profit exceeds
$1,000,000 and an annual bonus for fiscal year 1997 of 10% of the amount by
which the Company's operating profit exceeds $2,000,000; iv) options to
purchase 450,000 shares of the Company's Common Stock at the purchase price of
$3.875 per share, being equal to the market value at the date granted; v) any
benefits generally available to the officers of the Company from time to time;
and vi) a company car of Mr. Burns' choice. Mr. Burns voluntarily waived all
cash compensation payable under this agreement in the fiscal year ending June
30, 1996.
On July 31, 1995, the Company also entered into an agreement with Mr.
Burns to extend to him a loan in an amount not to exceed $100,000. Under this
agreement, the Company had made loans totalling $41,818 as of June 30, 1996.
The agreement provided that the loan would mature on April 1, 1998, but
provided for forgiveness of the loan if Mr. Burns remained employed by the
Company until that date.
On January 22, 1996, Mr. Burns' option agreement was cancelled and a new
option agreement was entered into by which the Company granted an option to
purchase 450,000 shares of the Company's Common Stock at an exercise price of
$3.06 per share, vesting at 25 percent per annum beginning on that date.
As of June 30, 1996, Mr. Burns signed a new agreement with the Company
providing for his continued employment as the Chief Executive Officer for a
term of four years ending June 30, 2000. Under this new agreement, Mr. Burns
is entitled to receive: i) a base salary of $187,500 per year, commencing July
1, 1996; ii) reimbursement for necessary and reasonable expenses incurred by
him in the performance of his duties as Chief Executive Officer; iii) an
annual cash bonus for fiscal year 1997 of 10% of the amount by which the
Company's operating profit exceeds $500,000, plus a non-qualified option to
purchase 15,000 shares of the Company's Common Stock, at an exercise price of
$0.01 per share, and an annual bonus for fiscal years 1998, 1999, and 2000 of
10% of the amount by which the Company's operating profit exceeds $1,000,000,
$1,500,000 and $2,000,000, respectively; iv) options to purchase an additional
450,000 shares of the Company's Common Stock at the purchase price of $2.875
per share, being equal to the market value on the date of grant, vesting at 25
percent per annum beginning July 1, 1997; v) any benefits generally available
to the officers of the Company from time to time, including, without
limitation, life insurance and medical benefits; and vi) a company car of Mr.
Burns' choice. The agreement prohibits Mr. Burns from directly or indirectly
competing with the business of the Company during the course of his employment
and for a period of eighteen months thereafter. The grant of additional
options to Mr. Burns is subject to shareholder approval of an amendment to the
Plan authorizing an increase in the number of shares available for issuance
under the plan. (See Item 3 of this Proxy Statement.)
In addition, as of June 30, 1996, Mr. Burns signed an amendment to his
loan agreement with the Company, which increased the available loan amount to
$116,818 and revised the forgiveness schedule such that all outstanding
amounts and related interest charges will be forgiven on July 29, 2000,
provided that he has continuously remained employed by the Company until that
date. As of September 20, 1996, the Company had advanced $116,818 to Mr.
Burns.
As of July 1, 1996, the Company and Ms. Robert signed an agreement
providing for her continued employment as the Senior Vice President,
Treasurer, and Chief Financial Officer of the Company for a term of five years
ending June 30, 2001. Under this agreement, Ms. Robert is entitled to
receive: i) a base salary of $100,000, $110,000 and $120,000 per year in
fiscal years 1997, 1998, and 1999, respectively; ii) reimbursement for
necessary and reasonable expenses incurred by her in the performance of her
duties as Chief Financial Officer; iii) an annual cash bonus for fiscal year
1997 of 3% of the amount by which the Company's operating profit exceeds
$500,000, plus a non-qualified option to purchase 5,000 shares of the
Company's Common Stock, at an exercise price of $0.01 per share, and an annual
cash bonus for fiscal years 1998, 1999, 2000, and 2001 of 3% of the amount by
which the Company's operating profit exceeds $1,333,000, $2,167,000,
$2,000,000, and $2,500,000, respectively; iv) options to purchase an
additional 225,000 shares of the Company's Common Stock at a price of $2.875
per share, being equal to the market value on the dates of grant, vesting at
25 percent per annum beginning July 1, 1997; v) any benefits generally
available to the officers of the Company from time to time, including, without
limitation, life insurance and medical benefits; and vi) a company car of Mr.
Robert's choice. The agreement prohibits Ms. Robert from directly or
indirectly competing with the business of the Company during the course of her
employment and for a period of eighteen months thereafter. The grant of
additional options to Ms. Robert is subject to shareholder approval of an
amendment to the Plan authorizing an increase in the number of shares
available for issuance under the plan. (See Item 3 of this Proxy Statement.)
STOCK OPTIONS
The following table sets forth the options granted to Mr. Pecor and Mr.
Burns during the fiscal year ended June 30, 1996:
<TABLE>
OPTION/SAR GRANTS
<CAPTION>
Percent of
Underlying Total to all Exercise Expiration
Name Shares Employees Price Date
- -------------------- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C>
Ray Pecor, 0 0.0 n/a n/a
Acting Chief
Executive Officer
R. Patrick Burns, 450,000 34.0 $3.06 1/22/2006
Chief Executive
Officer
</TABLE>
INTERESTS IN CERTAIN TRANSACTIONS
In June 1987, the Company entered into a Securities Purchase Agreement
for the private placement of $400,000 of Common Stock and up to $800,000 of
debentures to Ms. Martin. Ms. Martin and her two children, Franc Sloan and
Margaret H. Martin, presently own in the aggregate 44.35 percent of the issued
and outstanding shares of the Company's Common Stock. An aggregate of
$720,000 principal amount of debentures was issued to Ms. Martin under the
Securities Purchase Agreement in installments between June 1987 and June 1990.
In May 1993, the entire principal amount of such debentures was converted
into 72 shares of the Company's Series A Preferred Stock, and in August 1993,
$180,000 of accrued interest was converted into 18 shares of Series A
Preferred Stock. The balance of the accrued interest on the debentures was
converted into a promissory note in the principal amount of $69,167, which,
together with all accrued interest thereon, was paid in full out of the
proceeds from the November 1993 initial public offering of the Company's
Common Stock. By an agreement dated April 12, 1996, Ms. Martin waived her
right to receive $126,000 of accumulated preferred stock dividends in exchange
for a five-year warrant to purchase 43,826 shares of Common Stock at an
exercise price of $2.875 per share.
DELINQUENT FILINGS
Under federal securities laws, the Company's directors, certain of its
officers and any persons holding more than 10% of the Company's Common Stock
are required to report their ownership thereof and any changes in that
ownership to the Securities and Exchange Commission. Specific due dates for
these reports have been established, and the Company is required to report in
this proxy statement any failure to file by these dates during the fiscal year
ended June 30, 1996. All of these filing requirements were satisfied by the
Company's directors and officers and, to the knowledge of the Company, its 10%
shareholders, except as follows: 1) James Mitarotonda was required to file a
Form 4 on September 10, 1995, with respect to the purchase of 1,700 shares of
the Company's Common Stock on August 7, 1995, which was reported on a Form 4
on October 24, 1995; 2) John N. Sortino was required to file a Form 4 on
October 10, 1995, with respect to the sale of 2,000 shares of the Company's
Common Stock on September 29, 1995, which was reported on a Form 4 on April 6,
1996; 3) John N. Sortino was required to file a Form 4 on November 10, 1995,
with respect to the following: (a) sale of 2,000 shares of the Company's
Common Stock on October 5, 1995; (b) sale of 3,000 shares of the Company's
Common Stock on October 6, 1995; (c) sale of 2,000 shares of the Company's
Common Stock on October 11, 1995; (d) sale of 4,000 shares of the Company's
Common Stock on October 16, 1995; (e) sale of 2,000 shares of the Company's
Common Stock on October 18, 1995; (f) sale of 4,000 shares of the Company's
Common Stock on October 19, 1995; (g) sale of 2,000 shares of the Company's
Common Stock on October 24, 1995; (h) sale of 2,000 shares of the Company's
Common Stock on October 26, 1995; (i) sale of 4,000 shares of the Company's
Common Stock on October 30, 1995; and (j) sale of 2,000 shares of the
Company's Common Stock on October 31, 1995, all of which were reported on a
Form 4 on April 6, 1996; 4) John N. Sortino was required to file a Form 4 on
December 10, 1995, with respect to the following: (a) sale of 2,000 shares of
the Company's Common Stock on November 3, 1995; (b) sale of 2,000 shares of
the Company's Common Stock on November 8, 1995; (c) sale of 3,700 shares of
the Company's Common Stock on November 10, 1995; (d) sale of 2,000 shares of
the Company's Common Stock on November 21, 1995; and (e) sale of 12,300 shares
of the Company's Common Stock on November 27, 1995, all of which were reported
on a Form 4 on April 6, 1996; 5) John N. Sortino was required to file a Form 4
on January 10, 1996, with respect to the sale of 2,000 shares of the Company's
Common Stock on December 27, 1995, which was reported on a Form 4 on April 6,
1996; 6) John N. Sortino was required to file a Form 4 on March 10, 1996, with
respect to the following: (a) sale of 13,000 shares of the Company's Common
Stock on February 1, 1996; (b) sale of 3,000 shares of the Company's Common
Stock on February 7, 1996; (c) sale of 2,000 shares of the Company's Common
Stock on February 8, 1996; and (d) sale of 3,700 shares of the Company's
Common Stock on February 11, 1996; 7) Patrick Burns was required to file a
Form 4 on April 10, 1996, with respect to the purchase of 4,500 shares of the
Company's Common Stock on March 29, 1996, which was reported on a Form 4 on
May 7, 1996; and 8) David Garrett was required to file a Form 4 on June 10,
1996, with respect to the sale of 8,000 shares of the Company's Common Stock
on May 10, 1996 and the sale of 4,000 shares of the Company's Common Stock on
May 22, 1996, which were reported on a Form 4 on July 16, 1996.
ITEM 1. PROPOSAL TO ELECT DIRECTORS
Pursuant to the Company's Bylaws, the Board of Directors is authorized
to establish, from time to time, the number of directors, with a maximum of
nine directors, and has established a Board of six Directors to be elected at
the 1996 Annual Meeting for terms of one year each and until their successors
are elected and qualified.
It is the intention of the persons named in the accompanying form of
proxy to vote for the nominees named below. In the event that, because of
death or unforeseen disability, any of the nominees designated below is
unavailable for election, the persons named in the accompanying form of proxy
reserve the right to vote such proxy for such other person or persons as may
be nominated by the Board of Directors to fill such vacancies so as to provide
a full board.
Election of directors requires a majority vote. The six nominees for
directors are listed below with brief statements of their principal
occupations and other pertinent information. As indicated below, all of the
nominees are currently serving on the Company's Board of Directors. Also
indicated below is the number of shares of the Company's Common Stock owned
beneficially by each of the nominees as of September 18, 1996.
Director Nominees
R. PATRICK BURNS joined the Company as its Chief Executive Officer in
August 1995. He was appointed a director of the Company on August 30, 1995.
Before joining the Company, Mr. Burns was the Chief Executive Officer of
Disney Direct Marketing, a division of The Walt Disney Company. Prior to that
position, Mr. Burns also served as Senior Vice-President and General Manager
at J. Crew, Inc. and as Vice-President of Merchandising and Product
Development at L.L. Bean, Inc. Shares owned: 32,950 (0.6%)
DAVID W. GARRETT has been a director since 1987. He is a Vice President
of First Albany Corporation, an investment banking and brokerage firm. Mr.
Garrett is also President of The Black Willow Group, Ltd., a private company
which owns and operates The Point, a luxury hotel in Saranac Lake, New York,
and is President of The Garrett Hotel Group, a private hotel development and
consulting firm. Shares owned: 198,000 (3.8%)
FRED MARKS became a director of the Company in 1987 and became its
Treasurer and Chairman of the Board in 1989. Mr. Marks presently serves as
Chairman of the Board of two other privately held companies: Selectech, Ltd.,
a manufacturer of remote controls for computers and televisions; and Contaq
Technologies, a manufacturer of ultra-sonic instruments. He devotes only a
part of his time to the business of the Company. Shares owned: 600,500 (11.6%)
JOAN H. MARTIN is a private investor, who has been a director of the
Company since 1991. Ms. Martin has no business experience during the past six
years apart from managing her own private investment portfolio. Shares owned:
1,840,975 (35.6%)
SPENCER C. PUTNAM joined the Company as its Chief Operating Officer in
June, 1987. He has been a director and Secretary of its Board since 1989.
Before joining the Company, Mr. Putnam was the Director of the Cooperative
Education Program at the University of Vermont from 1980 to 1987. Shares
owned: 105,500 (2.0%)
ELISABETH B. ROBERT joined the Company as its Chief Financial Officer in
September 1995, and was appointed a director of the Company on January 22,
1996, and Treasurer of the Company on April 22, 1996. Before joining the
Company, Ms. Robert was the Chief Financial Officer, Executive Vice-President,
and Founding Partner of AirMouse Remote Controls, a manufacturing firm
specializing in remote control devices. Prior to that position, Ms. Robert
was an independent management consultant, as well as Director of Gas Supply
for Vermont Gas Systems. Shares owned: 2,700 (0.1%)
Voting Information
The Board of Directors recommends a vote FOR approval of the nominees
named above to serve as directors of the Company for the ensuing year and
until their successors are elected and qualified.
ITEM 2: PROPOSAL TO SELECT INDEPENDENT PUBLIC ACCOUNTANTS
During Fiscal Year 1996, Arthur Andersen, L.L.P. audited the Company's
financial statements and also provided other professional services to the
Company in connection with Securities and Exchange Commission filings. The
report of Arthur Andersen, L.L.P. regarding the Company's financial statements
for the year ending June 30, 1996, appears in the Company's 1996 Annual Report
on Form 10-KSB. The report of KPMG Peat Marwick L.L.P. regarding the
Company's financial statements for the six-month Transition Period ended June
30, 1995 and the Fiscal Year ended December 31, 1994 also appears in the
Company's 1996 Annual Report on Form 10-KSB. In accordance with the
recommendation of its Audit Committee, the Board of Directors has appointed
Arthur Andersen L.L.P. as independent public accountants of the Company for
the year ending June 30, 1997, subject to ratification by Stockholders at the
Annual Meeting. Stockholder ratification of Arthur Andersen L.L.P. as
independent public accountants of the Company requires a majority vote.
A representative of Arthur Andersen L.L.P. is expected to be present at
the Annual Meeting of Stockholders on November 22, 1996.
Voting Information
The Board of Directors recommends a vote FOR approval of ratifying the
selection of Arthur Andersen, LLP as independent public accountants for the
fiscal year ending June 30, 1997.
ITEM 3. AMENDMENT NO. 2 TO THE COMPANY'S 1993 INCENTIVE STOCK OPTION PLAN
On August 16, 1993, the Company's stockholders and Board of Directors
unanimously approved the Company's 1993 Incentive Stock Option Plan.
Amendment No. 1 to the Plan, approved by the Company's stockholders at a
Special Meeting on November 28, 1995, increased the number of shares issuable
under the Plan from 200,000 to 1,000,000. Amendment No. 2 to the Plan will
further increase the number of shares issuable under the Plan from 1,000,000
to 2,000,000. The brief summary of the Plan which follows is qualified in its
entirety by reference to the complete text.
General
The purpose of the Plan is to provide employees with a proprietary
interest in the Company through the granting of stock options.
The Plan is administered by the Option Committee (the "Committee") of
the Board of Directors (the "Board"). The Committee is composed of
independent, outside directors. Under the Plan, the Committee may only grant
options to full-time employees, including officers, of the Company or its
subsidiaries. Currently, the Plan is administered by a Stock Option Committee
comprised of Joan H. Martin and David W. Garrett.
Currently, the number of options which may be issued under the Plan may
not exceed 1,000,000 shares of the Common Stock of the Company, subject to
adjustment to reflect any stock dividend, stock split, share combination,
recapitalization or the like, of or by the Company. As of October 1, 1996,
options for 902,406 shares have been granted under the plan. The amendment
presently before the Shareholders, if approved, will increase the number of
shares issuable under the Plan to an aggregate of 2,000,000, subject to
adjustment to reflect any stock dividend, stock split, share combination,
recapitalization or the like, of or by the Company. This represents
approximately 38.8% of the outstanding shares of Common Stock of the Company
on October 1, 1996. On October 1, 1996, the closing price of the Common Stock
Shares as reported by NASDAQ was $2.625 per share. As of October 1, 1996, the
market value of the additional 1,000,000 shares issuable under the Plan, if
proposed Amendment No. 2 is approved by the Shareholders, was $2,625,000.
Stock Options
Under the Plan, the Committee is authorized to grant both non-qualified
stock options and incentive stock options to full-time employees of the
Company only, including officers of the Company ("Employees"). Any incentive
stock options offered by the Committee shall have designated prices which are
not less than 100% of the fair market value of the Common Stock on the date
the option is granted, however, should the proposed Item 4 described in this
proxy be approved at the Annual Meeting, the Committee may grant non-qualified
stock options at an exercise price less than 100% of the fair market value of
the Common Stock on the date the option is granted. The Committee will
determine the provisions and terms of any stock option grant. No option may
terminate later than ten years from the date the option is granted. The
Committee may provide for termination of the option in the case of termination
of employment with the Company or any other reason.
Non-transferability of Options
No stock option can be transferred except by will or by the laws of
descent and distribution.
Termination and Amendment of the Plan
The Plan terminates on August 16, 2003, however, the Plan may be
terminated earlier by decision of the Board. The Board may amend the Plan;
however, any amendment that would (1) materially increase the benefits
accruing to participants under the Plan, (ii) materially increase the number
of securities that may be issued under the Plan, or (iii) materially modify
the requirements of eligibility for participation in the Plan must be approved
by the shareholders of the Company.
Federal Income Tax Consequences
No federal income tax consequences will result to the Company or an
employee for the exercise of an incentive stock option by an employee while
the employee is still employed by the Company or within three months of the
date the employee ceases to be employed by the Company.
When shares are disposed of within two years from the date the incentive
stock option was granted to the employee or within one year from the date the
shares were transferred to the employee on exercise of the incentive stock
option ("Disqualifying Disposition"), the employee will recognize ordinary
income at the time of disposition in an amount equal to the excess, if any of
(A) the lower of (i) the amount realized on the disposition and (ii) the fair
market value of the shares on the date that the incentive stock option was
exercised, over (B) the amount paid for the shares on the exercise of the
incentive stock option. Upon a Disqualifying Disposition, the Company will be
entitled to a deduction at the same time and in the same amount as the
ordinary income recognized by the employee on the disposition of the shares,
but only if the Company attempts to withhold federal income tax with respect
to this amount.
When shares are disposed of after two years from the date the incentive
stock option was granted or after one year from the date the incentive stock
option was exercised ("Qualifying Disposition"), the employee must recognize
long-term capital gain or loss on the disposition in an amount equal to the
difference between the amount realized on the disposition and the amount paid
for the shares on exercise of the incentive stock option. The Company will
not be entitled to any deduction upon a Qualifying Disposition.
No federal income tax consequences will result to the Company or the
optionee on the grant of a non-qualified option. An optionee must recognize
ordinary income when he exercises a non-qualified option in an amount equal to
the excess of fair market value of shares transferred to an employee on
exercise of the option over the amount paid for the shares on the exercise
(the "Spread"). The Company will be entitled to a deduction at the same time
as the optionee includes the Spread in income, but only if the Company
attempts to withhold federal income tax with respect to such an amount.
An optionee's holding period for the shares received on exercise of a
non-qualified option will commence on the date the option is exercised, and
the basis in the shares will equal the option price plus the amount included
in income on exercise of the option.
New Plan Benefits
The following table represents benefits available under an amended Plan.
<TABLE>
NEW PLAN BENEFITS TABLE
<CAPTION>
Name and Position Dollar Value Number of Units
- -------------------------------------- ----------------- ---------------
<S> <C> <C>
R. Patrick Burns, CEO and President Not Applicable(8) 450,000 shares
Elisabeth B. Robert, CFO and Treasurer Not Applicable(9) 150,000 shares
<FN>
(8) Although the options granted to Mr. Burns will be considered granted as of
July 31, 1995, if approved by the Company's shareholders, their dollar value
is not yet determinable and will not be determinable until the options have
vested and Mr. Burns has exercised them.
With respect to the additional 275,000 shares for which shareholder
approval is sought, the Company's Stock Option Committee has not yet
determined to whom options to purchase these additional shares will be
granted.
(9) Although the options granted to Ms. Robert will be considered granted as
of October 4, 1995, if approved by the Company's shareholders, their dollar
value is not yet determinable and will not be determinable until the options
have vested and Ms. Robert has exercised them.
With respect to the additional 275,000 shares for which shareholder
approval is sought, the Company's Stock Option Committee has not yet
determined to whom options to purchase these additional shares will be
granted.
</FN>
</TABLE>
With respect to the additional shares which would be available for
issuance under the Plan as amended for which shareholder approval is sought,
the Company's Stock Option Committee has not yet determined to whom options to
purchase these additional shares will be granted.
The Proposed Amendment
Amendment No. 2 to the Plan, which is attached hereto as Exhibit A,
increases the number of shares issuable under the Plan from 1,000,000 to
2,000,000, subject to adjustment to reflect any stock dividend, stock split,
share combination, recapitalization or the like, of or by the Company.
Approval of Amendment No. 2 is necessary in order to grant Mr. Burns the
option to purchase 450,000 shares of the Company's Common Stock and Ms. Robert
the option to purchase 150,000 shares of the Company's Common Stock in
accordance with their employment agreements with the Company, dated June 30,
1996 and July 1, 1996, respectively.
Voting Information
The Board of Directors recommends a vote FOR approval of Amendment No. 2
to the Plan to increase the number of shares issuable under the Plan from
1,000,000 to 2,000,000. The affirmative vote of a majority of the voting
power of the Common Stock entitled to vote at the Annual Meeting of
Stockholders is required for approval of Amendment No. 2 to the Plan. Your
appointed proxies will vote your shares FOR approval unless you instruct
otherwise in the proxy.
Abstentions and broker non-votes will have the same effect as votes
against the amendment.
ITEM 4. AMENDMENT NO. 3 TO THE COMPANY'S 1993 INCENTIVE STOCK OPTION PLAN
Amendment No. 3 to the Company's 1993 Incentive Stock Option Plan will
enable the Option Committee to grant non-qualified stock options to persons
eligible to participate in the Plan at an exercise price less than the fair
market value of the Company's Common Stock on the date of grant. Approval of
Amendment No. 3 would enable the Company to provide its officers and employees
with greater compensation, through the granting of non-qualified stock
options. The brief summary of the Plan set forth above in Item 3 is qualified
in its entirety by reference to the complete text.
The Proposed Amendment
Amendment No. 3 to the Plan, which is attached hereto as Exhibit B,
authorizes the Option Committee to grant non-qualified stock options to
persons eligible to participate in the Plan at an exercise price less than the
fair market value of the Common Stock on the date of grant.
Approval of Amendment No. 3 is necessary in order to grant Mr. Burns the
non-qualified stock option to purchase 15,000 shares of the Company's Common
Stock at an exercise price of $.01 and Ms. Robert the option to purchase 5,000
shares of the Company's Common Stock at an exercise price of $.01 in
accordance with their employment agreements with the Company, dated June 30,
1996 and July 1, 1996, respectively.
Voting Information
The Board of Directors recommends a vote FOR approval of Amendment No. 3
to the Plan to authorize the Option Committee to grant options at an exercise
price less than the fair market value of the Common Stock on the date of
grant. The affirmative vote of a majority of the voting power of the Common
Stock entitled to vote at the Annual Meeting of Stockholders is required for
approval of Amendment No. 3 to the Plan. Your appointed proxies will vote
your shares FOR approval unless you instruct otherwise in the proxy.
Abstentions and broker non-votes will have the same effect as votes
against the amendment.
ITEM 5. PROPOSAL TO AMEND THE COMPANY'S BYLAWS
The Company's Bylaws currently contains a prohibition against the
Company paying compensation to members of the Company's Board of Directors,
other than reimbursement for expenses incurred in connection with actual
attendance at regular or special meetings of the Board. In order to provide
an incentive to attract qualified directors and to retain the Company's
current directors, the Company's Board of Directors has recommended an
amendment to the Bylaws, authorizing the Company to compensate members of its
Board of Directors. This amendment to the Company's Bylaws, if approved by
the stockholders, will allow the Company to pay cash, equity or other
compensation to members of its Board of Directors, as approved by the
Shareholders, and to provide reimbursement for expense incurred in connection
with actual attendance at meetings of the Board of Directors or any committees
thereof.
The Proposed Amendment
This amendment to the Company's Bylaws, which is attached hereto as
Exhibit C will allow the Company to pay compensation, in addition to
reimbursing members of the Board of Directors for expenses incurred in
connection with actual attendance at meetings of the Company's Board of
Directors or committees thereof.
Voting Information
The Board of Directors recommends a vote FOR approval of the amendment
to the Company's bylaws. The affirmative vote of the holders of the majority
of the voting power of the Common Stock entitled to vote at the annual meeting
of stockholders is required for approval of the amendment to the Bylaws. Your
appointed proxies will vote your shares FOR approval unless you instruct
otherwise.
Abstention and broker non-votes will have the same effect as votes
against the amendment.
ITEM 6. PROPOSAL TO APPROVE THE COMPANY'S NON-EMPLOYEE DIRECTOR STOCK OPTION
PLAN
The Company's Board of Directors has adopted and submitted to the
Company's Stockholders for approval the Non-Employee Directors Stock Option
Plan. The stated purpose of the Non-Employee Directors Stock Option Plan is
to further align the interests of the Company's outside directors with that of
the shareholders and to provide equity compensation for the Company's outside
directors as an incentive to attract and retain qualified outside directors.
The complete text of the Plan is set forth as Exhibit D to this Proxy
Statement. A brief summary of the Plan that follows is qualified in its
entirety by reference to the complete text.
General
The purpose of the Plan is to further align the non-employee directors'
interests with those of the shareholders, to provide an additional inducement
for such directors to remain with the Company, and to provide a means by which
the Company may attract qualified persons to serve as directors of the
Company.
The Plan is administered by a committee consisting of at least two of
the Company's directors who are not eligible to participate in the Plan. Only
those members of the Company's Board of Directors who are not officers or
employees of the Company are eligible to participate in the Plan.
As proposed, options may be issued under the Plan to purchase not more
than 400,000 shares of the Common Stock of the Company, subject to adjustments
to reflect any stock dividend, stock split, share combination,
recapitalization or the like, of or by the Company. Pursuant to the Plan,
each participating director will receive an option to purchase 2,000 shares of
the Common Stock of the Company as an annual retainer, such option to be
granted on the third day after the Company's Annual Meeting of Stockholders.
Additionally, the Chairman of the Board of Directors, if he or she is eligible
to participate in the Plan, shall also be entitled to receive an additional
annual retainer in the form of four stock options to purchase 2,000 shares of
the Company's Common Stock each, to be granted on the third business day
following each regular quarterly meeting of the Company's Board of Directors.
In addition to the annual retainer options, each participating director
shall receive an option to purchase 1,500 shares of the Common Stock of the
Company for actual attendance at each regular or special meeting of the Board
of Directors and an option to purchase 1,000 shares of Common Stock of the
Company for actual attendance at a meeting of a committee of the Board of
Directors. Each such option shall be granted automatically on the third day
following such meeting. All of the annual retainer and meeting options shall
have an exercise price equal to the fair market value of the Common Stock on
the date of grant, shall vest immediately and shall be exercisable for a
period of ten years.
Under the plan, the full Board of Directors may also grant stock options
to a Plan participant providing consulting or similar services to the Company.
Such consulting options shall be approved by a majority of the other members
of the full Board of Directors. The numbers of shares that may be purchased
under each such option shall be equal to the value of the services provided,
as determined by a majority of the other members of the full Board of
Directors, divided by the fair market value of a share of the Company's Common
Stock as of the date of grant.
Stock Options
Under the plan, all options granted will be non-qualified stock options.
Each option shall be exercisable at a price equal to the fair market value of
a share of the Company's Common Stock as of the date of grant. All of the
options shall vest immediately and terminate ten years from the date of grant.
Upon removal of a participating Director from the Board of Directors for
cause, all such Director's options previously granted shall terminate within
one month after the date of removal or upon the expiration date of such stock
option, whichever is earlier.
Effective Date and Amendment of the Plan
If approved by the stockholders, the Plan shall become effective as of
the date of the Company's 1996 Annual Meeting. The Plan may be amended or
terminated by the Board without the approval of the stockholders of the
Company, except that any amendment that would materially increase benefits
accruing to participants in the Plan, materially increase the number of
securities that may be issued under the Plan or materially modify the
requirements of eligibility of participation in the Plan must be approved by
the stockholders of the Company.
Federal Income Tax Consequences
No federal income tax consequences will result to the Company or the
optionee on the grant of a non-qualified stock option. An optionee must
recognize ordinary income when he or she exercises a non-qualified stock
option in an amount equal to the excess of fair market value of shares
transferred to the optionee on exercise of the option over the amount paid for
the shares on the exercise (the "Spread"). The Company will be entitled to a
deduction at the same time as the optionee includes the Spread in income, but
only if the Company attempts to withhold federal income tax with respect to
such an amount.
An optionee will also be taxed on any gain resulting from the subsequent
disposition of shares acquired pursuant to a non-qualified stock option. The
character of the gain will depend upon the length of the optionee's holding
period for the shares received, which will commence on the date the option is
exercised. The optionee's basis in the shares will equal the option price
plus the amount included in income on exercise of the option.
Approval of the Plan
Approval of the Plan, which is attached hereto as Exhibit D, will enact
the Plan effective as of the date of the 1996 Annual Meeting. Non-employee
directors shall automatically receive stock options under the Plan in
accordance with its terms commencing on the third day after the 1996 Annual
Meeting of Stockholders.
Voting Information
The Board of Directors recommends a vote FOR approval of the plan. The
affirmative vote of the holders of the majority of the voting power of the
Common Stock entitled to vote at the annual meeting of stockholders is
required for approval of the plan. Your appointed proxies will vote your
shares FOR approval unless you instruct otherwise in the proxy.
Abstention and broker non-votes will have the same effect as votes
against the amendment.
ITEM 7. APPROVAL OF THE GRANT OF A NON-QUALIFIED STOCK OPTION TO PURCHASE
30,000 SHARES OF THE COMPANY'S COMMON STOCK TO MR. DAVID W. GARRETT
At a Special Meeting of the Board of Directors held on September 26,
1996, the Board recommended that the Company grant a non-qualified stock
option to purchase 30,000 shares of the Company's Common Stock at an exercise
price equal to the fair market value of the Company's Common Stock on the date
of grant to Mr. David W. Garrett, an outside director of the Company since
1987. The Company's Board of Directors has recommended approval of the stock
option in recognition of Mr. Garrett's dedication and service to the Company's
Board of Directors over the last six years, without compensation.
Pursuant to New York corporation law, approval of the stockholders is
necessary prior to the granting of stock options to directors. If approved,
the stock option would be for the purchase of 30,000 shares of the Company's
Common Stock, at an exercise price equal to the fair market value of the
Company's Common Stock as of the date of grant, and exercisable for a period
of ten years.
The stock option would be a non-qualified stock option, and as such,
there would be no federal income tax consequences to the Company or the
optionee upon the grant of the non-qualified stock option. The optionee will
be required to recognize ordinary income when he or she exercises the non-
qualified stock option in an amount equal to the excess of the fair market
value of shares transferred to the optionee on exercise of the option over the
amount paid for the shares on the exercise (the "Spread"). The Company will
be entitled to a deduction at the same time as the optionee includes the
Spread in income, but only if the Company attempts to withhold federal income
tax with respect to such an amount.
The optionee will also be taxed on any gain resulting from the
subsequent disposition of shares acquired pursuant to the non-qualified stock
option. The character of the gain will depend upon the length of the
optionee's holding period for the shares received, which will commence on the
date the option is exercised. The optionee's basis in the shares will equal
the option price plus the amount included in the income on exercise of the
option.
The shares transferred to the optionee upon exercise of the option shall
be "restricted securities" as that term is defined in Rule 144, promulgated
under the Securities Act of 1933, as amended. As restricted securities, the
shares transferred to the optionee must be held by the optionee for at least
two years prior to disposition. Additionally, if the optionee is still an
affiliate of the Company either at the time of disposition or within three
months of the disposition, the optionee will be limited as to the number of
restricted securities that he or she may resell in any three month period.
Voting Information
The Board of Directors recommends a vote FOR approval of the non-
qualified stock option to Mr. Garrett. The affirmative vote of the holders of
the majority of the voting power of the Common Stock entitled to vote at the
annual meeting of stockholders is required for approval of the grant of non-
qualified stock options to Mr. Garrett. Your appointed proxies will vote your
shares FOR approval unless you instruct otherwise in the proxy.
Abstention and broker non-votes will have the same effect as votes
against the non-qualified stock option.
ITEM 8. APPROVAL OF THE GRANT OF A NON-QUALIFIED STOCK OPTION TO PURCHASE
30,000 SHARES OF THECOMPANY'S COMMON STOCK TO MS. JOAN H. MARTIN
At a Special Meeting of the Board of Directors held on September 26,
1996, the Board recommended that the Company grant a non-qualified stock
option to purchase 30,000 shares of the Company's Common Stock at an exercise
price equal to the fair market value of the Company's Common Stock on the date
of grant to Ms. Joan H. Martin, an outside director of the Company since 1991.
The Company's Board of Directors has recommended approval of the stock option
in recognition of Ms. Martin's dedication and service to the Company's Board
of Directors over the last five years, without compensation.
Pursuant to New York corporation law, approval of the stockholders is
necessary prior to the granting of stock options to directors. If approved,
the stock option would be for the purchase of 30,000 shares of the Company's
Common Stock, at an exercise price equal to the fair market value of the
Company's Common Stock as of the date of grant, and exercisable for a period
of ten years.
The stock option would be a non-qualified stock option, and as such,
there would be no federal income tax consequences to the Company or the
optionee upon the grant of the non-qualified stock option. The optionee will
be required to recognize ordinary income when he or she exercises the non-
qualified stock option in an amount equal to the excess of the fair market
value of shares transferred to the optionee on exercise of the option over the
amount paid for the shares on the exercise (the "Spread"). The Company will
be entitled to a deduction at the same time as the optionee includes the
Spread in income, but only if the Company attempts to withhold federal income
tax with respect to such an amount.
The optionee will also be taxed on any gain resulting from the
subsequent disposition of shares acquired pursuant to the non-qualified stock
option. The character of the gain will depend upon the length of the
optionee's holding period for the shares received, which will commence on the
date the option is exercised. The optionee's basis in the shares will equal
the option price plus the amount included in the income on exercise of the
option.
The shares transferred to the optionee upon exercise of the option shall
be "restricted securities" as that term is defined in Rule 144, promulgated
under the Securities Act of 1933, as amended. As restricted securities, the
shares transferred to the optionee must be held by the optionee for at least
two years prior to disposition. Additionally, if the optionee is still an
affiliate of the Company either at the time of disposition or within three
months of the disposition, the optionee will be limited as to the number of
restricted securities that he or she may resell in any three month period.
Voting Information
The Board of Directors recommends a vote FOR approval of the non-
qualified stock option to Ms. Martin. The affirmative vote of the holders of
the majority of the voting power of the Common Stock entitled to vote at the
annual meeting of stockholders is required for approval of the grant of non-
qualified stock options to Ms. Martin. Your appointed proxies will vote your
shares FOR approval unless you instruct otherwise in the proxy.
Abstention and broker non-votes will have the same effect as votes
against the non-qualified stock option.
ITEM 9. OTHER BUSINESS
The Company's Board of Directors knows of no other matters which may
come before the Annual Meeting. If, however, any other business should
properly come before the Annual Meeting, the proxies relating to such meeting
will be voted with respect thereto in accordance with the best judgment of the
Board.
Any stockholder proposal intended for presentation at the 1997 Annual
Meeting of Stockholders must be received by the Secretary of the Company at
its principal offices in Shelburne, Vermont, by June 1, 1997, for inclusion in
the Company's Proxy Statement and form of proxy relating to the 1996 Annual
Meeting.
October 7, 1996 The Vermont Teddy Bear Co., Inc.
<PAGE>
EXHIBIT A
THE VERMONT TEDDY BEAR CO., INC.
AMENDMENT NO. 2 to the 1993 INCENTIVE STOCK OPTION PLAN
Paragraph Five of The Vermont Teddy Bear Co., Inc. 1993 Incentive Stock
Option Plan (the "Plan") is hereby deleted and replaced with the following:
5. SHARES SUBJECT TO PLAN. The Board may not grant options under the
Plan for more than 2,000,000 shares of Common Stock of the Company, but this
number may be adjusted to reflect, if deemed appropriate by the Board, any
stock dividend, stock split, share combination, recapitalization or the like,
of or by the Company. Shares to be optioned and sold may be made available
from either authorized but unissued Common Stock or Common Stock held by the
Company in its treasury. Shares that by reason of the expiration of an option
or otherwise are no longer subject to purchase pursuant to an option granted
under the Plan may be re-offered under the Plan.
With exception of the foregoing, the Plan remains in full force and
effect.
<PAGE>
EXHIBIT B
THE VERMONT TEDDY BEAR CO., INC.
AMENDMENT NO. 3 to the 1993 INCENTIVE STOCK OPTION PLAN
Paragraph Nine of the Plan is hereby deleted and replaced with the
following:
9. OPTION PRICE. The option price shall be determined by the Board on
the date of grant. The Board shall set forth the option price determination
in its minutes, using any reasonable valuation method. The Board may grant
non-qualified stock options at an exercise price less than the fair market
value of the Common Stock on the date of grant.
With exception of the foregoing, the Plan remains in full force and
effect.
<PAGE>
EXHIBIT C
THE VERMONT TEDDY BEAR CO., INC.
AMENDMENT to the BYLAWS
Paragraph Fourteen of Article III of The Vermont Teddy Bear Co., Inc.'s
Bylaws is hereby deleted and replaced with the following:
14. COMPENSATION.
Directors shall be entitled to compensation for their services, as
approved by the Company's Shareholders, including, but not limited to, a
fixed sum and expenses for actual attendance at each regular or special
meeting of the Board or any committee meeting thereof. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
With exception of the foregoing, the Company's Articles of Incorporation
remain in full force and effect.
<PAGE>
EXHIBIT D
THE VERMONT TEDDY BEAR CO., INC.
1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The purposes of the 1996 Non-employee Directors' Stock Option Plan (the
"Plan") are to further align the non-employee directors' interests with those
of the shareholders, to provide an additional inducement for such directors to
remain with the Company, and to provide a means by which the Company may
attract qualified persons to serve as directors of the Company.
SECTION 1
ADMINISTRATION
The Plan shall be administered by a committee (the "Committee") to
consist of not less than two of the Company's directors who are not eligible
to participate in the Plan. A majority of the Committee shall constitute a
quorum at every meeting and the acts of the majority of the members at any
meeting at which a quorum is present, or acts approved in writing by all the
members of the Committee, shall be the acts of the Committee. The Committee
shall interpret the Plan and prescribe such rules, regulations and procedures
in connection with the operations of the Plan as it shall be deemed to be
necessary and advisable for the administration of the Plan consistent with the
purposes of the Plan. All questions of interpretation and application of the
Plan, or as to stock options granted under the Plan, shall be subject to the
determination of the Committee, which shall be final and binding.
Notwithstanding the above, the selection of the Directors to whom stock
options are to be granted, the timing of such grants, the number of shares
subject to the stock option, the exercise price of any stock option, the
periods during which any stock option may be exercised and the term of any
stock option shall be as hereinafter provided and the Committee shall have no
discretion as to such matters.
SECTION 2
SHARES AVAILABLE UNDER THE PLAN
The aggregate number of shares which may be issued and as to which
grants of stock options may be made under the plan is 400,000 shares of the
Company's Common Stock, par value $.05 per share, (the "Common Stock"), but
this number of shares may be adjusted to reflect, if deemed appropriate by the
Committee, any stock dividend, any stock split, share combination,
recapitalization or the like, of or by the Company. Shares to be optioned and
sold may be made available from either authorized but unissued Common Stock or
Common Stock held by the Company in its treasury. Shares that by reason of
the expiration of an option or otherwise are no longer subject to purchase
pursuant to an option granted under the Plan may be re-offered under the Plan.
SECTION 3
ELIGIBLE PARTICIPANTS
Each person who is a member of the Company's Board of Directors and who
is not, at the time of grant, an employee of the Company or any of its
subsidiaries (a "Participant") shall automatically be an eligible participant
under the Plan.
SECTION 4
GRANT OF STOCK OPTIONS
a. Annual Retainer. On the third day following the day of the Company's
Annual Meeting of Stockholders, each Participant shall automatically and
without further action by the Board or the Committee be granted a "non-
qualified stock option" (i.e., a stock option which does not qualify under
Sections 422 or 423 of the Internal Revenue Code of 1986, as amended (the
"Code")) to purchase 2,000 shares of common stock, subject to adjustment as
set forth in Section 6. If the number of shares then remaining available for
the grant of stock options under the Plan is not sufficient for each
Participant to be granted an option for 2,000 shares (or the number of
adjusted or substituted shares pursuant to Section 6), then each such
Participant shall be granted an option for a number of whole shares equal to
the number of shares then remaining available divided by the number of such
Participants, disregarding any fractions of a share.
b. Regular and Special Meetings of the Board of Directors. On the third
business day following the day of each regular quarterly meeting or special
meeting of the Board of Directors at which a Participant is present in person
or by telephone, such Participant shall automatically and without further
action by the Board or the Committee be granted a "non-qualified stock option"
to purchase 1,500 shares of Common Stock, subject to adjustment as set forth
in Section 6. Additionally, on the third business day following the day of
each regular quarterly meeting of the Board of Directors, the Chairman of the
Company's Board of Directors (the "Chairman") shall automatically and without
further action by the Board or the Committee be granted an additional "non-
qualified stock option" to purchase 2,000 shares of Common Stock, subject to
adjustment as set forth in Section 6. If the number of shares then remaining
available for the grant of stock options under the Plan is not sufficient for
each Participant to be granted an option for 1,500 shares and the Chairman to
be granted an option for 2,000 shares (or the number of adjusted or
substituted shares pursuant to Section 6) then each such Participant and the
Chairman shall be granted an option for a number of whole shares equal to the
number of shares then remaining available divided by the number of such
Participants plus the Chairman, disregarding any fractions of a share.
c. Committee Meetings. On the third business day following the day of
each regular quarterly meeting or special meeting of any committee of the
Board of Directors on which a Participant serves and at which such Participant
is present in person or by telephone, such Participant shall automatically and
without further action by the Board or the Committee be granted a "non-
qualified stock option" to purchase 1,000 shares of Common Stock, subject to
adjustment as set forth in Section 6. If the number of shares then remaining
available for the grant of stock options under the Plan is not sufficient for
each such Participant to be granted an option for 1,000 shares (or the number
of adjusted or substituted shares pursuant to Section 6) then each participant
shall be granted an option for a number of whole shares equal to the number of
shares then remaining available divided by the number of such Participants,
disregarding any fractions of a share.
d. Special Assignments. In the event that any Participant shall be
engaged by the Company or the Board of Directors in a consulting or similar
capacity to provide services above and beyond the duties of the Participant as
a Board or Committee member, then, upon approval by a majority of the other
members of the full Board of Directors, such Participant shall be granted a
"non-qualified stock option" as of the "date of completion" of the service to
purchase the number of shares equal to the "value of the service" provided by
such Participant divided by the fair market value per share of the Common
Stock as of the "date of completion." For purposes of this section, the "date
of completion" shall be the date on which the service is completed, as
determined by a majority of the other members of the full Board, and the
"value of the service" shall be the cash value of such services as determined
by a majority of the other members of the full Board.
SECTION 5
TERMS AND CONDITIONS OF STOCK OPTIONS
Stock options granted under the Plan shall be subject to the following
terms and conditions:
a. Exercise Price. The purchase price at which each stock option may be
exercised (the "Exercise Price") shall be equal to the fair market value per
share of the Common Stock on the date of grant. The fair market value of the
Common Stock shall be the price per share of the Common Stock for the last
reported sale on such date on the National Association of Securities Dealers
Automated Quotation system or any successor system then in use ("NASDAQ").
b. Payment of Exercise Price. The Exercise Price for each stock option
shall be paid in full upon exercise and shall be payable in cash in United
States dollars (including check, bank draft or money order). No shares of
Common Stock will be issued by the Company upon exercise of the stock option
until the company has received payment of the Exercise Price in full. The
date of exercise of a stock option shall be the date on which the Company has
received payment of the option price in full and, as of the date of exercise,
the person exercising the stock option shall be considered, for all purposes,
to be the owner of the shares with respect to which the stock option has been
exercised.
c. Option Period. The option period will begin on the date that the
option is granted. Each stock option shall be exercisable for ten years from
the date of grant and not thereafter. A stock option to the extent
exercisable at any time may be exercised in whole or in part.
d. Termination of Board Membership. If a grantee ceases to be a
director of the corporation for any reason, any outstanding stock options held
by the grantee shall be exercisable according to the following provisions:
(i) if a grantee ceases to be a director of the corporation for any
reason other than removal for cause or death, any outstanding stock option
held by such grantee shall be exercisable by the grantee at any time prior to
the expiration date of such stock option;
(ii) if a grantee is removed from office for cause, any outstanding
stock option held by the grantee which is not exercisable by the grantee
immediately prior to removal shall terminate as of the date of removal, and
any outstanding stock option held by the grantee which is exercisable by the
grantee immediately prior to removal shall be exercisable by the grantee at
any time prior to the expiration date of such stock option or within one month
after the date of removal of the grantee, whichever is the shorter period; and
(iii) following the death of a grantee, any outstanding stock option
held by the grantee at the time of death (whether or not exercisable by the
grantee immediately prior to death) shall be exercisable by the person
entitled to do so under the will of the grantee, or, if the grantee shall fail
to make testamentary disposition of the stock option or shall die intestate,
by the legal representative of the grantee at any time prior to the expiration
of such stock option.
e. Option Agreement. All stock options shall be confirmed by an
agreement, or an amendment thereto, which shall be executed on behalf of the
Company by the President or the Chief Financial Officer and by the grantee.
Subject to the foregoing provisions of this Section 5 and of the other
provisions of the Plan, any stock option granted under the Plan shall be
subject to such restrictions and other terms and conditions, if any, and shall
be determined in its discretion, by the Committee and set forth in the
agreement referred to in Section 5(e) or an amendment thereto.
SECTION 6
ADJUSTMENT AND SUBSTITUTION OF SHARES
If a dividend or other distribution shall be declared upon the Common
Stock payable in shares of the Common Stock set forth in Section 4, the number
of shares of the Common Stock then subject to any outstanding stock options or
the number of shares of the Common Stock which may be issued under the Plan,
but are not then subject to outstanding stock options on the date fixed for
determining the stockholders entitled to receive such stock dividend or
distribution shall be adjusted by adding thereto the numbers of shares of the
Common Stock which would have been distributable thereon if such shares had
been outstanding on such date.
If the outstanding shares of the Common Stock shall be changed into or
exchangeable for a different number or kind of shares of stock or other
securities of the Company or another corporation, whether through
reorganization, reclassification, recapitalization, stock split-up,
combination of shares, merger or consolidation, then there shall be
substituted for each share of the Common Stock set forth in Section 4, for
each share of the Common Stock subject to any then outstanding stock option
and for each share of the Common Stock which may be issued under the Plan, but
which has not been subject to any outstanding stock option, the number and
kind of shares of stock or other securities into which each outstanding share
of the Common Stock shall be so changed or for which each such share shall be
exchangeable.
In case of any adjustment or substitution as provided for in the first
two paragraphs of this Section 6, the aggregate option price for all shares
subject to each then outstanding stock option prior to such adjustment or
substitution shall be the aggregate option price for all shares of stock or
other securities (including any fraction) to which such shares shall have been
adjusted or shall have been substituted for such shares. Any new option price
per share shall be carried to at least three decimal places with the last
decimal place rounded upwards to the nearest whole number.
If the outstanding shares of the Common Stock shall be changed in value
by reason of any spin-off, split-off or split-up, or dividend in partial
liquidation, dividend in property other than cash or extraordinary
distribution to holders of the Common Stock, the Committee shall make any
adjustments to any outstanding stock option which it determines are equitably
required to prevent dilution or enlargements of the rights of grantees which
would otherwise result from any such transaction.
No adjustment or substitution provided for in this Section 6 shall
require the Company to issue or sell a fraction of a share or other security.
Accordingly, all fractional shares or other securities which result from any
such adjustment or substitution shall be eliminated and not carried forward to
any subsequent adjustment or substitution.
Except as provided in this Section 6, a grantee shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock with any class, any subdivision or consolidation of any
shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class.
SECTION 7
EFFECT OF THE PLAN ON THE RIGHTS OF
THE COMPANY AND STOCKHOLDERS
Nothing in the Plan, in any stock option granted under the Plan, or any
stock option agreement shall confer any right to any person to continue as a
director of the Company or interfere in any way with the rights of the
stockholders of the Company or the Board of Directors to elect and remove
directors.
SECTION 8
AMENDMENT AND TERMINATION
The Plan may be amended or terminated by the Board without the approval
of the stockholders of the Company, except that any amendment that would (a)
materially increase the benefits accruing to Participants in the Plan, (b)
materially increase the number of securities that may be issued under the
Plan, or (c) materially modify the requirements of eligibility for
participation in the Plan must be approved by the stockholders of the Company.
SECTION 9
EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective upon approval by the affirmative vote of
the holders of a majority of the common stock present in person or by proxy
and entitled to vote at a duly called and convened meeting of such holders.
If such approval is obtained at the 1996 Annual Meeting of Stockholders, the
Plan shall be effective on the date of such meeting.
