U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
Check the appropriate box:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[Fee Required]
For the fiscal year ended June 30, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[No Fee Required]
Commission file number 1-12580
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THE VERMONT TEDDY BEAR CO., INC.
(Name of small business issuer in its charter)
New York 03-0291679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2236 Shelburne Road P.O. Box 965
Shelburne, Vermont 05482
(802) 985-3001
(Address of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, par value NASDAQ National Market &
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$.05 per share The Pacific Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.05 per share
--------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No ___
Check if there is not disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year ended June 30,
1996 were $17,039,618.
The aggregate market value of the voting stock held by non-affiliates
of the issuer, based on the average high and low prices of such stock on
September 20, 1996, as reported on NASDAQ, was $14,225,062.
As of September 18, 1996, there were 5,172,750 shares of the issuer's
common stock issued and outstanding.
Documents Incorporated By Reference
The following documents, in whole or in part, are specifically
incorporated by reference in the indicated part of this Annual Report on
Form 10-KSB:
Proxy Statement for 1996 Annual Meeting of the issuer's stockholders:
Part III, Items 9, 10, 11 and 12.
Transitional Small Business Disclosure Format (check one): Yes ___; No _X_
The Vermont Teddy Bear Co., Inc.
1996 Form 10-KSB Annual Report
Table of Contents
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Page
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Item 1. Description of Business 1
Item 2. Description of Property 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters
to a Vote of Security Holders 7
Item 5. Market for Common Equity
and Related Stockholder Matters 7
Item 6. Management's Discussion
and Analysis or Plan of Operation 9
Item 7. Financial Statements 13
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 13
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act 13
Item 10. Executive Compensation 13
Item 11. Security Ownership of Certain Beneficial Owners
and Management 14
Item 12. Certain Relationships and Related Transactions 14
Item 13. Exhibits and Reports on Form 8-K 14
Item 1. Description of Business(1)
Founded in 1981 and incorporated in 1984, The Vermont Teddy Bear Co.,
Inc. (the "Company"), with its principal offices at 2236 Shelburne Road,
Shelburne, Vermont, is a designer, manufacturer, and direct marketer of teddy
bears and related products.
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<F1> The Company owns the following trademarks or service marks mentioned
in this Annual Report, which are registered or for which an application
to register is pending: Teddy Bear-Gram[registered trademark], Bear
Counselor[registered trademark], Racer Ted[registered trademark] and
Bear-Gram[service trademark]. The Company also has applications
pending to register the following trademarks or service marks: The
Vermont Teddy Bear Company[trademark], the Company's logo, and Vermont
Bear-Gram[service trademark], Acme Cartoon Company[trademark], The
Acme Moving Picture Group[trademark], Teddy Treats[trademark], Teddy
Togs[trademark], Bear Bottoms[trademark], Make A Friend For
Life[trademark], The All-American Teddy Bear[trademark] and The Great
American Teddy Bear[trademark].
Principal Distribution Methods
The Company uses a variety of channels to market its products, of which
the largest is Bear-Grams, comprising 77 percent of net revenues in the fiscal
year ended June 30, 1996. Other principal avenues of distribution include
direct mail catalogs, Company-owned retail stores, and licensing agreements.
The Company's sales are heavily seasonal, with Valentine's Day, Christmas, and
Mother's Day as the Company's largest sales seasons, respectively.
Bear-Grams are personalized teddy bears which are delivered directly to
recipients for special occasions such as birthdays, anniversaries, weddings,
new births, and holidays. Orders for Bear-Grams are generally placed by
calling a toll-free telephone number (1-800-829-BEAR), and speaking to Company
sales representatives, called Bear Counselors. The Company offers teddy bears
in a variety of sizes and colors, as well as approximately 100 different teddy
bear outfits to further personalize the Bear-Gram. Orders placed by 4:00pm can
be shipped the same day; packages are delivered primarily via United Parcel
Service by next-day air, second-day air, or ground delivery service.
The Bear-Gram has been the most significant factor in the historical
growth of the Company. Although Bear-Grams were introduced on a small scale in
1985, the Company's marketing effort throughout the 1980's focused on
wholesaling teddy bears to specialty stores and direct retail through its own
outlets. Shortly before Valentine's Day in 1990, the Company introduced radio
advertising of its Bear-Gram product in New York City, offering listeners a
toll-free number for customers to order Bear-Grams from the Company's facility
in Vermont. This test proved to be successful, and primarily through Bear-Gram
sales, the Company increased its total sales from approximately $351,000 in
1989 to a peak of $20,561,000 in 1994, before declining over the subsequent
eighteen months. Total sales were $17,040,000 for the twelve months ended June
30, 1996.
Since 1990, the Company has expanded its Bear-Gram radio marketing
strategy beyond New York City, to include other metropolitan areas and
syndicated radio programs carried by stations across the United States. During
the twelve-month period ended June 30, 1996, the Company regularly placed
advertising on a total of forty-nine radio stations in seven of the twenty
largest market areas in the United States, as well as on two syndicated
networks. For Valentine's Day, the Company's peak Bear-Gram sales season, the
Company advertised on seventy-one radio stations in eleven different markets
areas, as well as on three syndicated networks.
The following table shows the Company's largest markets and most frequent
reasons given by customers for purchasing the Company's products:
<TABLE>
<CAPTION>
Percentage of orders
for the twelve months
ended June 30,
1996 1995
---- ----
<S> <C> <C>
Markets
New York City 35.5% 38.6%
Boston 9.5% 9.5%
Philadelphia 8.9% 7.3%
Chicago 7.3% 8.5%
Los Angeles 4.0% 3.8%
Reasons for Purchases
Valentine's Day 20.8% 19.2%
Birthdays 13.4% 15.0%
New Births 12.8% 9.9%
Get Wells 12.0% 10.4%
Christmas 8.6% 10.4%
</TABLE>
In an effort to diversify the Company's distribution channels, the
Company has placed a greater emphasis on other forms of marketing, including
direct mail catalogs. For the fiscal year ended June 30, 1996, direct mail
accounted for seven percent of net revenues. The Company introduced its first
catalog for Christmas of 1992, and has come to accumulate an in-house mailing
list of approximately 1,067,000 names. In the twelve months ended June 30,
1996, more than 14 million circulated pages were mailed to prospective
customers, and the Company intends to increase the number of pages in
circulation in the year ahead. For the Fall/Christmas 1996 edition, the
Company has entered into agreements to rent or exchange additional catalog
names from companies such as Saks Fifth Avenue, Hammacher-Schlemmer, FAO
Schwartz, and The Walt Disney Company.
The Company is also seeking to increase its revenues through Company-
owned retail stores. The factory store, located ten miles south of Burlington,
Vermont in the town of Shelburne, was second only to Bear-Grams in its
contribution to sales in the fiscal year ended June 30, 1996, at 13 percent of
net revenues. During this period, store sales grew 19 percent from the twelve-
month period ended June 30, 1995. The Company has actively promoted family
tours of its teddy bear factory and store in Shelburne, which drew over 130,000
visitors in the twelve-month period ended June 30, 1996, compared to 85,000
visitors for the twelve months ended June 30, 1995. In an effort to make a
visit to the factory more entertaining and draw additional traffic, the Company
has invested over $100,000 in the renovation of its store, which included the
implementation of Make A Friend For Life, where visitors can participate in the
creation of their own teddy bear.
On July 1, 1996, the Company opened a second retail store, located on
Route 16 in North Conway, New Hampshire. The Company chose the North Conway
location because of the summer, foliage, and ski-season traffic passing through
the area. The Company also recently entered into a non-binding letter of
intent to lease 6,000 square feet of retail space in Freeport, Maine, beginning
August 1, 1997. The proposed location, currently the Bartol Library on Main
Street, is proximate to L.L. Bean and other retailers. The Company intends to
pursue leases in other locations in the year ahead.
The Company views licensing as another potential source of revenue. For
the fiscal year ended June 30, 1996, licensing contributed less than one
percent of the Company's net revenues. On September 11, 1995, the Company
entered into a licensing agreement with Tyco, Inc., under which Tyco has
manufactured miniature bears bearing the Vermont Teddy Bear name, though no
material royalties have yet been received. The agreement with Tyco, Inc. will
continue through December 31, 1998. In addition, the Company has entered into
a licensing agreement with the Theodore Roosevelt Association, though no
products have been introduced at this date. The Company believes this
partnership is worthwhile, as it links the Company to the history of the teddy
bear, which was created in 1902 by Morris Michtom to honor President Roosevelt,
who chose not to shoot a bear cub while on a hunting trip. The
Company intends to pursue additional licensing agreements in the year ahead.
Competitive Business Conditions
The Company competes with a number of companies which sell teddy bears in
the United States, including, but not limited to, Steiff of Germany, Dakin,
North American Bear, and Gund. The Company also competes with a number of
sellers of flowers, balloons, candy, cakes, and other gift items, which can be
ordered by phone for special occasions and delivered by express service in a
manner similar to Bear-Grams. Many of these competitors have greater
financial, sales, and marketing resources than the Company. On occasion, the
Company has also become aware of competitors, seeking to market the sale of
teddy bears in a manner similar to Bear-Grams. Although the Company believes
that none of these companies have remained in business for extended periods,
there are no material barriers to entry into this market. Accordingly, there
can be no assurance that other companies, including those with greater
resources and capital, will not seek to compete directly with the Company.
Principal Products
From its inception, the Company's focus has been to design and
manufacture the best teddy bears made in America, using quality American
materials and labor. The Company believes that, apart from its own manufactured
product, most of the teddy bears sold in the United States are manufactured in
foreign countries. The Company has sought to respond to customer demand for
American-made products by using American materials, with the exception of
mohair and a "super plush" fabric on its premium bears, which are obtained from
European suppliers, as well as one color of its standard plush, which is
currently sourced from Canada. The Company produces many different sizes of
bears, ranging from 11" to 72" tall, in six standard colors. Virtually all of
the Company's teddy bears have moveable joints, a feature associated with
traditional, high-quality teddy bears. Additionally, approximately 100
different bear outfits are manufactured, including ballerina bears, birthday
bears, bride and groom bears, business bears, nurse bears, and sports bears.
The Company believes that it is the largest manufacturer of teddy bears made
exclusively in the United States.
During the last fiscal year, the Company installed a new perpetual
inventory system to better manage the production process and inventory levels.
In addition to its own manufactured product, the Company sells items
related to teddy bears, as well as merchandise featuring the logo of The
Vermont Teddy Bear Company. Items such as apparel, jewelry, and ornaments are
available primarily in the Company's retail stores and through the direct mail
catalog. Recently, the Company has begun to sell stuffed toys which have been
manufactured by other companies, such as Gund and Steiff of Germany. The
Company believes that this trend will continue in the future, as the Company
actively re-positions itself to merchandise all things related to teddy bears,
including products from other stuffed toy manufacturers.
Sources and Availability of Materials, Supplies, and Production
Raw materials for the Company's bears (largely comprised of stuffing,
plush fur, eyes, and joints) are obtained from several domestic suppliers. The
Company presently purchases certain of its raw materials from single suppliers,
but believes that alternate sources of supply at competitive prices are
obtainable, should conditions warrant. Fabric for all teddy bears is cut at
the Company's Shelburne factory, prior to sewing. Sewing of bear parts (arms,
legs, bodies, and heads) is done by employees, as well as by homeworkers and
subcontractors. Once individual parts are sewn, they are returned to the
factory for mechanical stuffing. The bears are assembled by attaching the
stuffed parts to the bears with plastic joints, hand-stuffing the bodies, and
hand-stitching the backs. The Company also produces outfits for the bears,
which are then "dressed" to meet customer requests.
Patents, Trademarks, and Licenses
The Company's name in combination with its original logo is a registered
trademark in the United States. The Company also owns the registered service
marks "Teddy Bear-Gram," "Bear Counselor," and "Racer Ted," and has
applications pending to register the current Company logo, "The Vermont Teddy
Bear Company," "Bear-Gram," "Vermont Bear-Gram," "Acme Cartoon Company," "The
Acme Moving Picture Group," "Teddy Treats," "Teddy Togs," "Bear Bottoms," "Make
A Friend For Life," "The All-American Teddy Bear," and "The Great American
Teddy Bear."
Although the Company has continuously used the mark "Bear-Gram" since
April 1985, its initial application to register that mark, filed June 13, 1990,
was rejected by the United States Patent and Trademark office due, among other
things, to prior registration of the mark "Bear-A-Grams," which was issued to
another company on June 7, 1988. Although the Company subsequently abandoned
its initial "Bear-Gram" service mark application, it believes it is entitled to
use "Bear-Gram" by virtue of its prior use of that mark. Accordingly, the
Company has reapplied to register "Bear-Gram" and has applied to register the
service mark "Vermont Bear-Gram."
According to its trademark application, the registrant of "Bear-A-Gram"
uses that mark to send greeting cards. To the Company's knowledge, the
"Bear-A-Gram" mark is not presently used to compete with the Company's sending
of personalized teddy bears. There can be no assurance, however, that the
holder of "Bear-A-Gram" will not seek to use or license the use of that mark to
sell products competing directly with the Company, or will not seek to prevent
the Company from using "Bear-Gram" in the marketing of its products. The
Company would vigorously respond to any such action. If, however, the Company
is prohibited from using "Bear-Gram" or any of its other trademarks or service
marks, or is required to obtain a license for such use, any of these
developments could have a material adverse effect upon the Company's sales.
In addition, a federal trademark application was filed in April 1992 by
Donna L. Boyce, of Hyde Park, Massachusetts, for the mark "Teddygrams." Based
on materials submitted with her application, Ms. Boyce is seeking trademark
protection to sell personalized teddy bears. In response, the Company filed a
notice of opposition, and, in November 1993, the U.S. Patent and Trademark
Office instituted the opposition against Ms. Boyce's application to register
"Teddygrams." On April 19, 1996, a Motion for Summary Judgement in favor of
the Company was denied. The Company entered into a settlement agreement with
Ms. Boyce as of August 1, 1996, which requires the Company to dismiss its
opposition to the application to register "Teddygrams," and requires Ms. Boyce
to dismiss her opposition to the Company's application to register "Bear-Gram"
and "Teddy Bear-Gram." The Company has agreed to pay a total of $35,000 to
reimburse Ms. Boyce's attorney's fees and other costs related to her opposition
of the Company's trademarks, and to acquire the right of first refusal on Ms.
Boyce's "Teddygrams" mark.
The Company also claims copyright, service mark or trademark protection
for its teddy bear designs, its marketing slogans, and its advertising copy and
promotional literature. However, many aspects of the Company's marketing
techniques and product line are not protected and could be replicated by
competitors.
Employees
As of June 30, 1996, the Company employed 180 individuals, of whom 86
persons were employed in production-related functions, 66 persons were employed
in sales and marketing positions, and 28 were employed in general and
administrative positions. No employees are members of a union, and the Company
believes it enjoys favorable relations with all employees.
The Company supplements its regular in-house work force with homeworkers
who perform production functions at their homes. The level of outsourced work
fluctuates with Company production targets; at June 30, 1996, there were
fifteen homeworkers producing product for the Company. Homeworkers are treated
by the Company as independent contractors for all purposes, except for
withholding of social security taxes. Being independent contractors,
homeworkers are free to accept or reject work offered by the Company. This
working relationship allows the Company to adapt to fluctuations in seasonal
production demands.
Item 2. Description of Property
Prior to July 1995, the Company's principal offices and retail store
occupied 29,000 square feet of space at The Commons, a village-style retail
shopping complex in Shelburne, Vermont. The Company was also leasing
approximately 20,000 square feet in a warehouse in nearby Williston, Vermont,
used for inventory storage, manufacturing of outfits, and functions associated
with the homeworker network, as well as an additional 19,000 square feet of
inventory storage at a second location in Williston, Vermont.
In July 1995, in an effort to consolidate the Company's disparate
locations and improve manufacturing flow, the Company moved its principal
offices, along with its retail store, manufacturing, sales, and fulfillment
operations to its newly-constructed 62,000 square foot building, located on a
57-acre site along U.S. Route 7 in Shelburne, Vermont. The new site is two
miles south of the Company's former location, and ten miles south of
Burlington, Vermont. The Company purchased the site for approximately
$817,000, and the cost of improving the site and constructing the new facility
was approximately $7.1 million. On September 26, 1995, the Company entered
into a $3.5 million commercial loan with the Vermont National Bank, secured by
a first mortgage on the new facility, as well as general business assets.
Repayment of the mortgage loan is based on a thirty-year fixed principal
payment schedule with a balloon payment due on September 26, 1997.
The Company has a three-year lease on 10,000 square feet of inventory
space at a separate location in Shelburne, Vermont, one mile north of the
factory, for $14,000 annually. The Company also entered into a five-year
agreement to lease 6,000 square feet in North Conway, New Hampshire for $46,800
annually, and has entered into a non-binding letter of intent to lease 6,000
square feet in Freeport, Maine for ten years, beginning in August 1997, for
$240,000 annually.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings. On August
26, 1996, the Company and Ms. Boyce filed a Stipulation of Dismissal with the
U.S. Patent and Trademark Office to cancel the proceedings related to the
"Teddygrams" mark. (See Item 1 "Patents, Trademarks, and Licenses.")
Item 4. Submission of Matters to a Vote of Security Holders
There was no matter submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
At the time of the initial public offering of 1,172,500 shares of the
Company's Common Stock in November, 1993, the Company's Common Stock had been
approved for quotation on NASDAQ and the Pacific Stock Exchange under the
symbols "BEAR" and "VTB," respectively. To date, NASDAQ has been the principal
market for the exchange of the freely tradeable shares of the Company's Common
Stock. Effective July 31, 1996, the Company voluntarily de-listed from the
Pacific Stock Exchange as a result of minimal trading volume. Between the July
1, 1994 and June 30, 1996, the high and low sales prices for a share of the
Company's Common Stock as quoted on NASDAQ were as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------- ---- ---
<C> <C> <C>
June 30, 1996 $3.63 $2.38
March 31, 1996 $3.75 $2.75
December 31, 1995 $5.13 $3.13
September 30, 1995 $6.25 $3.25
June 30, 1995 $4.50 $3.00
March 31, 1995 $4.88 $2.75
December 31, 1994 $7.50 $4.50
September 31, 1994 $7.75 $4.50
</TABLE>
Description of Securities
Immediately prior to the Company's initial public offering, there were
4,000,000 shares of the Company's Common Stock outstanding, held of record by
nine shareholders. As a result of this 1,000,000 share initial public offering
and the Underwriters' purchase of an additional 172,500 shares to cover over-
allotments in connection therewith, there were 5,172,500 shares of the
Company's Common Stock outstanding immediately following the offering. On
March 8, 1995, the Company purchased 12,000 common shares in the open market,
and continues to hold these shares as treasury stock. On March 1, 1996, 250
shares of the Company's Common Stock were issued pursuant to the exercise of an
employee Incentive Stock Option. As a result of these activities, there were
5,160,750 shares of the Company's Common Stock outstanding, held of record by
1,380 shareholders as of June 30, 1996.
There are 90 shares of non-voting Series A Preferred Stock, held of
record by one shareholder, with a liquidation value of $10,000 per share, and a
cumulative dividend at a rate of eight percent per annum. There has been no
change in the number of Series A preferred shares, and the original shareholder
remains the sole shareholder of Series A Preferred Stock.
Subsequent to the close of the fiscal year ended June 30, 1996, the
Company privately placed $550,000 of Series B convertible Preferred Stock on
July 12, 1996. The 204,912 Series B preferred shares, held of record by twelve
shareholders, are not entitled to any dividends or voting rights, but each
share is convertible into one share of the Company's Common Stock at any time
on or after July 12, 1997. Accompanying the issuance of the Preferred Stock
were warrants to purchase 204,912 shares of the Company's Common Stock, subject
to certain anti-dilution rights, at an exercise price of $2.434 per share,
which are exercisable between July 12, 1997 and July 12, 1999. In addition,
finder's warrants for 10,245 common shares were issued with the same terms and
conditions. Common shares issued as the result of the conversion of the Series
B Preferred Stock and/or the exercise of the warrant shall be considered
"restricted securities" and shall be subject to certain registration rights.
On liquidation, dissolution, or winding up of the Company, holders of Series B
Preferred Stock are entitled to be paid on a pari passu basis with any holders
of Series A Preferred Stock.
Dividends
The Company has never paid cash dividends on any shares of its Common
Stock, and the Company's Board of Directors intends to continue this policy for
the foreseeable future. Earnings, if any, will be used to finance the
development and expansion of the Company's business. The Company's ability to
pay dividends on its Common Stock is limited by the preferences of the
outstanding Preferred Stock of the Company and may be further limited by the
terms of Preferred Stock issued or indebtedness incurred by the Company in the
future. Future dividend policy will depend upon the Company's earnings,
capital requirements, financial condition and other factors considered relevant
by the Company's Board of Directors. The Series A Preferred Stock is entitled
to receive cumulative dividends of eight percent per annum, which are payable
before any dividend may be paid upon, or set apart for, the Common Stock
outstanding. The Series B Preferred Stock is not entitled to receive
dividends.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. The discussion
should be read in conjunction with the financial statements and footnotes which
appear elsewhere in this report.
In June 1995, the Company changed its year end from December 31 to June
30. The financial analysis in this section compares (i) the twelve months
ended June 30, 1996 to the twelve months ended June 30, 1995 (unaudited), (ii)
the twelve months ended June 30, 1996, to the six-month Transition Period ended
June 30, 1995, and (iii) the six-month Transition Period ended June 30, 1995 to
the twelve months ended December 31, 1994. Comparisons including the
Transition Period are presented to highlight significant one-time charges and
other material changes in financial condition.
Results of Operations
Comparison of Fiscal Year 1996 and the twelve month period ended June 30, 1995
(unaudited)
Net revenues for the fiscal year ended June 30, 1996 totalled
$17,040,000, a decrease of $3,005,000 from net revenues of $20,045,000 in the
comparable twelve-month period ended June 30, 1995. Focused on improving
profitability during the last fiscal year, management chose to eliminate
unprofitable marketing initiatives and resist price discounting, which
contributed to a fifteen percent decrease in total net revenues. By business
segment, retail store net revenues improved by $346,000, wholesale net revenues
rose $130,000, and licensing revenues increased $106,000 in the fiscal year
just completed, compared to the twelve-month period ended June 30, 1995. Radio
Bear-Gram revenues decreased $2,559,000, while direct mail net revenues
declined by $547,000. The European test market, which generated $162,000 in
net revenues for the twelve months ended June 30, 1995, was closed in that
year, and accordingly, no revenue was generated in the fiscal year ended June
30, 1996.
Gross margin decreased by $1,213,000 to $9,731,000 for the fiscal year
ended June 30, 1996, from $10,944,000 for the twelve months ended June 30,
1995. As a percentage of net revenues, gross margin increased to 57.1 percent
from 54.6 percent. The Company's move to its new facilities in July 1995
resulted in improved manufacturing flow and efficiency. During the last fiscal
year, the Company installed a new perpetual inventory system to better manage
the production process and inventory levels.
Marketing and selling expenses totalled $6,287,000, or 36.9 percent of
net revenues, for the fiscal year ended June 30, 1996, a decline from
$9,121,000, or 45.5 percent of net revenues, for the comparable period ending
June 30, 1995. This $2,834,000 decrease largely resulted from elimination of
unprofitable marketing initiatives, such as NASCAR sponsorship, television
advertising, and European expansion, as well as a curtailment of certain
unprofitable radio advertising. Reduction in sales and marketing personnel
also contributed.
General and administrative expenses were $2,955,000 for the fiscal year
ended June 30, 1996, compared to $4,343,000 for the twelve-month period ended
June 30, 1995. As a percentage of net revenues, general and administrative
expenses fell to 17.3 percent from 21.7 percent. The largest factor in this
$1,388,000 decrease is related to the separation agreement with the Company's
former Chief Executive Officer amounting to approximately $620,000, which was
fully accrued and expensed in June 1995. Workforce reductions, reduced travel
and entertainment expenses, the elimination of administrative rent, cutbacks in
consulting, and the end of expenses related to the Europe test market also
contributed to the decrease.
The Company experienced an operating profit of $489,000 for the fiscal
year ended June 30, 1996, compared to a $2,520,000 operating loss for the
twelve months ended June 30, 1995. Improved operating results, despite lower
net revenues, resulted from increased gross margins, decreased marketing and
selling expenses, and reduced general and administrative expenses, as discussed
above.
Net interest income decreased to $41,000 for the year ended June 30,
1996, from $192,000 last year, principally as a result of lower cash balances.
Interest expense totalled $441,000 and $35,000 for the twelve month periods
ended June 30, 1996, and 1995, respectively. This increase was primarily due
to interest costs associated with the mortgage loan on the Company's new
facility.
Despite posting positive earnings for the fiscal year ended June 30,
1996, no tax provision was recorded for the period, due to the Company's
utilization of NOL carryforwards. For the twelve months ended June 30, 1995,
the Company recorded a tax provision of $61,000.
As a result of the foregoing factors, the net income to Common
Stockholders for the fiscal year ended June 30, 1996 was $152,000, compared to
a net loss to Common Stockholders of $2,494,000 for the twelve months ended
June 30, 1995. By an agreement dated April 12, 1996, the sole holder of the
Series A Preferred Stock waived her right to receive $72,000 in dividends which
would have accumulated and accrued during the fiscal year ended June 30, 1996,
as well as $54,000 worth of dividends accrued in the nine months ending June
30, 1995, in exchange for a five-year warrant to purchase 43,826 shares of
Common Stock at an exercise price of $2.875 per share. Preferred Stock
dividends totalling $72,000 were declared during the twelve-month period ended
June 30, 1995.
Comparison of Fiscal Year 1996 and the Transition Period ended June 30, 1995
On June 19, 1995, John Sortino stepped down as President and CEO of the
Company. As part of this separation agreement, Mr. Sortino was awarded a
bonus, and the forgiveness of outstanding amounts due to the Company. The
entire amount due to Mr. Sortino under the separation agreement was accrued and
expensed within the Transition Period based upon the fact that the Company will
not seek services from him in the future. This accrual resulted in a charge to
general and administrative expenses of approximately $620,000.
For the six months ended June 30, 1995, the Company recorded income tax
expense of $216,000, due to the establishment of a valuation allowance of
$1,026,000 to fully reserve the Company's net deferred tax assets resulting
form net operating loss carryforwards and temporary differences at June 30,
1995.
Comparison of the Transition Period ended June 30, 1995 to Fiscal Year 1994
Other than the information presented in "Comparison of The Fiscal Year
1996 and the Transition Period ended June 30, 1995," the Company believes there
were no additional significant one-time charges or material changes in
financial condition.
Income Taxes
At June 30, 1996, the Company's tax and book reporting year end, net
operating loss carryforwards ("NOLs") amounted to approximately $2,360,000 for
Federal income tax purposes. In the absence of an "ownership change" of the
Company, as defined in Section 382 of the Internal Revenue Code of 1986, as
amended, the Company's NOLs are available to reduce the Federal income taxes of
the Company in future taxable periods. In the event of a change of ownership,
the utilization of NOLs by the Company would be subject to an annual
limitation. The limitation would be equal to the product of a prescribed rate
(which is published each month by the Internal Revenue Service) and the fair
market value of the Company's Common Stock immediately prior to such ownership
change. The NOLs expire in varying amounts through 2007. In addition, as a
result of the change in the tax reporting year end to June 30, 1995, certain
amounts of the NOLs (approximately $1,700,000) are deductible ratably over a
six-year period beginning June 30, 1996.
Liquidity and Capital Resources
As of June 30, 1996, the Company's cash position increased to $1,122,000,
from $1,071,000 at June 30, 1995. Of the $1,122,000, $365,000 is classified as
restricted cash; there was $100,000 of restricted cash at June 30, 1995. The
largest component of the restricted cash is $300,000 restricted by a debt
service reserve, which was required as part of the Company's loan agreement
with the Vermont National Bank. Reduced inventory levels and an increase in
debt financing more than offset reductions in accounts payable, lower accrued
expenses, and purchases of property, plant, and equipment.
Inventory levels of materials and finished goods and work-in-process
totalled $1,975,000 at June 30, 1996, compared to $3,042,000 at June 30, 1995.
The Company undertook an internal initiative to reduce its inventory levels in
the fiscal year by better utilizing existing raw material inventories in the
manufacture of new product, and by accelerating efforts to sell finished goods
already held in inventory.
Accounts payable totalled $1,354,000 at June 30, 1996, compared to
$2,513,000 at June 30, 1995. This decrease is largely reflected by reduced
purchases of inventoried items and a contraction in marketing and selling
expenses. Accrued expenses were $473,000 at June 30, 1996, compared to
$860,000 at June 30, 1995. The largest reduction in this category was in
accrued severance payable, related to the separation agreement with the
Company's former Chief Executive Officer, who resigned on June 19, 1995.
The Company has available a $1,000,000 revolving line of credit from
Vermont National Bank. The line of credit, established September 26, 1995,
bears interest at a variable rate of 2 percent above the prime rate, is secured
by all assets of the Company, and has a one-year maturity. There was no
borrowing under the line at June 30, 1996. The Company is currently in the
process of securing a new line of credit.
On December 26, 1995, Green Mountain Capital L.P. agreed to lend the
company up to $500,000 in the form of five-year term notes. At June 30, 1996,
there was $180,000 in principal outstanding. The original amount of the note
was $200,000, the minimum borrowing required by the terms of the agreement.
The notes bear interest at 12 percent per annum, are repaid in monthly
installments through December 26, 2000, and are secured by a subordinated
security interest in the Company's personal property. In addition, Green
Mountain Capital is entitled to receive warrants to purchase 4,000 shares of
Vermont Teddy Bear Company Common Stock, at an exercise price of $3.375 per
share, for each $100,000 advanced to the Company. The right to exercise these
warrants begins December 26, 1997, and expires the earlier of December 26, 2002
or five years after full repayment of the loan. Accordingly, warrants to
purchase a total of 8,000 shares of the Company's Common Stock have been
granted to Green Mountain Capital as of June 30, 1996.
Subsequent to the close of the fiscal year, the Company privately placed
$550,000 of Series B convertible Preferred Stock on July 12, 1996. The 204,912
newly-issued preferred shares are not entitled to any dividends or voting
rights, but are convertible into 204,912 shares of the Company's Common Stock,
subject to certain anti-dilution rights, at any time on or after July 12, 1997.
Accompanying the issuance of the Preferred Stock were warrants to purchase
204,912 shares of the Company's Common Stock at an exercise price of $2.434 per
share, and are exercisable between July 12, 1997 and July 12, 1999. In
addition, finder's warrants for 10,245 common shares were issued with the same
terms and conditions. Common shares issued as the result of the conversion of
the Series B Preferred Stock and/or the exercise of the warrants shall be
considered "restricted securities" and shall be subject to certain registration
rights.
Management believes that the amount and structure of financing available
to the Company, as well as cash flows from operations, will be sufficient to
meet the Company's working capital needs and planned capital expenditures for
the next twelve months.
Item 7. Financial Statements
The list of financial statements set forth under the caption "Index to
Financial Statements" on page F-1 below is incorporated herein by reference.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Information concerning the directors and executive officers of the
company, their terms of office, the periods during which they have served,
their personal business experiences is included in the Company's definitive
Proxy Statement for its 1996 Annual Meeting and is specifically incorporated
herein by reference.
Item 10. Executive Compensation
Information regarding compensation of the Company's directors and
officers is included in the Company's definitive Proxy Statement for its 1996
Annual Meeting and is specifically incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information with respect to the beneficial ownership of the outstanding
shares of the Company's Common Stock by: (i) all persons owning of record, or
beneficially to the knowledge of the Company, more than five percent of the
outstanding shares, (ii) each director and executive officer of the Company
individually, and (iii) all directors and officers of the Company as a group,
is included in the Company's definitive Proxy Statement for its 1996 Annual
Meeting and is specifically incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information regarding certain relationships and transactions between the
Company and its directors, director-nominees, executive officers, and the
family members of these individuals is included in the Company's definitive
Proxy Statement for its 1996 Annual Meeting and is specifically incorporated
herein by reference.
Item 13. Exhibits and Reports on Form 8-K
Exhibits
The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission under the Securities Act of 1933 or the Securities Exchange Act of
1934 and are referred to and incorporated herein by reference to such filings.
Exhibit No. Description
- ----------- -----------
3.3 Restated Certificate of Incorporation of the Company, (filed
herein)
4.1 Representative's Warrant issued to Barington Capital Group, L.P.
upon the consummation of the initial public offering of the
Company's Common Stock in November, 1993 (filed with the
Securities and Exchange Commission as exhibit 4.1 to the
Company's 1993 Annual Report on Form 10-KSB (File No. 33-69898)
and incorporated herein by reference)
4.2 Form of Common Stock Certificate (filed with the Securities and
Exchange Commission as exhibit 4.2 to the Company's Registration
Statement on Form SB-2 (File No. 33-69898) and incorporated
herein by reference)
4.3 Form of Warrant, issued in connection with the private placement
of 204,912 shares of the Company's Series B Convertible Preferred
Stock (filed herein)
4.4 Form of Subscription Agreement issued in connection with the
private placement of 204,912 shares of the Company's Series B
Convertible Preferred Stock (filed herein)
4.5 Waiver of Joan H. Martin, dated April 12, 1996, issued in
connection with waiver of accrued dividends on Series A Preferred
Stock (filed herein)
4.6 Warrant to purchase 43,826.087 shares of the Company's Common
Stock, dated April 12, 1996, issued in connection with Joan H.
Martin's waiver of accrued dividends on Series A Preferred Stock
(filed herein)
10.2 Stock warrants issued to Edmund H. Shea, Jr. IRA, Allan Lyons
and William Maines in connection with the bridge financing prior
to the initial public offering of the Company's Common Stock in
November, 1993 (a form of which was filed with the Securities and
Exchange Commission as exhibit 10.2 to the Company's Registration
Statement on Form SB-2 (File No. 33-69898) and incorporated
herein by reference)
10.10 Incentive Stock Option Plan adopted by the Company on August 16,
1993, with form of Incentive Stock Option Agreement (filed with
the Securities and Exchange Commission as exhibit 10.10 to the
Company's Registration Statement on Form SB-2 (File No. 33-69898)
and incorporated herein by reference)
10.11 Securities Purchase Agreement, dated June 10, 1987 between the
Company and VTB Investment Group and Joan Hixon Martin (filed
with the Securities and Exchange Commission as exhibit 10.11 to
the Company's Registration Statement on Form SB-2 (File No.
33-69898) and incorporated herein by reference)
10.12 Agreement, dated as of June 19, 1995, between the Company and
John N. Sortino, providing the terms of Mr. Sortino's separation
agreement with the Company (filed with the Securities and
Exchange Commission as exhibit 10.12 to the Company's 10-KSB for
the transition period ending June 30, 1995 and incorporated
herein by reference)
10.13 Employment Agreement and Loan Arrangement, dated July 31, 1995,
between the Company and R. Patrick Burns providing the terms of
Mr. Burns' employment with the Company as Chief Executive Officer
(filed with the Securities and Exchange Commission as exhibit
10.13 to the Company's 10-KSB for the transition period ending
June 30, 1995 and incorporated herein by reference)
10.14 Employment Agreement, dated November 1, 1993, between the Company
and Spencer C. Putnam (filed with the Securities and Exchange
Commission as exhibit 10.14 to the Company's Registration
Statement on Form SB-2 (File No. 33-69898) and incorporated
herein by reference)
10.17 Commitment Letter issued by Vermont National Bank, Burlington,
Vermont, dated September 18, 1995, in connection with a
commercial mortgage loan and a line of credit loan (filed with
the Securities and Exchange Commission as exhibit 10.17 to the
Company's 10-KSB for the transition period ended June 30, 1995
and incorporated herein by reference)
10.18 Loan Agreement, dated September 26, 1995, between the Company and
Vermont National Bank regarding $3,500,000 Term Loan and
$1,000,000 Line of Credit Loan (filed with the Securities and
Exchange Commission as exhibit 10.18 to the Company's 10-KSB for
the transition period ended June 30, 1995 and incorporated herein
by reference)
10.19 Commercial Term Note, dated September 26, 1995, issued in
connection with the $3,500,000 Term Loan of Vermont National Bank
(filed with the Securities and Exchange Commission as exhibit
10.19 to the Company's 10-KSB for the transition period ended
June 30, 1995 and incorporated herein by reference)
10.20 Commercial Time Note, dated September 26, 1995, issued in
connection with the $1,000,000 Line of Credit Loan of Vermont
National Bank (filed with the Securities and Exchange Commission
as exhibit 10.20 to the Company's 10-KSB for the transition
period ended June 30, 1996 and incorporated herein by reference)
10.24 Amended 1993 Incentive Stock Option Plan of the Company, amended
as of November 28, 1995 (filed with the Securities and Exchange
Commission as exhibit 10.24 to the Company's 10-QSB for the
quarter ended December 31, 1995 and incorporated herein by
reference)
10.25 Loan Agreement, dated December 26, 1995, between Green Mountain
Capital, L.P. and the Company in connection with a $500,000 Term
Loan (filed with the Securities and Exchange Commission as
exhibit 10.25 to the Company's 10-QSB for the quarter ended
December 31, 1995 and incorporated herein by reference)
10.26 Convertible Note, dated December 26, 1995, in the principal
amount of $200,000, issued in connection with the $500,000 Term
Loan of Green Mountain Capital (filed with the Securities and
Exchange Commission as exhibit 10.26 to the Company's 10-QSB for
the quarter ended December 31, 1995 and incorporated herein by
reference)
10.27 Stock Purchase Warrant Agreement, dated December 26, 1995, in
connection with the $500,000 Term Loan of Green Mountain Capital
(filed with the Securities and Exchange Commission as exhibit
10.27 to the Company's 10-QSB for the quarter ended December 31,
1995 and incorporated herein by reference)
10.28 Employment and Loan Agreements, dated June 30, 1996, between the
Company and R. Patrick Burns (filed herein)
10.29 Employment Agreement, dated July 1, 1996, between the Company and
Elisabeth B. Robert (filed herein)
23.1 Consent of KPMG Peat Marwick, LLP, dated September 26, 1995
(filed with the Securities and Exchange Commission as exhibit
23.1 to the Company's 10-KSB for the transition period ended June
30, 1995 and incorporated herein by reference)
23.2 Consent of Arthur Andersen, dated September 26, 1996 (filed
herein)
23.3 Consent of KPMG Peat Marwick, LLP, dated September 26, 1996
(filed herein)
24 Power of Attorney (filed with the Securities and Exchange
Commission as exhibit 24 to the Company's Registration Statement
on Form SB-2 (File No. 33-69898) and incorporated herein by
reference.
27 Financial Data Schedule (filed herein)
Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE VERMONT TEDDY BEAR CO., INC.
Dated: September 19, 1996 By: /s/ R. Patrick Burns
----------------------------------------
R. Patrick Burns, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
Dated: September 20, 1996 By: /s/ R. Patrick Burns
------------------------------------------
R. Patrick Burns, Director, President, and
Chief Executive Officer
Dated: September 20, 1996 By: /s/ David W. Garrett
------------------------------------------
David W. Garrett, Director
Dated: September 23, 1996 By: /s/ Fred Marks
------------------------------------------
Fred Marks, Director, and Chairman of
the Board
Dated: __________________ By:
------------------------------------------
Joan Hixon Martin, Director
Dated: September 20, 1996 By: /s/ Spencer C. Putnam
------------------------------------------
Spencer C. Putnam, Director,
Secretary and Chief Operating Officer
Dated: September 23, 1996 By: /s/ Elisabeth B. Robert
------------------------------------------
Elisabeth B. Robert, Director, Treasurer,
and Chief Financial Officer
The Vermont Teddy Bear Co., Inc.
FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
The Vermont Teddy Bear Co., Inc.:
We have audited the accompanying balance sheet of The Vermont Teddy Bear
Co., Inc. (a New York corporation) as of June 30, 1996, and the related
statements of operations, stockholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Vermont Teddy Bear
Co., Inc. as of June 30, 1996, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 30, 1996
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
The Vermont Teddy Bear Co., Inc.:
We have audited the accompanying balance sheet of The Vermont Teddy Bear
Co., Inc. as of June 30, 1995, and the related statements of operations,
stockholders' equity and cash flows for the six months ended June 30, 1995
and for the twelve months ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Vermont Teddy Bear
Co., Inc. as of June 30, 1995, and the results of its operations and its
cash flows for the six months ended June 30, 1995 and for the twelve months
ended December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Stamford, Connecticut
September 6, 1995, except as to the first two paragraphs in Note 5
which is as of September 26, 1995
The Vermont Teddy Bear Co., Inc.
BALANCE SHEETS
JUNE 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (includes restricted
cash of $365,000 and $100,000 at June 30, 1996
and 1995, respectively) $ 1,121,500 $ 1,070,862
Accounts receivable, trade 131,550 122,679
Inventories 1,974,731 3,042,484
Prepaid expenses and other current assets 277,502 213,236
Deferred income taxes 240,585 126,393
---------------------------
Total current assets 3,745,868 4,575,654
Property And Equipment, Net 10,300,318 10,493,214
Deposits And Other Assets 98,086 102,676
Note Receivable 95,000 190,000
---------------------------
Total assets $14,239,272 $15,361,544
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of-
Long-term debt $ 187,095 $ 27,805
Capital lease obligations 104,146 126,306
Accounts payable 1,353,698 2,513,468
Accrued expenses 449,048 860,440
Income taxes payable 37,365 90,889
---------------------------
Total current liabilities 2,131,352 3,618,908
---------------------------
Long-Term Debt, net of current portion 3,505,812 3,252,379
Other Liabilities 84,430 204,430
Capital Lease Obligations, net of current portion 312,814 347,874
Deferred Income Taxes 240,585 126,393
---------------------------
Total liabilities 6,274,993 7,549,984
---------------------------
Stockholders' Equity:
Preferred stock, $.05 par value-
Authorized--1,000,000 shares Series A
Issued and outstanding--90 shares 900,000 900,000
Common stock, $.05 par value-
Authorized--20,000,000 shares
Issued--5,172,750 shares
Outstanding--5,160,750 and 5,160,500 shares at
June 30, 1996 and 1995, respectively 258,638 258,625
Additional paid-in capital 10,074,595 10,073,842
Treasury stock, at cost, 12,000 shares (106,824) (106,824)
Accumulated deficit (3,162,130) (3,314,083)
---------------------------
Total stockholders' equity 7,964,279 7,811,560
---------------------------
Total liabilities and stockholders' equity $14,239,272 $15,361,544
===========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
The Vermont Teddy Bear Co., Inc.
Statements of Operations
for the Twelve Months Ended June 30, 1996 and 1995 (Unaudited),
for the Six Months Ended June 30, 1995 and
for the Twelve Months Ended December 31, 1994
<TABLE>
<CAPTION>
Twelve
Twelve Twelve Six Months Months Ended
Months Ended Months Ended Ended December 31,
June 30, 1996 June 30, 1995 June 30, 1995 1994
- -------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net Revenues $17,039,618 $20,044,796 $11,082,596 $20,560,566
Cost of Goods Sold 7,309,038 9,101,028 5,169,178 8,619,580
-----------------------------------------------------------
Gross profit 9,730,580 10,943,768 5,913,418 11,940,986
-----------------------------------------------------------
Selling, General and Administrative
Expenses:
Selling expenses 6,287,208 9,121,023 5,192,346 8,907,440
General and administrative expenses 2,954,601 4,342,608 2,849,723 3,311,306
-----------------------------------------------------------
9,241,809 13,463,631 8,042,069 12,218,746
-----------------------------------------------------------
Operating income (loss) 488,771 (2,519,863) (2,128,651) (277,760)
Interest Income 41,092 192,156 67,214 248,987
Interest Expense (441,146) (35,002) (24,517) (24,848)
Other Income 63,236 1,620 - 1,620
-----------------------------------------------------------
Income (loss) before income taxes 151,953 (2,361,089) (2,085,954) (52,001)
Income Tax (Provision) Benefit - (61,388) (216,114) 69,524
-----------------------------------------------------------
Net income (loss) 151,953 (2,422,477) (2,302,068) 17,523
Preferred Stock Dividends - (72,000) (36,000) (72,000)
-----------------------------------------------------------
Net income (loss), common
stockholders $ 151,953 $(2,494,477) $(2,338,068) $ (54,477)
===========================================================
Net Income (Loss) Per Common Share $ 0.03 $ (0.48) $ (0.45) $ (0.01)
===========================================================
Weighted Average Number of Shares
Outstanding 5,160,583 5,160,500 5,160,500 5,164,057
===========================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
The Vermont Teddy Bear Co., Inc.
Statements of Stockholders' Equity
for the Twelve Months Ended December 31, 1994,
the Six Months Ended June 30, 1995 and
the Twelve Months Ended June 30, 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------- --------------------- Paid-in Treasury Accumulated Stockholders'
Shares Amount Shares Amount Capital Stock Deficit Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 90 $900,000 5,172,500 $258,625 $10,073,842 $ - $ (921,538) $10,310,929
Net income - - - - - - 17,523 17,523
Treasury stock - - - - - (106,824) - (106,824)
Preferred stock dividends - - - - - - (72,000) (72,000)
---------------------------------------------------------------------------------------------------
Balance, December 31, 1994 90 900,000 5,172,500 258,625 10,073,842 (106,824) (976,015) 10,149,628
Net loss - - - - - - (2,302,068) (2,302,068)
Preferred stock dividend - - - - - - (36,000) (36,000)
---------------------------------------------------------------------------------------------------
Balance, June 30, 1995 90 900,000 5,172,500 258,625 10,073,842 (106,824) (3,314,083) 7,811,560
Common stock issued - - 250 13 753 - - 766
Net income - - - - - - 151,953 151,953
---------------------------------------------------------------------------------------------------
Balance, June 30, 1996 90 $900,000 5,172,750 $258,638 $10,074,595 $(106,824) $(3,162,130) $7,964,279
===================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
The Vermont Teddy Bear Co., Inc.
Statements of Cash Flows
for the Twelve Months Ended June 30, 1996 and 1995 (Unaudited),
for the Six Months Ended June 30, 1995 and
for the Twelve Months Ended December 31, 1994
<TABLE>
<CAPTION>
Twelve
Twelve Twelve Six Months Months Ended
Months Ended Months Ended Ended December 31,
June 30, 1996 June 30, 1995 June 30, 1995 1994
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 151,953 $(2,422,477) $(2,302,068) $ 17,523
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities-
Depreciation and amortization 818,024 473,143 294,467 316,416
Loss on sale of fixed assets 4,610 - - -
Changes in assets and liabilities-
Accounts receivable, trade (8,871) (46,417) 19,350 (38,267)
Inventories 1,067,753 (502,173) 981,763 (1,599,014)
Prepaid and other current assets (64,266) 40,916 355,444 (444,794)
Deposits and other assets 4,590 129,589 18,964 (24,240)
Accounts payable (1,159,770) 216,642 (823,090) 2,017,059
Accrued expenses and other
liabilities (531,390) 526,342 622,403 61,321
Income taxes payable (53,524) (111,504) (26,921) -
Deferred income taxes - 146,590 216,114 (69,524)
--------------------------------------------------------------
Net cash provided by (used for)
operating activities 229,109 (1,549,349) (643,574) 236,480
--------------------------------------------------------------
Cash Flows from Investing Activities:
Acquisition of property and equipment (605,970) (2,290,852) (641,326) (2,075,937)
Proceeds from sale of fixed assets 40,455 - - 4,286
Note receivable 95,000 643,722 - (190,000)
Due from officer - - 693,722 (565,714)
Proceeds from sale of marketable
securities - 3,000,000 - 4,000,000
Construction in progress - (7,094,354) (3,818,827) (3,275,527)
--------------------------------------------------------------
Net cash used for investing
activities (470,515) (5,741,484) (3,766,431) (2,102,892)
--------------------------------------------------------------
Cash Flows from Financing Activities:
Borrowings of long-term debt 3,724,150 65,011 65,011 -
Borrowings of short-term debt 1,616,572 3,153,638 3,153,638 -
Payments of short-term debt (4,771,602) (72,748) (36,748) (72,000)
Payments of long-term debt (156,397) (32,638) (20,854) (22,815)
Principal payments on capital lease
obligations (121,445) (44,863) (23,940) (42,100)
Dividends paid - (36,000) (36,000) (71,614)
Acquisition of treasury stock - - - (106,824)
Issuance of common stock, exercise of
stock options 766 - - -
--------------------------------------------------------------
Net cash provided by (used for)
financing activities 292,044 3,032,400 3,101,107 (315,353)
--------------------------------------------------------------
Increase (Decrease) in Cash and Cash
Equivalents 50,638 (4,258,433) (1,308,898) (2,181,765)
Cash and Cash Equivalents, beginning
of period 1,070,862 5,329,295 2,379,760 4,561,525
--------------------------------------------------------------
Cash and Cash Equivalents, end
of period $ 1,121,500 $1,070,862 $1,070,862 $2,379,760
==============================================================
Supplemental Disclosures of Cash Flow
Information:
Cash paid for interest $ 473,154 $ 34,243 $ 23,758 $ 24,848
==============================================================
Cash paid for taxes $ 2,890 $ 32,761 $ 24,968 $ 8,709
==============================================================
Noncash financing, capital lease $ 64,223 $ 435,743 $ - $ 435,473
==============================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
The Vermont Teddy Bear Co., Inc.
Notes to Financial Statements
June 30, 1996
(1) Summary of Significant Accounting Policies
Description of Business
The Vermont Teddy Bear Co., Inc. (the Company), which was incorporated under
the laws of the State of New York in 1984, is a designer, manufacturer and
direct marketer of Vermont-made teddy bears and related products. Principal
geographic markets include New York, Philadelphia, Chicago and Boston. The
Company's sales are heavily seasonal, with Valentine's Day, Christmas and
Mother's Day as the Company's largest sales seasons.
Year-End Change
Effective June 30, 1995, the Company changed its fiscal year-end from
December 31 to June 30. Accordingly, the financial statements include the
results of operations and cash flows for the twelve months ended June 30,
1996 and 1995 (unaudited), the six months ended June 30, 1995 and the year
ended December 31, 1994.
Comparative amounts for the twelve months ended June 30, 1995 are unaudited.
In the opinion of management, the information presented in the unaudited
twelve-month statements reflects all adjustments necessary for a fair
presentation of the Company's results of operations and cash flows.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
All highly liquid investments with initial maturities of three months or
less are considered cash equivalents. At June 30, 1996 and 1995,
approximately $365,000 and $100,000, respectively, of the Company's cash was
restricted (Note 5).
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Equipment acquired under capital leases is stated at the lower of the
present value of future minimum lease payments or fair value at the
inception of the lease.
Depreciation, including amortization of assets covered by capital leases, is
provided on both the straight-line and accelerated methods over the
estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Building 39 years
Equipment 5-7 years
Furniture and fixtures 3-7 years
Vehicles 5 years
</TABLE>
Amortization of leasehold improvements is provided over their estimated
useful lives or the remaining lease term, whichever is shorter. Renewals
and improvements that extend the useful lives of the assets are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
Net Earnings Per Share
Net earnings per common share is determined by dividing the net earnings
available to common stockholders by the weighted average number of shares of
Common Stock and Common Stock equivalents outstanding.
Advertising
The Company expenses the production costs of radio and print advertising the
first time the advertising takes place. Direct-response advertising is
capitalized and amortized over its expected period of future benefits.
Direct-response advertising consists primarily of catalogs for the Company's
products. The capitalized costs are amortized over the four-month period
following the initial mailing of the catalog. The Company also capitalized
the costs of its sponsorship of a 1995 season NASCAR Busch Grand National
Series stock car which the Company considered a form of advertising, as the
car was painted with the Company's logo. Capitalized sponsorship costs were
amortized over the course of the 1995 NASCAR season.
At June 30, 1995, capitalized costs for advertising amounted to
approximately $100,000, consisting principally of unamortized NASCAR
sponsorship costs, and the remaining amounts relating to prepaid costs. At
June 30, 1996, capitalized advertising costs of approximately $50,000
consisted primarily of unamortized direct-response catalogs. Advertising
expenses were $4,336,337, $3,392,862 and $5,874,540 for the twelve months
ended June 30, 1996, the six months ended June 30, 1995 and the twelve
months ended December 31, 1994, respectively.
Fair Value of Financial Instruments
In accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107, Disclosures About Fair Value of Financial
Instruments, the Company has determined the estimated fair value of its
financial instruments using appropriate market information and valuation
methodologies. Considerable judgment is required to develop the estimates
of fair value; thus, the estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange. The Company's
financial instruments consist of cash, accounts receivable, accounts payable
and bank debt. The carrying value of these assets and liabilities is a
reasonable estimate of their fair market value at June 30, 1996.
Statement of Financial Accounting Standards No. 123--Accounting for Stock-
Based Compensation
SFAS No. 123, which is effective for fiscal years beginning after December
15, 1995, requires pro forma disclosure but only encourages companies to
change their accounting for stock-based compensation. Adoption of this
standard is required during the Company's next fiscal year. The Company is
currently in the process of determining how it will implement the standard.
Reclassifications
Certain prior-year balances have been reclassified to conform with the
current year's presentation.
(2) Inventories
Inventories consist of the following at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------
<S> <C> <C>
Raw materials $ 645,763 $ 674,234
Work-in-process 28,711 313,966
Finished goods 1,300,257 2,054,284
-------------------------
$1,974,731 $3,042,484
=========================
</TABLE>
(3) Property and Equipment
Property and equipment consist of the following at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $ 1,398,528 $ 817,187
Building 6,668,134 -
Equipment 3,456,837 3,026,497
Furniture and fixtures 291,250 248,804
Vehicles 122,159 174,992
Leasehold improvements 15,136 126,007
Construction-in-process - 7,094,354
---------------------------
11,952,044 11,487,841
Less--Accumulated depreciation and
amortization 1,651,726 994,627
---------------------------
$10,300,318 $10,493,214
===========================
</TABLE>
Depreciation and amortization expense for the twelve months ended June 30,
1996, the six months ended June 30, 1995 and the twelve months ended
December 31, 1994 was $818,024, $294,467 and $316,416, respectively.
(4) Related Party Transactions
On June 19, 1995, John N. Sortino resigned as the Chief Executive Officer
and President of the Company. The Company entered into a separation
agreement with Mr. Sortino on June 19, 1995. Under the separation
agreement, Mr. Sortino is entitled to receive: (1) cash compensation of
$100,000 in calendar 1995 (including compensation totaling $40,430 already
paid to Mr. Sortino as Chief Executive Officer of the Company), $120,000 in
calendar 1996 and $150,000 in calendar 1997; (2) a bonus of $100,000; (3)
the forgiveness of amounts outstanding to the Company, which include
approximately $128,000 in principal and $64,000 in accrued interest; and (4)
health insurance benefits generally available to employees of the Company.
The Company accrued and expensed the entire amount due to Mr. Sortino under
this agreement during the six-month period ended June 30, 1995 and will not
seek any services from him in the future.
The total accrued severance as of June 30, 1996 and June 30, 1995 was
approximately $205,000 and $324,000, respectively. The current amounts have
been included as components of accrued expenses in the accompanying balance
sheets.
(5) Indebtedness
The Company has available a $1,000,000 revolving line of credit from Vermont
National Bank. The line of credit, established September 26, 1995, bears
interest at a variable rate of 2% above the prime rate, is secured by all
assets of the Company and has a one-year maturity. There were no borrowings
outstanding under the line at June 30, 1996. In addition, on September 26,
1995, the Company executed a financing agreement with Vermont National Bank.
The agreement consists of a $3.5 million commercial mortgage loan, the
majority of which was used to repay its Construction Loan, and is secured by
a first mortgage on the Company's Shelburne, Vermont, facility as well as
business assets. The loan bears interest at a variable rate of 2% above the
prime rate. Payments under the loan are based on a 30-year amortization and
are due in monthly installments through September 1997 when the outstanding
balance will become due. The terms of the agreements also restrict $300,000
of the Company's cash.
On December 26, 1995, Green Mountain Capital L.P. agreed to lend the Company
up to $500,000 in the form of five-year term notes. At June 30, 1996, there
was $180,000 in principal outstanding. The original amount of the note was
$200,000, the minimum borrowing required by the terms of the agreement. The
notes bear interest at 12% per annum and are repayable in monthly
installments through December 2000. The notes are secured by a subordinated
security interest in the Company's personal property. A commitment fee on
the undrawn portion of the facility of 2% per annum is due monthly. In
addition, Green Mountain Capital is entitled to receive warrants to purchase
4,000 shares of Vermont Teddy Bear Company Common Stock, at an exercise
price of $3.375 per share, for each $100,000 advanced to the Company. The
right to exercise these warrants begins December 26, 1997 and expires the
earlier of December 26, 2002 or five years after full repayment of the loan.
Accordingly, warrants to purchase a total of 8,000 shares of the Company's
Common Stock have been granted to Green Mountain Capital as of June 30,
1996.
The Company's long-term debt consists of the following at June 30, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Variable rate (10.25% at June 30, 1996)
Vermont National Bank building loan
(see detailed discussion above) $3,411,114 $ -
Variable rate construction loan
(see detailed discussion above) - 3,153,638
12.0% Green Mountain Capital L.P.
note payable (see detailed discussion above) 180,000 -
7% Job Development Authority notes,
due in monthly installments through
April 1999, secured by inventory,
equipment and trade accounts receivable 41,205 54,538
7.9% Note payable to bank, due in monthly
installments through December 1997,
secured by a vehicle 4,119 6,607
9.0% Note payable to Vermont National
Bank, due in monthly installments
through December 2001, secured by
a vehicle 22,187 -
17.2% Note payable to financing service,
due in monthly installments through
January 2000, secured by a vehicle - 23,398
9.8% Note payable to financing services,
due in monthly installments through
December 1999, secured by a vehicle 30,768 37,057
13% Unsecured note payable to bank,
due in monthly installments through
February 1998 3,514 4,946
-------------------------
3,692,907 3,280,184
Less--Current installments 187,095 27,805
-------------------------
Long-term debt, excluding current
installments $3,505,812 $3,252,379
=========================
</TABLE>
Certain debt agreements contain covenants that restrict certain activities
and require the periodic submission of financial information. The Company
was in compliance with the covenants as of June 30, 1996.
Scheduled future maturities of debt including the Company's mortgage loan
for the next five years are as follows:
<TABLE>
<S> <C>
Period Ending June 30,
1997 $ 187,095
1998 3,365,621
1999 66,050
2000 51,265
2001 22,876
----------
$3,692,907
==========
</TABLE>
As of June 30, 1996 and 1995, the Company had outstanding letters of credit
of $49,505 and $432,116, respectively.
(6) Series A Preferred Stock
The Company has issued 90 shares, $.05 par value, of Cumulative Preferred
Stock to one individual.
The Series A stockholder is entitled to accrued dividends on the stated
values of the shares at a rate of 8% per annum. The dividends accrue
regardless of whether dividends have been declared, profits exist, or funds
are legally available for payment. Dividends are payable quarterly, in
arrears.
As of June 30, 1996, the Series A stockholder had agreed to waive any and
all claims on accrued dividends in exchange for a five-year warrant to
purchase 43,826 shares of the Company's Common Stock at a price of $2.875
per share.
The Series A Preferred Stock carries a liquidation preference value equal to
the stated value per share plus all accrued and unpaid dividends. The
stated value is equal to $10,000 per share.
(7) Commitments and Contingencies
Leases
During fiscal 1996, the Company relocated its operations to its newly
constructed facility in Shelburne, Vermont. The Company leases additional
warehouse space in Shelburne, Vermont, for additional inventory storage
under a lease which expires on June 30, 1999. On May 30, 1996, the Company
entered into a five-year operating lease for a retail location in North
Conway, New Hampshire. In addition, the Company leases various equipment
under noncancelable capital lease agreements which expire through 2001 and
have interest rates from 8.69% to 10.12%. Capital leases and noncancelable
operating leases at June 30, 1996 require the following annual minimum lease
payments:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------------------------------------------------------------
<S> <C> <C>
1997 $141,317 $109,163
1998 131,071 110,567
1999 127,655 106,672
2000 97,058 51,012
2001 4,827 52,416
----------------------
Total minimum lease payments 501,928 $429,830
========
Less--Amounts representing interest 84,968
--------
Present value of lease payments 416,960
Less--Current installments 104,146
--------
Long-term portion $312,814
========
</TABLE>
The original cost and net book value of equipment under capital leases at
June 30, 1996 and 1995 were $505,698 and $331,903 and $628,336 and $469,132,
respectively. Rental expense under operating leases for the twelve months
ended June 30, 1996, the six-month period ended June 30, 1995 and the 12-
month period ended December 31, 1994 was $106,550, $318,673 and $379,142,
respectively.
Contingencies
The Company is involved in various legal proceedings which, in the opinion
of management, will not result in a material adverse effect on its financial
condition or results of operations.
In September 1994, the Company filed a notice of opposition with the U.S.
Patent and Trademark Office against an individual who is seeking trademark
protection to sell personalized teddy bears under the trademark Teddygrams.
On December 14, 1993, the individual filed an answer to the Company's
opposition, and a counterclaim seeking cancellation of the Company's
registration of the service mark Teddy Bear-Gram. On July 26, 1994, the
individual also filed a notice of opposition with the U.S. Patent and
Trademark Office in connection with the Company's registration of the
trademark Bear-Gram. On August 26, 1996, the Company and the opposing party
filed a Stipulation of Dismissal with the U.S. Patent and Trademark Office
to cancel the proceedings related to the Teddygrams, Teddy Bear-Gram and
Bear-Gram marks.
(8) Income Taxes
The provision for income taxes for the twelve months ended June 30, 1996,
the six months ended June 30, 1995 and the twelve months ended December 31,
1994 is comprised of the following:
<TABLE>
<CAPTION>
Twelve
Twelve Six Months Months
Months Ended Ended
Ended June 30, December 31,
June 30, 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current-
Federal $ - $ - $ -
State - - -
--------------------------------------
- - -
--------------------------------------
Deferred-
Federal - 184,641 (66,913)
State - 31,473 (2,611)
--------------------------------------
- 216,114 (69,524)
--------------------------------------
Income tax provision (benefit) $ - $216,114 $(69,524)
======================================
</TABLE>
The components of the net deferred tax asset as of June 30, 1996 and 1995
are presented below:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets-
Vacation accrual $ 20,868 $ 24,086
Net operating loss carryforwards 920,395 858,487
Inventories 48,892 70,969
Severance accrual 81,772 127,267
Contribution carryforwards 47,966 51,253
Other 53,869 20,498
Valuation allowance (933,177) (1,026,167)
--------------------------
Total deferred tax assets 240,585 126,393
Deferred tax liabilities-
Property and equipment (240,585) (126,393)
--------------------------
Net deferred tax asset $ - $ -
==========================
</TABLE>
Based on the Company's recent losses, a valuation allowance has been
provided to fully reserve the deferred tax assets. If the Company is able
to achieve sufficient profitability to realize all or a portion of its
deferred tax assets, the valuation allowance will be reduced through a
credit to income in future periods.
The provision for income taxes varies from the amounts computed by applying
the U.S. federal income tax rate of 34% as follows for the twelve months
ended June 30, 1996, the six months ended June 30, 1995 and the twelve
months ended December 31, 1994:
<TABLE>
<CAPTION>
Twelve Six Twelve
Months Months Months
Ended Ended Ended
June 30, June 30, December 31,
1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected tax expense (benefit) 34.0 % (34.0)% (34.0)%
Increase (reduction) resulting from-
Tax-exempt interest income - (0.3) (109.6)
Valuation allowance for deferred tax
assets (34.0) 49.2 -
State taxes, net of federal benefits - (5.2) (3.3)
Meals - 0.4 9.7
Penalties and other - 0.3 2.9
--------------------------
Income tax provision (benefit) - % 10.4 % (134.3)%
==========================
</TABLE>
At June 30, 1996, the Company has federal income tax net operating loss
(NOL) carryforwards of approximately $2,360,000. The NOL carryforwards
expire in varying amounts through 2007. In addition, as a result of the
change in tax reporting year-end to June 30, 1995, certain amounts of the
NOL carryforwards (approximately $1,700,000) are available for use ratably
over a six-year period beginning June 30, 1996. The Tax Reform Act of 1986
included certain provisions relating to changes in stock ownership which, if
triggered, could result in future annual limitations on the utilization of
the NOLs.
(9) Capital Stock
Stock Option Plan
On August 16, 1993, the stockholders approved a 1993 incentive stock option
plan (the 1993 Plan), which provides for the granting of 200,000 stock
options to employees. Options granted may be either incentive stock options
within the meaning of Section 422 A of the Internal Revenue Code, or
nonqualified options. Options under the 1993 Plan vest ratably over a five-
year period. The stock options expire ten years after the date they are
granted.
On November 28, 1995, the stockholders ratified a change to the 1993 Plan
which increased the number of shares to 1.0 million from 200,000.
To date, all options have been issued at a price equal to at least the fair
market value of the shares of the Common Stock on the date of grant.
<TABLE>
<CAPTION>
Number Exercise
of Shares Price Range
- -------------------------------------------------------------
<S> <C> <C>
Outstanding, December 31, 1993 183,200 $6.50-$10.00
Granted 200 12.00
Exercised - -
Canceled (20,200) 6.50
-------------------------
Outstanding, December 31, 1994 163,200 6.50- 12.00
Granted - -
Exercised - -
Canceled (12,200) 6.50
-------------------------
Outstanding, June 30, 1995 151,000 6.50- 12.00
Granted 1,324,956 2.63- 3.06
Exercised (250) 3.06
Canceled (673,050) 3.00- 12.00
-------------------------
Outstanding, June 30, 1996 802,656 $2.63-$ 3.06
=========================
</TABLE>
As of June 30, 1996, options to purchase 89,852 shares of the Company's
Common Stock were exercisable under the 1993 Plan, and options to purchase
197,344 shares of the Company's Common Stock were available for grant under
the 1993 Plan.
Warrants
At June 30, 1996, there were several warrants outstanding for shares of the
Company's Common Stock. The following table summarizes the Company's
outstanding warrants at June 30, 1996:
<TABLE>
<CAPTION>
Warrant Exercise
Shares Price Expiration Date
-----------------------------------------------
<C> <C> <C>
115,000 $15.500 November 23, 1998
60,000 6.500 August 3, 1998
43,826 2.875 April 12, 2001
8,000 3.375 December 26, 2002
</TABLE>
(10) Unaudited June 30, 1994 Financial Data
Unaudited financial data for the six months ended June 30, 1994 is as
follows:
<TABLE>
<S> <C>
Net sales $11,598,366
Gross margin 6,910,636
Income tax provision 85,202
Net income 137,932
Preferred stock dividends 36,000
Net earnings, common stockholders 101,932
Net earnings, per common share 0.02
</TABLE>
(11) Subsequent Events
Subsequent to the close of the fiscal year, the Company privately placed
$550,000 of Series B Convertible Preferred Stock on July 15, 1996. The
204,912 newly issued preferred shares are not entitled to any dividends or
voting rights, but are convertible into 204,912 shares of the Company's
Common Stock at any time after July 14, 1997. Accompanying the issuance of
the Preferred Stock were warrants to purchase 204,912 shares of the
Company's Common Stock, subject to certain anti-dilution rights, at an
exercise price of $2.434 per share, exercisable between July 15, 1997 and
July 15, 1999. In addition, finder's warrants for 10,245 common shares were
issued with the same terms and conditions. Common shares issued as the
result of the preferred conversion and/or the warrant exercise shall be
considered restricted securities and shall be subject to certain
registration rights.
The Company entered into employment agreements with two key executives in
September 1996. These agreements stipulate salary levels and provide for
bonuses if certain operating targets are met.
RESTATED CERTIFICATE OF INCORPORATION
OF
THE VERMONT TEDDY BEAR CO., INC.
UNDER
SECTION 807 OF THE BUSINESS CORPORATION LAW
Pursuant to Section 807 of the Business Corporation Law, the undersigned,
being the Chairman of the Board, Chief Executive Officer and Secretary of The
Vermont Teddy Bear Co., Inc. (the "Corporation"), hereby certify that:
1. The name of the Corporation is The Vermont Teddy Bear Co., Inc.
2. The Certificate of Incorporation was filed by the Department of State on
January 27, 1984, and Certificates of Amendment of the Certificate of
Incorporation were filed by the Department of State on May 7, 1993,
August 2, 1993, a Restated Certificate of Incorporation was filed with
the Department of State on September 24, 1993, and Certificate of
Amendment of the Restated Certificate of Incorporation was filed with the
Department of State on March 11, 1996.
3. The Certificate of Incorporation, as previously amended, is further
amended by amending Section 4 to provide for the authorization of Three
Hundred Seventy-Five Thousand (375,000) shares of Series B Convertible
Preferred Stock and to amend the liquidation preference of the Series A
Preferred Stock, as follows:
A. Series A Preferred Stock. Ninety (90) shares of preferred stock
having a par value of $.05 per share, designated Series A Preferred Stock
and having the following preferences and limitations:
1. Dividends. Holders of Series A Preferred Stock shall be
entitled to receive out of the surplus or net profits of the
Corporation dividends at the rate of eight percent (8%) per annum
payable quarterly on the first days of January, April, July and
October. Dividends on the Series A Preferred Stock shall be
payable before any dividends shall be paid upon, or set apart for,
the common stock. Further, dividends on Series A Preferred Stock
shall be cumulative, so that if in any quarterly dividend period
the dividends shall not have been paid or set apart, the deficiency
shall be fully paid, or set apart for payment, before any dividends
shall be set apart for or paid upon the common stock.
Accumulations of dividends on Series A Preferred Stock shall not
bear interest.
2. Voting Rights. Except as required by law, Holders of Series
A Preferred Stock shall have no voting power whatsoever and
shall not be entitled to notice of any meeting of the
stockholders of the Corporation.
3. Liquidation. In the event of any liquidation, voluntary or
involuntary, the holders of Series A Preferred Stock shall be
entitled to be paid the consideration they paid for their shares
and the unpaid cumulative dividends accrued thereon on a pari
passu basis with the Series B Convertible Preferred Stock before
any amount shall be paid to the holders of the common stock.
4. Redemption. The Corporation may, at the option of its Board
of Directors, redeem all or any part of Series A Preferred Stock
outstanding on any dividend payment date after the issuance
thereof, by paying the holders thereof the consideration they
paid for their shares, together with all unpaid cumulative
dividends accrued thereon (the "Redemption Price"). Notice of
the Corporation's intention to redeem shares of the outstanding
preferred, and the date and place thereof, shall be sent by
first class mail at least thirty (30) days prior to the proposed
redemption date to the holders of the shares to be redeemed.
From and after the date fixed in any such notice as the date of
redemption, all dividends upon Series A Preferred Stock so
called for redemption shall cease to accrue, and all rights of
the holders of Series A Preferred Stock, except the right to
receive the Redemption Price upon surrender of the certificate
representing Series A Preferred Stock called for redemption,
shall cease and determine.
5. Conversion Rights. The holders of Series A Preferred Stock
shall not have any right to convert their shares into, or
exchange them for, common stock.
B. Series B Convertible Preferred Stock. Three Hundred Seventy-Five
Thousand (375,000) shares of preferred stock having a par value of
$.05 per share, designated Series B Convertible Preferred Stock and
having the following preferences and limitations:
1. Dividends. Holders of Series B Convertible Preferred Stock
shall not be entitled to any dividends.
2. Voting Rights. Except as required by law, Holders of Series
B Convertible Preferred Stock shall have no voting power
whatsoever and shall not be entitled to notice of any meeting of
the stockholders of the Corporation.
3. Liquidation. In the event of any liquidation, voluntary or
involuntary, the holders of Series B Convertible Preferred Stock
shall be entitled to be paid the consideration they paid for
their shares on a pari passu basis with the Series A Preferred
Stock before any amount shall be paid to the holders of the
common stock.
4. Conversion Rights. The holders of Series B Convertible
Preferred Stock shall have the right to convert their shares
into shares of the Corporation's Common Stock, par value $0.05,
as follows:
(a) Right to Convert. Each share of the Series B
Convertible Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the date
that is one (1) year from the date of the issuance of the
Series B Convertible Preferred Stock (the "Purchase
Date"), at the office of the Company or the Company's
transfer agent, into such number of fully paid and non-
assessable shares of Common Stock as is determined by
dividing the original Series B Convertible Preferred Stock
issue price by the Conversion Price applicable to such
share, determined as provided below, in effect on the date
the certificate of the Series B Convertible Preferred
Stock is surrendered for conversion. The initial
Conversion Price for the Series B Convertible Preferred
Stock shall be as set forth in subsection 4(c), below.
(b) Mechanics of Conversion. Before any holder of shares
of Series B Convertible Preferred Stock shall be entitled
to convert the same into shares of Common Stock, he shall
surrender the certificate or certificates representing the
Series B Convertible Preferred Stock, duly endorsed, by
delivering the certificate or certificates to the
Company's principal office or the Company's transfer agent
for the Series B Convertible Preferred Stock, and shall
give written notice to the Company's Investor Relations
Department at its principal office, of the election to
convert the Series B Convertible Preferred Stock and shall
state therein the name or names in which the certificate
or certificates for shares of Common Stock are to be
issued. The Company shall, as soon as practicable
thereafter, issue and deliver to such holder, or to the
nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to
which such holder shall be entitled as described above.
Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of
such surrender of the shares of Series B Convertible
Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable
upon conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as
of such date. If the conversion is in connection with an
underwritten offering of securities registered pursuant to
the Securities Act of 1933, as amended (the "1933 Act"),
the conversion may, at the option of any holder
surrendering shares of Series B Convertible Preferred
Stock for conversion, be conditioned upon the closing with
the underwriters of the sale of securities pursuant to
such offering, in which event the person or persons
entitled to receive the Common Stock upon conversion of
the Series B Convertible Preferred Stock shall not be
deemed to have converted such Series B Convertible
Preferred Stock until immediately prior to the closing of
such sale of securities.
(c) Conversion Price Adjustments of Series B Convertible
Preferred Stock for Certain Dilutive Issuances Splits and
Combinations. The Conversion Price of the Series B
Convertible Preferred Stock shall initially equal the
issuance price per share of the Series B Convertible
Preferred Stock, and shall be subject to adjustment from
time to time as follows:
(i) (A) If the Company shall issue, after the
Purchase Date, any Additional Stock (as
defined below) without consideration or for a
consideration per share less than the
Conversion Price in effect immediately prior
to the issuance of such Additional Stock, the
Conversion Price shall be adjusted to a price
equal to the price paid per share for such
Additional Stock.
(B) In the case of the issuance of Common
Stock for cash, the consideration shall be
deemed to be the amount of cash paid therefor
before deducting any reasonable discounts,
commissions or other expenses allowed, paid or
incurred by the Company for any underwriting
or otherwise in connection with the issuance
and sale thereof.
(C) In the case of the issuance of the Common
Stock for a consideration in whole or in part
other than cash, the consideration other than
cash shall be deemed to be the fair value
thereof as determined by the Board of
Directors of the Company irrespective of any
accounting treatment.
(D) In the case of the issuance (whether
before, on or after the applicable Purchase
Date) of options to purchase or rights to
subscribe for Common Stock, securities by
their terms convertible into or exchangeable
for Common Stock or options to purchase or
rights to subscribe for such convertible or
exchangeable securities, the following
provisions shall apply for all purposes of
this subsection 4(c)(i) and subsection
4(c)(ii):
(1) The aggregate maximum number of
shares of Common Stock deliverable upon
exercise (assuming the satisfaction of
any conditions to exercisability,
including without limitation, the
passage of time, but without taking into
account potential antidilution
adjustments) of such options
to purchase or rights to subscribe for
Common Stock shall be deemed to have
been issued at the time such Options or
rights were issued and for a
consideration equal to the consideration
(determined in the manner provided in
subsections 4(c)(i)(B) and (c)(i)(C)),
if any, received by the corporation upon
the issuance of such options or rights
plus the minimum exercise price provided
in such options or rights (without
taking into account potential
antidilution adjustments) for
the Common Stock covered thereby.
(2) The aggregate maximum number of
shares of Common Stock deliverable upon
conversion of or in exchange (assuming
the satisfaction of any conditions to
convertibility or exchangeability,
including, without limitation, the
passage of time, but without taking into
account potential antidilution
adjustments) for any such convertible or
exchangeable securities or upon the
exercise of options to purchase or
rights to subscribe for such convertible
or exchangeable securities and
subsequent conversion or exchange
thereof shall be deemed to have
been issued at the time such securities
were issued or such options or rights
were issued and for a consideration
equal to the consideration, if any,
received by the corporation for any such
securities and related options or rights
(excluding any cash received on account
of accrued interest or accrued
dividends), plus the minimum additional
consideration, if any, to be received by
the corporation (without taking into
account potential antidilution
adjustments) upon the conversion or
exchange of such securities or the
exercise of any related options or
rights (the consideration in each case
to be determined in the manner provided
in subsections 4(c)(i)(B) and (c)(i)(C))
(3) In the event of any change in the
number of shares of Common Stock
deliverable or in the consideration
payable to this corporation upon
exercise of such options or rights or
upon conversion of or in exchange for
such convertible or exchangeable
securities, including, but not limited
to, a change resulting from the
antidilution provisions thereof, the
Conversion Price of the Series B
Convertible Preferred Stock, to
the extent in any way affected by or
computed using such options, rights or
securities, shall be recomputed to
reflect such change, but no further
adjustment shall be made for the actual
issuance of Common Stock or any payment
of such consideration upon the exercise
of any such options or rights or the
conversion or exchange of such
securities.
(4) Upon the expiration of any such
options or rights, the termination of
any such rights to convert or exchange
or the expiration of any options or
rights related to such convertible or
exchangeable securities, the Conversion
Price of the Series B Convertible
Preferred Stock, to the extent in any
way affected by or computed using such
options, rights or securities or options
or rights related to such securities,
shall be recomputed to reflect the
issuance of only the number of shares of
Common Stock (and convertible or
exchangeable securities which remain in
effect) actually issued upon the
exercise of such options or rights, upon
the conversion or exchange of such
securities or upon the exercise of the
options or rights related to such
securities.
(5) The number of shares of Common
Stock deemed issued and the
consideration deemed paid therefor
pursuant to subsections 4(c)(i)(D)(1)
and (2) shall be appropriately adjusted
to reflect any change, termination or
expiration of the type described in
either subsection 4(c)(i)(D)(3) or (4).
(ii) "Additional Stock" shall mean any shares of
Common Stock issued (or deemed to have been issued
pursuant to subsection 4(c)(i)(D)) by this
corporation after the Purchase Date other than
(A) Common Stock issued pursuant to a
transaction described in subsection 4(c)(iii)
hereof,
(B) shares of Common Stock issuable or issued
to employees, officers, consultants, directors
or vendors (if in transactions with primarily
nonfinancing purposes) of this corporation
directly or pursuant to a stock option plan or
restricted stock plan approved by the
shareholders and Board of Directors of this
corporation
(iii) In the event the corporation should at any
time or from time to time after the Purchase Date
fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common
Stock or the determination of holders of Common
Stock entitled to receive a dividend or other
distribution payable in additional shares of Common
Stock or other securities or rights convertible
into, or entitling the holder thereof to receive
directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock
Equivalents") without payment of any consideration
by such holder for the additional shares of Common
Stock or the Common Stock Equivalents (including the
additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such
record date (or the date of such dividend
distribution, split or subdivision if no
record date is fixed), the Conversion Price of the
Series B Convertible Preferred Stock shall be
appropriately decreased so that the number of shares
of Common Stock issuable on conversion of each share
of such series shall be increased in proportion to
such increase of the aggregate of shares of Common
Stock outstanding and those issuable with respect to
such Common Stock Equivalents with the number of
shares issuable with respect to Common Stock
Equivalents determined from time to time in the
manner provided for deemed issuances in subsection
4(c)(i)(D).
(iv) If the number of shares of Common Stock
outstanding at any time after the Purchase Date is
decreased by a combination of the outstanding shares
of Common Stock, then, following the record date of
such combination, the Conversion Price for the
Series B Convertible Preferred Stock shall be
appropriately increased so that the number of shares
of Common Stock issuable on conversion of each share
of such series shall be decreased in proportion to
such decrease in outstanding shares.
(d) Notice. In case at any time the Company shall
propose:
(i) to pay any dividend or make any distribution on
shares of Common Stock in shares of Common Stock or
make any other distribution (other than regularly
scheduled cash dividends which are not in a greater
amount per share than the most recent such cash
dividend) to all holders of Common Stock; or
(ii) to issue any rights, warrants, or other
securities to all holders of Common Stock entitling
them to purchase any additional shares of Common
Stock or any other rights, warrants, or other
securities; or
(iii) to effect any reclassification or change of
outstanding shares of Common Stock, or any
consolidation, merger, sale, lease, or conveyance of
property; or
(iv) to effect any liquidation, dissolution, or
winding-up of the Company; or
(v) to take any other action which would cause an
adjustment to the Conversion Price; then, and in any
one or more of such cases, the Company shall give
written notice thereof, by registered mail, postage
prepaid, to the Holder at his then-current address,
mailed at least 15 days prior to (i) the date as of
which the holders of record of shares of Common
Stock to be entitled to receive any such dividend,
distribution, rights, warrants, or other securities
are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares
of Common Stock, consolidation, merger, sale, lease,
conveyance of property, liquidation, dissolution, or
winding-up is expected to become effective, and the
date as of which it is expected that holders of
record of shares of Common Stock shall be entitled
to exchange their shares for securities or other
property, if any, deliverable upon such
reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of
property, liquidation, dissolution, or winding-up,
or (iii) the date of such action which would require
an adjustment to the Conversion Price.
C. Undesignated Preferred Stock. Six Hundred Twenty-Four
Thousand Nine Hundred Ten (624,910) shares of preferred
stock having a par value of $.05 per share and having such
preferences, limitations and relative rights as determined
from time to time by the Board of Directors. The Board of
Directors is hereby expressly granted authority to divide
these shares of preferred stock into series and to fix and
determine before the issuance thereof the number of shares
and the relative rights and preferences of any series so
established.
D. Common Stock. Twenty million (20,000,000) shares of
common stock having a par value of $.05 per share.
4. The amendment related to the authorization of the Series B Convertible
Preferred Stock was authorized by the Corporation's Board of Directors
as of June 27, 1996, pursuant to Section 502 of the Business
Corporation Law and by the unanimous written consent of the
shareholders of the Series A Preferred Stock, dated June 27, 1996,
pursuant to Section 615 of the Business Corporation Law.
5. The text of the Certificate of Incorporation and all prior amendments
thereto are hereby restated as further amended above to read herein
set forth in full:
ARTICLE I
NAME
The name of the corporation is The Vermont Teddy Bear Co., Inc.
ARTICLE II
PURPOSES
The purpose or purposes for which this corporation is formed are as
follows, to wit: to engage in any lawful act or activity for which
corporations may be organized under the Business Corporation Law, provided
that it is not formed to engage in any act or activity requiring the consent
or approval of any state official, department, board, agency or other body,
without first obtaining such consent or approval.
ARTICLE III
OFFICE
The office of the corporation is to be located in the City of Albany,
County of Albany, State of New York.
ARTICLE IV
CAPITAL STOCK
The aggregate number of shares which the corporation shall have
authority to issue is twenty one million (21,000,000) shares, divided as
follows:
A. Series A Preferred Stock. Ninety (90) shares of preferred stock
having a par value of $.05 per share, designated Series A Preferred
Stock and having the following preferences and limitations:
1. Dividends. Holders of Series A Preferred Stock shall be
entitled to receive out of the surplus or net profits of the
Corporation dividends at the rate of eight percent (8%) per
annum payable quarterly on the first days of January, April,
July and October. Dividends on the Series A Preferred Stock
shall be payable before any dividends shall be paid upon, or set
apart for, the common stock. Further, dividends on Series A
Preferred Stock shall be cumulative, so that if in any quarterly
dividend period the dividends shall not have been paid or set
apart, the deficiency shall be fully paid, or set apart for
payment, before any dividends shall be set apart for or paid
upon the common stock. Accumulations of dividends on Series A
Preferred Stock shall not bear interest.
2. Voting Rights. Except as required by law, Holders of Series
A Preferred Stock shall have no voting power whatsoever and
shall not be entitled to notice of any meeting of the
stockholders of the Corporation.
3. Liquidation. In the event of any liquidation, voluntary or
involuntary, the holders of Series A Preferred Stock shall be
entitled to be paid the consideration they paid for their shares
and the unpaid cumulative dividends accrued thereon on a pari
passu basis with the Series B Convertible Preferred Stock before
any amount shall be paid to the holders of the common stock.
4. Redemption. The Corporation may, at the option of its Board
of Directors, redeem all or any part of Series A Preferred Stock
outstanding on any dividend payment date after the issuance
thereof, by paying the holders thereof the consideration they
paid for their shares, together with all unpaid cumulative
dividends accrued thereon (the "Redemption Price"). Notice of
the Corporation's intention to redeem shares of the outstanding
preferred, and the date and place thereof, shall be sent by
first class mail at least thirty (30) days prior to the proposed
redemption date to the holders of the shares to be redeemed.
From and after the date fixed in any such notice as the date of
redemption, all dividends upon Series A Preferred Stock so
called for redemption shall cease to accrue, and all rights of
the holders of Series A Preferred Stock, except the right to
receive the Redemption Price upon surrender of the certificate
representing Series A Preferred Stock called for redemption,
shall cease and determine.
5. Conversion Rights. The holders of Series A Preferred Stock
shall not have any right to convert their shares into, or
exchange them for, common stock.
B. Series B Convertible Preferred Stock. Three Hundred Seventy-Five
Thousand (375,000) shares of preferred stock having a par value of
$.05 per share, designated Series B Convertible Preferred Stock and
having the following preferences and limitations:
1. Dividends. Holders of Series B Convertible Preferred Stock
shall not be entitled to any dividends.
2. Voting Rights. Except as required by law, Holders of Series
B Convertible Preferred Stock shall have no voting power
whatsoever and shall not be entitled to notice of any meeting of
the stockholders of the Corporation.
3. Liquidation. In the event of any liquidation, voluntary or
involuntary, the holders of Series B Convertible Preferred Stock
shall be entitled to be paid the consideration they paid for
their shares on a pari passu basis with the Series A Preferred
Stock before any amount shall be paid to the holders of the
common stock.
4. Conversion Rights. The holders of Series B Convertible
Preferred Stock shall have the right to convert their shares
into shares of the Corporation's Common Stock, par value $0.05,
as follows:
(a) Right to Convert. Each share of the Series B
Convertible Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the date
that is one (1) year from the date of the issuance of the
Series B Convertible Preferred Stock (the "Purchase
Date"), at the office of the Company or the Company's
transfer agent, into such number of fully paid and non-
assessable shares of Common Stock as is determined by
dividing the original Series B Convertible Preferred Stock
issue price by the Conversion Price applicable to such
share, determined as provided below, in effect on the date
the certificate of the Series B Convertible Preferred
Stock is surrendered for conversion. The initial
Conversion Price for the Series B Convertible Preferred
Stock shall be as set forth in subsection 4(c), below.
(b) Mechanics of Conversion. Before any holder of shares
of Series B Convertible Preferred Stock shall be entitled
to convert the same into shares of Common Stock, he shall
surrender the certificate or certificates representing the
Series B Convertible Preferred Stock, duly endorsed, by
delivering the certificate or certificates to the
Company's principal office or the Company's transfer agent
for the Series B Convertible Preferred Stock, and shall
give written notice to the Company's Investor Relations
Department at its principal office, of the election to
convert the Series B Convertible Preferred Stock and shall
state therein the name or names in which the certificate
or certificates for shares of Common Stock are to be
issued. The Company shall, as soon as practicable
thereafter, issue and deliver to such holder, or to the
nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to
which such holder shall be entitled as described above.
Such conversion shall be deemed to have been made
immediately prior to the close of business on the
date of such surrender of the shares of Series B
Convertible Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common
Stock issuable upon conversion shall be treated for all
purposes as the record holder or holders of such shares of
Common Stock as of such date. If the conversion is in
connection with an underwritten offering of securities
registered pursuant to the Securities Act of 1933, as
amended (the "1933 Act"), the conversion may, at the
option of any holder surrendering shares of Series B
Convertible Preferred Stock for conversion, be conditioned
upon the closing with the underwriters of the sale of
securities pursuant to such offering, in which event the
person or persons entitled to receive the Common Stock
upon conversion of the Series B Convertible Preferred
Stock shall not be deemed to have converted such Series B
Convertible Preferred Stock until immediately prior to the
closing of such sale of securities.
(c) Conversion Price Adjustments of Series B Convertible
Preferred Stock for Certain Dilutive Issuances Splits and
Combinations. The Conversion Price of the Series B
Convertible Preferred Stock shall initially equal the
issuance price per share of the Series B Convertible
Preferred Stock, and shall be subject to adjustment from
time to time as follows:
(i) (A) If the Company shall issue, after the
Purchase Date, any Additional Stock (as
defined below) without consideration or for a
consideration per share less than the
Conversion Price in effect immediately prior
to the issuance of such Additional Stock, the
Conversion Price shall be adjusted to a price
equal to the price paid per share for such
Additional Stock.
(B) In the case of the issuance of Common
Stock for cash, the consideration shall be
deemed to be the amount of cash paid therefor
before deducting any reasonable discounts,
commissions or other expenses allowed, paid or
incurred by the Company for any underwriting
or otherwise in connection with the issuance
and sale thereof.
(C) In the case of the issuance of the Common
Stock for a consideration in whole or in part
other than cash, the consideration other than
cash shall be deemed to be the fair value
thereof as determined by the Board of
Directors of the Company irrespective of any
accounting treatment.
(D) In the case of the issuance (whether
before, on or after the applicable Purchase
Date) of options to purchase or rights to
subscribe for Common Stock, securities by
their terms convertible into or exchangeable
for Common Stock or options to purchase or
rights to subscribe for such convertible or
exchangeable securities, the following
provisions shall apply for all purposes of
this subsection 4(c)(i) and subsection
4(c)(ii):
(1) The aggregate maximum number of
shares of Common Stock deliverable upon
exercise (assuming the satisfaction of
any conditions to exercisability,
including without limitation, the
passage of time, but without taking into
account potential antidilution
adjustments) of such options
to purchase or rights to subscribe for
Common Stock shall be deemed to have
been issued at the time such Options or
rights were issued and for a
consideration equal to the consideration
(determined in the manner provided in
subsections 4(c)(i)(B) and (c)(i)(C)),
if any, received by the corporation upon
the issuance of such options or rights
plus the minimum exercise price provided
in such options or rights (without
taking into account potential
antidilution adjustments) for the Common
Stock covered thereby.
(2) The aggregate maximum number of
shares of Common Stock deliverable upon
conversion of or in exchange (assuming
the satisfaction of any conditions to
convertibility or exchangeability,
including, without limitation, the
passage of time, but without taking into
account potential antidilution
adjustments) for any such convertible or
exchangeable securities or upon the
exercise of options to purchase or
rights to subscribe for such convertible
or exchangeable securities and
subsequent conversion or exchange
thereof shall be deemed to have
been issued at the time such securities
were issued or such options or rights
were issued and for a consideration
equal to the consideration, if any,
received by the corporation for any such
securities and related options or rights
(excluding any cash received on account
of accrued interest or accrued
dividends), plus the minimum additional
consideration, if any, to be received by
the corporation (without taking into
account potential antidilution
adjustments) upon the conversion or
exchange of such securities or the
exercise of any related options or
rights (the consideration in each case
to be determined in the manner provided
in subsections 4(c)(i)(B) and (c)(i)(C))
(3) In the event of any change in the
number of shares of Common Stock
deliverable or in the consideration
payable to this corporation upon
exercise of such options or rights or
upon conversion of or in exchange for
such convertible or exchangeable
securities, including, but not limited
to, a change resulting from the
antidilution provisions thereof, the
Conversion Price of the Series B
Convertible Preferred Stock, to
the extent in any way affected by or
computed using such options, rights or
securities, shall be recomputed to
reflect such change, but no further
adjustment shall be made for the actual
issuance of Common Stock or any payment
of such consideration upon the exercise
of any such options or rights or the
conversion or exchange of such
securities.
(4) Upon the expiration of any such
options or rights, the termination of
any such rights to convert or exchange
or the expiration of any options or
rights related to such convertible or
exchangeable securities, the Conversion
Price of the Series B Convertible
Preferred Stock, to the extent in any
way affected by or computed using such
options, rights or securities or options
or rights related to such securities,
shall be recomputed to reflect the
issuance of only the number of shares of
Common Stock (and convertible or
exchangeable securities which remain in
effect) actually issued upon the
exercise of such options or rights, upon
the conversion or exchange of such
securities or upon the exercise of the
options or rights related to such
securities.
(5) The number of shares of Common
Stock deemed issued and the
consideration deemed paid therefor
pursuant to subsections 4(c)(i)(D)(1)
and (2) shall be appropriately adjusted
to reflect any change, termination or
expiration of the type described in
either subsection 4(c)(i)(D)(3) or (4).
(ii) "Additional Stock" shall mean any shares of
Common Stock issued (or deemed to have been issued
pursuant to subsection 4(c)(i)(D)) by this
corporation after the Purchase Date other than
(A) Common Stock issued pursuant to a
transaction described in subsection 4(c)(iii)
hereof,
(B) shares of Common Stock issuable or issued
to employees, officers, consultants, directors
or vendors (if in transactions with primarily
nonfinancing purposes) of this corporation
directly or pursuant to a stock option plan or
restricted stock plan approved by the
shareholders and Board of Directors of this
corporation
(iii) In the event the corporation should at any
time or from time to time after the Purchase Date
fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common
Stock or the determination of holders of Common
Stock entitled to receive a dividend or other
distribution payable in additional shares of Common
Stock or other securities or rights convertible
into, or entitling the holder thereof to receive
directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock
Equivalents") without payment of any consideration
by such holder for the additional shares of Common
Stock or the Common Stock Equivalents (including the
additional shares of Common Stock issuable upon
conversion or exercise thereof), then, as of such
record date (or the date of such dividend
distribution, split or subdivision if no
record date is fixed), the Conversion Price of the
Series B Convertible Preferred Stock shall be
appropriately decreased so that the number of shares
of Common Stock issuable on conversion of each share
of such series shall be increased in proportion to
such increase of the aggregate of shares of Common
Stock outstanding and those issuable with respect to
such Common Stock Equivalents with the number of
shares issuable with respect to Common Stock
Equivalents determined from time to time in the
manner provided for deemed issuances in subsection
4(c)(i)(D).
(iv) If the number of shares of Common Stock
outstanding at any time after the Purchase Date is
decreased by a combination of the outstanding shares
of Common Stock, then, following the record date of
such combination, the Conversion Price for the
Series B Convertible Preferred Stock shall be
appropriately increased so that the number of shares
of Common Stock issuable on conversion of each share
of such series shall be decreased in proportion to
such decrease in outstanding shares.
(d) Notice. In case at any time the Company shall
propose:
(i) to pay any dividend or make any distribution on
shares of Common Stock in shares of Common Stock or
make any other distribution (other than regularly
scheduled cash dividends which are not in a greater
amount per share than the most recent such cash
dividend) to all holders of Common Stock; or
(ii) to issue any rights, warrants, or other
securities to all holders of Common Stock entitling
them to purchase any additional shares of Common
Stock or any other rights, warrants, or other
securities; or
(iii) to effect any reclassification or change of
outstanding shares of Common Stock, or any
consolidation, merger, sale, lease, or conveyance of
property; or
(iv) to effect any liquidation, dissolution, or
winding-up of the Company; or
(v) to take any other action which would cause an
adjustment to the Conversion Price; then, and in any
one or more of such cases, the Company shall give
written notice thereof, by registered mail, postage
prepaid, to the Holder at his then-current address,
mailed at least 15 days prior to (i) the date as of
which the holders of record of shares of Common
Stock to be entitled to receive any such dividend,
distribution, rights, warrants, or other securities
are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares
of Common Stock, consolidation, merger, sale, lease,
conveyance of property, liquidation, dissolution, or
winding-up is expected to become effective, and the
date as of which it is expected that holders of
record of shares of Common Stock shall be entitled
to exchange their shares for securities or other
property, if any, deliverable upon such
reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of
property, liquidation, dissolution, or winding-up,
or (iii) the date of such action which would require
an adjustment to the Conversion Price.
C. Undesignated Preferred Stock. Six Hundred Twenty-Four Thousand
Nine Hundred Ten (624,910) shares of preferred stock having a par value of
$.05 per share and having such preferences, limitations and relative rights
as determined from time to time by the Board of Directors. The Board of
Directors is hereby expressly granted authority to divide these shares of
preferred stock into series and to fix and determine before the issuance
thereof the number of shares and the relative rights and preferences of any
series so established.
D. Common Stock. Twenty million (20,000,000) shares of common stock
having a par value of $.05 per share.
ARTICLE V
PROCESS AGENT
The Secretary of State is designated as agent of the corporation upon
whom process against it may be served. The post office address to which the
Secretary of State shall mail a copy of any process against the corporation
served upon him is 2236 Shelburne Road, P.O. Box 965, Shelburne, Vermont
05482.
ARTICLE VI
DIRECTOR LIABILITY AND INDEMNIFICATION
No director of the corporation shall be personally liable to the
corporation or its shareholders for damages for any breach of duty in such
capacity; provided, however, that this provision shall not eliminate or
limit the liability of any director:
(a) For acts or omissions in bad faith or which involved intentional
misconduct or a knowing violation of law, as established by a judgment
or other final adjudication;
(b) For any transaction from which the director derived in fact a
financial profit or other advantage to which he or she was not legally
entitled, as established by a judgment or other final adjudication;
(c) For any violation of Section 719 of the Business Corporation Law,
as established by a judgment or other final adjudication; or
(d) For any act or omission occurring prior to the corporation's
adoption of this provision.
6. This restatement of the Certificate of Incorporation as previously
amended and as amended above was authorized by the Corporation's Board
of Directors, as of June 27, 1996, pursuant to Section 807 of the
Business Corporation Law.
IN WITNESS WHEREOF the undersigned, being the Chairman of the Board,
Chief Executive Officer and Secretary of the Corporation, affirm that the
statements made herein are true under the penalties of perjury.
/s/ FRED MARKS
-----------------------------------------
Fred Marks, Chairman of the Board
/s/ R. PATRICK BURNS
-----------------------------------------
R. Patrick Burns, Chief Executive Officer
/s/ SPENCER C. PUTNAM
-----------------------------------------
Spencer C. Putnam, Secretary
NEITHER THE WARRANTS REPRESENTED BY THIS
CERTIFICATE NOR THE SHARES ISSUABLE UPON EXERCISE
HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. NEITHER THE WARRANTS NOR
SUCH SHARES MAY BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT, OR AN EXEMPTION FROM REGISTRATION
UNDER SUCH ACT.
THE VERMONT TEDDY BEAR CO., INC.
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
par value $.05 per share
June 28, 1996 ___________ Shares
THIS CERTIFIES that, for good and valuable consideration, the receipt of
which is hereby acknowledged, ___________________ (the "Holder"), or his
registered assigns, is entitled to subscribe for and purchase from The Vermont
Teddy Bear Co., Inc., a New York corporation (the "Company"), upon the terms and
conditions set forth herein, at any time or from time to time one (1) year after
the date hereof, and before 5:00 P.M. on June 28, 1999, New York time or such
earlier time as set forth herein (the "Exercise Period"), _________ shares of
the Company's Common Stock, par value $.05 per share ("Common Stock"), at an
original exercise price of $_______ per share (the "Exercise Price"). As used
herein the term "this Warrant" shall mean and include this Warrant and any
Warrant or Warrants hereafter issued as a consequence of the exercise or
transfer of this Warrant in whole or in part.
The number of shares of Common Stock issuable upon exercise of this Warrant
(the "Warrant Shares") and the Exercise Price may be adjusted from time to time
as hereinafter set forth.
1. This Warrant may be exercised during the Exercise Period, as to the
whole or any lesser number of the respective whole Warrant Shares, by the
surrender of this Warrant (with the election at the end hereof duly executed) to
the Company at its office as set forth in the form of election attached hereto,
or at such other place as is designated in writing by the Company, together with
a certified or bank cashier's check payable to the order of the Company in an
amount equal to the Exercise Price multiplied by the number of the respective
Warrant Shares for which this Warrant is being exercised.
2. Upon each exercise of the Holder's rights to purchase Warrant Shares and
payment of the Exercise Price, the Holder shall be deemed to be the holder of
record of the Warrant Shares issuable upon such exercise, notwithstanding that
the transfer books of the Company shall then be closed or certificates
representing such Warrant Shares shall not then have been actually delivered to
the Holder. As soon as practicable after each such exercise of this Warrant and
payment of the Exercise Price, the Company shall issue and deliver to the Holder
a certificate or certificates for the Warrant Shares issuable upon such
exercise, registered in the name of the Holder or his designee. If this Warrant
should be exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the Warrant Shares (or portions
thereof) subject to purchase hereunder.
3. This Warrant shall be transferable only on the books of the Company upon
delivery thereof duly endorsed by the Holder or by his duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment,
or authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his or her authority shall be produced. Upon any registration of
transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto. This Warrant may be exchanged, at the option of the Holder
thereof, for another Warrant, or other Warrants of different denominations, of
like tenor and representing in the aggregate the right to purchase a like number
of Warrant Shares (or portions thereof), upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Warrants to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations thereunder.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the rights to purchase all Warrant Shares granted pursuant to
this Warrant, such number of shares of Common Stock as shall, from time to time,
be sufficient therefor. The Company covenants that all shares of Common Stock
issuable upon exercise of this Warrant, upon receipt by the Company of the full
Exercise Price therefor, shall be validly issued, fully paid, nonassessable, and
free of preemptive rights.
5. (a) In case the Company shall at any time after the date this Warrant
was first issued (i) declare a dividend on the outstanding Common Stock payable
in shares of its capital stock, (ii) subdivide the outstanding Common Stock,
(iii) combine the outstanding Common Stock into a smaller number of shares, or
(iv) issue any shares of its capital stock by reclassification of the Common
Stock (including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), then, in each case,
the Exercise Price, and the number of Warrant Shares issuable upon exercise of
this Warrant, in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination, or reclassification, shall
be proportionately adjusted so that the Holder after such time shall be entitled
to receive the aggregate number and kind of shares which, if this Warrant had
been exercised immediately prior to such time, he would have owned upon such
exercise and been entitled to receive by virtue of dividend, subdivision,
combination, or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record date for the
issuance to all holders of Common Stock of rights, options, or warrants to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion or
exchange price per share, if a security convertible into or exchangeable for
Common Stock) less than the Exercise Price per share of Common Stock on such
record date, then, in each case, the Exercise Price shall be adjusted so that it
is equal to such lesser exercise price. Such adjustment shall become effective
at the close of business on such record date; provided, however, that, to the
extent the shares of Common Stock (or securities convertible into or
exchangeable for shares of Common Stock) are not delivered, the Exercise Price
shall be readjusted after the expiration of such rights, options, or warrants
(but only with respect to that portion of this Warrant exercised after such
expiration), to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights, options, or warrants been
made upon the basis of delivery of only the number of shares of Common Stock (or
securities convertible into or exchangeable for shares of Common Stock) actually
issued. In case any subscription price may be paid in a consideration part or
all of which shall be in a form other than cash, the value of such consideration
shall be as determined in good faith by the Company's Board of Directors, whose
determination shall be conclusive absent manifest error. Shares of Common Stock
owned by or held for the account of the Company or any majority-owned subsidiary
shall not be deemed outstanding for the purpose of any such computation.
(c) In case the Company shall distribute to all holders of Common
Stock (including any such distribution made to the stockholders of the Company
in connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its indebtedness or assets (other than cash
dividends or distributions and dividends payable in shares of Common Stock), or
rights, options, or warrants to subscribe for or purchase Common Stock, or
securities convertible into or exchangeable for shares of Common Stock
(excluding those with respect to the issuance of which an adjustment of the
Exercise Price is provided pursuant to Section 5(b) hereof), then, in each case,
the Exercise Price shall be adjusted so that it equals the fair market value (as
determined in good faith by the Company's Board of Directors, whose
determination shall be conclusive absent manifest error) of the portion of the
evidences of indebtedness or assets so to be distributed, or of such rights,
options, or warrants or convertible or exchangeable securities, applicable to
one share. Such adjustment shall be made whenever any such distribution is made,
and shall become effective on the record date for the determination of
shareholders entitled to receive such distribution.
(d) In case the Company shall issue shares of Common Stock or rights,
options, or warrants to subscribe for or purchase Common Stock, or securities
convertible into or exchangeable for Common Stock (excluding shares, rights,
options, warrants, or convertible or exchangeable securities issued or issuable
(i) in any of the transactions with respect to which an adjustment of the
Exercise Price is provided pursuant to Sections 5(a), 5(b), or 5(c) above or
(ii) upon exercise of this Warrant), at a price per share (determined, in the
case of such rights, options, warrants, or convertible or exchangeable
securities, by dividing (x) the total amount received or receivable by the
Company in consideration of the sale and issuance of such rights, options,
warrants, or convertible or exchangeable securities, plus the minimum aggregate
consideration payable to the Company upon exercise, conversion, or exchange
thereof, by (y) the maximum number of shares covered by such rights, options,
warrants, or convertible or exchangeable securities) lower than the Exercise
Price per share of Common Stock in effect immediately prior to such issuance,
then the Exercise Price shall be reduced on the date of such issuance to a price
(calculated to the nearest cent) equal to such lower exercise price. No further
adjustment of the Exercise Price shall be made as a result of the actual
issuance of shares of Common Stock on exercise of such rights, options, or
warrants or on conversion or exchange of such convertible or exchangeable
securities. On the expiration or the termination of such rights, options, or
warrants, or the termination of such right to convert or exchange, the Exercise
Price shall be readjusted (but only with respect to that portion of this Warrant
exercised after such expiration or termination) to such Exercise Price as would
have obtained had the adjustments made upon the issuance of such rights,
options, warrants, or convertible or exchangeable securities been made upon the
basis of the delivery of only the number of shares of Common Stock actually
delivered upon the exercise of such rights, options, or warrants or upon the
conversion or exchange of any such securities; and on any change of the number
of shares of Common Stock deliverable upon the exercise of any such rights,
options, or warrants or conversion or exchange of such convertible or
exchangeable securities or any change in the consideration to be received by the
Company upon such exercise, conversion, or exchange, including, but not limited
to, a change resulting from the antidilution provisions thereof, the Exercise
Price, as then in effect, shall forthwith be readjusted (but only with respect
to that portion of this Warrant exercised after such change) to such Exercise
Price as would have been obtained had an adjustment been made upon the issuance
of such rights, options, or warrants not exercised prior to such change, or
securities not converted or exchanged prior to such change, on the basis of such
change. In case the Company shall issue shares of Common Stock or any such
rights, options, warrants, or convertible or exchangeable securities for a
consideration consisting, in whole or in part, of property other than cash or
its equivalent, then the "price per share" and the "consideration received by
the Company" for purposes of the first sentence of this Section 5(d) shall be as
determined in good faith by the Company's Board of Directors, whose
determination shall be conclusive absent manifest error. Shares of Common Stock
owned by or held for the account of the Company or any majority-owned subsidiary
shall not be deemed outstanding for the purpose of any such computation.
(e) No adjustment in the Exercise Price shall be required if such
adjustment is less than $.05; provided, however, that any adjustments which by
reason of this Section 5 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 5 shall be made to the nearest cent or to the nearest one-thousandth of
a share, as the case may be.
(f) In any case in which this Section 5 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the Holder, if the Holder exercised this Warrant after such
record date, the shares of Common Stock, if any, issuable upon such exercise
over and above the shares of Common Stock, if any, issuable upon such exercise
on the basis of the Exercise Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to the Holder a due bill or other
appropriate instrument evidencing the Holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(g) Upon each adjustment of the Exercise Price as a result of the
calculations made in Sections 5(b), 5(c), or 5(d) hereof, this Warrant shall
thereafter evidence the right to purchase, at the adjusted Exercise Price, that
number of shares (calculated to the nearest thousandth) obtained by dividing (A)
the product obtained by multiplying the number of shares purchasable upon
exercise of this Warrant prior to adjustment of the number of shares by the
Exercise Price in effect prior to adjustment of the Exercise Price by (B) the
Exercise Price in effect after such adjustment of the Exercise Price.
(h) Whenever there shall be an adjustment as provided in this Section
5, the Company shall promptly cause written notice thereof to be sent by
registered mail, postage prepaid, to the Holder, at his then-current address,
which notice shall be accompanied by an officer's certificate setting forth the
number of Warrant Shares purchasable upon the exercise of this Warrant and the
Exercise Price after such adjustment and setting forth a brief statement of the
facts requiring such adjustment and the computation thereof, which officer's
certificate shall be conclusive evidence of the correctness of any such
adjustment absent manifest error.
6. (a) In case of any consolidation with or merger of the Company with or
into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise of this Warrant solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall provide for adjustments which shall be as nearly
equivalent as practicable to the adjustments in Section 5.
(b) In case of any reclassification or change of the shares of Common
Stock issuable upon exercise of this Warrant (other than a change in par value,
or as a result of a subdivision or combination, but including any change in the
shares into two or more classes or series of shares), or in case of any
consolidation or merger of another corporation into the Company in which the
Company is the continuing corporation and in which there is a reclassification
or change (including a change to the right to receive cash or other property) of
the shares of Common Stock (other than a change in par value, or as a result of
a subdivision or combination, but including any change in the shares into two or
more classes or series of shares), the Holder shall have the right thereafter to
receive upon exercise of this Warrant solely the kind and amount of shares of
stock and other securities, property, cash, or any combination thereof
receivable upon such reclassification, change, consolidation, or merger by a
holder of the number of shares of Common Stock for which this Warrant might have
been exercised immediately prior to such reclassification, change,
consolidation, or merger. Thereafter, appropriate provision shall be made for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution (other than
regularly scheduled cash dividends which are not in a greater amount per share
than the most recent such cash dividend) to all holders of Common Stock; or
(b) to issue any rights, warrants, or other securities to all holders
of Common Stock entitling them to purchase any additional shares of Common Stock
or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding shares of
Common Stock, or any consolidation, merger, sale, lease, or conveyance of
property, described in Section 6; or
(d) to effect any liquidation, dissolution, or winding-up of the
Company; or
(e) to take any other action which would cause an adjustment to the
Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at his
then-current address, mailed at least 15 days prior to (i) the date as of which
the holders of record of shares of Common Stock to be entitled to receive any
such dividend, distribution, rights, warrants, or other securities are to be
determined, (ii) the date on which any such reclassification, change of
outstanding shares of Common Stock, consolidation, merger, sale, lease,
conveyance of property, liquidation, dissolution, or winding-up is expected to
become effective, and the date as of which it is expected that holders of record
of shares of Common Stock shall be entitled to exchange their shares for
securities or other property, if any, deliverable upon such reclassification,
change of outstanding shares, consolidation, merger, sale, lease, conveyance of
property, liquidation, dissolution, or winding-up, or (iii) the date of such
action which would require an adjustment to the Exercise Price.
8. Certificates evidencing the Warrant Shares issued upon exercise of the
Warrants shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SUCH SHARES MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH ACT, OR AN EXEMPTION FROM REGISTRATION UNDER SUCH
ACT."
9. Upon receipt of evidence satisfactory to Company of the loss, theft,
destruction, or mutilation of this Warrant (and upon surrender of this Warrant
if mutilated), and upon reimbursement of the Company's reasonable incidental
expenses, the Company shall execute and deliver to the Holder hereof a new
Warrant of like date, tenor, and denomination.
10. This Warrant shall not entitle the holder hereof to any voting rights
or other rights as a stockholder of the Company. No provision hereof, in the
absence of affirmative action by the Holder hereof to purchase shares of Common
Stock, and no mere enumeration herein of the rights or privileges of the Holder
hereof shall give rise to any liability of such Holder for the Warrant Price or
as a stockholder of the Company, whether such liability is asserted by the
company or by creditors of the Company.
11. Any notice of other communication to be given hereunder shall be in
writing and mailed via certified first class mail, return receipt requested and
an additional copy sent via facsimile to such party at the address or number set
forth below:
If to the Company: 2236 Shelburne Road
PO Box 965
Shelburne, VT 05482
Attention: Elisabeth Robert
Facsimile No.: (802) 985-1304
If to the Holder: _____________________________________________
_____________________________________________
_____________________________________________
Facsimile No.: (_____) _____________________
or to such other person, address or number as the party entitled to such notice
or communication shall have specified by notice to the other party given in
accordance with the provisions of this Section. Any such notice or other
communication shall be deemed given when deposited in the mail, properly
addressed and with postage prepaid.
12. This Warrant shall be governed by and construed in accordance with the
laws of the State of Vermont, without giving effect to such jurisdiction's
principles of conflict of laws.
Dated: _________________ ___, 1996
THE VERMONT TEDDY BEAR CO., INC
By: ____________________________________
Its Duly Authorized Agent
___________________________________
Secretary
FORM OF ASSIGNMENT
(To be executed by the Holder if he desires to transfer the attached Warrant.)
FOR VALUE RECEIVED, ______________________ hereby sells, assigns, and
transfers unto _________________________ a Warrant to purchase ____________
shares of Common Stock, $.05 par value per share of The Vermont Teddy Bear Co.,
Inc. (the "Company"), together with all right, title, and interest therein, and
does hereby irrevocably constitute and appoint ___________________________ as
his attorney to transfer such Warrant on the books of the Company, with full
power of substitution.
Dated: ____________________________ ____________________________________
Signature
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
To: The Vermont Teddy Bear Co., Inc.
PO Box 965
2236 Shelburne Road, #5
Shelburne, Vermont 05482
ELECTION TO EXERCISE
The undersigned hereby exercises his rights to purchase ______________________
Warrant Shares covered by the within Warrant and tenders payment herewith in the
amount of $________________ in accordance with the terms thereof, and requests
that certificates for such securities be issued in the name of, and delivered
to: _______________________________
________________________________________________________________________________
________________________________________________________________________________
(Print Name, Address and Social Security or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be prepared in the name of, and delivered
to, the undersigned at the address stated below.
Dated: __________________________ Name: _______________________________
Address: _______________________________________________________________________
________________________________________________________________________________
_____________________________________
Signature
SUBSCRIPTION AGREEMENT
The Vermont Teddy Bear Co., Inc.
2236 Shelburne Road
P.O. Box 965
Shelburne, Vermont 05482
Ladies and Gentlemen:
The undersigned, intending to be legally bound, hereby subscribes to
purchase the number of Units indicated below at a purchase price per unit equal
to the Closing Price one day prior to the Closing Date, discounted as follows:
<TABLE>
<CAPTION>
Discount: Closing Price:
--------- --------------
<C> <C>
$0.25 up to $3.375
$0.50 over $3.375 to $4.00
$0.625 above $4.00
</TABLE>
for a total purchase price of $________, in accordance with the terms of this
Subscription Agreement ("Subscription Agreement"). For purposes of this
Subscription Agreement, the Closing Price shall mean the average of (a) the
average of all bona fide trades of the Company's Common Stock effected on NASDAQ
on the day one day prior to the Closing Date; provided, however, if no trades
were effected during such day, trades effected during the next preceding day
during which trades were effected shall be used, and (b) the average of (i) the
highest quoted bid price by a market-maker in the Company's Common Stock and
(ii) the lowest quoted ask price by a market-maker in the Company's Common
Stock, in each case as of the close of trading on the day one day prior to the
Closing Date. This subscription is irrevocable, but may be rejected by The
Vermont Teddy Bear Co., Inc. (the "Company") in its sole discretion.
SECTION 1
Authorization and Sale of Units
1.1 Authorization. The Company shall authorize and issue a sufficient
number of Units so that the purchase price of all of the Units authorized and
issued shall be a minimum of $450,000 and a maximum of $750,000, provided that
the issuance of any Units that would cause the aggregate purchase price of all
Units issued to exceed $500,000 shall be at the Company's sole discretion. Each
Unit shall consist of (i) one share of the Company's Series B Convertible
Preferred Stock (the "Preferred Stock") and (ii) a three year warrant (the
"Warrant") to purchase one share of the Company's Common Stock, par value $0.05
(the "Common Stock") at an exercise price equal to the lesser of (i) $2.50 or
(ii) the Closing Price minus $0.25. The Preferred Stock shall have the rights
and preferences as set forth in the Amendment to the Company's Certificate of
Incorporation, attached hereto as Exhibit A. The form of the Warrant is attached
hereto as Exhibit B. The shares of Common Stock into which the Preferred Stock
will be convertible and which may be purchased upon exercise of the Warrant
shall be referred to as the "Conversion Stock."
1.2 Sale of the Units. Subject to the terms and conditions of this
Subscription Agreement, the Company shall issue and sell, and the undersigned
shall purchase, _________ (___) Units, for a total purchase price of
________________ Dollars ($________). The number of Units to be purchased is
equal to the undersigned's total purchase price divided by the price per Unit,
as defined above.
SECTION 2
Closing
2.1 Closing Date. The closing of the purchase and sale of a minimum of the
Units having an aggregate purchase price of $450,000 or greater shall be held at
the offices of the Company at 12:00 p.m., on June 28, 1996 (the "Closing") or at
such other time as the Company and the undersigned shall agree (the "Closing
Date"). The closing of the purchase and sale of the remaining Units subscribed
for and accepted by the Company pursuant to Section 1.1 shall be held on or
before July 12, 1996.
2.2 Delivery. At the Closing the Company shall deliver to the undersigned a
certificate or certificates of Preferred Stock and a Warrant, registered in the
undersigned's name, representing the number of whole Units purchased by the
undersigned against payment of the purchase price therefor, by check payable to
the Company or wire transfer per the Company's instructions. Any excess purchase
price shall be returned to the undersigned.
SECTION 3
Undersigned's Representations and Warranties
3.1 Accredited Investor. The undersigned represents and warrants that he or
she is an "accredited investor" as that term is defined in Rule 501(a) of
Regulation D, promulgated under the Securities Act of 1933 (the "1933 Act").
Specifically, the undersigned is (check appropriate items):
a. A bank as defined in Section 3(a)(2) of the Securities Act of 1933,
as amended (the "Act"), or a savings and loan association or other institution
as defined in Section 3(a)(5)(A) of the Act, whether acting in its individual or
fiduciary capacity; a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934; an insurance company as defined in Section
2(13) of the Act; an investment company registered under the Investment Company
Act of 1940 (the "Investment Company Act") or a business development company as
defined in Section 2(a)(48) of the Investment Company Act; a Small Business
Investment Company licensed by the U.S. Small Business Administration Company
under Section 301(c) or (d) of the Small Business Investment Act of 1958; a plan
established and maintained by a state, its political subdivision or any agency
or instrumentality of a state or its political subdivisions for the benefit of
its employees, if such plan has total assets in excess of $5,000,000; an
employee benefit plan within the meaning of the Employee Retirement Income
Security Act of 1974 ("ERISA"), if the investment decision is made by a plan
fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, savings
and loan association, insurance company, or registered investment advisor, or if
the employee benefit plan has total assets in excess of $5,000,000 or, if a
self-directed plan, with investment decisions made solely by persons that are
accredited investors.
b. A private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940.
c. An organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring Units offered,
with total assets in excess of $5,000,000.
d. A director or executive officer of the Company.
e. A natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his or her purchase exceeds
$1,000,000.
f. A natural person who had an individual income in excess of $200,000
in each of the two most recent years or joint income with that person's spouse
in excess of $300,000 in each of those years and has a reasonable expectation of
reaching the same income level in the current year.
g. A trust, with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring Units, whose purchase is directed by a
sophisticated person as described in Rule 506(b)(2)(ii) promulgated under the
Act (i.e., a person who has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks of the
prospective investment).
h. An entity in which all of the equity owners are accredited
investors. (If this alternative is checked, the undersigned must identify each
equity owner and provide statements signed by each demonstrating how each is
qualified as an accredited investor.)
3.2 Investment Intent. The undersigned is acquiring the Units and the
Conversion Stock for investment for its own account, not as a nominee or agent,
and not with the view to, or for resale in connection with, any distribution
thereof. The undersigned understands that the Preferred Stock, Warrants and
Conversion Stock have not been, and will not be, registered under the 1933 Act
(except in accordance with Section 7 of this Subscription Agreement) by reason
of a specific exemption from the registration provisions of the 1933 Act, the
availability of which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the undersigned's representations as
expressed herein and in the Suitability Questionnaire, attached hereto as
Exhibit C.
3.3 Restricted Securities. The undersigned acknowledges that the Preferred
Stock, Warrants and the Conversion Stock must be held indefinitely unless
subsequently registered under the 1933 Act, or unless an exemption from such
registration is available. The undersigned is aware of the provisions of Rule
144 promulgated under the 1933 Act, which permit limited resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things, the existence of a public market for
the shares, the availability of certain current public information about the
Company, the resale occurring not less than two years after a party has
purchased and paid for the security to be sold, the sale being effected through
a "broker's transaction" or in transactions directly with a "market maker" and
the number of shares being sold during any three-month period not exceeding
specified limitations.
3.4 No Public Market. The undersigned understands and acknowledges that no
public market exists for the Preferred Stock or the Warrants to be issued by the
Company and that the Company has made no assurances that a public market will
ever exist for the Preferred Stock or the Warrants.
3.5 Access to Information. The undersigned acknowledges that he has
received and reviewed the Company's Prospectus, issued in connection with the
Company's initial public offering in 1993 (the "IPO"), and all of the Company's
Annual Reports to Shareholders, Proxy Statements, Forms 10-QSB and 10-KSB sent
to shareholders or filed with the Securities and Exchange Commission since the
IPO, and its Business Plan, and that the undersigned has had an opportunity to
discuss the Company's business, management and financial affairs with the
Company's management. The undersigned has also had an opportunity to ask
questions of and receive answers from the Company's officers.
3.6 Authorization. This Subscription Agreement when executed and delivered
by the undersigned shall constitute a valid and legally binding obligation of
the undersigned, enforceable in accordance with its terms.
3.7 Indemnification. The undersigned acknowledges that the undersigned
understands the meaning and legal consequences of the representations and
warranties contained in this Section, and agrees to indemnify and hold harmless
the Company and its directors, officers, employees and agents, past, present or
future, from and against any and all loss, damage or liability due to or arising
out of a breach of any such representation or warranty made by the undersigned.
3.8 Survival. The undersigned acknowledges that the representations,
warranties and agreements made by the undersigned herein shall survive the
execution and delivery of this Agreement and the Closing.
SECTION 4
Company's Representations and Warranties
4.1 Organization and Standing; Articles and By-Laws. The Company is a
corporation duly organized and existing under, and by virtue of, the laws of the
State of New York and is in good standing under such laws. The Company has
requisite corporate power and authority to own and operate its properties and
assets, and to carry on its business as presently conducted and as proposed to
be conducted. The Company is qualified to do business as a foreign corporation
in the State of Vermont.
4.2 Corporate Power. The Company will have at the Closing Date all
requisite legal and corporate power and authority to execute and deliver this
agreement, to sell and issue the Units hereunder, to issue the Conversion Stock
upon conversion of the Preferred Stock and/or exercise of the Warrants, and to
carry out and perform its obligations under the terms of this Agreement.
4.3 Authorization. All corporate action on the part of the Company, its
directors and shareholders necessary for the authorization, execution, delivery
and performance of this Agreement by the Company, the authorization, sale,
issuance and delivery of the Units and the Conversion Stock and the performance
of all of the Company's obligations hereunder has been taken or will be taken
prior to the Closing. This Agreement, when executed and delivered by the
Company, shall constitute a valid and binding obligation of the Company,
enforceable in accordance with its terms. The Units, when issued in compliance
with the provisions of this Agreement, will be validly issued, fully paid and
nonassessable and will have the rights, preferences and privileges described in
Exhibits A and B, attached hereto; the Conversion Stock have been duly and
validly reserved and, when issued in compliance with the provisions of this
Agreement, will be validly issued, fully paid and nonassessable; and the Units
and Conversion Stock will be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein. Issuance of the Units is not
subject to any preemptive rights or rights of first refusal.
4.4 Capitalization and Voting Rights. As of the Closing Date, the
authorized capital of the Company consists of:
(i) Preferred Stock. One Million (1,000,000) shares of Preferred
Stock (the "Preferred Stock"), Ninety (90) of which shares have
been designated Series A Preferred Stock (the "Series A Preferred
Stock") and all of which have been issued. The rights, privileges
and preferences of the Series A Preferred Stock are as stated in
the Company's Certificate of Incorporation. Three Hundred
Seventy-Five Thousand (375,000) shares of Preferred Stock have
been designated Series B Convertible Preferred Stock (the "Series
B Preferred Stock") and a portion of which, as determined in
Section 1 of this Agreement, will be issued pursuant to this
Agreement. The rights, privileges and preferences of the Series B
Preferred Stock will be as stated in the Company's Amended and
Restated Certificate of Incorporation, attached hereto as Exhibit
A. The remaining shares of preferred stock are undesignated.
(ii) Common Stock. Twenty Million (20,000,000) shares of common stock
("Common Stock"), of which 5,160,750 shares are issued and
outstanding.
4.5 Governing Documents. Except for amendments necessary to satisfy the
representations and warranties or conditions contained herein, the Restated
Certificate of Incorporation and Bylaws of the Company are in the form attached
as Schedule 4.5.
4.6 Financial Statements. The Company has delivered to the undersigned its
audited financial statements (balance sheet and profit and loss statement,
statement of stockholders' equity and statement of cash flows, including notes
thereto) at December 31, 1994 and for the fiscal year then ended, at June 30,
1995, and for the transition period then ended, and its unaudited financial
statements (balance sheet and profit and loss statement) as at and for the
nine-month period ended March 31, 1996 (the "Financial Statements"). The
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated and with each other, except that unaudited Financial Statements may
not contain all footnotes required by generally accepted accounting principles.
The Financial Statements fairly present the financial condition and operating
results of the Company as of the dates, and for the periods, indicated therein,
subject in the case of unaudited Financial Statements to normal year-end audit
adjustments. Except as set forth in the Financial Statements, the Company has no
material liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to March 31, 1996, and
(ii) obligations under contracts and commitments incurred in the ordinary course
of business and not required under generally accepted accounting principles to
be reflected in the Financial Statements, which, in both cases, individually or
in the aggregate, are not material to the financial condition or operating
results of the Company. There has been no material adverse change since March
31, 1996, in the business, operations, assets, prospects or condition (financial
or otherwise) of the Company. Except as disclosed in the Financial Statements,
the Company is not a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation. The Company maintains and will continue to maintain
a standard system of accounting established and administered in accordance with
generally accepted accounting principles.
4.7 No Violation or Defaults. As of the Closing Date, the Company is not in
violation or default of any provision of its Restated Certificate of
Incorporation or Bylaws, or in any material respect of any instrument, judgment,
order, writ, decree or contract to which it is a party or by which it is bound,
or, of any provision of any federal or state statute, rule or regulation
applicable to the Company which violation would have a material effect on the
Company's operations or business. The execution, delivery and performance of
this Agreement, and the consummation of the transactions contemplated hereby
will not result in any such violation or be in conflict with or constitute, with
or without the passage of time and giving of notice, either a default under any
such provision, instrument, judgment, order, writ, decree or contract or an
event that results in the creation of any lien, charge or encumbrance upon any
assets of the Company or the suspension, revocation, impairment, forfeiture, or
nonrenewal of any material permit, license, authorization, or approval
applicable to the Company, its business or operations or any of its assets or
properties.
4.8 Broker's Fees. Except for a finders fee payable to Equinox Ventures,
Inc., to consist of (i) a cash payment equal to 5% of the total aggregate
purchase price of the Units purchased at the Closing and (ii) a Warrant for the
purchase of the number of shares of the Company's Common Stock equal to the Cash
Payment divided by the purchase price per Unit, the Company is not liable for,
nor is it aware of, any broker's fee or other compensation payable in connection
with the transactions contemplated by this Agreement. The Company will indemnify
and hold the undersigned harmless against any and all liability with respect to
any such commission, fee or other compensation which may be payable or deemed
payable in connection with the transactions contemplated by this Agreement.
4.9 Absence of Undisclosed Liabilities. Except as disclosed in information
furnished pursuant to Section 3.5, the financial statements referred to in
Section 4.6 hereof, or arising in the ordinary course of business and for
obligations created pursuant to this Agreement, as of the Closing Date, the
Company will have no material liabilities and will be subject to no material
obligations under any contract or commitment of any kind.
4.10 Litigation. As of the Closing Date, there is no action, suit,
proceeding or investigation pending or currently threatened against the Company
that questions the validity of this Agreement or the right of the Company to
enter into such agreements, or to consummate the transactions contemplated by
this Agreement, or that might result, either individually or in the aggregate,
in any material adverse changes in the assets, condition, affairs or prospects
of the Company, financially or otherwise, or any change in the current equity
ownership of the Company. The Company is not a party or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or that the Company intends to
initiate.
4.11 Consents. No consent, approval, order or authorization of, or
registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of the Company is
required in connection with the consummation of the transactions contemplated by
this Agreement, except for the filing of Form D with the Securities and Exchange
Commission and the waiver of the application of 9 V.S.A. [SECTION] 4204a(a)(9)
by the Commissioner of the Vermont Department of Banking, Insurance &
Securities, which waiver has been granted.
4.12 Trademark, Licenses. The Company has sufficient title and ownership of
all trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights, licenses and processes necessary for its
business as now conducted and as proposed to be conducted without, to the best
of the Company's knowledge, any conflict with or infringement of the rights of
others; provided, however, that the Company has entered into a collateral
assignment of its pending and registered trademarks (the "Trademarks") to the
Vermont National Bank ("VNB"), in connection with VNB's term loan of $3,500,000
and revolving line of credit in the maximum amount of $1,000,000. Pursuant to
this collateral assignment, the Company has an exclusive, nontransferable
license to use the Trademarks and a license to grant sublicenses with respect to
the Trademarks. The Company has not received any communications alleging that
the Company has violated or, by conducting its business as proposed, would
violate any of the trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity.
4.13 Subsidiaries. The Company does not presently own or control, directly
or indirectly, any interest in any other corporation, association, or other
business entity, except that the Company owns all of the stock in VTB Marketing,
Inc., a Vermont corporation, which currently has minimal capital and no
operations. The Company is not a participant in any joint venture, partnership,
or similar arrangement.
4.14 Title to Properties, Liens and Encumbrances. The Company owns its
property and assets free and clear of all mortgages, liens, loans and
encumbrances, except such encumbrances and liens that arise in the ordinary
course of business and do not materially impair the Company's ownership or use
of such property or assets. With respect to the property and assets it leases,
the Company is in compliance with such leases and, to the best of its knowledge,
holds a valid leasehold interest free of any liens, claims or encumbrances.
4.15 Environmental Compliance. As of the Closing Date, the Company is not
in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, which violation would have a
materially adverse effect on the Company's business or operations, and to the
best of its knowledge, no material expenditures are or will be required in order
to comply with any such existing statute, law or regulation.
4.16 Exempt Offering. Subject in part to the truth and accuracy of the
undersigned's representations set forth in Section 3 of this Agreement, the
offer, sale and issuance of the Units and Conversion Shares as contemplated by
this Agreement are exempt from the registration requirements of the Act, and
neither the Company nor any authorized agent acting on its behalf will take any
action hereafter that would cause the loss of such exemption. The Company has
complied with and will comply with all applicable state "blue sky" laws in
connection with the offer, sale and issuance of the Units and the Conversion
Stock.
4.17 Disclosure. The Company has fully provided the undersigned with all
the information that he has requested for deciding whether to purchase the
Units. The information furnished to the undersigned pursuant to Section 3.5 is
true and correct and discloses all information required to be disclosed by
applicable securities law. Neither this Agreement, nor any other information,
statements or certificates made or delivered in connection herewith contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements herein not misleading.
4.18 Agreement Affecting Capital Stock. As of the Closing Date, the Company
is not a party to any agreements affecting its Capital Stock, with the exception
of (i) an agreement by and between the Company and the holder of all of the
Ninety (90) shares of the Series A Preferred Stock (the "Series A Holder"), by
which Agreement the Series A Holder has agreed to forego her cumulated dividends
through June 30, 1996, in exchange for a warrant for the purchase of 43,826.087
shares of the Company's Common Stock at a purchase price of $2.875 per share,
(ii) the Company's Incentive Stock Option Plan, and (iii) a warrant for the
purchase of up to 20,000 shares of the Company's Common Stock at a purchase
price of $3.375 per share, held by Green Mountain Capital, Ltd. A description of
the options currently issued and outstanding under the Company's Incentive Stock
Option Plan is attached as Schedule 4.18.
SECTION 5
Company's Covenant
5.1 Protective Covenant. The Company hereby agrees not to authorize or
issue any additional shares of Series A Preferred Stock or the Preferred Stock
or any other series of preferred stock that would have rights or preferences at
parity with or superior to the Preferred Stock as to redemption rights,
dividends or distribution of assets in liquidation, or to otherwise alter or
amend any of the rights or privileges of the Preferred Stock without first
obtaining the written approval of at least Sixty Percent (60%) of the holders of
the Preferred Stock.
5.2 Information Rights. The Company shall provide the undersigned with all
reports, including financial statements, sent to holders of the Common Stock
and/or the Company's Series A Preferred Stock, by mailing such information to
the undersigned on the same date that such information is mailed to any other
shareholder of the Company.
SECTION 6
Company's Conditions to Closing
The Company's obligation to issue and sell on the Closing Date is, at the
option of the Company, subject to the fulfillment as of the Closing Date of the
following conditions:
6.1 Minimum Investment. There shall be subscriptions for a sufficient
number of Units having an aggregate purchase price of not less than $450,000.
6.2 Representations. The representations made by the undersigned in Section
3 of the Subscription Agreement shall be true and correct when made, and shall
be true and correct on the Closing Date.
6.3 Suitability Questionnaire. The undersigned shall have executed and
delivered to the Company a Suitability Questionnaire, acceptable to counsel for
the Company.
6.4 Compliance with Federal and State Securities Laws. The Company shall
have obtained all permits and qualifications required by the any state or
federal government for the offer and sale of the Units and the Conversion
Shares, or shall have the availability of exemptions therefrom. Upon sale of the
Units, the Company shall file a Form D with the United States Securities and
Exchange Commission in a timely manner.
6.5 Amended Certificate of Incorporation. The Company shall have filed an
Amended Certificate of Incorporation in the form of Exhibit A, attached hereto,
with the New York Department of State, pursuant to Section 805 of the New York
Business Corporation Law.
6.6 Legal Matters. All material matters of a legal nature which pertain to
this Agreement, and the transactions contemplated hereby, shall have been
reasonably approved by counsel to the Company.
SECTION 7
Undersigned's Conditions to Closing
The undersigned's obligation to purchase the Units on the Closing Date is,
at the option of the undersigned, subject to the fulfillment as of the Closing
Date of the following conditions:
7.1 Representations. The representations made by the Company in Section 4
of the Subscription Agreement shall be true and correct when made, and shall be
true and correct on the Closing Date. The Company shall deliver to the
undersigned at the Closing an officer's certificate acknowledging that the
representations by the Company in Section 4 are true and correct.
7.2 Certified Documents. The Company shall deliver to the undersigned at
the Closing copies of resolutions of the Company's Board of Directors
authorizing the issuance of the Units and the Conversion Shares and the
execution of this Agreement, the Company's Certificate of Incorporation and
Bylaws, an incumbency certificate regarding the Company's officers, all
certified by the Company's Secretary and Certificates of Good Standing from the
Secretary of State of New York and Vermont.
7.3 Opinion of Counsel. The Company shall deliver to the undersigned at the
Closing a copy of the opinion of Dinse, Erdmann, Knapp & McAndrew, P.C., counsel
to the Company, substantially in the form attached hereto as Exhibit D.
SECTION 8
Restrictions on Transferability; Compliance with the 1933 Act;
Registration Rights
8.1 Restrictions on Transferability. The Preferred Stock, Warrants or
Conversion Stock (the "Restricted Securities") shall not be sold, assigned,
transferred or pledged except in accordance with the conditions specified in
this Section 8, which conditions are intended to ensure compliance with the
provisions of the 1933 Act. The undersigned will cause any proposed purchaser,
assignee, transferee, or pledgee of the Preferred Stock, Warrants or Conversion
Stock of the undersigned to agree to take and hold such securities subject to
the provisions and conditions of this Section 8.
8.2 Restrictive Legend. Each certificate representing (i) the Preferred
Stock, (ii) the Warrants, and (iii) the Conversion Stock, and (iv) any other
securities issued in respect of the Preferred Stock or Warrants upon any stock
split, stock dividend, recapitalization, merger, consolidation or similar event,
shall (unless otherwise permitted by the provisions of Section 8.3 below) be
stamped or otherwise imprinted with a legend in the following form (in addition
to any legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, SUCH SHARES MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION
OR ITS TRANSFER AGENT THAT SUCH REGISTRATION IS NOT REQUIRED.
COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND
RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN
REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES
OF THE CORPORATION.
The undersigned consents to the Company making a notation on its records
and giving instructions to any transfer agent of the Preferred Stock, Warrants
or Conversion Stock in order to implement the restrictions on transfer
established in this Section 8. Upon registration of the Conversion Stock and the
request of the undersigned, the Company shall authorize the removal of the
restrictive legend from the certificates of stock representing the Conversion
Stock registered, and shall provide its transfer agent with any opinion of
counsel necessary to effect the removal of the restrictive legend.
8.3 Notice of Proposed Transfers. The holder of each certificate
representing Restricted Securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Section 8.3. Prior to any proposed
sale, assignment, transfer or pledge of any Restricted Securities (other than
(i) transfers not involving a change in beneficial ownership or (ii)
transactions involving the distribution without consideration of Restricted
Securities by the undersigned to any of its partners, or retired partners, or to
the estate of any of its partners or retired partners), unless there is in
effect a registration statement under the 1933 Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied, at such holder's expense by either (i) an unqualified written
opinion of legal counsel who shall be, and whose legal opinion shall be,
reasonably satisfactory to the Company addressed to the Company, to the effect
that the proposed transfer of the Restricted Securities may be effected without
registration under the 1933 Act, or (ii) a "no action " letter from the
Securities and Exchange Commission (the "Commission") to the effect that the
transfer of such securities without registration will not result in a
recommendation by the staff of the Commission that action be taken with respect
thereto, whereupon the holder of such Restricted Securities shall be entitled to
transfer such Restricted Securities in accordance with the terms of the notice
delivered by the holder to the Company. Each certificate evidencing the
Restricted Securities transferred as above provided shall bear, except if such
transfer is made pursuant to Rule 144, the appropriate restrictive legend set
forth in Section 8.2 above, except that such certificate shall not bear such
restrictive legend if in the opinion of counsel for such holder and the Company
such legend is not required in order to establish compliance with any provision
of the 1933 Act.
8.4 Requested Registration. The holders of the Units shall be entitled to
two (2) demand registrations as follows: (i) the holders of at least sixty
percent (60%) of the Preferred Stock, or Conversion Stock into which the
Preferred Stock is convertible, or has been converted, may request one (1)
resale registration of the Conversion Stock; and (ii) the holders of at least
sixty percent (60%) of the Warrants, or Conversion Stock which may be, or has
been, purchased upon exercise of the Warrants, may request one (1) resale
registration of the Conversion Stock. Upon receipt by the Company of a proper
request of at least sixty percent (60%) of the holders of the Preferred Stock or
the Warrants, and the Conversion Stock, as the case may be (the "Holders"), the
Company will:
a. promptly give notice of the proposed registration to all of the
Holders, who shall then have twenty (20) days to notify the Company in writing
of their interest in participating in the registration; provided that any
Holders who fail or decline to participate in the resale registrations provided
under this Section 8.4 shall not have a right to request any additional resale
registrations; and
b. as soon as practicable, the Company shall effect a resale
registration of all of the Conversion Stock (including, without limitation,
appropriate compliance with applicable blue sky or other state securities laws
and appropriate compliance with applicable regulations issued under the 1933 Act
and any other governmental requirements or regulations) as may be so requested
and as would permit or facilitate the sale and distribution of the Conversion
Stock; provided, however that the Company shall not be obligated to take any
action to effect any such registration pursuant to this Section 8.4:
(i) Prior to twelve (12) months or later than seventy-two (72)
months after the issuance of the Units; or
(ii) If the Company shall furnish to the requesting shareholders
a certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company it would be seriously
detrimental to the Company or its shareholders for a registration statement to
be filed in the near future, in which case the Company's obligation to register
under this Section 8.4 shall be deferred for a period not to exceed 120 days
from the date of receipt of the written request from the requesting
shareholders.
The Holders shall be entitled to request registration only once in
connection with the Conversion Stock underlying the Preferred Stock, and only
once in connection with the Conversion Stock underlying the Warrants, and any
Holders that do not join in the demand registrations shall have no further right
to registration, except for the piggyback registration rights described in
Section 8.5 below.
8.5 Company Registration.
a. Notice of Registration. If at any time, or from time to time, the
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders, other than a
registration relating solely to employee benefit plans or a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Conversion Stock specified in a written request or requests,
made within twenty (20) days after receipt of such written notice from the
Company, by any Holder.
b. Underwriting. If the registration of which the Company gives notice
is for a registered public offering involving an underwriting, the Company shall
so advise the Holders as a part of the written notice given pursuant to Section
8.5(a)(i). In such event, the right of any Holder to registration pursuant to
this Section 8.5 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Conversion Stock in the
underwriting to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company and
other shareholders distributing their securities through such underwriting)
enter into an underwriting agreement in customary form with the managing
underwriter selected for such underwriting by the Company. Notwithstanding any
other provision of this Section 8.5, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the Conversion Stock to be
included in such registration. The Company shall so advise all Holders and the
numbers of shares of Conversion Stock that may be included in the registration
and underwriting shall be allocated among all Holders in proportion, as nearly
as practicable, to the respective amounts of Conversion Stock held by such
Holders at the time of filing the registration statement. To facilitate the
allocation of shares in accordance with the above provisions, the Company may
round the number of shares allocated to any Holder or other shareholder to the
nearest 100 shares. If any Holder or other shareholder disapproves of the terms
of any such underwriting, he may elect to withdraw therefrom by written notice
to the Company and the managing underwriter. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration, and
shall not be transferred in a public distribution prior to 90 days after the
effective date of the registration statement relating thereto, or such other
shorter period of time as the underwriters may require. The Company may include
shares of Common Stock held by shareholders other than Holders in a registration
statement pursuant to this Section 8.5 and to the extent that the amount of
Conversion Stock otherwise includible in such registration statement would not
thereby be diminished.
c. Right to Terminate Registration. The company shall have the right
to terminate or withdraw any registration initiated by it under this Section 8.5
prior to the effectiveness of such registration whether or not any Holder has
elected to include securities in such registration.
8.6 Limitations on Subsequent Registration Rights. From and after the
Closing Date, the Company shall not enter into any agreement granting any holder
or prospective holder of any securities of the Company registration rights with
respect to such securities unless such new registration rights, including
standoff obligations, are subordinate to the registration rights granted Holders
hereunder.
8.7 Expenses of Registration. All Registration Expenses, except for Selling
Expenses relating to securities registered on behalf of the Holders, incurred in
connection with (i) two (2) registrations pursuant to Section 8.4, and (ii) all
registrations pursuant to Section 8.5, shall be borne by the Company. Unless
otherwise stated, all Selling Expenses relating to securities registered on
behalf of the Holders shall be borne by the Holders of such securities pro rata
on the basis of the number of shares so registered. "Registration Expenses"
shall include all registration and filing fees, printing expenses, fees and
disbursements of counsel and independent public accountants for the Company,
fees and expenses, including counsel fees, incurred in connection with complying
with state securities or "blue sky" laws, fees of the National Association of
Securities Dealers, Inc., transfer taxes, fees of transfer agents and
registrars. "Selling Expenses" shall include all underwriting discounts and
selling commissions applicable to the registration and sale of any securities
held by the Holders.
8.8 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Section 8,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
a. Prepare and file with the Commission a registration statement with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective for at least ninety (90) days, and
prepare and file with the Commission such amendments to such registration
statement and supplements to the prospectus contained therein as may be
necessary to keep such registration statement effective for at least ninety (90)
days, provided that no such registration shall constitute a shelf registration
under Rule 415 promulgated by the Commission under the Securities Act;
b. Enter into a written underwriting agreement in customary form and
substance reasonably satisfactory to the Company, the Holders and the managing
underwriter or underwriters of the public offering of such securities, if the
offering is to be underwritten in whole or in part;
c. Furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities;
d. Use its best efforts to register or qualify the securities covered
by such registration statement under such state securities or blue sky laws of
such jurisdictions as such participating Holders may reasonably request within
ten (10) days prior to the original filing of such registration statement,
except that the Company shall not for any purpose be required to execute a
general consent to service of process or to qualify to do business as a foreign
corporation in any jurisdiction where it is not so qualified;
e. Notify the Holders (or if they have appointed an attorney-in-fact,
such attorney-in-fact) participating in such registration, promptly after it
shall receive notice thereof, of the time when such registration statement has
become effective or a supplement to any prospectus forming a part of such
registration statement has been filed;
f. Notify such Holders or their attorney-in-fact promptly of any
request by the Commission for the amending or supplementing of such registration
statement or prospectus or for additional information;
g. Prepare and file with the Commission promptly upon the request of
any such Holders, any amendments or supplements to such registration statement
or prospectus which, in the reasonable opinion of counsel for such Holders, is
required under the 1933 Act or the rules and regulations thereunder in
connection with the distribution of the Conversion Stock by such Holders;
h. Prepare and promptly file with the Commission, and promptly notify
such Holders or their attorney-in-fact of the filing of, such amendment or
supplement to such registration statement or prospectus as may be necessary to
correct any statements or omissions if, at the time when a prospectus relating
to such securities is required to be delivered under the 1933 Act, any event has
occurred as the result of which any such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading
in light of the circumstances in which they were made;
i. In case any of such Holders or any underwriter for any such Holders
is required to deliver a prospectus at a time when the prospectus then in effect
may no longer be used under the 1933 Act, prepare promptly upon request such
amendment or amendments to such registration statement and such prospectuses as
may be necessary to permit compliance with the requirements of the 1933 Act;
j. Advise such Holders or their attorney-in-fact, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance of any stop
order by the Commission suspending the effectiveness of such registration
statement or the initiation or threatening of any proceeding for that purpose
and promptly use its best efforts to prevent the issuance of any stop order or
to obtain its withdrawal if such stop order should be issued; and
k. At the request of any such Holder, furnish on the effective date of
the registration statement and, if such registration includes an underwritten
public offering, at the closing provided for in the underwriting agreement, (i)
an opinion, dated each such date, of the counsel representing the Company for
the purposes of such registration, addressed to the underwriters, if any, and to
the Holder or Holders making such request, covering such matters with respect to
the registration statement, the prospectus and each amendment or supplement
thereto, proceedings under state and federal securities laws, other matters
relating to the Company, the securities being registered and the offer and sale
of such securities as are customarily the subject of opinions of issuer's
counsel provided to underwriters in underwritten public offerings, and (ii) to
the extent the Company's accounting firm is willing to do so, a letter dated
each such date, from the independent public accountants of the Company,
addressed to the underwriters, if any, and to the Holder or Holders making such
request, stating that they are independent public accountants within the meaning
of the 1933 Act and that in the opinion of such accountants the financial
statements and other financial data of the Company included in the registration
statement or the prospectus or any amendment or supplement thereto comply in all
material respects with the applicable accounting requirements of the 1933 Act,
and additionally covering such other financial matters, including information as
to the period ending not more than five (5) business days prior to the date of
such letter with respect to the registration statement and prospectus, as the
underwriters or such requesting Holder or Holders may reasonably request.
8.9 Information by Holder. The Holder or Holders of Conversion Stock
included in any registration shall furnish the Company such information
regarding such Holder or Holders, the Conversion Stock held by them and the
distribution proposed by such Holder or Holders as the Company may request in
writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 8.
8.10 Transfer of Registration Rights. The rights to cause the Company to
register securities granted Purchasers under Sections 8.4 and 8.5 may be
assigned to a transferee or assignee reasonably acceptable to the Company in
connection with any transfer or assignment of the Units or Conversion Stock by
the undersigned provided that: (i) such transfer may otherwise be effected in
accordance with applicable securities laws, and (ii) such assignee or transferee
acquires all of the Units and/or Conversion Stock (appropriately adjusted for
Recapitalizations) held by the transferor. Notwithstanding the foregoing, the
rights to cause the Company to register securities may be assigned to any
constituent partner of the undersigned, without compliance with item (ii) above,
provided written notice thereof is promptly given to the Company.
8.11 Indemnification. In the event any Conversion Shares are included in a
registration statement under this Section 8:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the
1933 Act) for such Holder and each person, if any, who controls
such Holder or underwriter within the meaning of the 1933 Act or
the 1934 Act, against any losses, claims, damages, or liabilities
(joint or several) to which they may become subject under the
Act, the 1934 Act or other federal or state law insofar as such
losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including
any preliminary prospectus or final prospectus contained therein
or any amendments or supplements thereto, (ii) the omission or
alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not
misleading, or (iii) any violation or alleged violation by the
Company of the 1933 Act, the 1934 Act, any state securities law
or any rule or regulation promulgated under the 1933 Act, the
1934 Act or any state securities law; and the Company will pay to
each such Holder, underwriter or controlling person, as incurred,
any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim,
damage, liability, or action; provided however, that the
indemnity agreement contained in this subsection 8.11(a) shall
not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected
without the consent of the Company (which consent shall not be
unreasonably withheld), nor shall the Company be liable in any
such case for any such loss, claim, damage, liability, or action
to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling
person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors,
each of its officers who has signed the registration statement,
each person, if any, who controls the Company within the meaning
of the 1933 Act, any underwriter, any other Holder selling
securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to
which any of the foregoing persons may become subject under the
1933 Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in
connection with such registration; and each such if holder will
pay, as incurred, any legal or other expenses reasonably incurred
by any person intended to be indemnified pursuant to this
subsection 8.11(b), in connection with investigating or defending
any such loss, claim, damage, liability, or action; provided,
however, that the, indemnity agreement contained in this
subsection 8.l1(b) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which
consent shall not be unreasonably withheld; provided, that, in no
event shall any indemnity under this subsection 8.11(b) exceed
the gross proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
8.11 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party
under this Section 8.11, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying
party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense
thereof with counsel mutually satisfactory to the parties;
provided, however, that an indemnified party (together with all
other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one
separate counsel, with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party
by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests
between such indemnified party and any other party represented by
such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 8.11, but
the omission so to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 8.11.
(d) If the indemnification provided for in this Section 8.11 is held
by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim,
damage, or expense referred to therein, then the indemnifying
party, in lieu of indemnifying such indemnified party hereunder,
shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim,
damage, or expense in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one
hand and of the indemnified party on the other in connection with
the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other
relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied
by the indemnifying party or by the indemnified party and the
parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public
offering are in conflict with the foregoing provisions, the
provisions in the underwriting agreement shall control.
(f) The obligations of the Company and Holders under this Section
8.11 shall survive the completion of any offering of Conversion
Shares in a registration statement under this Section 8, and
otherwise.
SECTION 9
Preferred Stock Conversion and Warrant Exercise Rights
The holders of the Preferred Stock and the Warrants shall have conversion
and exercise rights as described in the Company's Amdended Certificate of
Incorporation, attached hereto as Exhibit A, and the form of Warrant, as
attached hereto as Exhibit B, respectively.
SECTION 10
Right to Participate in Subsequent Private Placements
In the event that the Company shall make any private offering of securities
subsequent to the offering contemplated by this Subscription Agreement, the
Company shall provide the undersigned with at least thirty (30) days written
notice of the offering and shall, thereby, provide the undersigned the
opportunity to participate, on the same terms and conditions, in any such
offering, provided such participation will not interfere with the Company's
ability to proceed with such offering. The undersigned shall have ten (10) days
from the date of the Company's notice to indicate in writing whether he desires
to participate in the offering and the dollar amount of his desired investment
or the number of securities that he desires to purchase. In the event that any
such offering is oversubscribed as a result of this participation right, the
Holders shall be entitled to participate in the offering on a pro rata basis in
proportion to their indicated degree of desired participation.
SECTION 11
Expenses
The Company shall be responsible for, and shall pay, all expenses related
to this private placement of the Units and the subsequent issuance of the
Conversion Shares, including the reasonable out-of-pocket costs incurred by the
purchasers of the Units, including the legal fees of a law firm acting as
special counsel retained by one or more of the purchasers on behalf of all of
the purchasers, up to $5,000 (or up to $7,500 upon mutual agreement of the
parties and upon advance notice of the status of such expenses).
SECTION 12
Miscellaneous
12.1 Governing Law. This Agreement shall be governed in all respects by the
laws of the State of Vermont.
12.2 Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by the undersigned and the
closing of the transactions contemplated hereby.
12.3 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto,
provided, however, that the rights of the undersigned to purchase the Units
shall not be assignable without the consent of the Company.
12.4 Entire Agreement: Amendment. This Agreement and the other documents
delivered pursuant hereto at the Closing constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
12.5 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail postage prepaid or otherwise delivered by hand or by messenger,
addressed (a) if to the undersigned at:
---------------------------
---------------------------
with a copy to: H. Kenneth Merritt, Esq.
Merritt & Merritt
112 Lake Street
P.O. Box 5839
Burlington, Vermont 05402-5839
or at such other address as such Purchaser shall have furnished to the Company
in writing, or (b) if to any other holder of any Units or Conversion Stock, at
such address as such holder shall have furnished the Company in writing, or
until any such holder so furnishes an address to the Company, then to and at the
address of the last holder of such Shares or Conversion Stock who has so
furnished an address to the Company, or (c) if to the Company, one copy should
be sent to its address set forth on the cover page of this Agreement and
addressed to the attention of the Corporate Secretary, or at such other address
as the Company shall have furnished to the Purchasers
with a copy to: Spencer R. Knapp, Esq.
Dinse, Erdmann, Knapp & McAndrew, P.C.
209 Battery Street
P.O. Box 988
Burlington, Vermont 05402-0988.
Each such notice or other communication shall, for all purposes of this
Agreement, be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
12.7 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
12.8 Titles and Subtitles. The titles and subtitles used in this Agreement
are used for convenience only and are not considered in construing or
interpreting this Agreement.
DATED at __________________, Vermont, this _____ day of June, 1996.
________________________________________
(Signature)
________________________________________
(Please print name)
ACCEPTED BY:
THE VERMONT TEDDY BEAR CO., INC.
By: __________________________________
Its Duly Authorized Agent
<PAGE>
EXHIBIT A
AMENDMENT TO CERTIFICATE OF INCORPORATION
<PAGE>
EXHIBIT B
FORM OF WARRANT
<PAGE>
EXHIBIT C
SUITABILITY QUESTIONNAIRE
<PAGE>
EXHIBIT D
FORM OF OPINION OF DEK&M
April 12, 1996
Ms. Elisabeth Robert
Chief Financial Officer
The Vermont Teddy Bear Co., Inc.
2236 Shelburne Road
Shelburne, Vermont 05482
Dear Liz:
I understand that on June 30, 1996, The Vermont Teddy Bear Co., Inc. (the
"Company") shall have accrued $126,000 in dividends on my Series A Preferred
Stock (the "Accrued Dividends") as more fully described in Attachment A.
I hereby agree to waive any and all claims on the Accrued Dividends in exchange
for a 5 year warrant to purchase 43,826.087 shares of the Company's common
stock at the current market price of $2.875 per share.
Sincerely,
/s/ Joan H. Martin
Joan H. Martin
Attachment A
HISTORY OF PREFERRED STOCK
05/07/93 The Company issued 72 shares of no par, 12% cumulative
preferred stock, with a liquidation value of $10,000 per
share, as full payment of the outstanding debenture payable
to Joan Martin.
06/30/93 The Company accrued $12,782 in dividends on preferred
shares.
08/18/93 The Company issued 18 shares of no par, 12% cumulative
preferred stock, with a liquidation value of $10,000 per
share, as partial payment of the outstanding interest
payable to Joan Martin. (The balance of accrued interest,
$69,167, was paid with a portion of the proceeds of the
IPO.)
09/15/93 The 90 shares of preferred stock outstanding were converted
to 90 shares of 8% Series A preferred.
09/30/93 The Company accrued $22,832 in dividends on preferred
shares.
12/31/93 The first quarterly dividend ($18,000) was declared on
Series A preferred stock.
03/31/94 The second quarterly dividend ($18,000) was declared on
Series A preferred stock.
05/12/94 The dividends declared 06/30/93, 09/30/93, 12/31/93, and
03/31/94 (totalling $71,614) were paid.
Schedule of Dividends
From April 1, 1994, forward
- ---------------------------
Incurred On Amount Paid On
06/30/94 $18,000 05/31/95
09/30/94 $18,000 05/31/95
12/31/94 $18,000
03/31/95 $18,000
06/30/95 $18,000
09/30/95 $18,000
12/31/95 $18,000
NEITHER THE WARRANTS REPRESENTED
BY THIS CERTIFICATE NOR THE SHARES
ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. NEITHER THE
WARRANTS NOR SUCH SHARES MAY BE OFFERED
OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT,
OR AN EXEMPTION FROM REGISTRATION UNDER
SUCH ACT.
THE VERMONT TEDDY BEAR CO., INC.
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
par value $.05 per share
April 12, 1996 43,826.087 Shares
THIS CERTIFIES that, for good and valuable consideration, the receipt of
which is hereby acknowledged, Joan Hixon Martin (the "Holder") is entitled to
subscribe for and purchase from The Vermont Teddy Bear Co., Inc., a New York
corporation (the "Company"), upon the terms and conditions set forth herein, at
any time or from time to time after the date hereof, and before 5:00 P.M. on
April 12, 2001, New York time or such earlier time as set forth herein (the
"Exercise Period"), 43,826.087 shares of the Company's Common Stock, par value
$.05 per share ("Common Stock"), at a price of $2.875 per share (the "Exercise
Price"). As used herein the term "this Warrant" shall mean and include this
Warrant and any Warrant or Warrants hereafter issued as a consequence of the
exercise or transfer of this Warrant in whole or in part.
The number of shares of Common Stock issuable upon exercise of this
Warrant (the "Warrant Shares") and the Exercise Price may be adjusted from time
to time as hereinafter set forth.
l. This Warrant may be exercised during the Exercise Period, as to the
whole or any lesser number of the respective whole Warrant Shares, by the
surrender of this Warrant (with the election at the end hereof duly executed)
to the Company at its office as set forth in the form of election attached
hereto, or at such other place as is designated in writing by the Company,
together with a certified or bank cashier's check payable to the order of the
Company in an amount equal to the Exercise Price multiplied by the number of
the respective Warrant Shares for which this Warrant is being exercised.
2. Upon each exercise of the Holder's rights to purchase Warrant Shares
and payment of the Exercise Price, the Holder shall be deemed to be the holder
of record of the Warrant Shares issuable upon such exercise, notwithstanding
that the transfer books of the Company shall then be closed or certificates
representing such Warrant Shares shall not then have been actually delivered to
the Holder. As soon as practicable after each such exercise of this Warrant and
payment of the Exercise Price, the Company shall issue and deliver to the
Holder a certificate or certificates for the Warrant Shares issuable upon such
exercise, registered in the name of the Holder or her designee. If this Warrant
should be exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the Warrant Shares (or portions
thereof) subject to purchase hereunder.
3. This Warrant shall be transferable only on the books of the Company
upon delivery thereof duly endorsed by the Holder or by her duly authorized
attorney or representative, or accompanied by proper evidence of succession,
assignment, or authority to transfer. In all cases of transfer by an attorney,
executor, administrator, guardian, or other legal representative, duly
authenticated evidence of his or her authority shall be produced. Upon any
registration of transfer, the Company shall deliver a new Warrant or Warrants
to the person entitled thereto. This Warrant may be exchanged, at the option of
the Holder thereof, for another Warrant, or other Warrants of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Warrant Shares (or portions thereof), upon surrender
to the Company or its duly authorized agent. Notwithstanding the foregoing, the
Company shall have no obligation to cause Warrants to be transferred on its
books to any person if, in the opinion of counsel to the Company, such transfer
does not comply with the provisions of the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations thereunder.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the rights to purchase all Warrant Shares granted pursuant to
this Warrant, such number of shares of Common Stock as shall, from time to
time, be sufficient therefor. The Company covenants that all shares of Common
Stock issuable upon exercise of this Warrant, upon receipt by the Company of
the full Exercise Price therefor, shall be validly issued, fully paid,
nonassessable, and free of preemptive rights.
5. (a) In case the Company shall at any time after the date this Warrant
was first issued (i) declare a dividend on the outstanding Common Stock payable
in shares of its capital stock, (ii) subdivide the outstanding Common Stock,
(iii) combine the outstanding Common Stock into a smaller number of shares, or
(iv) issue any shares of its capital stock by reclassification of the Common
Stock (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing corporation), then, in each
case, the Exercise Price, and the number of Warrant Shares issuable upon
exercise of this Warrant, in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination, or
reclassification, shall be proportionately adjusted so that the Holder after
such time shall be entitled to receive the aggregate number and kind of shares
which, if this Warrant had been exercised immediately prior to such time, she
would have owned upon such exercise and been entitled to receive by virtue of
dividend, subdivision, combination, or reclassification. Such adjustment shall
be made successively whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record date for the issuance
to all holders of Common Stock of rights, options, or warrants to subscribe for
or purchase Common Stock (or securities convertible into or exchangeable for
Common Stock) at a price per share (or having a conversion or exchange price
per share, if a security convertible into or exchangeable for Common Stock)
less than the Exercise Price per share of Common Stock on such record date,
then, in each case, the Exercise Price shall be adjusted by multiplying the
Exercise Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the number of shares of Common Stock
outstanding on such record date plus the number of shares of Common Stock which
the aggregate offering price of the total number of shares of Common Stock so
to be offered (or the aggregate initial conversion or exchange price of the
convertible or exchangeable securities so to be offered) would purchase at such
current Exercise Price and the denominator of which shall be the number of
shares of Common Stock outstanding on such record date plus the number of
additional shares of Common Stock to be offered for subscription or purchase
(or into which the convertible or exchangeable securities so to be offered are
initially convertible or exchangeable). Such adjustment shall become effective
at the close of business on such record date; provided, however, that, to the
extent the shares of Common Stock (or securities convertible into or
exchangeable for shares of Common Stock) are not delivered, the Exercise Price
shall be readjusted after the expiration of such rights, options, or warrants
(but only with respect to that portion of this Warrant exercised after such
expiration), to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights, options, or warrants been
made upon the basis of delivery of only the number of shares of Common Stock
(or securities convertible into or exchangeable for shares of Common Stock)
actually issued. In case any subscription price may be paid in a consideration
part or all of which shall be in a form other than cash, the value of such
consideration shall be as determined in good faith by the Company's Board of
Directors, whose determination shall be conclusive absent manifest error.
Shares of Common Stock owned by or held for the account of the Company or any
majority-owned subsidiary shall not be deemed outstanding for the purpose of
any such computation.
(c) In case the Company shall distribute to all holders of Common Stock
(including any such distribution made to the stockholders of the Company in
connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its indebtedness or assets (other than
cash dividends or distributions and dividends payable in shares of Common
Stock), or rights, options, or warrants to subscribe for or purchase Common
Stock, or securities convertible into or exchangeable for shares of Common
Stock (excluding those with respect to the issuance of which an adjustment of
the Exercise Price is provided pursuant to Section 5(b) hereof), then, in each
case, the Exercise Price shall be adjusted by multiplying the Exercise Price in
effect immediately prior to the record date for the determination of
stockholders entitled to receive such distribution by a fraction, the numerator
of which shall be the Exercise Price per share of Common Stock on such record
date, less the fair market value (as determined in good faith by the Company's
Board of Directors, whose determination shall be conclusive absent manifest
error) of the portion of the evidences of indebtedness or assets so to be
distributed, or of such rights, options, or warrants or convertible or
exchangeable securities, applicable to one share, and the denominator of which
shall be such current Exercise Price per share of Common Stock. Such adjustment
shall be made whenever any such distribution is made, and shall become
effective on the record date for the determination of shareholders entitled to
receive such distribution.
(d) In case the Company shall issue shares of Common Stock or rights,
options, or warrants to subscribe for or purchase Common Stock, or securities
convertible into or exchangeable for Common Stock (excluding shares, rights,
options, warrants, or convertible or exchangeable securities issued or issuable
(i) in any of the transactions with respect to which an adjustment of the
Exercise Price is provided pursuant to Sections 5(a), 5(b), or 5(c) above or
(ii) upon exercise of this Warrant), at a price per share (determined, in the
case of such rights, options, warrants, or convertible or exchangeable
securities, by dividing (x) the total amount received or receivable by the
Company in consideration of the sale and issuance of such rights, options,
warrants, or convertible or exchangeable securities, plus the minimum aggregate
consideration payable to the Company upon exercise, conversion, or exchange
thereof, by (y) the maximum number of shares covered by such rights, options,
warrants, or convertible or exchangeable securities) lower than the Exercise
Price per share of Common Stock in effect immediately prior to such issuance,
then the Exercise Price shall be reduced on the date of such issuance to a
price (calculated to the nearest cent) determined by multiplying the Exercise
Price in effect immediately prior to such issuance by a fraction, (iii) the
numerator of which shall be an amount equal to the sum of (A) the number of
shares of Common Stock outstanding immediately prior to such issuance plus (B)
the quotient obtained by dividing the consideration received by the Company
upon such issuance by such current Exercise Price, and (iv) the denominator of
which shall be the total number of shares of Common Stock outstanding
immediately after such issuance. For the purposes of such adjustments, the
maximum number of shares which the holders of any such rights, options,
warrants, or convertible or exchangeable securities shall be entitled to
initially subscribe for or purchase or convert or exchange such securities into
shall be deemed to be issued and outstanding as of the date of such issuance,
and the consideration received by the Company therefor shall be deemed to be
the consideration received by the Company for such rights, options, warrants,
or convertible or exchangeable securities, plus the minimum aggregate
consideration or premiums stated in such rights, options, warrants, or
convertible or exchangeable securities to be paid for the shares covered
thereby. No further adjustment of the Exercise Price shall be made as a result
of the actual issuance of shares of Common Stock on exercise of such rights,
options, or warrants or on conversion or exchange of such convertible or
exchangeable securities. On the expiration or the termination of such rights,
options, or warrants, or the termination of such right to convert or exchange,
the Exercise Price shall be readjusted (but only with respect to that portion
of this Warrant exercised after such expiration or termination) to such
Exercise Price as would have obtained had the adjustments made upon the
issuance of such rights, options, warrants, or convertible or exchangeable
securities been made upon the basis of the delivery of only the number of
shares of Common Stock actually delivered upon the exercise of such rights,
options, or warrants or upon the conversion or exchange of any such securities;
and on any change of the number of shares of Common Stock deliverable upon the
exercise of any such rights, options, or warrants or conversion or exchange of
such convertible or exchangeable securities or any change in the consideration
to be received by the Company upon such exercise, conversion, or exchange,
including, but not limited to, a change resulting from the antidilution
provisions thereof, the Exercise Price, as then in effect, shall forthwith be
readjusted (but only with respect to that portion of this Warrant exercised
after such change) to such Exercise Price as would have been obtained had an
adjustment been made upon the issuance of such rights, options, or warrants not
exercised prior to such change, or securities not converted or exchanged prior
to such change, on the basis of such change. In case the Company shall issue
shares of Common Stock or any such rights, options, warrants, or convertible or
exchangeable securities for a consideration consisting, in whole or in part, of
property other than cash or its equivalent, then the "price per share" and the
"consideration received by the Company" for purposes of the first sentence of
this Section 5(d) shall be as determined in good faith by the Company's Board
of Directors, whose determination shall be conclusive absent manifest error.
Shares of Common Stock owned by or held for the account of the Company or any
majority-owned subsidiary shall not be deemed outstanding for the purpose of
any such computation.
(e) No adjustment in the Exercise Price shall be required if such
adjustment is less than $.05; provided, however, that any adjustments which by
reason of this Section 5 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
this Section 5 shall be made to the nearest cent or to the nearest one-
thousandth of a share, as the case may be.
(f) In any case in which this Section 5 shall require that an adjustment
in the Exercise Price be made effective as of a record date for a specified
event, the Company may elect to defer, until the occurrence of such event,
issuing to the Holder, if the Holder exercised this Warrant after such record
date, the shares of Common Stock, if any, issuable upon such exercise over and
above the shares of Common Stock, if any, issuable upon such exercise on the
basis of the Exercise Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to the Holder a due bill or other
appropriate instrument evidencing the Holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(g) Upon each adjustment of the Exercise Price as a result of the
calculations made in Sections 5(b), 5(c), or 5(d) hereof, this Warrant shall
thereafter evidence the right to purchase, at the adjusted Exercise Price, that
number of shares (calculated to the nearest thousandth) obtained by dividing
(A) the product obtained by multiplying the number of shares purchasable upon
exercise of this Warrant prior to adjustment of the number of shares by the
Exercise Price in effect prior to adjustment of the Exercise Price by (B) the
Exercise Price in effect after such adjustment of the Exercise Price.
(h) Whenever there shall be an adjustment as provided in this Section 5,
the Company shall promptly cause written notice thereof to be sent by
registered mail, postage prepaid, to the Holder, at her then-current address,
which notice shall be accompanied by an officer's certificate setting forth the
number of Warrant Shares purchasable upon the exercise of this Warrant and the
Exercise Price after such adjustment and setting forth a brief statement of the
facts requiring such adjustment and the computation thereof, which officer's
certificate shall be conclusive evidence of the correctness of any such
adjustment absent manifest error.
6. (a) In case of any consolidation with or merger of the Company with or
into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise of this Warrant solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall provide for adjustments which shall be as
nearly equivalent as practicable to the adjustments in Section 5.
(b) In case of any reclassification or change of the shares of Common
Stock issuable upon exercise of this Warrant (other than a change in par value,
or as a result of a subdivision or combination, but including any change in the
shares into two or more classes or series of shares), or in case of any
consolidation or merger of another corporation into the Company in which the
Company is the continuing corporation and in which there is a reclassification
or change (including a change to the right to receive cash or other property)
of the shares of Common Stock (other than a change in par value, or as a result
of a subdivision or combination, but including any change in the shares into
two or more classes or series of shares), the Holder shall have the right
thereafter to receive upon exercise of this Warrant solely the kind and amount
of shares of stock and other securities, property, cash, or any combination
thereof receivable upon such reclassification, change, consolidation, or merger
by a holder of the number of shares of Common Stock for which this Warrant
might have been exercised immediately prior to such reclassification, change,
consolidation, or merger. Thereafter, appropriate provision shall be made for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution (other than
regularly scheduled cash dividends which are not in a greater amount per share
than the most recent such cash dividend) to all holders of Common Stock; or
(b) to issue any rights, warrants, or other securities to all holders of
Common Stock entitling them to purchase any additional shares of Common Stock
or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding shares of
Common Stock, or any consolidation, merger, sale, lease, or conveyance of
property, described in Section 6; or
(d) to effect any liquidation, dissolution, or winding-up of the Company;
or
(e) to take any other action which would cause an adjustment to the
Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at her then-
current address, mailed at least 15 days prior to (i) the date as of which the
holders of record of shares of Common Stock to be entitled to receive any such
dividend, distribution, rights, warrants, or other securities are to be
determined, (ii) the date on which any such reclassification, change of
outstanding shares of Common Stock, consolidation, merger, sale, lease,
conveyance of property, liquidation, dissolution, or winding-up is expected to
become effective, and the date as of which it is expected that holders of
record of shares of Common Stock shall be entitled to exchange their shares for
securities or other property, if any, deliverable upon such reclassification,
change of outstanding shares, consolidation, merger, sale, lease, conveyance of
property, liquidation, dissolution, or winding-up, or (iii) the date of such
action which would require an adjustment to the Exercise Price.
8. Certificates evidencing the Warrant Shares issued upon exercise of the
Warrants shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH
SHARES MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, OR AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT."
9. Upon receipt of evidence satisfactory to Company of the loss, theft,
destruction, or mutilation of this Warrant (and upon surrender of this Warrant
if mutilated), and upon reimbursement of the Company's reasonable incidental
expenses, the Company shall execute and deliver to the Holder hereof a new
Warrant of like date, tenor, and denomination.
Dated: April 12, 1996
THE VERMONT TEDDY BEAR CO., INC
By: /s/ R. PATRICK BURNS
----------------------------------------
Its Duly Authorized Agent
/s/ SPENCER C. PUTNAM
- --------------------------------
Secretary
FORM OF ASSIGNMENT
(To be executed by the Holder if she desires to transfer the attached Warrant.)
FOR VALUE RECEIVED, Joan Hixon Martin hereby sells, assigns, and transfers unto
_________________________ a Warrant to purchase 43,826.087 shares of Common
Stock, $.05 par value per share of The Vermont Teddy Bear Co., Inc. (the
"Company"), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint ___________________________ as her
attorney to transfer such Warrant on the books of the Company, with full power
of substitution.
Dated: __________________ __________________________________________
Signature
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant in every particular, without alteration
or enlargement or any change whatsoever.
To: The Vermont Teddy Bear Co., Inc.
P.O. Box 965
2236 Shelburne Road, #5
Shelburne, Vermont 05482
ELECTION TO EXERCISE
The undersigned hereby exercises her rights to purchase
__________________________ Warrant Shares covered by the within Warrant and
tenders payment herewith in the amount of $________________ in accordance with
the terms thereof, and requests that certificates for such securities be issued
in the name of, and delivered to: _______________________________
______________________________________________________________________________
______________________________________________________________________________
(Print Name, Address and Social Security or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be prepared in the name of, and
delivered to, the undersigned at the address stated below.
Dated: __________________ Name: ________________________________________
Address:
______________________________________________________________________________
______________________________________________________________________________
___________________________________________
(Signature)
The Vermont Teddy Bear Co., Inc.
Shelburne, Vermont 05482
June 30, 1996
Mr. R. Patrick Burns
Shelburne, VT 05482
Dear Pat:
This letter is to follow up on our recent discussions and confirm our
agreement concerning the terms of your continued employment by The Vermont
Teddy Bear Co., Inc. (the "Company"). Except as specifically set forth in
this letter, this agreement is intended to amend and supersede your existing
Employment Agreement, dated July 31, 1995 (the "July 31 Agreement"). Our
agreement is as follows:
1. Position. You shall continue to be employed as President and Chief
Executive Officer of the Company and you shall continue to devote all of
your business time, attention, skill and efforts to the business and affairs
of the Company, with such duties as shall be assigned to you by the Board of
Directors. You shall be based at the Company's Shelburne, Vermont offices.
2. Term. Your employment shall continue for a term ending June 30,
2000, unless earlier terminated in accordance with this agreement.
3. Base Salary. Commencing July 1, 1996 and continuing during the
term, your base salary shall be $187,500. You have agreed to forego the base
salary payable to you under the July 31 Agreement for the 3-month period
commencing April 1, 1996 and ending June 30, 1996.
4. Annual Bonus. You will be entitled to a bonus for each fiscal year
during the term, based upon the Company's net operating profit, calculated
and payable as follows:
Fiscal year 1997-10% of operating profit in excess of $500,000 and a
non-qualified stock option to purchase 15,000 shares of the Company's
Common Stock at an exercise price of $0.01 per share. The non-
qualified stock option shall be granted by the Company in fiscal year
1997, vesting as of February 1, 1997.
Fiscal Year 1998-10% of operating profit in excess of $1,000,000.
Fiscal Year 1999-10% of operating profit in excess of $1,500,000.
Fiscal Year 2000-10% of operating profit in excess of $2,000,000.
The options or cash bonus shall be issued or paid as the case may be, within
sixty (60) days following the end of the fiscal year to which the bonus
relates.
5. Stock Options. In addition to the stock options you are entitled to
receive under the July 31 Agreement, you shall be entitled to receive
additional incentive stock options, subject to shareholder approval of
appropriate amendments to the Company's 1993 Incentive Stock Option Plan, to
purchase 450,000 shares of the Company's common stock. These options shall
vest one quarter annually on July 1 of each year commencing July 1, 1997.
6. Benefits. You shall continue to receive all of the Company benefits
set forth in the July 31 Agreement, including (a) reimbursement of your
reasonable travel expenses from your home in Maine to Shelburne, (b) rent up
to $1,450 per month (and related utility expenses of a furnished apartment
within reasonable commuting distance of the Company's offices, (c) a company
car of your choice, subject to the Company's approval which shall not be
unreasonably withheld, and (d) participation in all other benefit plans
available to senior executive employees of the Company in accordance with
the policies and procedures currently, or then in effect, as the case may
be.
7. Indemnification. The Company shall indemnify you (and your estate)
in accordance with the Company's by-laws as in effect from time to time.
This indemnification by the Company shall survive termination or expiration
of this Agreement.
8. Termination. This Agreement may be terminated by either you or by
the Company at any time. If your employment is terminated by (a) you for
"Good Reason" or (b) the Company, for any reason other than for "Cause" at
any time, (i) you shall receive, in lieu of any other payment or benefit
except as set forth in this paragraph, and in a lump sum, an amount equal to
18 months base salary, plus bonus for the year in which your employment was
terminated pro rated for the period you were employed, (ii) an amount equal
to the outstanding amount due to the Company by you under your Loan
Agreement, dated July 31, 1995; and (iii) all your outstanding stock options
which were subject to vesting on or prior to the end of the fiscal year in
which your employment was terminated shall immediately vest and all your
stock options shall continue to be exercisable for a period of ten years
after the date of their grant. Upon a termination of employment by the Company
at any time (other than for "Cause") the Company shall provide you with
reasonable outplacement services. Upon a termination by the Company for
"Cause" or by you without "Good Reason", you shall not be entitled to
receive any further payments or benefits following the date of your
termination.
If your employment is terminated on account of your death or your disability
which lasts (or is likely, based on reasonable medical evidence, to last)
for more than six consecutive months and renders you unable to perform your
duties under this Agreement, all outstanding stock options which were
subject to vesting on or prior to the end of the fiscal year in which your
employment was terminated shall immediately vest and all your stock options
shall continue to be exercisable for a period of ten years after the date of
their grant. Upon such termination for your death or disability, neither you
nor your estate shall be entitled to receive the salary continuation
referred to in clause (i) with respect to a termination by the Company for
any reason other than "Cause", but you or your estate shall be entitled to
the lump sum payment referred to in clause (ii) with respect to a
termination by the Company for any reason other than "Cause" and to such
further payments or benefits provided under plans or policies of the Company
in effect from time to time.
In the event that your employment is terminated within ninety days prior to,
or six months after, a "Change in Control", in addition to the other
benefits to which you would be entitled in the event of a termination by the
Company for any reason other than "Cause", all your stock options shall
continue to be exercisable for a period of ten years after the date of their
grant.
For purposes of this Agreement the terms "Good Reason", "Cause" and "Change
in Control" shall have the meanings defined in the July 31 Agreement.
9. Covenant Not To Compete. During the term and for a period of
eighteen (18) months following termination of your employment with the
Company, you shall not, directly or indirectly, whether as stockholder,
officer, director, employee, consultant or otherwise (except as a beneficial
of less than 5% of the number of shares of any publicly traded securities)
engage in any business that, with respect to 5% or more of its sales,
competes with the Company in the business of marketing and selling stuffed
teddy bears.
10. Subject to Board and Shareholder Approval. The terms of this
Agreement are subject to approval by the Company's Board of Directors and,
as indicated in Section 5, above, the additional incentive stock option is
subject to shareholder approval of appropriate amendments to the Company's
1993 Incentive Stock Option Plan. So long as the terms of this Agreement
receive the approval of the Company's Board of Directors and Shareholders,
you hereby waive and forever release any claim you may have now or in the
future against the Company for compensation that you have agreed to forego,
as described in Section 3, above.
If the foregoing correctly sets forth your understanding of our Agreement,
please sign and return the enclosed copy of this letter to me.
Sincerely,
THE VERMONT TEDDY BEAR CO., INC.
By: /s/ Fred Marks
Fred Marks, Chairman of the Board
ACKNOWLEDGED AND AGREED TO:
/s/ Patrick Burns
R. Patrick Burns
The Vermont Teddy Bear Co., Inc.
Shelburne, Vermont 05482
R. Patrick Burns
Shelburne, VT 05482
Dear Pat:
This letter amends our Letter Agreement, dated July 31, 1995 (the "July 31
Agreement") regarding the terms of a Loan made, and to be made, to you by The
Vermont Teddy Bear Co., Inc. (the "Company").
Under the July 31 Agreement, the Company agreed to advance the Loan to you in
an amount up to $100,000 in eight equal monthly installments commencing August
4, 1995. With your consent, the Company advanced $75,000 of the Loan, but the
balance of the Loan has not yet been advanced. We have agreed that the amount
of the loan shall be increased to $116,818.18 and that the balance of the Loan,
$41,818.18, will be advanced to you on or after, at your request, July 1, 1995.
The Loan shall continue to bear interest at the Applicable Federal Rate.
The Loan shall be repaid, and the entire amount of the Loan then outstanding
shall become immediately due and payable upon demand by the Company, upon the
termination of your employment with the Company. However, if you are still in
the employ of the Company, the Company shall cancel all outstanding principal
amounts and related interest charges on June 29, 2000.
Except as specifically set forth herein, this Letter Agreement amends and
supersedes the July 31 Agreement.
If the foregoing correctly sets forth your understanding of our agreement,
please sign and return the enclosed copy of this letter to me.
Sincerely,
THE VERMONT TEDDY BEAR CO., INC.
By: /s/ Fred Marks
------------------------------------------
Fred Marks, Chairman of the Board
ACKNOWLEDGED AND AGREED TO:
/s/ R. Patrick Burns
- ----------------------------------
R. Patrick Burns
The Vermont Teddy Bear Co., Inc.
Shelburne, Vermont 05482
July 1, 1996
Ms. Elisabeth B. Robert
Shelburne, VT 05482
Dear Liz:
This letter is to follow up on our recent discussions and confirm our
agreement concerning the terms of your continued employment by The Vermont
Teddy Bear Co., Inc. (the "Company"). Except as specifically set forth in this
letter, this agreement is intended to amend and supersede your existing
Employment Agreement, dated August 28, 1995 (the "August 28 Agreement"). Our
agreement is as follows:
1. Position. You shall continue to be employed as Treasurer, Chief
Financial Officer and Senior Vice-President of the Company and you shall
continue to devote all of your business time, attention, skill and efforts to
the business and affairs of the Company, with such duties as shall be assigned
to you by the Board of Directors. In the absence of R. Patrick Burns, you
shall act as the Company's President and Chief Executive Officer. You shall be
based at the Company's Shelburne, Vermont offices.
2. Term. Your employment shall continue for a term ending June 30, 2001,
unless earlier terminated in accordance with this agreement.
3. Base Salary. Commencing July 1, 1996, your base salary shall be
$100,000, increasing to $110,000 on July 1, 1997, and to $120,000 on July 1,
1998. For the year commencing on July 1, 1999, and thereafter, your base
salary shall be renegotiated.
4. Annual Bonus. In addition to your base salary, you will be entitled
to a bonus for each fiscal year during the term, based upon the Company's net
operating profit, calculated and payable as follows:
For the year ended June 30, 1997: 3% of any operating profit in excess of
$500,000 and a non-qualified stock option
to purchase 5,000 shares of the Company's
Common Stock at an exercise price of $0.01
per share. The non-qualified stock option
shall be granted by the Company in fiscal
year 1997, vesting as of February 1, 1997.
For the year ended June 30, 1998: a sum equal to the amount by which 3% of
any operating profit in excess of
$1,000,000 exceeds $10,000.
For the year ended June 30, 1999: a sum equal to the amount by which 3% of
any operating profit in excess of
$1,500,000 exceeds $20,000.
For the year ended June 30, 2000: 3% of any operating profit in excess of
$2,000,000.
For the year ended June 30, 2001: 3% of any operating profit in excess of
$2,500,000.
The cash bonus shall be paid in cash and within sixty (60) days
following the end of the fiscal year to which the bonus relates.
5. Stock Options. In addition to the stock options you are entitled to
receive under the August 28 Agreement, you shall be entitled to receive one or
more incentive stock options to purchase a total of 225,000 shares of the
Company's common stock at a purchase price equal to the market price on the
date of grant, which is July 1, 1996, under the Company's 1993 Incentive Stock
Option Plan as currently in effect. These options shall vest one quarter
annually on July 1 of each year commencing July 1, 1997.
6. Benefits. You shall continue to receive all of the Company benefits
set forth in the August 28 Agreement, including (a) a Thirty Thousand Dollar
($30,000) life insurance policy, (b) a company car of your choice, subject to
the Company's approval, which shall not be unreasonably withheld, and (c)
participation in all other benefit plans available to senior executive
employees of the Company in accordance with the policies and procedures
currently, or then in effect, as the case may be.
7. Indemnification. The Company shall indemnify you (and your estate) in
accordance with the Company's by-laws as in effect from time to time. This
indemnification by the Company shall survive termination or expiration of this
Agreement.
8. Termination. This Agreement may be terminated by either you or by the
Company at any time. If your employment is terminated by (a) you for "Good
Reason" or (b) the Company, for any reason other than for "Cause" at any time,
(i) you shall receive, in lieu of any other payment or benefit except as set
forth in this paragraph, and in a lump sum, an amount equal to eighteen (18)
months base salary, plus bonus for the year in which your employment was
terminated pro rated for the period you were employed, and (ii) all your
outstanding stock options which were subject to vesting on or prior to the end
of the fiscal year in which your employment was terminated shall immediately
vest and all your stock options shall continue to be exercisable for a period
of ten years after the date of their grant. Upon a termination of employment
by the Company at any time (other than for "Cause") the Company shall provide
you with reasonable outplacement services. Upon a termination by the Company
for "Cause" or by you without "Good Reason", you shall not be entitled to
receive any further payments or benefits following the date of your
termination.
If your employment is terminated on account of your death or your
disability which lasts (or is likely, based on reasonable medical evidence, to
last) for more than six consecutive months and renders you unable to perform
your duties under this Agreement, all outstanding stock options which were
subject to vesting on or prior to the end of the fiscal year in which your
employment was terminated shall immediately vest and all your stock options
shall continue to be exercisable for a period of ten years after the date of
their grant. Upon such termination for your death or disability, neither you
nor your estate shall be entitled to receive the salary continuation referred
to in clause (i) with respect to a termination by the Company for any reason
other than "Cause".
In the event that your employment is terminated within ninety days prior
to, or six months after, a "Change in Control", in addition to the other
benefits to which you would be entitled in the event of a termination by the
Company for any reason other than "Cause", all your stock options shall
continue to be exercisable for a period of ten years after the date of their
grant.
For purposes of this Agreement the terms "Good Reason", "Cause" and
"Change in Control" shall be defined as follows:
"Good Reason" means (a) the breach or contravention by the Company of any
provision of this agreement, (b) the assignment to you of any duties
inconsistent your status as a senior officer of the Company or a substantial
adverse alteration in the nature or status of your responsibilities from those
in effect on the Commencement Date, (c) a reduction in your annual base salary
as set forth herein or as the same may be increased from time to time and (d)
the failure of the company to provide you with the benefits contemplated
herein. Your continued employment shall not constitute consent to, or a waiver
of rights with respect to, any act or failure to act constituting Good Reason
hereunder.
"Cause" means (a) your conviction for, or guilty plea to, any felony, (b) your
commission of an act of personal dishonesty of breach of fiduciary duty which
involves personal profit in connection with employment by the Company or (c)
your material breach or contravention of any material provision of this
agreement or your commission of an act of gross negligence or willful
misconduct in the conduct of your duties to the Company; provided, however,
that in the cases of clauses (b) and (c), the Company shall have given you
ten business days' notice thereof, a reasonable opportunity to be heard by the
Board of Directors and, during such ten business day period, an opportunity to
cure.
"Change of Control" means (a) the Company is merged or consolidated with
another corporation or entity, (b) one person (together with its affiliates)
becomes the beneficial owner of 50% or more of the issued and outstanding
equity securities of the Company or (c) all or substantially all of the assets
of the Company are acquired by another corporation or entity.
9. Covenant Not To Compete. During the term and for a period of eighteen
(18) months following termination of your employment with the Company, you
shall not, directly or indirectly, whether as stockholder, officer, director,
employee, consultant or otherwise (except as a beneficial of less than 5% of
the number of shares of any publicly traded securities) engage in any business
that, with respect to 5% or more of its sales, competes with the Company in
the business of marketing and selling stuffed teddy bears.
10. Subject to Board and Shareholder Approval. The terms of this
Agreement are subject to approval by the Company's Board of Directors and, if
necessary, the additional incentive stock options are subject to shareholder
approval of appropriate amendments to the Company's 1993 Incentive Stock
Option Plan.
If the foregoing correctly sets forth your understanding of our Agreement,
please sign and return the enclosed copy of this letter to me.
Sincerely,
THE VERMONT TEDDY BEAR CO., INC.
By: /s/ Fred Marks
Fred Marks, Chairman of the Board
ACKNOWLEDGED AND AGREED TO:
/s/ Elisabeth Robert
Elisabeth B. Robert
Exhibit 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference of our report, dated August 30, 1996, included in The Vermont
Teddy Bear Co., Inc.'s Annual Report on Form 10-KSB for the year ended June
30, 1996, into the Company's previously filed Registration Statement on Form
S-8 No.33-84586 (filed on September 26, 1995).
Arthur Andersen LLP
/s/ Arthur Anderson LLP
Boston, Massachusetts
September 26, 1996
Consent of Independent Auditors
The Board of Directors
The Vermont Teddy Bear Co., Inc.
We consent to incorporation by reference in the registration statement
(No. 33-84586) on Form S-8 of The Vermont Teddy Bear Co., Inc. of our
report dated September 6, 1995, except as to the first two paragraphs of
Note 5 which is as of September 26, 1995, relating to the balance sheet
of The Vermont Teddy Bear Co., Inc., as of June 30, 1995 and the related
statements of operations, stockholders' equity, and cash flows for the
six months ended June 30, 1995, and the year ended December 31, 1994,
which report appears in the June 30, 1996 annual report on Form 10-KSB
of The Vermont Teddy Bear Co., Inc.
/s/ KPMG Peat Marwick LLP
Stamford, Connecticut
September 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1996 BALANCE SHEET AND THE TWELVE MONTH STATEMENT OF OPERATIONS ENDED JUNE 30,
1996 FOR THE VERMONT TEDDY BEAR CO., INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,121,500
<SECURITIES> 0
<RECEIVABLES> 131,550
<ALLOWANCES> 0
<INVENTORY> 1,974,731
<CURRENT-ASSETS> 3,745,868
<PP&E> 11,952,044
<DEPRECIATION> 1,651,726
<TOTAL-ASSETS> 14,239,272
<CURRENT-LIABILITIES> 2,131,352
<BONDS> 4,109,867
0
900,000
<COMMON> 258,638
<OTHER-SE> 6,805,641
<TOTAL-LIABILITY-AND-EQUITY> 14,239,272
<SALES> 17,039,618
<TOTAL-REVENUES> 17,039,618
<CGS> 7,309,038
<TOTAL-COSTS> 7,309,038
<OTHER-EXPENSES> 9,178,573
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 400,054
<INCOME-PRETAX> 151,953
<INCOME-TAX> 0
<INCOME-CONTINUING> 151,953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151,953
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
