SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
[ ] Preliminary Proxy Statement [ ] Confidential, for use of
the
[x] Definitive Proxy Statement Commission Only (as
permitted by Rule 14-a-6(e)(2)
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (s) 240.14a-11(c) or (S) 240.14a.12
The Vermont Teddy Bear Co., Inc.
(Name of Registrant as Specified In Its Charter)
The Vermont Teddy Bear Co., Inc.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (check the appropriate box):
[x] No Fee Required.
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1)m 14a-6(i)(2)
or Item 22a(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and date of
its filing.
(1) Amount Previously Paid: N/A
(2) Form, Schedule or Registration Statement No.: ______
Schedule 14A, File No.: ______
(3) Filing Party:
(4) Date Filed:
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Notice of Special Meeting of Stockholders
and
Proxy Statement
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The Vermont Teddy Bear Co., Inc.
Notice of Special Meeting of Stockholders
A Special Meeting of the Stockholders of The Vermont Teddy Bear Co.,
Inc. will be held at 10:00 a.m. EST on August/September ___, 1998, at the
Company's retail/manufacturing facility, 5566 Shelburne Road, Route Seven,
Shelburne, Vermont, for the following purposes:
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1. To approve an amendment to the Company's Certificate of Incorporation
to eliminate preemptive rights.
2. To approve the sale of Series C Redeemable Convertible Preferred Stock
and associated warrants.
3. To transact such other business that may properly come before the
meeting or adjournment thereof.
Stockholders of record at the close of business on July 24, 1998, are
entitled to notice of, and to vote at, the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Spencer C. Putnam, Secretary
Shelburne, Vermont
August ___, 1998
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The Vermont Teddy Bear Co., Inc.
5566 Shelburne Road
Shelburne, Vermont 05482
August ___, 1998
Proxy Statement
Special Meeting of Stockholders
To Be Held August/September ___, 1998
This proxy statement is furnished to the stockholders of The Vermont
Teddy Bear Co., Inc., a New York corporation duly qualified to transact
business in the State of Vermont (the _Company_), in connection with a
special meeting of the stockholders of the Company to be held at 10:00 a.m.
on August/September ___, 1998, at the Company's retail/manufacturing
facility located at 5566 Shelburne Road, Route Seven, Shelburne, Vermont.
The enclosed proxy card is furnished by the Company. This proxy is
being solicited by the Company's Board of Directors for use at the Special
Meeting or at any adjournment thereof. A proxy duly executed and returned
by a stockholder will be voted as directed by the proxy, and, if no choice
is specified, the proxy will be voted in accordance with the
recommendations of the Board of Directors contained herein. As to other
matters, if any, to be voted upon, the persons named in the proxy will take
such action as the Board of Directors may deem advisable.
All expenses of soliciting proxies are being borne by the Company. It
is expected that solicitations will be made primarily by mail, but regular
employees or representatives of the Company may also solicit proxies by
telephone or other communication methods and arrange for nominees,
custodians and fiduciaries to forward proxies and proxy material to their
principals at the Company's expense.
<PAGE>
A proxy may be revoked at any time before it is exercised by notifying
the Company's Secretary in writing at the address set forth above or by
attending the Special Meeting and voting the shares covered by the proxy in
person.
It is expected that this Proxy Statement will be mailed on or about
August ___, 1998, to stockholders of record on July 24, 1998.
Voting Securities
The Board of Directors has fixed the close of business on July 24,
1998, as the record date for the determination of Stockholders entitled to
receive notice of and to vote at the Special Meeting. Each share of the
Company's Common Stock outstanding on the record date is entitled to one
vote.
As of the close of business on July 24, 1998, there were 5,180,708
shares of the Company's Common Stock outstanding and entitled to vote, of
which 2,551,300 shares, or approximately 49.2%, were owned beneficially by
the current directors and officers of the Company.(1)
(1) These figures include a total of 21,475 shares held of record as a
group by spouses and minor children of the Company's current directors and
officers. These figures do not include options to purchase 941,342 shares
of the Company's Common Stock, which have been granted to the current
directors and officers as a group under the Company's Incentive Stock
Option Plan and its Non-Employee Director Stock Option Plan. These figures
also do not include Series B Preferred Stock and Series B Warrants held by
Jason Bacon, and a Warrant to purchase 51,841 shares of the Company's
Common stock granted to Joan Martin.
The following table presents information about those persons known by
the Company to own beneficially, as of July 24, 1998, more than 5% of the
shares of the Company's Common Stock outstanding, directors of the Company
and executive officers of the Company:
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Name and Address Shares
Percent
of Beneficial Owner Owned Owned
Jason Bacon 5,500(1) 0.1
RR #1, Box 78, New Haven, VT 05472
R. Patrick Burns 17,625(2) 0.3
c/o The Vermont Teddy Bear Co., Inc.
5566 Shelburne Road, Shelburne, VT 05482
Fred Marks 600,500(3) 11.6
c/o The Vermont Teddy Bear Co., Inc.
5566 Shelburne Road, Shelburne, VT 05482
Joan H. Martin 1,840,975(4) 35.5
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36 Church Street, Apt 2F, Woodbury, CT 06798
Margaret H. Martin 267,000 5.2
500 Lovell Avenue, Mill Valley, CA 94941
Spencer C. Putnam 84,000(5) 1.6
c/o The Vermont Teddy Bear Co., Inc.
5566 Shelburne Road, Shelburne, VT 05482
Elisabeth B. Robert 2,700(6) 0.1
c/o The Vermont Teddy Bear Co., Inc.
P.O. Box 965, Shelburne, VT 05482
(1) This figure includes 500 shares held of record by Mr. Bacon's wife, as
to which beneficial ownership is disclaimed. This figure does not include
a Warrant for the purchase of 22,670 shares of the Company's Common Stock,
or 9,314 shares of the Company's Series B Preferred Stock, which are
convertible into 22,670 shares of the Company's Common Stock. This figure
does not include options granted under the Company's Non-Employee Director
Stock Option Plan to Mr. Bacon to purchase 10,500 shares of the Company's
Common Stock, which have fully vested.
(2) This figure includes 5,975 shares held of record by Mr. Burns' wife, as
to which beneficial ownership is disclaimed. This figure does not include
options granted under the Company's Incentive Stock Option Plan to Mr.
Burns to purchase 562,500 shares of the Company's Common Stock, which have
fully vested.
(3) This figure includes 500 shares held of record by Mr. Marks' wife, as
to which beneficial ownership is disclaimed.
(4) This figure includes 1,120,000 shares held of record by the Joan Hixon
Martin Trust. This figure does not include 152,995 shares held of record
by Ms. Martin's son, Franc Sloan, and 267,000 shares held of record by Ms.
Martin's daughter, Margaret Martin. Ms. Martin disclaims beneficial
ownership of these shares. This figure does not include a Warrant for the
Purchase of 51,841 shares of the Company's Common Stock, which has fully
vested.
(5) This figure includes 10,000 shares held of record by Mr. Putnam's
children. This figure also includes 2,500 shares held of record by Mr.
Putnam's wife, as to which beneficial ownership is disclaimed. This figure
does not include options granted under the Company's Incentive Stock Option
Plan to Mr. Putnam to purchase 62,832 shares of the Company's Common Stock,
of which 30,332 shares have vested.
(6) This figure includes 2,000 shares held of record by Ms. Robert's minor
children. This figure does not include options granted under the Company's
Incentive Stock Option Plan to Ms. Robert to purchase 305,510 shares of the
Company's Common Stock, of which 136,760 shares have vested.
ITEM 1. Approval of an amendment to the Company's Certificate of
Incorporation to eliminate preemptive rights subject to the condition that
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dissenters' rights are not exercised by a number of the Company's
shareholders determined by the Board of Directors, in its discretion, to be
excessive.
The Company's Board of Directors has been advised by counsel that
Holders of the Company's Common Stock currently have preemptive rights
under the provisions of S 622 of the New York Business Corporation Law.(1)
Under these provisions, holders of the Common Stock of the Company would
have the right to participate proportionately in the proposed offering of
preferred stock and warrants to The Shepherd Group LLC (the _Shepherd
Group_), a private investment firm located in Massachusetts, and other
investors (collectively, the _Shepherd Investors_) described in Item 2 (the
_Proposed Offering_), and in certain other stock offerings by the Company
that would have a dilutive effect on such holders' voting or dividend
rights. The investment by the Shepherd Investors is contingent upon the
elimination of these preemptive rights without the exercise of any
dissenters' rights. Additionally, the Board of Directors of the Company
believes that the continued existence of these preemptive rights could
interfere with the Company's ability to attract other capital investments
in the future. The Board of Directors, therefore, has recommended the
adoption of an amendment to the Company's Certificate of Incorporation
eliminating the preemptive rights of holders of the Company's Common Stock.
However, the effectiveness of this amendment, if approved, is subject to
the condition that dissenters' rights are not exercised by holders of a
number of the issued and outstanding shares of the Company's Common Stock
determined by the Company's Board of Directors, in its discretion, to be
excessive. For an explanation of dissenters' rights, see _Dissenters'
Rights,_ below. The Board of Directors intends to exercise this discretion
by taking into account the number of shares exercising dissenters' rights,
if any, the cost to the Company of paying dissenting shareholders the fair
value of their shares, and the impact of this cost on the Proposed Offering
and the Company's overall financial condition. The full text of the
amendment is set on the following page.
(1) The provisions of Section 622 of the New York Business Corporation
Law applicable to the Company provide in pertinent part as follows:
(b) Except as otherwise provided in the certificate of
incorporation, and except as provided in this section, the
holders of equity shares of any class, in case of the proposed
issuance by the corporation of, or the proposed granting by the
corporation of rights or options to purchase, its equity shares
of any class or any shares or other securities convertible into
or carrying rights or options to purchase its equity shares of
any class, shall, if the issuance of the equity shares proposed
to be issued or issuable upon exercise of such rights or options
or upon conversion of such other securities would adversely
affect the unlimited dividend rights of such holders, have the
right during a reasonable time and on reasonable conditions, both
to be fixed by the board, to purchase such shares or other
securities in such proportion as shall be determined as provided
in this section.
(c) Except as otherwise provided in the certificate of
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incorporation, and except as provided in this section, the
holders of voting shares of any class, in case of the proposed
issuance by the corporation of, or the proposed granting by the
corporation of rights or options to purchase, its voting shares
of any class or any shares or other securities convertible into
or carrying rights or options to purchase its voting shares of
any class, shall, if the issuance of the voting shares proposed
to be issued or issuable upon exercise of such rights or options
or upon conversion of such other securities would adversely
affect the voting rights of such holders, have the right during a
reasonable time and on reasonable conditions, both to be fixed by
the board, to purchase such shares or other securities in such
proportions as shall be determined as provided in this section.
Effective February 22, 1998, S 622 was amended to provide that holders of
equity shares in corporations formed under the New York Business
Corporation Law after that date would not have preemptive rights unless
specifically authorized in the corporation's certificate of incorporation.
Absent approval of the amendment to the Company's Certificate of
Incorporation, holders of the Company's Common Stock, upon certain
offerings by the Company of any securities that could adversely affect
either the dividend rights or voting rights of the Common Stock, would be
entitled to purchase the proportion of the securities offered that, as
nearly as practicable, would preserve such holders' relative dividend and
voting rights. Under these circumstances, shareholders exercising their
preemptive rights would be entitled to do so on the same terms and at the
same price offered to the investors whose purchase had triggered such
preemptive rights.
If the amendment to the Company's Certificate of Incorporation is
approved and takes effect, the Company's Board of Directors would be
empowered to offer any of the Company's authorized but unissued shares of
Series B Convertible Preferred Stock or Common Stock, or to designate and
offer shares of new classes or series of the Company's undesignated
preferred stock, without offering any right of participation to the holders
of the Company's Common Stock. Additionally, the Company would be
authorized to complete the Proposed Offering, without offering any right of
participation to any of the holders of the Company's Common Stock. The
impact of the Proposed Offering to the holders of the Company's Common
Stock without preemptive rights is described in Item 2, below.
The Proposed Amendment
The Company's Certificate of Incorporation shall be amended by adding
a new Article IV, Section D, as follows:
D. Common Stock. Twenty million (20,000,000) shares of common stock
having a par value of $.05 per share. No holder of shares of common stock
shall have, as such holder, any preemptive right to purchase any shares or
other securities of the corporation.
This amendment to the Company's Certificate of Incorporation will
eliminate the preemptive rights currently available to holders of the
<PAGE>
Company's Common Stock. The effectiveness of the amendment is subject to
the condition that dissenters' rights are not exercised by holders of a
number of the Company's issued and outstanding shares of Common Stock that
the Board of Directors determines, in its discretion, to be excessive. The
Proposed Offering to the Shepherd Investors is subject to the condition
that no holders of the Company's Common Stock exercise their dissenters'
rights.
Voting Information
The Board of Directors recommends a vote FOR approval of the amendment
to the Company's Certificate of Incorporation. The affirmative vote of the
holders of the majority of the voting power of the Common Stock entitled to
vote at the Special Meeting of Stockholders is required for approval of the
amendment to the Certificate of Incorporation. Your appointed proxies will
vote your shares FOR approval unless you instruct otherwise.
Abstention and broker non-votes will have the same effect as votes
against the amendment.
Dissenters' Rights
Holders of the Company's Common Stock who object to the amendment of
the Company's Certificate of Incorporation are entitled to exercise their
dissenters' rights and receive payment for the fair value of their shares.
As described above, however, the Proposed Offering to the Shepherd
Investors is contingent on all of the Company's shareholders electing not
to exercise their dissenters' rights. Additionally, the Company's Board of
Directors has made the effectiveness of the amendment subject to the
condition that dissenters' rights are not exercised by holders of a number
of the Company's issued and outstanding shares of Common Stock determined
by the Board, in its discretion, to be excessive.
Shareholders desiring to exercise their dissenters' rights must vote
AGAINST the amendment of the Company's Certificate of Incorporation and
must file with the Company a written objection stating their election to
exercise their dissenters' rights, name, residential address, the number of
shares of the Company's Common Stock of which they are the beneficial
owner, and demanding payment of the fair value of their shares PRIOR to the
vote to be taken at the Special Meeting of Shareholders. Shareholders
exercising their dissenters' rights must do so as to all shares held by
them of record that they own beneficially. In addition to filing a written
objection and notice of election to dissent, shareholders exercising their
dissenters' rights must deliver to the Company the certificates
representing their shares within one (1) month of filing their notice of
election to dissent. The Company shall note thereon the shareholder's
notice of election to dissent and return the certificate to the
shareholder. Upon approval of the amendment to the Company's Certificate
of Incorporation, dissenting shareholders shall no longer have any of the
rights of shareholders of the Company, except the right to be paid the fair
value of their shares.
In the event that the amendment of the Company's Certificate of
Incorporation is approved, then the Company will notify within ten (10)
<PAGE>
days of the Special Meeting of Shareholders those shareholders that have
filed a notice of election to dissent of the approval of the amendment.
Within fifteen days of the Company's consummation of the amendment of the
Company's Certificate of Incorporation, but no later than ninety days after
the Special Meeting of Stockholders, the Company shall notify dissenting
shareholders of the Company's calculation of the fair value of their shares
as of the day prior to the Special Meeting, and shall make an advance
payment of eighty percent (80%) of such amount to those shareholders that
have delivered their certificates to the Company for notation. In the
event of disagreement as to the fair value of the shares, the Company will
institute a court proceeding to determine the fair value in accordance with
New York law. The court's determination of fair value will include an
allowance for interest.
ITEM 2. Approval of the sale of Series C Redeemable Convertible Preferred
Stock and warrants to the Shepherd Investors.
Although no shareholder approval is currently required to authorize
the Proposed Offering, the Company has been informed by NASDAQ that
regulations governing the listing of the Company's Common Stock with NASDAQ
could require the Company to obtain shareholder approval in the future if
the anti-dilution provisions applicable to the securities to be issued to
the Shepherd Investors are triggered such that the Shepherd Investors could
then obtain twenty percent (20%) or more of the Company's currently issued
and outstanding shares of Common Stock. Rather than seek approval at that
time, the Company's Board of Directors believes that it is in the best
interests of the Company to approve the Proposed Offering, including the
possible impact of the anti-dilution provisions, at this time.
The Proposed Offering consists of the issuance by the Company of a new
series of preferred stock to be designated as Series C Redeemable
Convertible Preferred Stock (the _Series C Stock_) and accompanying
warrants to the Shepherd Investors for Six Hundred Thousand Dollars
($600,000). The Shepherd Investors will receive sixty (60) shares of the
Series C Stock and accompanying warrants to purchase 495,868 shares,
subject to certain customary weighted-average anti-dilution provisions, of
the Company's Common Stock at $1.21 per share. The sixty shares of Series
C Stock will be convertible, subject to certain anti-dilution provisions,
into a total of 495,868 shares of the Company's Common Stock. The exercise
price of the warrants and the conversion ratio of the Series C Stock were
set at fifteen percent (15%) below the average closing price of the
Company's Common Stock for the sixty days on which a trade occurred prior
to execution of the letter of intent with the Shepherd Investors on May 21,
1998. As of July 24, 1998, the Company had 5,192,708 shares of Common
Stock issued and 5,180,708 shares outstanding. Accordingly, upon approval
and consummation of the Proposed Offering, the 991,736 shares of Common
Stock issuable upon exercise of the warrants and conversion of the Series C
Stock issued to the Shepherd Group would equal 19.1% of the Company's
shares outstanding as of the record date.
The following table sets forth the capitalization of the Company (i)
as of March 31, 1998 and (ii) as adjusted to reflect the sale of the Series
C Preferred Stock:
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CAPITALIZATION
March 31, 1998
Actual As Adjusted
Short-term debt $ 521,193 $ 521,193
Long-term debt 6,218,261 6,218,621
Series C Preferred Stock -
600,000
Shareholders' equity:
Series A Preferred Stock, 90 shares
authorized; 90 shares outstanding,
with cumulative dividends at 8% and
a liquidation value of $10,000 per share 900,000
900,000
Series B Preferred Stock, 375,000 shares
authorized; 204,912 shares outstanding 10,245 10,245
Common Stock, 20,000,000 shares authorized;
5,180,708 shares outstanding 259,299 259,299
Additional paid in capital 10,578,054 10,578,054
Treasury stock at cost, 12,000 shares (106,824)
(106,824)
Accumulated deficit (6,569,669) (6,569,669)
-------------- ------------
Total shareholder's equity $ 5,071,105 $
5,671,105
-------------- ------------
Total capitalization $ 11,810,559 $
12,410,559
============== ============
(1) Includes current portion of long-term debt.
(2) Includes capital lease obligations.
(3) Because the Series C Stock requires mandatory redemption after ten
years, this class of security is treated as a debt instrument for
accounting presentation purposes. Additionally, the Board of Directors has
yet to formally designate the Series C stock. A total of 60 Series C
Shares would be issued as the result of this Proposed Offering, with an
additional 50 shares designated for payment of in-kind dividends on
outstanding Series C Stock.
(4) Does not reflect the exercise of warrants granted in conjunction with
Series C issuance.
(5) The Company has 1,000,000 shares of _blank check_ preferred stock
authorized, which the Board of Directors has the sole authority to
designate. The Board of Directors has designated 375,090 shares, as
indicated above.
(6) Excludes (i) up to 2,000,000 shares of Common Stock reserved for
issuance under the Company's Incentive Stock Option Plan, of which options
to purchase 1,119,977 shares are outstanding; (ii) up to 400,000 shares of
Common Stock reserved for issuance under the Company's Non-Employee
Director Stock Option Plan, of which options to purchase 10,500 shares are
outstanding; (iii) Series B Preferred stock, which is currently convertible
into 482,441 shares of Common Stock; and (iv) warrants outstanding to
<PAGE>
purchase 936,751 shares of Common Stock, with exercise prices ranging from
$1.00 to $15.24 per Common Share.
Although the conversion ratio of the Series C Stock, $1.21 per Common
Share, was $.04 per Common Share less than the closing price of the
Company's Common Stock as of the date that the Company signed a letter of
intent for the Proposed Offering, the issuance of Series C Stock and
exercise of warrants would have a positive impact on the Company's net
tangible book value. As of March 31, 1998, the Company had a net tangible
book value (total tangible assets less total liabilities and Preferred
Stock) of $3,445,819, or $.67 per share of Common Stock outstanding. After
giving effect to the proposed sale of the Series C Stock, the exercise of
accompanying warrants, and payments of six percent Series C dividend in
Series C Stock for five years, and the receipt and application of the
estimated net proceeds therefrom, the pro forma net tangible book value of
the Company at March 31, 1998 would have been $4,645,819, or $.73 per share
of Common Stock outstanding, which represents an increase in the pro forma
net tangible book value of $.06 per share to current shareholders and a
decrease in the pro forma net tangible book value of $.48 to the new
investors.
The following table illustrates such dilution:
DILUTION
Conversion price to Common Stock of each Series C Share
$ 1.21
Net tangible book value per Common Share before the offering $ .67
Increase per Common Share attributable to purchase of Series
C Shares by new investors $ .06
------
Pro forma net tangible book value per Common Share after
the offering (1) $ .73
------
Dilution of net tangible took value per Common Share to new
Series C investors $ .48
======
(1) Assumes conversion of Series C Stock into common, the exercise of all
warrants associated with Series C Stock issuance, and payment of six
percent Series C dividend in Series C Stock for five years.
The following table summarizes, as of the date of this Proxy
Statement, the differences between existing shareholders and investors in
the Series C Stock offering with respect to the number and percentage of
shares of Common Stock purchased from the Company, the amount and
percentage of consideration paid and the average price paid per share:
Average
Shares Owned Consideration Price
Per
Number Percent Amount Percent
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Share
Present Shareholders (2) 5,180,708 81.7% $ 10,580,708 89.8%
$ 2.04
New Investors (3) 1,159,451 18.3% 1,200,000 10.2%
1.03
--------- ------ ------------ -----
Total 6,340,159 100.0% $ 11,780,708 100.0%
1(2) Excludes (i) up to 2,000,000 shares of Common Stock reserved for
issuance under the Company's Incentive Stock Option Plan, of which options
to purchase 1,119,977 shares are outstanding; (ii) up to 400,000 shares of
Common Stock reserved for issuance under the Company's Non-Employee
Director Option Plan, of which options to purchase 10,500 shares are
outstanding; (iii) Series B Preferred stock, which is currently convertible
into 482,441 shares of Common Stock; and (iv) warrants outstanding to
purchase 936,751 shares of Common Stock, with exercise prices ranging from
$1.00 to $15.24 per Common Share.
1(3) Assumes conversion of Series C Stock into common, the exercise of all
warrants associated with Series C Stock issuance, and payment of six
percent Series C dividend in Series C Stock for five years.
In addition to the rights and preferences described above, and as more
fully described in the term sheet and letter of intent attached to this
Proxy Statement as Exhibit A, the shares of Series C Stock will have the
following rights and preferences: (i) a cumulative dividend of six percent
(6%) payable in shares of Series C Stock for the first five years and in
shares of Series C Stock or cash, at the option of the Company, thereafter;
(ii) a liquidation preference superior to the Company's Common Stock; (iii)
the right, subject to certain limitations, to cause the redemption of the
Series C Stock after the fifth anniversary of its issuance at a price equal
to its liquidation value; (iv) the right to vote as a class for two out of
no more than nine members of the Company's Board of Directors; and (v) the
right to vote on all other matters on which holders of the Company's Common
Stock are entitled to vote as if the Series C Stock has been converted.
After the fifth anniversary of its issuance, the Company shall be
entitled to call all of the Series C Stock at a specific redemption price,
provided that if it is not previously redeemed, the Company must redeem the
Series C Stock upon the tenth anniversary of its issuance. In connection
with the right to vote as a class for two members of the Company's Board of
Directors, the Company's Board of Directors shall increase the size of the
Board from seven to nine members.
In connection with its investment, the Shepherd Group shall receive an
annual management fee of $25,000.00 in consideration of its performance of
ongoing services to be provided to the Company in accordance with the form
of Management Agreement attached hereto as Exhibit B. The Shepherd Group
shall also receive a 1/% financing fee for any capital raised by the
Company in the future with the assistance of the Shepherd Group, except
where such capital is raised directly from the Shepherd Group or its
affiliates.
Voting Information
<PAGE>
The Board of Directors recommends a vote FOR approval of the Proposed
Offering to the Shepherd Investors. As described above, the Board of
Directors believes that it is in the best interests of the Company to
approve the Proposed Offering in order to ensure compliance with NASDAQ
regulations governing the Company's Common Stock. The affirmative vote of
the holders of the majority of the voting power of the Common Stock
entitled to vote at the Special Meeting of Stockholders is required for
approval of the Proposed Offering. Your appointed proxies will vote your
shares FOR approval unless you instruct otherwise.
Abstention and broker non-votes will have the same effect as votes
against the Proposed Offering.
ITEM 3: OTHER BUSINESS
The Company's Board of Directors knows of no other matters which may
come before the Special Meeting. If, however, any other business should
properly come before the Special Meeting, the proxies relating to such
meeting will be voted with respect thereto in accordance with the best
judgment of the Board.
Stockholder proposals intended for presentation at the 1998 Annual
Meeting of Stockholders were to be received by the Secretary of the Company
by June 29, 1998, for inclusion in the Company's Proxy Statement and form
of proxy relating to the 1998 Annual Meeting. The Company has not yet set
the date for which stockholder proposals intended for presentation at the
Company's 1999 Annual Meeting of Stockholders must be received by the
Secretary of the Company, but will inform Stockholders of such date in the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders.
August ___, 1998 The Vermont Teddy Bear Co., Inc.
<PAGE>
EXHIBIT A
May 21, 1998
Via Facsimile and Federal Express
Ms. Elisabeth Robert
President and Chief Executive Officer
The Vermont Teddy Bear Co., Inc.
2236 Shelburne Road
Shelburne, VT 05482
Re: Final terms of a proposed investment in The Vermont Teddy Bear Co.,
Inc. by The Shepherd Group LLC and other investors.
Dear Elisabeth:
This letter, including the attached term sheet, represents a non-binding
<PAGE>
proposal for the review and analysis of a transaction in which The Shepherd
Group LLC (_TSG_ or the _Lead Institutional Investor_) and possibly an
additional institutional investor (collectively the _Institutional
Investors_) and / or individuals (collectively the _Investor Group_)
propose to make an investment in The Vermont Teddy Bear Company (the
_Company_ or _VTB_). The purpose of this letter and accompanying term
sheet is to set forth the principal terms and conditions upon which an
investment will be considered. The terms and conditions set forth herein
are subject to any adjustments made in order to achieve the most tax
advantageous structure of any such investment.
In consideration of the substantial expenditure of time, effort and expense
to be undertaken by TSG, the Company, its officers, directors, employees,
agents, representatives and affiliates agree, on the basis of this letter,
that during the period commencing from the date this letter is accepted by
the Company, for a period of 90 days, without the written consent of TSG,
the Company nor its officers, employees, directors, agents, representatives
or affiliates will not: (i) solicit, initiate or encourage submission of
proposals or offers, or enter into or continue negotiations or discussions
with, any other person or persons with regard to any sale by the Company of
the stock or assets of the Company (other than the sale of stock or assets
in the ordinary course of business including the exercise of options by
employees and / or disposal of treasury stock), the sale by the Company or
any of its affiliates of the Company's stock, the merger, consolidation or
any other business combination as a result of which those persons that
control the company, immediately prior to such transaction no longer
control the Company, or any other financing of the Company except for the
refinancing of the mortgage on the Company's principal place of business
held by W.P. Carey & Co or any senior creditor working capital financings;
or (ii) furnish to any other person any information with respect to, or
otherwise cooperate in any way, or assist, facilitate or encourage, any
acquisition or proposal for the assets or stock of the Company or any part
thereof or any other financing except for the refinancing of the mortgage
on the Company's principal place of business held by W.P. Carey & Co or any
senior creditor working capital financings to the Company by any other
person; or (iii) solicit, initiate or encourage submission of proposals or
offers, or enter into or continue negotiations or discussions with, any
other person or persons with regard to transactions similar in nature to
the investment contemplated herein.
If at any time during the period beginning with the date of this letter and
ending 90 days thereafter the Company sells, or enters into any agreement
to sell, all or substantially all of its stock or its assets; merges,
consolidates or enters into a business combination or enters into any
agreements to merge consolidate or enter into any business combination;
executes, or enters into an agreement to execute a transactions similar in
nature to the investment contemplated herein, the Company shall pay to TSG
a fee calculated as follows: (i) $100,000; plus (ii) all out of pocket
costs and expenses incurred by TSG and its respective accountants and
attorneys in connection with their performance of due diligence and
documentation to the point at which the Company alerts TSG in writing of
its intent to pursue a sale, merger, consolidation, business combination or
investment.
<PAGE>
Additionally, if the Company wishes to terminate this agreement it may do
so under the following conditions (i) the closing price of Company's common
stock the day prior to the day on which the parties hereto plan to
consummate the investment herein is greater than $1.625; (ii) the Company
pays TSG on demand, and upon presentation of appropriate documentation all
out of pocket costs and expenses incurred by TSG and its respective
accountants and attorneys in connection with their performance of due
diligence and documentation; and (iii) the Company pays TSG on demand one
hundred thousand dollars ($100,000).
Regardless as to whether or not the investment contemplated herein is
consummated, the Company agrees to pay on demand, and upon presentation of
appropriate documentation all out of pocket costs and expenses incurred by
TSG and its respective accountants and attorneys in connection with their
performance of due diligence and documentation.
Upon the signing of this Letter of Intent, TSG will begin a due diligence
analysis of the Company. This process will focus on the historical and
projected financial results of the Company, customer interviews, industry
analysis, legal and accounting due diligence. If, during such process, TSG
or the Investor Group uncovers any issue that is viewed to materially
detract from the investment, TSG and the Investor Group may, at their sole
discretion, elect to discontinue the pursuit of the investment contemplated
herein. Except as contemplated in the previous paragraph, if TSG or the
Investor Group, at their sole discretion, elect to discontinue the pursuit
of the investment contemplated herein, the Company will not be subject to
any fees or costs.
Except as provided in the immediately succeeding sentence, this letter
contains a statement of the present intention on TSG's part and on your
part and is not intended to create any legal binding obligation including a
legal binding obligation to purchase or sell the Company's stock described
above or in the accompanying term sheet, unless or until a purchase
agreement has been negotiated, is acceptable to all parties in all respects
and has been duly executed and delivered on behalf of all parties. This
letter does, however, constitute a binding obligation with respect to the
provisions of Paragraphs 2, 3, 4 & 5. This letter is delivered to you on
the condition that it be kept confidential and not shown to or discussed
with any third party other than legal and financial advisors. This letter
shall be of no further force or in effect if it has not been executed by
May 22, 1998. This letter may be executed in counterparts, all of which,
taken together shall constitute one and the same document.
Elisabeth, if the above is acceptable to you and the Board of Directors,
please so signify by signing the enclosed copy of this letter. This letter
agreement shall become effective upon execution by all parties listed
below.
Sincerely, Agreed and Acknowledged to,
The Shepherd Group LLC The Vermont Teddy Bear
Co., Inc.
<PAGE>
T. Nathanael Shepherd Elisabeth Robert
/s/ T. Nathanael Shepherd, /s/ Elisabeth B. Robert,
President President & Chief Executive Officer,
Director
<PAGE>
The Shepherd Group LLC
The Vermont Teddy Bear Co., Inc. Summary Investment Term Sheet
Amount of Investment
$600,000
Issuer
The Vermont Teddy Bear Co., Inc. (the "Company")
Investors
The investors shall be comprised of The Shepherd Group LLC ("TSG") and / or
individuals (collectively the "Investor Group").
Type of Security
Convertible Redeemable Preferred Stock (the "Preferred") with Warrants.
Term
The Preferred must be redeemed upon the tenth anniversary of the issuance
of the Preferred into an amount equal to the par value of the Preferred
plus any accrued and unpaid dividends. If the Company's common stock is
not listed on any principal exchange or any NASDAQ system at such time, the
Preferred must be liquidated into an amount equal to the greater of the par
value of the Preferred plus any accrued and unpaid dividends; and the fair
market value of the common stock of the Company that the Preferred is
convertible into at the time of such redemption. The fair market value
shall be determined by a good faith determination by the Company and the
Investor Group; if an agreement cannot be reached then the fair market
value shall be determined by a disinterested third party that is a
nationally recognized investment banking firm. The cost of obtaining such
fair market value shall be shared equally between TSG and the Company.
Par Value
$10,000 / share
Number of Shares
60
Dividend Rate
6.0% of outstanding Preferred to be paid for the first five years from the
date of closing on an annual basis in the form of shares of Preferred
(PIK). Beginning the sixth year from the date of closing and at the
discretion of the Company, the dividend is to be paid on an annual basis in
the form of shares of Preferred (PIK) or in cash. Additionally, dividends
paid on the common stock of the Company shall be paid on the Preferred on
an as converted basis.
Subordination Provision
<PAGE>
To the extent requested by the Company's existing lenders TSG will enter
into an intercreditor agreement whereby TSG will allow for the following:
The Preferred will be subordinated in right of payment of principal and
dividends to all of the Company's existing and future indebtedness that is
not convertible, exchangeable or transferable into securities representing
an equity interest in the Company. The Company may not make any payments
on account of the Preferred if there shall have occurred and be continuing
a default under any of the Company's existing or future indebtedness. The
Company may not make any payments on account of the Preferred if such
payment should cause a default under any of the Company's existing or
future indebtedness. Additionally, the Preferred will rank senior in right
of payment of principal and dividends to all existing and future common
stock and common stock equivalents, except for existing preferred stock
that is expressly senior to any subsequent series of preferred stock, of
the Company.
Common Stock Ownership
Conversion Provision
Each Preferred share will be convertible into Common Stock at an amount
equal to the par value of the Preferred divided by the Common Stock
Conversion Price.
Common Stock Conversion Price
The Common Stock Conversion Price shall be calculated on the effective date
of the attached Letter of Intent and will equal (i) the average of the
closing price of the common stock of the Company, as recorded on the
National Association of Securities Dealers Automated Quotation System under
the symbol BEAR, on the prior sixty (60) days in which an actual trade was
executed at the closing price ("The Actual Sixty Day Trading Average");
minus (ii) The Actual Sixty Day Trading Average multiplied by fifteen
percent (0.15).
Anti-Dilution Adjustments
Anti-Dilution adjustments to the Conversion Provision shall be customary
including a weighted average adjustment component.
Call Provisions
A. The Company may call the Preferred after the fifth anniversary of the
issuance of the Preferred only after giving Preferred holders 30 days
notice of the Company's intent to call the Preferred;
B. The Preferred may be called in whole, but not in part, at a price equal
to the greater of: (i) par plus accrued and unpaid dividends and (ii) the
amount represented by the percentage share of the fair market value of the
Common Stock of the Company that the Preferred is convertible into. If the
Company's common stock is not listed on any principal exchange or any
NASDAQ system at such time, the Preferred must be liquidated into an amount
equal to the greater of the par value of the Preferred plus any accrued and
unpaid dividends and the fair market value of the common stock of the
Company that the Preferred is convertible into at the time of such
redemption. The fair market value shall be determined by good faith
determination by the Company and TSG, if an agreement cannot be reached
then the fair market value shall be determined by a disinterested third
party that is a nationally recognized investment banking firm.
<PAGE>
Put Rights
A. Holders may put the Preferred back to the Company after the fifth
anniversary of the issuance of the Preferred;
B. Preferred may be put at a price equal to par, the Preferred shall
include any accrued and unpaid dividends;
C. In any single year, the aggregate value of Preferred put back to the
Company may not exceed the greater of 25% of net earnings after taxes of
the preceding 12 months or 25% of the Company's net worth.
Warrants
Rights of Warrant
To purchase one share of Common Stock
Number
A number equal to the par value of the Preferred divided by the Common
Stock Conversion Price
Exercise Price
Common Stock Conversion Price
Term
Seven Years
Operation of the Business
From the date of the enclosed letter until closing of the transaction, the
business of the Company will be operated in the ordinary course and will
not dispose of assets, incur any materially adverse changes, dividends,
distributions or sales other than in the ordinary course of business
without the prior written consent of TSG. Further, until the closing of
the transaction contemplated herein, unless the prior written consent of
TSG, the current state of the Balance Sheet of the Company shall be
maintained in substantially the same condition it is in on the date of this
Letter of Intent.
Registration and Other Shareholder Rights
A. Preemptive Rights: The Investor Group will be given the right to
purchase all new stock in an amount equal to their pro-rata share.
B. Piggy-Back Registration Rights: All shareholders will be given standard
Piggy-Back Registration Rights on a pro-rata basis.
C. Demand Registration Rights: The Investor Group will have the right to
demand the public sale of its stock through no more than three separate S-3
filings with the SEC. The Investor Group will be limited to exercising
such right to no more than once every twelve months.
Board Representation
TSG shall have the right, at their sole discretion, to appoint two board
members to the Board of Directors (the "Board") of the Company. The Board
will be capped at 9 members.
Compensation Committee
TSG will be entitled to a seat on the Compensation Committee. The
Committee will be capped at no more than 3 seats.
<PAGE>
Executive Committee
TSG will be entitled to a seat on the Executive Committee and will serve
with the Company's CEO and Chairman of the Board of Directors. The
Committee will be capped at no more than 3 seats.
Financing Fees
TSG will receive a 1 1/2% Financing Fee for capital raised by the Company
with the assistance of TSG following the closing of the Investment except
in situations where capital raised is (i) directly from TSG or (ii) from
affiliates directly under TSG's control.
Management Fees
TSG shall receive an annual, non-accountable, $25,000 management fee, plus
travel and other reasonable expenses which will be approved in advance and
payable monthly. Such fee is for management services such as (i) liaison
services with credit institutions and financial markets; (ii) access to
alternative sources of established equity capital; (iii) transaction
experience with secondary stock offerings, mergers, acquisitions and (iv)
business operations advisory services.
Such services shall be rendered pursuant to the attached Management
Agreement in Exhibit I.
Non-Compete Agreements
Non-compete agreements for key senior executive; for a period of 18 months
beyond the conclusion of employment.
Key Woman Insurance
$1,000,000 key-woman insurance policy for Elisabeth Robert with the Company
as the beneficiary. Such policy must be obtained within sixty (60) days of
the investment contemplated herein.
Other
A. Stock Purchase Agreement to contain customary terms and provisions,
including
representations, conditions, warranties, covenants, events of default and
indemnities.
B. So long as the Preferred is outstanding there will be no additional
incurrence of debt, liens, or other contracts with recourse to the assets
or cash flow of the Company without the approval of TSG except for such
incurrences undertaken in the ordinary course of business, including but
not limited to financing or leasing agreements, capital expenditures,
research and development, hiring (except as stated in C below), firing,
arrangements or agreements relating to promotions, with customers or
vendors, advertising, sales, production and general operations.
C. So long as the Preferred is outstanding TSG shall have veto rights on
hiring decisions for the CEO, CFO and COO positions excluding the renewal
of Elisabeth Robert's contract in the Fall of 1998.
Conditions to Closing
A. The satisfactory completion of all financial, industry, accounting,
business and legal due diligence.
B. Financial and other information that is currently available to TSG does
not materially change prior to closing.
<PAGE>
C. The Company shall have received a definitive declaration from the
Vermont National Bank ("VNB") that VNB has rescinded their claim to, and
unencumbered, the working capital assets of the Company specifically
pertaining to the Company's trademark's, receivables, inventory and work in
progress inventory.
D. The Company shall have received third party consents necessary for the
uninhibited implementation of the investment contemplated herein.
E. The Directors and Executive Officers shall provide written approval of
the transaction contemplated herein prior to the Company sending proxy
materials (seeking the approvals described in F. below) to shareholder's of
the Company.
F. The Company shall obtain approval from the shareholder's of the Company
for an amendment to the Company's Articles of incorporation, eliminating
shareholder preemptive rights and allowing for the creation of the Board of
Director's seats contemplated in the section entitled Board Representation
herein. Such approval shall be obtained with no more than 0.0% of the
shareholder's exercising their right to dissent if a majority of votes is
obtained.
G. There will not exist any material pending or threatened litigation
against the Company pertaining to investment contemplated herein or the
elimination of shareholder preemptive rights.
H. No obligation, liability or fee shall exist or be payable by the Company
to any broker or investment banking firm in connection with the investment
contemplated herein.
<PAGE>
EXHIBIT B
MANAGEMENT AGREEMENT
Management Agreement dated as of [_________], 1998, by and between the
Vermont Teddy Bear Co., Inc. a Vermont corporation (_VTB_ or the
_Company_), and The Shepherd Group LLC, a Massachusetts limited liability
company (the _Shepherd Group_).
W I T N E S S E T H:
WHEREAS, VTB wishes to retain the Shepherd Group to provide it with
the services set forth on Appendix A hereto; and
WHEREAS, the Shepherd Group desires to provide such services to VTB,
all on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the mutual covenants and agreements
and subject to all the terms and conditions hereinafter set forth, the
parties agree as follows:
Section 1. Term of Agreement
Unless sooner terminated by mutual consent of the parties hereto, the
term of this Agreement (the _Term of the Agreement_) shall commence on the
date hereof and end upon the earliest to occur of (i) The Shepherd Group
ceases to own more than 15% of its original Preferred investment or (ii)
ten (10) years from the date hereof.
<PAGE>
Section 2. Duties of the Shepherd Group
The Shepherd Group shall, during the Term of the Agreement as
reasonably requested by the Company, provide the Company with the services
set forth on Appendix A hereto; provided, however, that Shepherd Group
shall in no event be obligated to devote more than fifteen (15) hours per
month to providing to VTB the services described herein.
Section 3. Management Fee
Commencing as of the date hereto, VTB shall pay the Shepherd Group for
its services hereunder an annual management fee (the _Management Fee_) of
$25,000. The Management Fee shall, accrue daily, be paid monthly in
arrears, on the last day of the month beginning on the date hereof.
Section 4. Financing Fees. VTB shall pay TSG a 1 /%
financing fee (the _Financing Fee_) with respect to any capital raised by
the VTB or its subsidiaries with the assistance of TSG at any time after
the date hereof other than capital raised directly from TSG or Affiliates
of TSG. Notwithstanding the foregoing, should it be determined (based upon
a written opinion of counsel reasonable to TSG) that the payment of a
Financing Fee with respect to a particular issuance would prevent VTB from
qualifying for applicable federal or state private placement exceptions,
the payment of such Financing Fee shall be waived by the Investors.
Section 5. Entire Agreement; Amendment of Agreement;
Counterparts
This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof. No modification of this
Agreement or any part hereof, no waiver of any of the terms or provisions
hereof, and no further agreement between the parties shall be valid or
effective unless agreed to in writing by the parties. This Agreement may
be executed in any number of counterparts.
Section 6. Governing Law; Jurisdiction; Venue. This
Agreement shall be deemed to be a contract made under, and shall be
construed in accordance with, the laws of the State of Massachusetts
without giving effect to conflict of laws principles thereof. The Company
waives any claim that Boston, Massachusetts is an inconvenient forum or an
improper forum based on lack of venue.
IN WITNESS WHEREOF, the parties to this Agreement have caused their
respective names to be hereunto subscribed under seal by their respective
officer thereunto duly authorized as of the date first above written.
The Vermont Teddy Bear Co., Inc.
By:
Name:
<PAGE>
Title:
THE SHEPHERD GROUP LLC
By:
Name:
Title:
Appendix A
Management Services description:
To provide:
Analytical and qualitative analysis regarding brand development,
financing alternatives and strategic efforts;
Ad hoc advisory assistance via the Executive Committee;
Liaisons with credit institutions and the financial market;
Access to alternative sources of established equity capital;
Transaction experience in IPO's, mergers and acquisitions; and
Other networking, analytical and qualitative services pertaining
to the development and growth of the company.
Recruitment of candidates for the Board.
<PAGE>
PROXY
THE VERMONT TEDDY BEAR CO., INC.
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS AUGUST 28, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The
undersigned appoints Fred Marks, Jason Bacon, and Elisabeth
Robert, and each of them, as Proxies, each with power to appoint
his or her substitute, and hereby authorize any of them to
represent and to vote, as designated below, all shares of Common
Stock of The Vermont Teddy Bear Co., Inc. held of record by the
undersigned on July 24, 1998, at the Special Meeting of
Stockholders to be held at 10:00am EDT on August 28, 1998 at the
corporate headquarters of The Vermont Teddy Bear Co., Inc., 5566
Shelburne Road, Shelburne, Vermont, or any adjournment thereof.
<PAGE>
( X ) PLEASE MARK VOTES AS IN THIS EXAMPLE
1. APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO ELIMINATE PREEMPTIVE RIGHTS SUBJECT TO THE
CONDITION THAT DISSENTERS' RIGHTS ARE NOT EXERCISED BY A NUMBER
OF THE COMPANY'S SHAREHOLDERS DETERMINED BY THE BOARD OF
DIRECTORS, IN ITS DISCRETION, TO BE EXCESSIVE.
( ) FOR ( ) AGAINST ( ) ABSTAIN
2. APPROVAL OF THE SALE OF SERIES C REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND WARRANTS TO THE SHEPHERD INVESTORS.
( ) FOR ( ) AGAINST ( ) ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon
such other business as may properly come before the meeting or
any adjournment thereof.
This Proxy, when properly executed, will be voted in the manner
directed herein by the stockholder. IF NO DISCRETION IS MADE,
THIS PROXY WILL BE VOTED FOR ALL PROPOSALS.
Dated:
_____________________________, 1998
__________________________________________
Signature
__________________________________________
Signature, if held jointly
NOTE: Please sign exactly as name
appears
hereon. Joint owners should each
sign.
When signing as an attorney,
executor,
administrator, trustee, or
guardian,
please give full title as such.
