The Vermont Teddy Bear Co., Inc.
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 September 11, 1998, at the
Company's retail/manufacturing facility, 5566 Shelburne Road, Route
Seven, Shelburne, Vermont, for the following purposes:
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 4, 1998
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The Vermont Teddy Bear Co., Inc.
5566 Shelburne Road
Shelburne, Vermont 05482
August 4, 1998
Proxy Statement
Special Meeting of Stockholders
To Be Held September 11, 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 September 11, 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.
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 14, 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
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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)
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:
Name and Address Shares Percent
of Beneficial Owner Owned Owned
Jason Bacon 5,500(2) 0.1
RR #1, Box 78, New Haven, VT 05472
R. Patrick Burns 17,625(3) 0.3
c/o The Vermont Teddy Bear Co., Inc.
5566 Shelburne Road, Shelburne, VT 05482
Fred Marks 600,500(4) 11.6
c/o The Vermont Teddy Bear Co., Inc.
5566 Shelburne Road, Shelburne, VT 05482
Joan H. Martin 1,840,975(5) 35.5
34 Woodbury Hill, Woodbury, CT 06798
Margaret H. Martin 267,000 5.2
500 Lovell Avenue, Mill Valley, CA 94941
Spencer C. Putnam 84,000(6) 1.6
c/o The Vermont Teddy Bear Co., Inc.
5566 Shelburne Road, Shelburne, VT 05482
Elisabeth B. Robert 2,700(7) 0.1
c/o The Vermont Teddy Bear Co., Inc.
P.O. Box 965, Shelburne, VT 05482
(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.
(2) 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
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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.
(3) 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.
(4) This figure includes 500 shares held of record by Mr. Marks' wife,
as to which beneficial ownership is disclaimed.
(5) 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.
(6) This figure includes 10,000 shares held of record by Mr. Putnam's
children. This figure also includes 2,500 shares held of record by Mr.
Putnam's wife, as to which beneficial ownership is disclaimed. This
figure does not include options granted under the Company's Incentive
Stock Option Plan to Mr. Putnam to purchase 62,832 shares of the
Company's Common Stock, of which 30,332 shares have vested.
(7) 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 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 Section 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
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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 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, Section 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
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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
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.
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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)
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.
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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:
CAPITALIZATION
March 31, 1998
Actual As Adjusted
Short-term debt(1) $ 521,193 $ 521,193
Long-term debt(2) 6,218,261 6,218,621
Series C Preferred Stock (3) - 600,000(4)
Shareholders' equity(5):
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;
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5,180,708 shares outstanding(6) 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) Since 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 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:
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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
=====
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 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%
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(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.
(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.
(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
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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 11/2% 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
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.
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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 4, 1998 The Vermont Teddy Bear Co., Inc.
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
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
<PAGE>
"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
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.
<PAGE>
Subordination Provision
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,
<PAGE>
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.
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.
<PAGE>
Compensation Committee
TSG will be entitled to a seat on the Compensation Committee. The
Committee will be capped at no more than 3 seats.
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
<PAGE>
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.
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.
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
<PAGE>
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.
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 1/2% 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.
<PAGE>
The Vermont Teddy Bear Co., Inc.
By:
Name:
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 SEPTEMBER 11, 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
September 11, 1998 at the corporate headquarters of The Vermont Teddy
Bear Co., Inc., 5566 Shelburne Road, Shelburne, Vermont, or any
adjournment thereof.
( 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.
<PAGE>
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.
