U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
Check the appropriate box:
[ X ] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
[Fee Required]
For the fiscal year ended June 30, 1998 .
[ ] Transition report under Section 13 or 15(d) of the Exchange
Act
[No Fee Required]
For the transition period from _______________ to
_______________.
Commission file number 1-12580 .
THE VERMONT TEDDY BEAR CO., INC.
(Exact name of small business issuer as specified in its charter)
New York 03-0291679
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6655 Shelburne Road, Post Office Box 965
Shelburne, Vermont 05482
(802) 985-3001
(Address of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.05 per share NASDAQ Smallcap Market
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, per value $.05 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X ; No .
Check if there is no disclosure of delinquent filers in response to
<PAGE>
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[ ]
The issuer's revenues for its most recent fiscal year ended June 30,
1998 were $17,207,543.
The aggregate market value of the voting stock held by non-affiliates
of the issuer, based on the average high and low prices of such stock
on July 24, 1998, as reported on NASDAQ, was $6,479,666.
As of July 24, 1998, there were 5,195,733 shares of the issuer's
common stock issued and 5,183,733 shares outstanding.
Documents Incorporated By Reference
The following documents, in whole or in part, are specifically
incorporated by reference in the indicated part of this Annual Report
on Form 10-KSB:
Proxy Statement for 1998 Annual Meeting of the issuer's stockholders:
Part III, Items 9, 10, 11 and 12.
Transitional Small Business Disclosure Format (check one): Yes
; No X .
The Vermont Teddy Bear Co., Inc.
1998 Form 10-KSB Annual Report
Table of Contents
Page
Item 1. Description of Business 3
Item 2. Description of Property 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Market for Common Equity and Related
Stockholder Matters 10
Item 6. Management's Discussion and Analysis or Plan
of Operation 12
Item 7. Financial Statements 15
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 15
<PAGE>
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance With Section
16(a) of the Exchange Act 15
Item 10. Executive Compensation 15
Item 11. Security Ownership of Certain Beneficial Owners
and Management 16
Item 12. Certain Relationships and Related Transactions 16
Item 13. Exhibits and Reports on Form 8-K 16
Signatures 22
Index to Financial Statements 23
Item 1. Description of Business
Founded in 1981 and incorporated in 1984, The Vermont Teddy Bear
Co., Inc. (the "Company"), with its principal offices located at 6655
Shelburne Road, Shelburne, Vermont, is a designer, manufacturer, and
direct marketer of teddy bears and related products.
Principal Distribution Methods
The Company uses a variety of channels to market its products, of
which the largest is its Bear-Gram delivery service, comprising 72.0
percent of net revenues for the fiscal year ended June 30, 1998.
Other principal avenues of distribution include Company-owned retail
stores, direct mail catalogs, and licensing and wholesale agreements.
The Company's sales are heavily seasonal, with Valentine's Day,
Christmas, and Mother's Day as the Company's largest sales seasons.
Primary distribution methods
for the twelve months ended June 30,
1998 1997 1996 1995
Bear-Grams* 72.0% 70.0% 75.8% 78.7%
Retail Operations 18.0% 17.7% 12.9% 9.2%
Direct Mail 9.2% 10.9% 7.2% 8.8%
Other 0.8% 1.4% 4.1% 3.3%
* Excludes Bear-Gram revenues from retail operations.
The Bear-Gram delivery service involves sending personalized
teddy bears directly to recipients for special occasions such as
birthdays, anniversaries, weddings, and new births, as well as
holidays such as Valentine's Day, Christmas, and Mother's Day. Orders
for the Bear-Gram deliver service are generally placed by calling a
toll-free telephone number (1-800-829-BEAR) and speaking with Company
sales representatives, called Bear Counselors. Customers can also
visit the Company's website (www.vtbear.com) and place their orders
<PAGE>
on-line. The Company offers teddy bears in a variety of sizes and
colors, as well as approximately 100 different teddy bear outfits to
further personalize the teddy bear. Orders placed by 4:00 pm can be
shipped the same day; packages are delivered primarily via United
Parcel Service and other carriers by next-day air or ground delivery
service.
The Bear-Gram delivery service has been the most significant
factor in the historical growth of the Company. Although the Bear-
Gram delivery service was first introduced on a small scale in 1985,
the Company's marketing effort throughout the 1980's focused primarily
on wholesaling teddy bears to specialty stores and direct retail
through its own outlets. Shortly before Valentine's Day in 1990, the
Company introduced radio advertising of its Bear-Gram delivery service
on radio station WHTZ ("Z-100") in New York City, positioning it as a
novel gift for Valentine's Day, and offering listeners a toll-free
number for customers to order from the Company's facility in Vermont.
This test proved to be successful, and the service was expanded to
other major radio markets across the country. Primarily through the
Bear-Gram delivery service, the Company increased its net revenues
from approximately $351,000 in 1989 (the year prior to the initial New
York City Bear-Gram campaign) to a peak of $20,561,000 in 1994. Total
revenues were $17,208,000 for the twelve months ended June 30, 1998.
Since 1990, the Company has expanded the radio marketing of its
Bear-Gram delivery service beyond New York City, to include other
metropolitan areas and syndicated radio programs carried by stations
across the United States. During the twelve-month period ended June
30, 1998, the Company regularly placed advertising on a total of 44
radio stations in twelve of the twenty largest market areas in the
United States. For Valentine's Day, the Company's peak Bear-Gram
sales season, the Company advertised on 162 radio stations in 44
different markets.
The following table shows the Company's largest markets and most
frequent reasons given by customers for purchasing the Company's Bear-
Grams:
Percentage of Bear-Grams for the
twelve months ended June 30,
1998 1997 1996 1995
Markets
New York City 37.8% 40.8% 35.5% 38.6%
Boston 13.4% 13.2% 9.5% 9.5%
Philadelphia 8.9% 11.6% 8.9% 7.3%
Chicago 6.5% 8.9% 7.3% 8.5%
Los Angeles 6.3% 5.8% 4.0% 3.8%
Reasons for Purchases
Valentine's Day 27.7% 22.1% 20.8% 19.2%
Birthdays 11.8% 11.6% 13.4% 15.0%
New Births 11.6% 10.3% 12.8% 9.9%
Get Wells 11.0% 9.7% 12.0% 10.4%
<PAGE>
Christmas 8.4% 5.6% 8.6% 10.4%
Included in Bear-Gram revenues are sales from the Company's
internet website, www.vtbear.com. A total of 396,000 "hits" were
recorded during the twelve months ended June 30, 1998, more than
double the 195,000 hits received during the twelve months ended June
30, 1997. All radio advertisements are tagged with a reference to the
web site, which, in turn, provides visual support for the radio
advertising and the opportunity for customers to place orders on-line.
In the year ahead, the Company plans to expand its Bear-Gram
radio advertising into more of the top fifty radio markets with the
goal of efficiently and effectively maximizing the number of radio
listeners reached.
In aggregate, retail stores were second only to Bear-Grams in
their contribution to sales in the fiscal year ended June 30, 1998, at
18.0 percent of net revenues. In an effort to diversify the Company's
distribution channels, the Company had placed a greater emphasis on
other forms of marketing, including the establishment of Company-owned
satellite retail stores, over the past two years.
Due to continued unprofitability in its satellite stores, the
Company has reversed its retail expansion strategy, closing its New
York City store on December 7, 1997, and its Freeport, Maine store on
August 11, 1998. Additionally, the Company will close its North
Conway, New Hampshire store in October, 1998, which will leave the
Company's factory in Shelburne, Vermont as the only retail store
location. The Company actively promotes family tours of its teddy
bear factory and store in Shelburne, located ten miles south of
Burlington, Vermont. The factory drew over 129,000 visitors in the
twelve-month period ended June 30, 1998, and has drawn more than
390,000 visitors since moving to its new location in July 1995. In an
effort to make a visit to the factory more entertaining and draw
additional traffic, the Company has implemented the Make-A-Friend-For-
Life bear assembly area, where visitors can participate in the
creation of their own teddy bear.
The Company also generates revenues from direct mail initiatives.
For the fiscal year ended June 30, 1998, direct mail accounted for 9.2
percent of net revenues. The Company introduced its first catalog for
Christmas of 1992, and has accumulated an in-house mailing list in
excess of 1,500,000 names. During the twelve months ended June 30,
1998, more than 15 million circulated pages were mailed to prospective
customers. The Company intends to increase the number of circulated
pages in the year ahead, primarily through renting and exchanging of
additional names from other catalogs and mailing to more names on the
in-house mailing list.
Competitive Business Conditions
The Company competes with a number of sellers of flowers,
balloons, candy, cakes, and other gift items, which can be ordered by
<PAGE>
telephone for special occasions and delivered by express service in a
manner similar to Bear-Grams. The Company also competes with a number
of companies that sell teddy bears in the United States, including,
but not limited to, Steiff of Germany, Dakin, North American Bear, and
Gund. Many of these competitors have greater financial, sales, and
marketing resources than the Company.
The Company also competes with businesses that market and sell
teddy bears in a manner similar to Bear-Grams, including "Pooh-Grams"
by certain subsidiaries of Disney Enterprises, Inc. On May 16, 1997,
The Vermont Teddy Bear Co., Inc. filed suit against the Disney
subsidiaries alleging that "Pooh-Grams" infringed on the Company's
marks and sough to enjoin the sale of "Pooh-Grams." On September 9,
1997, the two companies entered into an agreement to resolve their
dispute, whereby Disney will continue to offer its Pooh-Gram products
and services but will voluntarily limit its use of the Pooh-Gram mark
in certain advertising. The Company, in turn, will be allowed to
offer certain Winnie The Pooh merchandise for sale in its mail order
catalog but will not offer such merchandise in conjunction with its
Bear-Gram program.
There are no material barriers to entry into this market, and
accordingly, there can be no assurance that additional companies will
not seek to compete directly with the Company, including those with
greater resources than the Company.
Principal Products
From its inception, the Company's focus has been to design and
manufacture the best teddy bears made in America. The Company
manufactures its bears in the United States, with the exception of
some products for its corporate and wholesale channels. The Company
believes that, apart from its own product, most of the teddy bears
sold in the United States are manufactured in foreign countries, and
that the Company is the largest manufacturer of teddy bears made in
the United States. Additionally, the Company has started to source
raw materials from offshore for its Shelburne-based teddy bear
manufacturing operations, in an effort to lower the Company's cost of
goods sold and to broaden its available sources of supply.
The move offshore represents a significant departure from the
Company's historical position as an American manufacturer using almost
exclusively American materials. The Company's strategic repositioning
involves a commitment to ensuring that our partners provide decent,
lawful working environments, and the Company obtains a written
statement to that effect from each off-shore vendor prior to any
transaction.
The Company produces many different sizes of bears, ranging from
11" to 72" tall, in six standard colors. Virtually all of the
Company's teddy bears have moveable joints, a feature associated with
traditional, high-quality teddy bears. Additionally, approximately
100 different bear outfits are manufactured, including ballerina
<PAGE>
bears, birthday bears, bride and groom bears, business bears, nurse
bears, and sports bears. Forty-four percent of the outfits were
outsourced to overseas contractors during the twelve months ended June
30, 1998.
In addition to its own manufactured product, the Company sells
items related to teddy bears, as well as merchandise from other
manufacturers featuring the logo of The Vermont Teddy Bear Company.
Items such as apparel, jewelry, books, and ornaments are available
primarily in the Company's retail stores and to a lesser extent
through its direct mail catalog. The Company also sells stuffed toys
that have been manufactured by other companies, such as Gund and
Steiff of Germany. The Company intends to reverse this product
strategy in the year ahead, in order to focus more attention on the
sale of the Company's own manufactured products, including those
manufactured offshore.
Sources and Availability of Materials, Supplies, and Production
Raw materials for the Company's bears and outfits are obtained
from several suppliers. The Company presently purchases certain of
its raw materials from single suppliers, but believes that alternate
sources of supply are available at competitive prices, should
conditions warrant.
Fabric for all teddy bears is cut at the Company's Shelburne
factory prior to being sewn. Sewing of bear parts (arms, legs,
bodies, and heads) is done by employees, as well as by homeworkers and
other subcontractors. Once individual parts are sewn, they are
returned to the factory for mechanical stuffing. The bears are
assembled by attaching the stuffed parts to the bears with plastic
joints, hand-stuffing the bodies, and hand-stitching the backs. The
Company also produces and subcontracts outfits for the bears, which
are then "dressed" to meet customer requests.
Patents, Trademarks, and Licenses
The Company's name in combination with its original logo is a
registered trademark in the United States. In addition, the Company
also owns the registered trademarks in the United States for "The
Vermont Teddy Bear Company," "Bear-Gram, " "Teddy Bear-Gram, " and
"Make-A-Friend-For-Life." The Company also owns the registered
service marks "Bear Counselor," "Vermont Bear-Gram" and "Racer Ted,"
and has applications pending to register the Company's second and
third Company logos, "Bearanimal," "Coffee Cub," "Teddy-Grams,"
"Vermont Baby Bear," "Vermont Teddy Wear," "Vermont Bear-Gram," "The
Great American Teddy Bear," "All-American Teddy Bear" and "Beau and
Beebee."
The Company also owns the registered trademark "Vermont Teddy
Bear" in Japan, and also has an application pending to register "The
Great American Teddy Bear" in Japan.
<PAGE>
The Company also claims copyright, service mark or trademark
protection for its teddy bear designs, its marketing slogans, and its
advertising copy and promotional literature.
Employees
As of June 30, 1998, the Company employed 181 individuals, of
whom 94 were employed in production-related functions, 67 were
employed in sales and marketing positions, and 20 were employed in
general and administrative positions. No employees are members of a
union, and the Company believes it enjoys favorable relations with all
employees.
The Company supplements its regular in-house work force with
homeworkers who perform production functions at their homes. The
level of outsourced work fluctuates with Company production targets;
at June 30, 1998, there were 21 homeworkers producing products for the
Company. Homeworkers are treated by the Company as independent
contractors for all purposes, except for withholding of federal
employment taxes. As independent contractors, homeworkers are free to
accept or reject work offered by the Company. This working
relationship allows the Company to adapt to fluctuations in production
requirements.
Item 2. Description of Property
In July 1995, in an effort to consolidate the Company's disparate
locations and improve manufacturing flow, the Company moved its
principal offices, along with its retail store, manufacturing, sales,
and fulfillment operations to its newly-constructed 62,000 square foot
building, located on a 57-acre site along U.S. Route 7 in Shelburne,
Vermont. The new site is two miles south of the Company's former
location, and ten miles south of Burlington, Vermont. The Company
purchased the site for approximately $817,000, and the cost of
improving the site and constructing the new facility totaled
approximately $7.1 million. On September 26, 1995, the Company
entered into a $3.5 million commercial loan with the Vermont National
Bank, secured by a first mortgage on the new facility, as well as
general business assets. Repayment of the mortgage loan was based on
a thirty-year fixed principal payment schedule, with a balloon payment
due on September 26, 1997.
On July 18, 1997, the Company completed a sale-leaseback
transaction, involving its factory headquarters and a portion of its
property located in Shelburne, Vermont. This financing replaced the
Company's mortgage loan agreement with the Vermont National Bank. The
Company received approximately $5.9 million in cash, of which
approximately $3.3 million was used to pay off the existing mortgage
with the Vermont National Bank. The balance, approximately $2.6
million, was used for general working capital purposes, to pay down a
$600,000 balance on the Company's line of credit (which was retired as
<PAGE>
the result of the termination of the original mortgage loan), and
transaction costs associated with the sale-leaseback. The lease
obligation, secured by the business assets of the Company, is
repayable on a twenty-year amortization schedule through July 2017.
The Company has a three-year lease on 10,000 square feet of
inventory space at a separate location in Shelburne, Vermont, one mile
north of the factory, for $56,000 annually. The Company also has the
following lease agreements for its retail stores:
Square Annual 1999 Rent End of Lease
Location Footage Rent Obligation Obligation
North Conway, NH 6,000 $ 49,608 $ 28,938 1/31/1999
New York City, NY 2,600 $300,000 $300,000 10/23/2006
Freeport, ME 6,000 $240,000 $ 25,644 8/6/1998
The annual rent listed in the table above is for fiscal year 1999
only. These figures for rent expense are the cash payments due to the
respective lessors, which may differ from the actual amount expensed
for accounting purposes in any given fiscal year.
The 1999 rent exposure reflects the closure of the North Conway
and Freeport stores, but does not reflect a replacement tenant for the
New York City retail location, as no definitive contract has been
signed at the time of this filing.
On July 29, 1998, in accordance with provisions in its lease, the
Company formally notified its North Conway, New Hampshire landlord of
its intent to close its retail store, and as a result, will have no
further lease obligation effective February 1, 1999.
On October 24, 1996, the company entered into a ten-year lease
for 2,600 square feet on Madison Avenue in New York City. On December
7, 1997, the Company's 538 Madison Avenue location was closed due to
structural problems at neighboring 540 Madison Avenue. On December
16, the Company announced that it was permanently closing that retail
location. The City of New York deemed the 538 Madison Avenue building
uninhabitable from December 8, 1997 to April 9, 1998, and as such, the
Company incurred no rent expense during that period, and the
landlord's insurance carrier covered the rent payments on behalf of
the Company from April 10, 1998 to June 30, 1998. The Company is
currently making its best efforts to find a replacement tenant for its
space, and, as of June 30, 1998, has accrued $145,000 for this
contingency, which is included in accrued expenses in the accompanying
financial statements. (If no replacement tenant is
found, the annual rent for the Company's New York City location will
increase to $330,000, effective January 1, 2000, and to $363,000,
effective January 1, 2003.)
After reaching an agreement on June 12, 1998 to have Abercrombie
and Fitch, a national clothing retailer, take over its Freeport, Maine
space, the Company closed that store location on August 11, 1998, and
its lease obligation ended on August 6, 1998.
<PAGE>
Item 3. Legal Proceedings
The Company is not currently a party to any material legal
proceedings.
On September 9, 1997, the Company entered into a binding
settlement agreement in its lawsuit against The Walt Disney Catalog,
Inc., Disney Enterprises, Inc., and the Disney Store, Inc.
("Defendants"), entitled The Vermont Teddy Bear Co., Inc. v. The Walt
Disney Catalog, Inc., Disney Enterprises, Inc., and the Disney Store,
Inc. The suit, originally filed on May 16, 1997, in the United States
District Court for the Eastern District of Virginia, Civil Action No.
97-762-A, alleged trademark and trade dress infringement and unfair
competition in connection with the Company's service marks Bear-Gram,
Vermont Bear-Gram, and the Company's logo. The settlement provides
for certain assurances that the Defendants will adequately distinguish
their trademarks and service marks from those of the Company and limit
their use of the Pooh-Gram mark in certain advertising. The Company
remains committed to preserving and strengthening all of its
trademarks and servicemarks.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
At the time of the initial public offering of 1,172,500 shares of
the Company's Common Stock in November, 1993, the Company's Common
Stock had been approved for quotation on NASDAQ and the Pacific Stock
Exchange under the symbols "BEAR" and "VTB," respectively. To date,
NASDAQ has been the principal market for the exchange of the freely
tradable shares of the Company's Common Stock. On July 31, 1996, the
Company voluntarily de-listed from the Pacific Stock Exchange as a
result of minimal trading volume. Between July 1, 1996 and June 30,
1998, the high and low sales prices for a share of the Company's
Common Stock as quoted on NASDAQ were as follows:
Quarter Ended High Low
June 30, 1998 $ 1.63 $ 1.06
March 31, 1998 $ 1.63 $ 0.75
December 31, 1997 $ 2.13 $ 0.88
September 30, 1997 $ 2.56 $ 1.06
June 30, 1997 $ 1.88 $ 1.00
March 31, 1997 $ 2.88 $ 1.38
December 31, 1996 $ 3.25 $ 2.25
September 30, 1996 $ 3.38 $ 2.13
<PAGE>
Description of Securities
Immediately prior to the Company's initial public offering, there
were 4,000,000 shares of the Company's Common Stock outstanding, held
of record by nine shareholders. As a result of the 1,000,000 share
initial public offering and the Underwriters' purchase of an
additional 172,500 shares to cover over-allotments in connection
therewith, there were 5,172,500 shares of the Company's Common Stock
outstanding immediately following the offering. On March 8, 1995, the
Company purchased 12,000 common shares in the open market, and
continues to hold these shares as treasury stock. From March 1, 1996
to June 30, 1998, 23,233 shares of the Company's Common Stock were
issued pursuant to the exercise of employee Incentive Stock Options.
As a result of these activities, there were 5,183,733 shares of the
Company's Common Stock outstanding, held of record by 1,553
shareholders as of June 30, 1998.
There are 90 shares of non-voting Series A Preferred Stock, held
of record by one shareholder, with a liquidation value of $10,000 per
share plus cumulative dividends of eight percent per annum. There has
been no change in the number of Series A preferred shares, and the
original shareholder remains the sole shareholder of Series A
Preferred Stock.
On July 12, 1996, the Company privately placed $550,000 of Series
B convertible Preferred Stock. The 204,912 Series B preferred shares,
held of record by twelve shareholders, are not entitled to any
dividends or voting rights, but each share was originally convertible
into one share of the Company's Common Stock at any time on or after
July 12, 1997. As the result of subsequent financing transactions,
the anti-dilution provisions of the Series B agreement were activated,
and the 204,912 shares of Series B Preferred Stock are now convertible
into 482,441 shares of Common Stock. Common shares issued as the
result of the conversion of the Series B Preferred Stock shall be
considered "restricted securities" and shall be subject to certain
registration rights. On liquidation, dissolution, or winding up of
the Company, holders of Series B Preferred Stock are entitled to be
paid on a pari passu basis with any holders of Series A Preferred
Stock.
On September 25, 1998, after receiving Common stockholder
approval on September 11, 1998, the Company entered into an agreement
to privately place $600,000 of Series C Convertible Redeemable
Preferred Stock. Consummation of the agreement is subject to certain
conditions. Each of the sixty Series C shares will have a liquidation
value of $10,000 per share, and will be convertible into 8,264 shares
of the Company's Common Stock. The Series C Stock will require
redemption upon the tenth anniversary of its issuance, with both the
Company and the Series C Stockholders having call and put rights,
respectively, beginning on the fifth anniversary of issuance. The
Series C Stock will carry voting rights on an as-converted basis, and,
as a class, will have the right to elect two members to the Company's
Board of Directors. Accompanying the issuance of the Series C Stock
will be warrants to purchase 495,868 shares of the Company's Common
<PAGE>
Stock at an exercise price of $1.21 per share, which will expire seven
years from the date of issuance. Both the Series C Stock and the
accompanying warrants will carry certain anti-dilution provisions.
Dividends
The Company has never paid cash dividends on any shares of its
Common Stock, and the Company's Board of Directors intends to continue
this policy for the foreseeable future. Earnings, if any, will be
used to finance the development and expansion of the Company's
business. The Company's ability to pay dividends on its Common Stock
is limited by the preferences of certain classes of Preferred Stock,
as well as certain indebtedness, and may be further limited by the
terms of Preferred Stock issued or other indebtedness incurred by the
Company in the future. Future dividend policy will depend upon the
Company's earnings, capital requirements, financial condition and
other factors considered relevant by the Company's Board of Directors.
The Series A Preferred Stock is entitled to receive cumulative
dividends of eight percent per annum, which are payable before any
dividend may be paid upon, or set apart for, the Common Stock
outstanding. The Series B Preferred Stock is not entitled to receive
dividends. The Series C Preferred Stock is entitled to a six percent
dividend, to be paid in additional shares of Series C Preferred Stock
for the first five years and thereafter either in cash or Series C
Preferred Stock, at the Company's discretion.
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis provides information that
the Company's management believes is relevant to an assessment and
understanding of the Company's results of operations and financial
condition. The discussion should be read in conjunction with the
financial statements and footnotes that appear elsewhere in this
report, as well as the 10-KSB filing for the fiscal year ending June
30, 1997. This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1993 and Section 21E of the
Securities Exchange Act of 1934. The words "believe," "expect,"
"anticipate," "intend," "estimate," and other expressions that predict
or indicate future events and trends, and that do not relate to
historical matters, identify forward-looking statements. Such
statements involve risks and uncertainties that could cause actual
results to differ materially from those set forth in such forward-
looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise.
Results of Operations
Comparison of Fiscal Year 1998 and Fiscal Year 1997
<PAGE>
Net revenues for the fiscal year ended June 30, 1998 totaled
$17,208,000, an increase of $719,000 from net revenues of $16,489,000
for the fiscal year ended June 30, 1997. By business segment, Bear-
Gram revenues, which include internet revenues, increased $853,000,
attributable to increased sales from the Company's www.vtbear.com
website. Retail store net revenues increased by $194,000, principally
due to the opening of the Company's Freeport, Maine retail store in
August 1997. Wholesale revenues increased $11,000, while licensing
revenues decreased $115,000. Direct mail revenues decreased $224,000
as the Company cut back on the number of circulated pages, in response
to poor performance of significantly larger mailings during the prior
fiscal year.
Gross margin increased by $389,000 to $9,810,000 for the fiscal
year ended June 30, 1998, from $9,421,000 for the fiscal year ended
June 30, 1997. As a percentage of net revenues, gross margin
decreased to 57.0 percent for the fiscal year ended June 30, 1998,
from 57.1 percent for the fiscal year ended June 30, 1997.
Selling expenses totaled $7,867,000, or 45.7 percent of net
revenues, for the fiscal year ended June 30, 1998, a decrease from
$7,961,000, or 48.3 percent of net revenues, for the comparable period
ending June 30, 1997. This $94,000 decrease was attributable
primarily to lower costs associated with smaller catalog circulation,
which more than offset higher operational costs and write-offs of
leasehold improvements for all three of the Company's off-site retail
stores.
General and administrative expenses were $3,032,000 for the
fiscal year ended June 30, 1998, compared to $2,938,000 for the
twelve-month period ended June 30, 1997. An increase in legal fees
and unanticipated expenses related to the un-sublet portion of the
Company's Freeport, Maine retail location more than offset reduced
wages in general and administrative departments due to headcount
reduction. As a percentage of net revenues, general and
administrative expenses were 17.6 percent for the fiscal year ended
June 30, 1998, compared to 17.8 percent for the fiscal year ended June
30, 1997.
As a result of the foregoing factors, the net loss to Common
Stockholders for the fiscal year ended June 30, 1998 was $1,756,000,
compared to a net loss to Common Stockholders of $1,974,000 for the
twelve months ended June 30, 1997.
Liquidity and Capital Resources
As of June 30, 1998, the Company's cash position increased to
$1,527,000, from $442,000 at June 30, 1997. Of the $1,527,000,
$361,000 is classified as restricted cash; there was $365,000 of
restricted cash at June 30, 1997. The largest component of the
restricted cash is $300,000 restricted by a debt service reserve,
which was required as part of the Company's loan agreement with the
<PAGE>
Vermont National Bank and was required to be maintained as part of the
Company's sale-leaseback transaction. Proceeds from financing
activities and a decrease in inventory more than offset capitalized
financing costs and decreases in accounts payable.
Inventory levels of materials and finished goods and work-in-
process totaled $2,396,000 at June 30, 1998, compared to $3,302,000 at
June 30, 1997. The decrease is primarily the result of successful
Valentine's Day and Mother's Day selling seasons. Accounts payable
totaled $1,846,000 at June 30, 1998, compared to $2,563,000 at June
30, 1997. As the Company's cash position improved over the course of
the fiscal year, the Company was able to pay its trade payables on a
more timely basis.
On September 25, 1998, after receiving Common stockholder
approval on September 11, 1998, the Company entered into an agreement
to privately place $600,000 of Series C Convertible Redeemable
Preferred Stock. Consummation of the agreement is subject to certain
conditions. Each of the sixty Series C shares will have a liquidation
value of $10,000 per share, and will be convertible into 8,264 shares
of the Company's Common Stock. The Series C Stock will require
redemption upon the tenth anniversary of its issuance, with both the
Company and the Series C Stockholders having call and put rights,
respectively, beginning on the fifth anniversary of issuance. The
Series C Stock will carry voting rights on an as-converted basis, and,
as a class, will have the right to elect two members to the Company's
Board of Directors. Accompanying the issuance of the Series C Stock
will be warrants to purchase 495,868 shares of the Company's Common
Stock at an exercise price of $1.21 per share, which will expire seven
years from the date of issuance. Both the Series C Stock and the
accompanying warrants will carry certain anti-dilution provisions.
On December 31, 1997, the Company borrowed $200,000 from Green
Mountain Capital L.P. in the form of a five-year term note. The note
bears interest at 12 percent per annum, is repayable in monthly
installments through December 31, 2002, and is secured by a security
interest in the Company's real and personal property. In conjunction
with the issuance of the notes, Green Mountain Capital received
warrants to purchase 100,000 shares of Common Stock at an exercise
price of $1.00 per share, subject to certain anti-dilution provisions.
(Prior warrants granted to Green Mountain Capital to purchase 20,000
shares at $3.375 were canceled upon the issuance of this new note.)
The right to exercise these warrants begins December 31, 1999, and
expires the earlier of December 31, 2004 or five years after the full
repayment of the loan and existing notes.
On July 18, 1997, the Company completed a sale-leaseback
transaction, involving its factory headquarters and a portion of its
property located in Shelburne, Vermont. This financing replaced the
Company's mortgage and line of credit agreement with the Vermont
National Bank. The Company received approximately $5.9 million in
cash, of which approximately $3.3 million was used to pay off the
existing mortgage with the Vermont National Bank. The balance,
approximately $2.6 million, was used for general working capital
<PAGE>
purposes, to pay down a $600,000 balance on the Company's line of
credit (which was retired as the result of the termination of the
original mortgage loan), and transaction costs of $679,000 associated
with the sale-leaseback. The lease obligation, secured by the business
assets of the Company, is payable on a twenty-year amortization
schedule through July 2017.
On July 12, 1996, the Company privately placed $550,000 of Series
B convertible Preferred Stock. The 204,912 Series B preferred shares,
held of record by twelve shareholders, are not entitled to any
dividends or voting rights, but each share was originally convertible
into one share of the Company's Common Stock at any time on or after
July 12, 1997. Accompanying the issuance of the Preferred Stock were
warrants to purchase 204,912 shares of the Company's Common at a price
of $2.434 per share, exercisable between July 12, 1997 and July 12,
1999, subject to certain anti-dilution provisions (see footnote 9).
In addition, finder's warrants for 10,245 common shares were issued
with the same terms and conditions. As the result of subsequent
financing transactions, the anti-dilution provisions of the Series B
agreement were activated, and the 204,912 shares of Series B Preferred
Stock are now convertible into 482,441 shares of Common Stock, and the
warrants in aggregate now provide the right to purchase 523,692 shares
of Common Stock at an exercise price of $1.00 per share. Common
shares issued as the result of the conversion of the Series B
Preferred Stock and the exercise of the accompanying warrants shall be
considered "restricted securities" and shall be subject to certain
registration rights. On liquidation, dissolution, or winding up of
the Company, holders of Series B Preferred Stock are entitled to be
paid on a pari passu basis with any holders of Series A Preferred
Stock.
The Company has been operating without a working capital line of
credit facility since July 18, 1997. The Company believes that its
existing cash and cash equivalent balances, together with funds
generated from operations, will be sufficient to finance the Company's
operations for at least the next twelve months.
Year 2000 Disclosure
The Company has been addressing computer software modifications
or replacements to enable transactions to process properly in the year
2000. Based on currently available information, all necessary changes
are expected to occur in a timely manner. The cost of these changes,
which incorporates amounts to handle additional capacity, is expected
to be approximately $500,000, which is based on management's best
estimates and may be changed as additional information becomes
available. Although the Company is working with suppliers and
customers regarding this issue, no assurance can be given with respect
to any potential adverse effects on the Company of any failure by
other parties to achieve year 2000 compliance.
Item 7. Financial Statements
<PAGE>
The list of financial statements set forth under the caption
"Index to Financial Statements" on page 23 below is incorporated
herein by reference.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
Not applicable.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Information concerning the directors and executive officers of
the Company, their terms of office, the periods during which they have
served, their personal business experiences is included in the
Company's definitive Proxy Statement for its 1998 Annual Meeting and
is specifically incorporated herein by reference.
Item 10. Executive Compensation
Information regarding compensation of the Company's directors and
officers is included in the Company's definitive Proxy Statement for
its 1998 Annual Meeting and is specifically incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Information with respect to the beneficial ownership of the
outstanding shares of the Company's Common Stock by (i) all persons
owning of record, or beneficially to the knowledge of the Company,
more than five percent of the outstanding shares, (ii) each director
and executive officer of the Company individually, and (iii) all
directors and officers of the Company as a group, is included in the
Company's definitive Proxy Statement for its 1998 Annual Meeting and
is specifically incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information regarding certain relationships and transactions
between the Company and its directors, director-nominees, executive
officers, and the family members of these individuals is included in
the Company's definitive Proxy Statement for its 1998 Annual Meeting
and is specifically incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
Exhibits
<PAGE>
3.3 Restated Certificate of Incorporation of the Company (filed with
the Securities and Exchange Commission as exhibit 3.3 to the Company's
1996 Annual Report on Form 10-KSB (File No. 33-69898) and incorporated
herein by reference).
3.4 Amended and Restated By-Laws of the Company (filed with the
Securities and Exchange Commission as exhibit 3.4 to the Company's 10-
QSB for the quarter ended December 31, 1996 and incorporated herein by
reference).
4.1 Representative's Warrant issued to Barington Capital Group, L.P.
upon the consummation of the initial public offering of the Company's
Common Stock in November 1993 (filed with the Securities and Exchange
Commission as exhibit 4.1 to the Company's 1993 Annual Report on Form
10-KSB (File No. 33-69898) and incorporated herein by reference).
4.2 Form of Common Stock Certificate (filed with the Securities and
Exchange Commission as exhibit 4.2 to the Company's Registration
Statement on Form SB-2 (File No. 33-69898) and incorporated herein by
reference).
4.3 Form of Warrant, issued in connection with the private placement
of 204,912 shares of the Company's Series B Convertible Preferred
Stock (filed with the Securities and Exchange Commission as exhibit
4.3 to the Company's 1996 Annual Report on Form 10-KSB (File No. 33-
69898) and incorporated herein by reference).
4.4 Form of Subscription Agreement issued in connection with the
private placement of 204,912 shares of the Company's Series B
Convertible Preferred Stock (filed with the Securities and Exchange
Commission as exhibit 4.4 to the Company's 1996 Annual Report on Form
10-KSB (File No. 33-69898) and incorporated herein by reference).
4.5 Waiver of Joan H. Martin, dated April 12, 1996, issued in
connection with waiver of accrued dividends on Series A Preferred
Stock (filed with the Securities and Exchange Commission as exhibit
4.5 to the Company's 1996 Annual Report on Form 10-KSB (File No. 33-
69898) and incorporated herein by reference).
4.6 Warrant to purchase 43,826.087 shares of the Company's Common
Stock, dated April 12, 1996, issued in connection with Joan H.
Martin's waiver of accrued dividends on Series A Preferred Stock
(filed with the Securities and Exchange Commission as exhibit 4.6 to
the Company's 1996 Annual Report on Form 10-KSB (File No. 33-69898)
and incorporated herein by reference).
4.7 Stock Purchase Warrant Agreement, dated July 10, 1997, between
the Company and URSA (VT) QRS-30, Inc., in conjunction with the
sale-leaseback of the Company's headquarters in Shelburne, Vermont
(filed herein).
4.8 Stock Purchase Warrant Agreement, dated December 31, 1997, in
connection with the $200,000 Term Loan of Green Mountain Capital
<PAGE>
(filed with the Securities and Exchange Commission as exhibit 4.8 to
the Company's 10-QSB for the quarter ended December 31, 1997, and
incorporated herein by reference.)
10.2 Stock warrants issued to Edmund H. Shea, Jr. IRA, Allan Lyons and
William
Maines in connection with the bridge financing prior to the initial
public offering of the Company's Common Stock in November 1993 (a form
of which was filed with the Securities and Exchange Commission as
exhibit 10.2 to the Company's Registration Statement on Form SB-2
(File No. 33-69898) and incorporated herein by reference).
10.10 Incentive Stock Option Plan adopted by the Company on August
16, 1993, with
form of Incentive Stock Option Agreement (filed with the Securities
and Exchange Commission as exhibit 10.10 to the Company's Registration
Statement on Form SB-2 (File No. 33-69898) and incorporated herein by
reference).
10.11 Securities Purchase Agreement, dated June 10, 1987 between
the Company
and VTB Investment Group and Joan Hixon Martin (filed with the
Securities and Exchange Commission as exhibit 10.11 to the Company's
Registration Statement on Form SB-2 (File No. 33- 69898) and
incorporated herein by reference).
10.12 Agreement, dated as of June 19, 1995, between the Company
and John N. Sortino, providing the terms of Mr. Sortino's separation
agreement with the Company (filed with the Securities and Exchange
Commission as exhibit 10.12 to the Company's 10-KSB for the transition
period ended June 30, 1995 and incorporated herein by reference).
10.13 Employment Agreement and Loan Arrangement, dated July 31,
1995, between
the Company and R. Patrick Burns providing the terms of Mr. Burns'
employment with the Company as Chief Executive Officer (filed with the
Securities and Exchange Commission as exhibit 10.13 to the Company's
10- KSB for the transition period ended June 30, 1995 and
incorporated herein by reference).
10.14 Employment Agreement, dated November 1, 1993, between the
Company and
Spencer C. Putnam (filed with the Securities and Exchange Commission
as exhibit 10.14 to the Company's Registration Statement on Form SB-2
(File No. 33-69898) and incorporated herein by reference).
10.17 Commitment Letter issued by Vermont National Bank,
Burlington, Vermont,
dated September 18, 1995, in connection with a Commercial Mortgage
Loan and a Line of Credit Loan (filed with the Securities and Exchange
Commission as exhibit 10.17 to the Company's 10-KSB for the transition
period ended June 30, 1995 and incorporated herein by reference).
10.18 Loan Agreement, dated September 26, 1995, between the
<PAGE>
Company and Vermont National Bank regarding $3,500,000 Term Loan and
$1,000,000 Line of Credit Loan (filed with the Securities and
Exchange Commission as exhibit 10.18 to the Company's 10-KSB for the
transition period ended June 30, 1995 and incorporated herein by
reference).
10.19 Commercial Term Note, dated September 26, 1995, issued in
connection with the $3,500,000 Term Loan of Vermont National Bank
(filed with the Securities and Exchange Commission as exhibit 10.19 to
the Company's 10-KSB for the transition period ended June 30, 1995 and
incorporated herein by reference).
10.20 Commercial Time Note, dated September 26, 1995, issued in
connection with the $1,000,000 Line of Credit Loan of Vermont National
Bank (filed with the Securities and Exchange Commission as exhibit
10.20 to the Company's 10-KSB for the transition period ended June 30,
1995 and incorporated herein by reference).
10.24 Amended 1993 Incentive Stock Option Plan of the Company,
amended as of November 28, 1995 (filed with the Securities and
Exchange Commission as exhibit 10.24 to the Company's 10-QSB for the
quarter ended March 31, 1995 and incorporated herein by reference).
10.25 Loan Agreement, dated December 26, 1995, between Green
Mountain Capital, L.P. and the Company, in connection with a $500,000
Term Loan (filed with the Securities and Exchange Commission as
exhibit 10.25 to the Company's 10-QSB for the quarter ended December
31, 1995 and incorporated herein by reference).
10.26 Convertible Note, dated December 26, 1995, in the principal
amount of $200,000, issued in connection with the $500,000 Term Loan
of Green Mountain Capital (filed with the Securities and Exchange
Commission as exhibit 10.26 to the Company's 10-QSB for the quarter
ended December 31, 1995 and incorporated herein by reference).
10.27 Stock Purchase Warrant Agreement, dated December 26, 1995,
in connection
with the $500,000 Term Loan of Green Mountain Capital (filed with the
Securities and Exchange Commission as exhibit 10.27 to the Company's
10-QSB for the quarter ended December 31, 1995 and incorporated herein
by reference).
10.28 Employment and Loan Agreements, dated June 30, 1996, between
the Company and R. Patrick Burns (filed with the Securities and
Exchange Commission as exhibit 10.28 to the Company's 1996 Annual
Report on Form 10-KSB (File No. 33-69898) and incorporated herein by
reference).
10.29 Employment Agreement, dated July 1, 1996, between the
Company and Elisabeth B. Robert (filed with the Securities and
Exchange Commission as exhibit 10.29 to the Company's 1996 Annual
Report on Form 10-KSB (File No. 33-69898) and incorporated herein by
reference).
<PAGE>
10.30 Amended 1993 Incentive Stock Option Plan of the Company,
amended as of November 22, 1996 (filed with the Securities and
Exchange Commission as exhibit 10.30 to the Company's 10-QSB for the
quarter ended December 31, 1996 and incorporated herein by reference).
10.31 Non-Employee Directors Stock Option Plan adopted by the
Company on November 22, 1996 (filed with the Securities and Exchange
Commission as exhibit 10.31 to the Company's 10-QSB for the quarter
ended December 31, 1996 and incorporated herein by reference).
10.32 Employment Agreement, dated as of July 1, 1996, between the
Company and
Spencer C. Putnam (filed with the Securities and Exchange Commission
as exhibit 10.32 to the Company's 10-QSB for the quarter ended
December 31, 1996 and incorporated herein by reference).
10.33 Convertible Note, dated November 19, 1996, in the principal
amount of $300,000, issued in connection with the $500,000 Term Loan
of Green Mountain Capital (filed with the Securities and Exchange
Commission as exhibit 10.33 to the Company's 10-QSB for the quarter
ended December 31, 1996 and incorporated herein by reference).
10.34 Lease Agreement, dated October 24, 1996, in connection with
the Company's
lease of 2,600 square feet at 538 Madison Avenue in New York, New York
(filed with the Securities and Exchange Commission as exhibit 10.34 to
the Company's 1997 Annual Report 10-KSB (File No. 33-69898) and
incorporated herein by reference).
10.35 Consulting Agreement, dated December 31, 1996, between the
Company and Venture Management Group, Inc., regarding the provision of
consulting services to the Company (filed with the Securities and
Exchange Commission as exhibit 10.35 to the Company's 1997 Annual
Report 10-KSB (File No. 33-69898) and incorporated herein by
reference).
10.36 Lease Agreement, dated January 17, 1997, in connection with
the Company's lease of 6,000 square feet at 55 Main Street in
Freeport, Maine (filed with the Securities and Exchange Commission as
exhibit 10.36 to the Company's 1997 Annual Report 10-KSB (File No. 33-
69898) and incorporated herein by reference).
10.37 Lease Agreement, dated July 10, between the Company and URSA
(VT) QRS-30, Inc., regarding the sale-leaseback of the Company's
headquarters in Shelburne, Vermont (filed with the Securities and
Exchange Commission as exhibit 10.37 to the Company's 1997 Annual
Report 10-KSB (File No. 33-69898) and incorporated herein by
reference).
10.38 Binding commitment letter, dated October 10, 1997, from
Green Mountain Capital LP, in connection with a $200,000 term loan
(filed with the Securities and Exchange Commission as exhibit 10.38 to
the Company's 1997 Annual Report 10-KSB (File No. 33-69898) and
incorporated herein by reference).
<PAGE>
10.39 Agreement, dated as of October 10, 1997, between the Company
and R. Patrick Burns, providing the terms of Mr. Burns' separation and
consulting agreement with the Company (filed with the Securities and
Exchange Commission as exhibit 10.39 to the Company's 10-QSB for the
quarter ended September 30, 1997 and incorporated herein by
reference).
10.40 Employment Agreement, dated December 3, 1997, between the
Company and Elisabeth B. Robert (filed with the Securities and
Exchange Commission as exhibit 10.40 to the Company's 10-QSB for the
quarter ended December 31, 1997 and incorporated herein by reference).
10.41 Loan Agreement, dated December 31, 1997, between Green
Mountain Capital, L.P. and the Company, in connection with a $200,000
Term Loan (filed with the Securities and Exchange Commission as
exhibit 10.41 to the Company's 10-QSB for the quarter ended December
31, 1997 and incorporated herein by reference).
10.42 Convertible Note, dated December 31, 1997, in the principal
amount of $200,000, issued in connection with the $200,000 Term Loan
of Green Mountain Capital (filed with the Securities and Exchange
Commission as exhibit 10.42 to the Company's 10-QSB for the quarter
ended December 31, 1997 and incorporated herein by reference).
10.43 Employment Agreement, dated March 13, 1998, between the
Company and Spencer C. Putnam (filed with the Securities and Exchange
Commission as exhibit 10.43 to the Company's 10-QSB for the quarter
ended March 31, 1998 and incorporated herein by reference).
10.44 Employment Agreement, dated April 30, 1998, between the
Company and Robert D. Delsandro, Jr. (filed with the Securities and
Exchange Commission as exhibit 10.44 to the Company's 10-QSB for the
quarter ended March 31, 1998 and incorporated herein by reference).
10.45 Non-Binding Proposal and Management Agreement, dated May 21,
1998, between the Company and The Shepherd Group LLC, in connection
with the Company's private placement of sixty shares of Series C
Convertible Redeemable Preferred Stock (filed with the Securities and
Exchange Commission as Exhibits A and B to the Company's definitive
proxy statement for its Special Meeting of Stockholders held September
11, 1998 and incorporated herein by reference).
10.46 Amendment to Employment Agreement, dated June 1, 1998,
between the Company and Elisabeth B. Robert (filed herein).
10.47 Securities Purchase Agreement, dated September 25, 1998,
between the Company and The Shepherd Group LLC, in connection with the
Company's private placement of sixty shares of Series C Convertible
Redeemable Preferred Stock (filed herein).
23.1 Consent of Arthur Andersen, LLP, dated September 25, 1998 (filed
herein)
<PAGE>
24 Power of Attorney (filed with the Securities and Exchange
Commission as exhibit 24 to the Company's Registration Statement on
Form SB-2 (File No. 33-69898) and incorporated herein by reference.
Reports on Form 8-K
As reported on June 8, 1998
On Friday, May 22, 1998, The Vermont Teddy Bear Co., Inc. entered
into a letter of intent with The Shepherd Group, L.L.C., of Acton,
Massachusetts to sell, in a private placement, sixty shares of a new
series of preferred stock to be designated "Series C Convertible
Redeemable Preferred Stock." ("Series C Preferred") The Shepherd
Group will invest $600,000 in exchange for the sixty shares of Series
C Preferred, which will have a six percent cumulative dividend, and
each share will be convertible into 8,264.467 shares of the Company's
Common Stock. The holders of the Series C Preferred shall be entitled
to vote as a class for two directors of the Company and shall be
entitled to vote, on an as-converted basis, on all other matters on
which the Company's Common Stockholders are entitled to vote. In
addition to sixty shares of Series C Preferred, the Shepherd Group
will also receive warrants to purchase an additional 495,868 shares of
the Company's Common Stock at an exercise price of $1.21 per share.
Consummation of the transactions contemplated by the letter of
intent is subject to the preparation of binding agreements and various
approvals and contingencies described in the letter of intent and term
sheet.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE VERMONT TEDDY BEAR CO., INC.
Dated: September 28, 1998 By: /s/ Elisabeth B. Robert,
Elisabeth B. Robert, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Company and in the capacities and on the date indicated.
Dated: September 28, 1998 By:/s/ Jason Bacon,
<PAGE>
Jason Bacon, Director
Dated: September 28, 1998 By:/s/ R. Patrick Burns,
R. Patrick Burns, Director
Dated: September 28, 1998 By:/s/ Fred Marks,
Fred Marks, Director and
Chairman of the Board
Dated: September 28, 1998 By:/s/ Joan H. Martin,
Joan H. Martin, Director
Dated: September 28, 1998 By:/s/ Spencer C. Putnam,
Spencer C. Putnam, Director,
Vice President and Secretary
Dated: September 28, 1998 By:/s/ Elisabeth B. Robert,
Elisabeth B. Robert, Director,
President, Treasurer, Chief
Executive Officer and Chief
Financial Officer
The Vermont Teddy Bear Co., Inc.
1998 Form 10-KSB Annual Report
Index To Financial Statements
Page
Report of Independent Public Accountants 24
Balance Sheets as of June 30, 1998 and 1997 25
Statements of Operations for the Years
Ended June 30, 1998 and 1997 26
Statements of Stockholders' Equity for
the Years Ended June 30, 1998 and 1997 27
Statements of Cash Flows for the Years
Ended June 30, 1998 and 1997 28
Notes to Financial Statements 29
<PAGE>
Report of Independent Public Accountants
To the Stockholders and Board of Directors of
The Vermont Teddy Bear Co., Inc.:
We have audited the accompanying balance sheets of The Vermont Teddy
Bear Co., Inc. (a New York corporation) as of June 30, 1998 and 1997,
and the related statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The
Vermont Teddy Bear Co., Inc. as of June 30, 1998 and 1997, and the
results of its operations and its cash flows for the years then ended,
in conformity with generally accepted accounting principles.
<PAGE>
ARTHUR ANDERSEN LLP
Boston, Massachusetts
August 18, 1998,
except with respect to the matter
discussed in Note 11, as to which
the date is September 25, 1998.
The Vermont Teddy Bear Co., Inc.
Balance Sheets
June 30, 1998 and 1997
1998 1997
ASSETS
Current Assets:
Cash and cash equivalents
(includes restricted cash of
$361,000 and $365,000,
respectively) $ 1,527,052 $ 441,573
Accounts receivable, trade 51,538 46,304
Inventories 2,396,245 3,302,313
Prepaid expenses and other
current assets 444,229 386,947
Deferred income taxes 233,203 259,016
------------ ------------
Total Current Assets 4,652,267 4,436,153
Property and equipment, net 8,844,475 9,845,935
Deposits and other assets 903,110 272,348
Note receivable 87,500 95,000
------------ ------------
Total Assets $ 14,487,352 $ 14,649,436
============ ============
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ - $ 550,000
Short-term notes payable 45,603 -
Current portion of:
Long-term debt 231,133 3,443,096
Capital lease obligations 225,738 103,759
Accounts payable 1,846,042 2,562,536
Accrued expenses 916,191 585,347
------------ ------------
Total Current Liabilities 3,264,707 7,244,738
Long-term debt,net of
current portion 338,317 372,999
Capital lease obligations, net
of current portion 5,748,182 209,054
Deferred income taxes 233,203 259,016
------------ ------------
Total Liabilities $ 9,584,409 $ 8,085,807
Stockholders' Equity:
Preferred stock, $.05 par value:
Authorized 1,000,000 Series A;
issued and outstanding,
90 shares. $ 1,044,000 $ 972,000
Authorized 375,000 Series B;
issued and outstanding,
204,912 shares. 10,245 10,245
Common stock, $.05 par value:
Authorized 20,000,000 shares;
issued 5,195,733 shares,
outstanding 5,183,733 shares. 259,787 258,638
Additional paid-in capital 10,587,316 10,565,482
Treasury stock, at cost,
12,000 shares (106,824) (106,824)
Accumulated deficit (6,891,581) (5,135,912)
------------ ------------
Total Stockholders' Equity $ 4,902,943 $ 6,563,629
Total Liabilities and
Stockholders' Equity $ 14,487,352 $ 14,649,436
============ ============
The accompanying notes are an integral part of these financial
statements.
The Vermont Teddy Bear Co., Inc.
Statements of Operations
For the Years Ended June 30, 1998 and 1997
<PAGE>
1998 1997
Net Revenues $ 17,207,543 $ 16,489,482
Cost of Goods Sold 7,397,450 7,068,549
------------ ------------
Gross Profit 9,810,093 9,420,933
Selling, General and
Administrative Expenses:
Selling Expenses 7,866,843 7,961,003
General and
Administrative Expenses 3,031,716 2,938,251
------------ ------------
10,898,559 10,899,254
------------ ------------
Operating Loss (1,088,466) (1,478,321)
Interest Income 26,126 53,267
Interest Expense (650,572) (464,765)
Other Income (Expense) 29,243 (11,963)
------------ ------------
Loss Before Income Taxes (1,683,669) (1,901,782)
Income Tax Provision - -
------------ ------------
Net Loss (1,683,669) (1,901,782)
Preferred Stock Dividends (72,000) (72,000)
------------ ------------
Net Loss -- Common Stockholders $ (1,755,669) $ (1,973,782)
============ ============
Basic Net Loss Per Common Share $ (0.34) $ (0.38)
============ ============
Diluted Net Loss Per Common Share $ (0.34) $ (0.38)
============ ============
Weighted Average Number of Common
Shares Outstanding 5,172,475 5,160,750
============ ============
Weighted Average Number of Diluted
Common Shares Outstanding 5,172,475 5,160,750
============ ============
The accompanying notes are an integral part of these financial
statements.
<PAGE>
The Vermont Teddy Bear Co., Inc.
Statements of Stockholders' Equity
For the Years Ended June 30, 1998 and 1997
Preferred Stock Preferred Stock
Series "A" Series "B"
Shares Amount Shares Amount
Balance at June 30, 1996 90 $ 900,000 - $ -
Sale of Preferred Stock - - 204,912 10,245
Net Loss - - - -
Preferred Stock Dividends - 72,000 - -
-- ---------- ------- --------
Balance at June 30, 1997 90 $ 972,000 204,912 $ 10,245
Exercise of Stock Options - - - -
Net Loss - - - -
Preferred Stock Dividends - 72,000 - -
-- ---------- ------- --------
Balance at June 30, 1998 90 $1,044,000 204,912 $ 10,245
== ========== ======= ========
Additional
Common Stock Paid-In
Shares Amount Capital
Balance at June 30, 1996 5,172,750 $ 258,638 $ 10,074,595
Sale of Preferred Stock - - 490,887
Net Loss - - -
Preferred Stock Dividends - - -
--------- --------- ------------
Balance at June 30, 1997 5,172,750 $ 258,638 $ 10,565,482
Exercise of Stock Options 22,983 1,149 21,834
Net Loss - - -
Preferred Stock Dividends - - -
--------- --------- ------------
Balance at June 30, 1998 5,195,733 $ 259,787 $ 10,587,316
========= ========= ============
Total
Treasury Accumulated Stockholders'
Stock Deficit Equity
Balance at June 30, 1996 (106,824) $(3,162,130) $ 7,964,279
Sale of Preferred Stock - - 501,132
Net Loss - (1,901,782) (1,901,782)
Preferred Stock Dividends - (72,000) -
------- ----------- -----------
Balance at June 30, 1997 (106,824) $(5,135,912) $ 6,563,629
Exercise of Stock Options - - 22,983
Net Loss - (1,683,669) (1,683,669)
Preferred Stock Dividends - (72,000) -
<PAGE>
------- ----------- -----------
Balance at June 30, 1998 (106,824) $(6,891,581) $ 4,902,943
======= =========== ===========
The accompanying notes are an integral part of these financial statements
The Vermont Teddy Bear Co., Inc.
Statements of Cash Flows
For the Years Ended June 30, 1998 and 1997
1998 1997
Cash Flows From Operating Activities:
Net Loss $ (1,683,669) $ (1,901,782)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Depreciation and amortization 955,045 943,163
Loss on sale/disposal of
fixed assets 135,633 20,797
Changes in assets and liabilities:
Accounts receivable, trade (5,234) 85,246
Inventories 906,068 (1,327,582)
Prepaid and other
current assets (57,282) (109,445)
Deposits and other assets (662,696) (174,262)
Accounts payable (716,494) 1,208,838
Accrued expenses and
other liabilities 330,844 51,869
Income taxes payable - (37,365)
------------ ------------
Net cash used for
operating activities (797,785) (1,240,523)
Cash Flows From Investing Activities:
Acquisition of property
and equipment (98,172) (509,577)
Proceeds from sale of fixed assets 40,888 -
Note receivable 7,500 -
------------ ------------
Net cash used for
investing activities (49,784) (509,577)
<PAGE>
Cash Flows From Financing Activities:
Borrowings of short-term debt 313,136 2,069,143
Borrowings of long-term debt 216,785 357,104
Payments of short-term debt (817,533) (1,519,143)
Payments of long-term debt (3,463,430) (233,916)
Proceeds from sale-leaseback
of building and property 5,863,874 -
Principal payments on capital
lease obligations (202,767) (104,147)
Issuance of common stock,
exercise of stock option 22,983 -
Issuance of preferred stock - 501,132
------------ ------------
Net cash provided by
financing activities 1,933,048 1,070,173
Net Increase (Decrease) in
Cash and Cash Equivalents 1,085,479 (679,927)
Cash and Cash Equivalents,
Beginning of Year 441,573 1,121,500
Cash and Cash Equivalents,
End of Year $ 1,527,052 $ 441,573
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 653,214 $ 462,707
Cash paid for income taxes 3,734 2,218
Supplemental Disclosures of Non-cash Investing and Financing Activities:
Capital lease from sale-leaseback
of building and property $ 5,863,874 $ -
The accompanying notes are an integral part of these financial
statements.
The Vermont Teddy Bear Co., Inc.
Notes to Financial Statements
June 30, 1998
(1) Summary of Significant Accounting Policies
Description of Business and Operations
The Vermont Teddy Bear Co., Inc. (the Company), which was
incorporated under the laws of the State of New York in 1984, is a
<PAGE>
designer, manufacturer and direct marketer of Vermont-made teddy bears
and related products. Principal geographic markets include New York,
Boston, Philadelphia, Los Angeles, and Chicago. The Company's sales
are heavily seasonal, with Valentine's Day, Christmas and Mother's Day
as the Company's largest sales seasons.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Reclassification and Presentation
Certain items in fiscal year 1997 have been reclassified to
conform with 1998 classifications.
Cash and Cash Equivalents
All highly liquid investments with initial maturities of three
months or less are considered cash equivalents. At June 30, 1998 and
1997, approximately $361,000 and $365,000 of the Company's cash was
restricted, respectively. The largest component of the restricted
cash is $300,000 restricted by a debt service reserve, which was
required as part of the Company's loan agreement with the Vermont
National Bank and was required to be maintained as part of the
Company's sale-leaseback transaction.
Inventories
Inventories are stated at the lower of cost or market using the
first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation. Equipment acquired under capital leases is stated at
the lower of the present value of future minimum lease payments or
fair value at the inception of the lease.
Depreciation, including amortization of assets covered by
capital
leases, is calculated using both the straight-line and accelerated
methods over the estimated useful lives of the assets, as follows:
Building 37 years
Equipment 5-7 years
Furniture and fixtures 3-7 years
Vehicles 5 years
<PAGE>
Amortization of leasehold improvements is provided over their
estimated useful lives or the remaining lease term, whichever is
shorter. Renewals and improvements that extend the useful lives of
the assets are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Income Taxes
The Company accounts for income taxes in accordance with the
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes, which requires the use of the liability method.
This standard determines deferred income taxes based on the estimated
future tax effects of any differences between the financial statement
and the basis of tax assets and liabilities, given the provisions of
the enacted tax laws. In view of the Company's recent losses, a
valuation allowance has been provided to fully reserve its deferred
tax assets due to the uncertainty of their realization. If the
Company is able to achieve sufficient profitability to realize all or
a portion of its deferred assets, the valuation allowance will be
reduced through a credit to the income tax provision in future
periods.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
Advertising
The Company expenses the production costs of radio and print
advertising the first time the advertising takes place. Catalog
advertising, consisting primarily of catalogs for the Company's
products, is capitalized and amortized over its expected period of
future benefits, usually over the four-month period following the
initial mailing of the catalog.
At June 30, 1998 and June 30, 1997, capitalized advertising
costs were approximately $53,000 and $15,000, respectively, consisting
primarily of trade credits and unamortized direct-response catalogs.
Advertising expenses were $4,346,000 and $4,847,000 for the twelve
months ended June 30, 1998 and 1997, respectively.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with SFAS
No. 121, Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of. The Company continually reviews its
long-lived assets for events or changes in circumstances that might
indicate the carrying amount of the assets may not be recoverable.
The Company assesses the recoverability of assets by determining
whether the depreciation of such assets over their remaining lives can
be recovered through projected undiscounted cash flows. The amount of
impairment, if any, is measured based on projected discounted future
cash flows using a discount rate reflecting the Company's average cost
<PAGE>
of funds. At June 30, 1998, no such impairment of assets was
indicated.
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments, the Company has
determined the estimated fair value of its financial instruments using
appropriate market information and valuation methodologies.
Considerable judgment is required to develop the estimates of fair
value; thus, the estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange. The
Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and debt. The carrying value of
these assets and liabilities is a reasonable estimate of their fair
market value at June 30, 1998 and 1997.
Earnings Per Share
In accordance with SFAS No. 128, Earnings Per Share, basic and
diluted net income (loss) per common share is calculated by dividing net
income (loss) by the weighted number of common shares outstanding for
all periods presented. SFAS No. 128 establishes standards for
computing and presenting earnings per share and applies to entities
with publicly held common stock or potential common stock. The
Company has applied the provisions of SFAS No. 128 and Staff
Accounting Bulletin (SAB) No. 98 retroactively to all periods
presented.
The following table reconciles the weighted average common shares
outstanding to the shares used in the computation of basic and
weighted average common shares outstanding:
Years Ended
6/30/98 6/30/97
Weighted average number of shares
used in basic EPS calculation 5,172,475 5,160,750
Add: Incremental weighted average common
shares issuable upon exercise of stock options
and warrants outstanding -- --
Weighted average number of shares
used in diluted EPS calculation 5,172,475 5,160,750
Diluted weighted average shares outstanding for 1998 and 1997
exclude all potential common shares from stock options and convertible
preferred stock because to include such shares would have been anti-
dilutive due to the Company's net loss in both years. As of June 30,
1998 and 1997, 1,612,765 and 1,165,519 potential common shares were
outstanding, respectively, but not included in the above calculation
as their effect would have been anti-dilutive.
<PAGE>
New Accounting Pronouncements
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components. The
adoption of SFAS No. 130 had no impact on the Company's net loss or
shareholders' equity for the twelve months ended June 30, 1998.
The Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information,
which is required to be adopted by the Company no later than fiscal
year 1999. This statement introduces a new model for segment
reporting, called the management approach. The management approach is
based on the way that the chief operating decision maker organizes
segments within a company for making operating decisions and assessing
performance. Reportable segments are defined in any manner in which
management disaggregates the company, for example, based on products
and services, geography, legal structure, etc. The Company will adopt
this statement in fiscal year 1999.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use,
requiring computer software costs associated with internal use
software to be expensed as incurred until certain capitalization
criteria are met. The Company will adopt SOP 98-1 beginning July 1,
1999. Adoption of this Statement is not expected to have a material
impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, Reporting on Costs of
Start-Up Activities, requiring all costs associated with pre-opening,
pre-operating, and organization activities to be expensed as incurred.
The Company will adopt SOP 98-5 beginning July 1, 1999. Adoption of
this Statement is not expected to have a material impact on the
Company's financial position or results of operations.
(2) Inventories
Inventories consist of the following at June 30, 1998 and 1997:
1998 1997
Raw materials $ 457,847 $ 565,267
Work-in-process 21,804 109,838
Finished goods 1,916,594 2,627,208
------------ ------------
$ 2,396,245 $ 3,302,313
============ ============
(3) Property and Equipment
<PAGE>
Property and equipment consist of the following at June 30,
1998 and 1997:
1998 1997
Land and land improvements $ 1,398,528 $ 1,398,528
Building 6,668,134 6,668,134
Equipment 3,504,434 3,654,005
Furniture and fixtures 381,548 374,769
Vehicles 127,664 122,159
Leasehold improvements 65,375 200,296
------------- -------------
$ 12,145,683 $ 12,417,891
Less - Accumulated depreciation
and amortization 3,301,209 2,571,956
------------- -------------
$ 8,844,474 $ 9,845,935
============= =============
Depreciation and amortization expense for the years ended June
30, 1998, and 1997 was $955,045 and $943,163, respectively.
(4) Related Party Transactions
As of June 30, 1996, R. Patrick Burns, the former President of
the Company, signed a new agreement with the Company which, at the time,
provided for his continued employment through June 30, 2000. In
addition to cash compensation and stock options, the Company also
increased the amount available to be lent to Mr. Burns to $116,818,
and revised the forgiveness schedule on the loan agreement such that
all outstanding amounts and related interest charges would have been
forgiven on July 29, 2000, provided that Mr. Burns would remain
continuously employed by the Company until that date. As of June 30,
1997, the Company had reserved for all loans due from Mr. Burns. On
October 10, 1997, Mr. Burns stepped down as President and entered into
a consulting agreement with the Company. As of December 31, 1997, the
Company accrued and expensed the entire amount due to Mr. Burns under
this consulting agreement and will not seek any services from him in
the future beyond his capacity as a Director of the Company. The
total accrued severance as of June 30, 1998 was $100,000; there was no
accrued severance for Mr. Burns as of June 30, 1997. The current
amount has been included as a component of accrued expenses in the
accompanying financial statements at June 30, 1998.
On December 31, 1996, the Company entered into a consulting
agreement with Venture Management Group, Inc. The President of
Venture Management Group, Inc. currently serves as a member of the
Company's Board of Directors. The terms of this agreement commenced
on January 1, 1997 and will terminate on December 31, 2006, unless
earlier terminated in accordance with this agreement. In
consideration of the consulting services to be provided, the Company
will pay fees of $65,000 per year, payable monthly, plus expenses and
disbursements reasonably incurred in the performance of services under
the agreement. In the event that the Company defaults in its
<PAGE>
obligations under this agreement, or if a change in control of the
Company occurs during the term of the agreement, Venture Management
Group, Inc. may, at its sole option, declare the entire compensation
under this contract to be immediately due and payable.
On June 19, 1995, John N. Sortino resigned as the Chief Executive
Officer and President of the Company. The Company entered into a
separation agreement with Mr. Sortino on June 19, 1995. Under the
separation agreement, Mr. Sortino was entitled to receive (1) cash
compensation of $100,000 in calendar 1995 (including compensation
totaling $40,430 already paid to Mr. Sortino as Chief Executive
Officer of the Company), $120,000 in calendar 1996 and $150,000 in
calendar 1997; (2) a bonus of $100,000; (3) the forgiveness of amounts
outstanding to the Company, which included approximately $128,000 in
principal and $64,000 in accrued interest; and (4) health insurance
benefits generally available to employees of the Company. The Company
accrued and expensed the entire amount due to Mr. Sortino under this
agreement during the six-month period ended June 30, 1995 and will not
seek any services from him in the future. The total accrued severance
as of June 30, 1997 was approximately $75,000; there was no accrued
severance for Mr. Sortino as of June 30, 1998.
(5) Indebtedness
The Company has been operating without a working capital line of
credit since July 18, 1997.
On December 31, 1997, the Company borrowed $200,000 from Green
Mountain Capital L.P. in the form of a five-year term note. The note
bears interest at 12 percent per annum, is repayable in monthly
installments through December 31, 2002, and is secured by a security
interest in the Company's real and personal property. In conjunction
with the issuance of the notes, Green Mountain Capital received
warrants to purchase 100,000 shares of Common Stock at an exercise
price of $1.00 per share, subject to certain anti-dilution provisions.
(Prior warrants granted to Green Mountain Capital to purchase 20,000
shares at $3.375 were canceled upon the issuance of this new note.)
The right to exercise these warrants begins December 31, 1999, and
expires the earlier of December 31, 2004 or five years after the full
repayment of the loan and existing notes. No value has been ascribed
to these warrants, as the amount would not be material to the
financial statements.
As of June 30, 1997, the Company had a $1,000,000 revolving line
of credit from a bank, which was terminated on July 18, 1997, pursuant
to the Company's sale-leaseback transaction.
The Company's long-term debt consists of the following at
June 30, 1998 and 1997:
1998 1997
Variable rate (10.25% at June 30, 1997)
<PAGE>
Vermont National Bank building loan
(see detailed discussion above) $ - $3,294,450
12.0% Green Mountain Capital L.P. notes
payable (see detailed discussion above) 463,674 397,142
(see detailed discussion above)
7.0% Job Development Authority notes, due in
monthly installments through April 1999,
secured by inventory, equipment, and
trade accounts receivable 11,884 27,012
7.9% Note payable to bank, due in monthly
installments through December 1997,
secured by a vehicle - 1,427
9.0% Note payable to bank, due in monthly
installments through December 2001,
secured by a vehicle 13,395 17,988
8.5% Note payable to bank, due in monthly
installments through June 2003, secured
by a vehicle 16,785 -
7.5% Note payable to North Creek Partners,
due in monthly installments through
March 2007 48,784 53,274
9.8% Note payable to financing services,
due in monthly installments through
December 1999, secured by a vehicle 14,928 23,234
13% Unsecured note payable to bank, due in
monthly installments through February 1998 - 1,568
---------- ----------
$ 569,450 $3,816,095
Less - Current portion 231,133 3,443,096
---------- ----------
Long-term debt, net of current portion $ 338,317 $ 372,999
========== ==========
Certain debt agreements contain covenants that require the
Company to, among other things, restrict certain activities, meet certain
financial covenants, and periodically submit financial information. As
of June 30, 1998, the Company was in compliance with the covenants or had
obtained waivers for all covenants for the year ended June 30, 1998.
Scheduled future long-term debt maturities are as follows:
Period ending June 30,
1999 $ 231,133
2000 167,797
<PAGE>
2001 102,943
2002 43,628
2003 23,949
Thereafter -
------------
$ 569,450
============
As of June 30, 1998 and 1997, the Company had no outstanding
letters of credit.
(6) Commitments and Contingencies
Leases
During fiscal 1996, the Company relocated its operations to its
newly constructed facility in Shelburne, Vermont. The Company leases
additional warehouse space in Shelburne, Vermont, for additional
inventory storage under a lease that expires on June 30, 1999.
On May 30, 1996, the Company entered into a five-year operating
lease for a retail location in North Conway, New Hampshire. On July
29, 1998, in accordance with provisions in its lease, the Company
formally notified its North Conway, New Hampshire landlord of its
intent to close its retail store, and as a result, will have no
further lease obligation effective February 1, 1999.
On October 24, 1996, the company entered into a ten-year lease
for 2,600 square feet on Madison Avenue in New York City. On December
7, 1997, the Company's 538 Madison Avenue location was closed due to
structural problems at neighboring 540 Madison Avenue. On December
16, the Company announced that it was permanently closing that retail
location. The City of New York deemed the 538 Madison Avenue building
uninhabitable from December 8, 1997 to April 9, 1998, and as such, the
Company incurred no rent expense during that period, and the
landlord's insurance carrier continued making rent payment on behalf
of the Company from April 10, 1998 to June 30, 1998. The Company is
currently making its best efforts to find a replacement tenant for its
space, and, as of June 30, 1998, has accrued $145,000 for this
contingency, which is included in accrued expenses in the accompanying
financial statements. (If no replacement tenant is
found, the annual rent for the Company's New York City location will
increase to $330,000, effective January 1, 2000, and to $363,000,
effective January 1, 2003.)
On January 17, 1997, the Company entered into a ten-year
operating lease for a retail location in Freeport, Maine. After
reaching an agreement on June 12, 1998 to have Abercrombie and Fitch,
a national clothing retailer, take over its Freeport, Maine space, the
Company closed that store location on August 11, 1998, and its lease
obligation ended on August 6, 1998.
On July 18, 1997, the Company completed a sale-leaseback
<PAGE>
transaction involving its factory headquarters and a portion of its
property located in Shelburne, Vermont. This financing replaced the
Company's mortgage and line of credit agreement with the Vermont
National Bank. The Company received approximately $5.9 million in
cash, of which approximately $3.3 million was used to pay off the
existing mortgage with the Vermont National Bank. The balance,
approximately $2.6 million, was used for general working capital
purposes, to pay down a $600,000 balance on the Company's line of
credit (which was retired as the result of the termination of the
original mortgage loan), and for associated transaction costs of
$679,000, which have been capitalized and recorded as a component of
other assets as of June 30, 1998. The lease obligation, secured by
the business assets of the Company, is payable on a twenty-year
amortization schedule through July 2017. The transaction was
accounted for under the financing method in accordance with Statement
of Financial Accounting Standard No. 98, "Accounting for Leases." The
book value of the building and apportioned land and land improvements
was $6,515,930 as of June 30, 1998.
In addition, the Company leases various equipment under
noncancelable capital lease agreements. Capital leases and
noncancelable operating leases at June 30, 1998 require the following
annual minimum lease payments:
Capital Operating
Leases Leases
1999 $ 780,055 $ 645,608
2000 749,458 611,012
2001 657,227 622,416
2002 652,400 580,000
2003 652,400 598,500
Thereafter 9,187,967 2,301,500
------------ ------------
Total minimum lease payments $ 12,679,507 $ 5,359,036
Less-Amounts representing interest 6,705,587 ============
------------
Present value of lease payments $ 5,973,920
Less-Current installments 225,738
------------
Long-term portion $ 5,748,182
============
The original cost and net book value of assets under capital
lease at June 30, 1998 and 1997 was $7,494,680 and $6,647,142, and
$505,698 and $231,161, respectively. Rental expense under operating
leases for the years ended June 30, 1998 and 1997 was $528,252 and
$321,924, respectively.
Contingencies
The Company is involved in various legal proceedings that, in the
opinion of management, will not result in a material adverse effect on
its financial condition or results of operations.
<PAGE>
(7) Income Taxes
The provision for income taxes for the years ended June 30,
1998 and 1997 was comprised of the following:
Year Ended Year Ended
June 30, 1998 June 30, 1997
Current-
Federal $ - $ -
State - -
------ ------
- -
------ ------
Deferred-
Federal - -
State - -
------ ------
- -
------ ------
Income tax provision (benefit) $ - $ -
====== ======
The components of the net deferred tax asset as of June
30, 1998 and 1997 are presented below:
Deferred tax assets-
Vacation accrual $ 44,753 $ 45,916
Net operating loss carryforwards 2,303,590 1,649,969
Inventories 48,892 48,892
Severance accrual 44,105 30,000
Contribution carryforwards 117,736 49,456
Deferred rent 37,891 27,843
Other 52,705 53,292
Valuation allowance (2,416,469) (1,646,352)
----------- -----------
Total deferred tax assets $ 233,203 $ 259,016
Deferred tax liabilities-
Prepaid expenses $ (21,229) $ -
Property and equipment (211,974) (259,016)
----------- -----------
Total deferred tax liabilities $ (233,203) $ (259,016)
Net deferred tax asset $ - $ -
=========== ===========
The provision for income taxes varies from the amounts
computed by applying the U.S. federal income tax rate of 34% as follows
for the years ended June 30, 1998 and 1997:
Year Ended Year Ended
June 30, 1998 June 30, 1997
<PAGE>
Computed expected tax rate -34% -34%
Increase resulting from-
Valuation allowance for deferred tax assets 34% 34%
--- ---
Income tax provision (benefit) - % - %
=== ===
At June 30, 1998, the Company has federal income tax net
operating loss (NOL) carryforwards of approximately $5.9 million. The
NOL carryforwards expire in varying amounts through 2013. In addition,
as a result of the change in tax reporting year-end to June 30, 1995,
certain amounts of the NOL carryforwards (approximately $1.7 million)
are available for use ratably over a six-year period beginning
June 30, 1996. In addition, the Tax Reform Act of 1986 included
certain provisions relating to changes in stock ownership that, if
triggered, could result in limitations on the utilization of the NOLs.
The Company has not calculated or assessed the impact of any changes
in ownership on its ability to use its NOLs.
(8) Preferred Stock
Series A
The Company has issued 90 shares, $.05 par value, of Series A
Cumulative Preferred Stock to one individual. The Series A
stockholder is entitled to accrued dividends on the stated values of
the shares at a rate of 8% per annum. The dividends accrue regardless
of whether dividends have been declared, profits exist, or funds are
legally available for payment. Dividends are payable quarterly, in
arrears. For the fiscal years ended June 30, 1998 and 1997, $72,000
of dividends were accrued. The Series A Preferred Stock carries a
liquidation preference value equal to the stated value per share plus
all accrued and unpaid dividends. The stated value is equal to
$10,000 per share.
Series B
The Company has issued 204,912 shares, $.05 par value, of Series
B Convertible Preferred Stock to twelve individuals. Series B
stockholders are not entitled to any dividends or voting rights, but
each share was originally convertible into one share of the Company's
Common Stock at any time on or after July 14, 1997, subject to certain
anti-dilution rights. As the result of subsequent financing
transactions, the anti-dilution provisions of the Series B agreement
were activated, and the 204,912 shares of Series B Preferred Stock are
now convertible into 482,441 shares of Common Stock. Common shares
issued as the result of the conversion of the Series B Preferred Stock
shall be considered "restricted securities" and shall be subject to
certain registration rights. On liquidation, dissolution, or winding
up of the Company, holders of Series B Preferred Stock are entitled to
be paid on a pari passu basis with any holders of Series A Preferred
Stock.
<PAGE>
(9) Warrants
At June 30, 1998, there were several warrants outstanding for
shares of the Company's Common Stock. Substantially all of the warrant
agreements contain certain anti-dilution provisions which, if
triggered, can result in additional shares being available to the
warrant holder and/or a reduction in the exercise price for each
share. Certain anti-dilution provisions were triggered in fiscal 1998
as the result of the issuance of warrants and employee stock options.
The following table summarizes the Company's outstanding warrants at
June 30, 1998 and 1997, inclusive of the effects of anti-dilution
provisions:
June 30, 1998 June 30, 1997
Warrant Exercise Expiration Warrant Exercise Expiration
Shares Price Date Shares Price Date
77,608 $ 5.025 8/3/1998 75,374 $ 5.174 8/3/1998
124,431 14.325 11/23/1998 123,377 14.448 11/23/1998
100,000 1.000 12/26/2004 20,000 3.375 12/26/2002
51,841 2.431 4/12/2001 50,795 2.480 4/12/2001
523,692 1.000 7/2/2000 523,692 1.000 7/2/2000
160,024 1.233 7/18/2004
(10) Stock Options
1993 Incentive Stock Option Plan
On August 16, 1993, the stockholders approved a 1993 incentive
stock option plan ("1993 Plan"), which provided for the granting of
200,000 stock options to employees. Options granted may be either
incentive stock options within the meaning of Section 422 of the
Internal Revenue Code, or non-qualified options.
Under the 1993 Plan, the Option Committee of the Board of
Directors is authorized to grant both non-qualified and incentive
stock options to full-time employees of the Company only, including
officers of the Company. The Committee will determine the provisions
and terms of any stock option grant. No option may terminate later
than ten years from the date the option is granted. The Committee may
provide for termination of the option in the case of termination of
employment with the Company or any other reason. No stock option can
be transferred except by will or by the laws of descent and
distribution. The 1993 Plan terminates on August 16, 2003, however,
the 1993 Plan may be terminated earlier by decision of the Board. The
Board may amend the 1993 Plan; however, any amendment that would (1)
materially increase the benefits accruing to participants under the
1993 Plan, (2) materially increase the number of securities that may
be issued under the 1993 Plan, or (3) materially modify the
requirements of eligibility for participation in the 1993 Plan must be
approved by the Stockholders of the Company.
The majority of options under the 1993 Plan vest ratably over a
<PAGE>
five-year period, and a minority vest based on performance of the
market price of the Company's Common Stock. All stock options expire
ten years after the date they are granted. At various intervals, the
stockholders of the Company have ratified changes to the 1993 Plan,
which have increased the number of shares available under the plan to
2,000,000.
Weighted
Average
Remaining
Number of Exercise Price Contractual
Shares Range Average Life
Oustanding, June 30, 1996 802,656 $2.63 - $6.50 $3.10 9.7 years
Granted 2,135,279 $1.00 - $3.13 $1.60
Exercised - - -
Cancelled (1,490,916) $1.00 - $3.13 $2.93
--------- ------------- ----- ---------
Outstanding, June 30, 1997 1,447,019 $1.00 - $6.50 $1.06 8.6 years
Granted 178,500 $1.00 - $1.75 $1.22
Exercised (22,983) $1.00 $1.00
Cancelled (25,271) $1.00 - $1.25 $1.01
--------- ------------- -----
Outstanding, June 30, 1997 1,577,265 $1.00 - $6.50 $1.09 7.9 years
========= ============= =====
On June 3, 1997, the Company offered to grant options with an
exercise price of $1.00 per share (the fair market value of the
Company's Common Stock on that date) in exchange for the surrender of
all outstanding qualified employee incentive stock options at that
date. The repriced options had original exercise prices ranging from
$1.50 to $3.13 per share.
As of June 30, 1998, options to purchase 805,640 shares of the
Company's Common Stock were exercisable under the 1993 Plan with an
average weighted average exercise price of $1.13, and options to
purchase 399,502 shares of the Company's Common Stock were available
for grant under the 1993 Plan. As of June 30, 1997, options to
purchase 255,989 shares of the Company's Common Stock were exercisable
under the 1993 Plan with an average weighted average exercise price of
$1.41, and options to purchase 552,981 shares of the Company's Common
Stock were available for grant under the 1993 Plan.
Non-Employee Director Stock Option Plan
On November 22, 1996, the stockholders approved the Non-Employee
Director Stock Option Plan ("NEDSO Plan"), which provides for the
granting of 400,000 shares of the Common Stock of the Company in
exchange for their participation as a Director of the Company.
Pursuant to the NEDSO Plan, amended on January 22, 1998, each
participating Director will receive an option to purchase 2,000 shares
of Common Stock as an annual retainer. The Chairman of the Board of
Directors, if eligible, is also entitled to receive an additional
annual retainer to purchase 8,000 shares of the Company's Common
<PAGE>
Stock. In addition to the annual retainer options, each participating
director shall receive an option to purchase up to 1,500 shares of
Common Stock per quarter for actual attendance at each regular meeting
of the Board of Directors. All options have an exercise price equal
to the fair market value of the Common Stock on the date of grant,
vest immediately, and are exercisable for a period of ten years.
Number of Exercise Price
Shares Range Average
Outstanding, June 30, 1996 - - -
Granted 18,500 $1.31 - $2.75 $1.87
Exercised - - -
Cancelled - - -
------ ------------- -----
Outstanding, June 30, 1997 18,500 $1.31 - $2.75 $1.87
Granted 20,500 $1.00 - $1.75 $1.15
Exercised - - -
Cancelled (3,500) $1.00 - $1.19 $1.05
------ ------------- -----
Outstanding, June 30, 1998 35,500 $1.00 - $2.75 $1.53
====== ============= =====
As of June 30, 1998, options to purchase 35,500 shares of the
Company's Common Stock were exercisable under the NEDSO Plan, and
options to purchase 364,500 shares of the Company's Common Stock were
available for grant under the NEDSO Plan.
Statement of Financial Accounting Standards No. 123
During 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock Based Compensation, which defines a fair
value based method of accounting for an employee stock option or
similar equity instruments and encourages all entities to adopt that
method of accounting for all of their employee stock compensation
plans.
The Company has elected to account for its stock based
compensation plans under APB Opinion No. 25, under which no
compensation cost has been recognized. However, the Company has
computed for pro-forma disclosure purposes the value of all options
granted during fiscal years 1998 and 1997, using the Black-Scholes
option pricing model as prescribed by SFAS No. 123 and the following
weighed average assumptions used for grants:
1998 1997
Risk-free interest rate 6.0% 6.5%
Expected dividend yield 0.0% 0.0%
Expected volatility 121.0% 34.0%
Expected lives 10 years 10 years
Because the Statement 123 method of accounting has not been
applied to options granted prior to July 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be
expected in future years. Adjustments are made for options forfeited
prior to vesting. The total value of options granted was computed and
<PAGE>
would be amortized on a straight-line basis over the vesting period of
the options. The weighted average fair value of options granted
during fiscal years 1998 and 1997 was $1.16 and $2.00, respectively.
If the Company had accounted with these plans in accordance with SFAS
No. 123, the Company's net income and earnings per share would have
been reported as follows:
1998 1997
Net Loss As Reported ($1,755,670) ($1,973,782)
Pro Forma ( 2,541,875) ( 2,397,585)
Basic and As Reported ($.34) ($.38)
Diluted EPS Pro Forma ( .49) ( .46)
Other Stock Options
At the Company's 1996 Annual Meeting, the Stockholders of the
Company approved two separate grants of non-qualified options to
purchase 30,000 shares of Common Stock each to two Directors of the
Company. On January 22, 1998, one director voluntarily waived their
stock option. The remaining option has an exercise price of $2.75 per
share, being the fair market value on the date of grant, has fully
vested, and is exercisable through November 22, 2006.
(11) Subsequent Events
Financing
On September 25, 1998, after receiving Common stockholder
approval on September 11, 1998, the Company entered into an agreement
to privately place $600,000 of Series C Convertible Redeemable
Preferred Stock. Consummation of the agreement is subject to certain
conditions. Each of the sixty Series C shares will have a liquidation
value of $10,000 per share, and will be convertible into 8,264 shares
of the Company's Common Stock. The Series C Stock will require
redemption upon the tenth anniversary of its issuance, with both the
Company and the Series C Stockholders having call and put rights,
respectively, beginning on the fifth anniversary of issuance. The
Series C Stock will carry voting rights on an as-converted basis, and,
as a class, will have the right to elect two members to the Company's
Board of Directors. Accompanying the issuance of the Series C Stock
will be warrants to purchase 495,868 shares of the Company's Common
Stock at an exercise price of $1.21 per share, which will expire seven
years from the date of issuance. Both the Series C Stock and the
accompanying warrants will carry certain anti-dilution provisions.
Retail Store Closures
On July 29, 1998, in accordance with provisions in its lease, the
Company formally notified its North Conway, New Hampshire landlord of
its intent to close its retail store, and as a result, will have no
further lease obligation effective February 1, 1999. After reaching
an agreement on June 12, 1998 to have Abercrombie and Fitch, a
national clothing retailer, take over its Freeport, Maine space, the
<PAGE>
Company closed that store location on August 11, 1998, and its lease
obligation ended on August 6, 1998.
Legal Proceedings
On July 15, 1998, the Company filed a lawsuit against Tyco
Industries, Inc., entitled The Vermont Teddy Bear Co., Inc. vs. Tyco
Industries, Inc., in the United States District Court for the Northern
District of New York, alleging that Tyco failed to make minimum
royalty payments as required by its contract with the Company dated
September 11, 1995. The litigation is currently at a preliminary
stage, with Tyco denying liability for the minimum royalties in its
answer to the Company's complaint. The Company is vigorously pursuing
this claim to collect amounts due, however no assurances can be made
that the amounts will be received from Tyco. A portion of the claim
is included in other assets as of June 30, 1998 in the accompanying
financial statements.
<PAGE>
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation of our report included in this form 10-KSB into the
Company's previously filed Registration Statement on Form S-8 No. 33-
84586 (filed on September 26, 1995). It should be noted that we have
not audited any financial statements of the Company subsequent to June
30, 1998.
Arthur Andersen LLP
Boston, Massachusetts
September 28, 1998
EXHIBIT 10.46
June 1, 1998
<PAGE>
Ms. Elisabeth B. Robert
Shelburne, VT 05482
Dear Liz:
This letter will follow up on our recent Board meeting and confirm a
technical amendment to your Employment Agreement, dated October 23,
1997, relating to you position as President and Chief Executive
Officer. Specifically, the Letter Agreement shall be amended to
reflect that the exercise price for the options authorized by that
letter shall be the market price of the Company's stock on the date
the options were granted. In all other respects, your Employment
Agreement shall remain in effect without modification. If this
amendment is acceptable to you, please so indicate by signing below.
Very truly yours,
/s/ Fred Marks
Fred Marks
Chairman of the Board
Acknowledged and Agreed To:
/s/ Elisabeth B. Robert
Elisabeth B. Robert
President and CEO
EXHIBIT 10.47
GPH DRAFT: 9/25/98
<PAGE>
THE VERMONT TEDDY BEAR CO., INC.
SECURITIES PURCHASE AGREEMENT
Dated as of September 25, 1998
Table of Contents
Page
ARTICLE 1. PURCHASE AND SALE OF SECURITIES 1
Section 1.1 Description of Securities 1
Section 1.2 Purchase and Sale. 2
Section 1.3 Closing 2
Section 1.4 Investors' Representative 2
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF COMPANY 2
Section 2.1 Organization and Corporate Power 3
Section 2.2 Authorization and Non-Contravention 3
Section 2.3 Capitalization 4
Section 2.4 Subsidiaries; Investments 5
Section 2.5 Reports and Financial Statements 5
Section 2.6 Absence of Undisclosed Liabilities 6
Section 2.7 Absence of Certain Developments 6
Section 2.8 Ordinary Course 7
Section 2.9 Accounts Receivable 7
Section 2.10 Title to Properties 7
Section 2.11 Tax Matters 8
Section 2.12 Certain Contracts and Arrangements 8
Section 2.13 Intellectual Property Rights; Employee Restrictions 10
Section 2.14 Litigation 10
Section 2.15 Employee Benefit Plans 11
Section 2.16 Labor Laws 11
Section 2.17 List of Certain Employees and Consultants 11
Section 2.18 Hazardous Waste, Etc 11
Section 2.19 Business; Compliance with Laws 12
Section 2.20 Investment Banking; Brokerage 12
Section 2.21 Transactions with Affiliates 12
Section 2.22 Customers and Distributors 12
Section 2.23 SEC Reports; Proxy Statement 12
Section 2.24 Form S-3 Eligibility 14
Section 2.25 Disclosure 14
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS 14
<PAGE>
Section 3.1 Compliance with Securities Laws. 14
Section 3.2 Accredited Investor. 14
Section 3.3 Authorization and Non-Contravention. 15
Section 3.4 Investment Banking; Brokerage. 15
ARTICLE 4. CONDITIONS OF CLOSING 15
Section 4.1 Satisfaction of Conditions 15
Section 4.2 Authorization; Shareholder Approval; and Dissenting Shares
16
Section 4.3 No Company Material Adverse Effect 16
Section 4.4 Board Matters 16
Section 4.5 Opinion of Counsel 17
Section 4.6 All Proceedings Satisfactory 17
Section 4.7 Investors Fees 17
Section 4.8 No Violation or Injunction 17
Section 4.9 Consents, Waivers and Rescission 17
Section 4.10 Management Agreement 17
Section 4.12 Key Person Insurance 18
Section 4.13 Non-competition Agreement 18
Section 4.14 Financial Statements 18
ARTICLE 5. PRE-CLOSING COVENANTS 18
Section 5.1 Conduct of Business of the Company 18
Section 5.2 Best Efforts; Cooperation 20
ARTICLE 6. POST-CLOSING COVENANTS 20
Section 6.1 Financial Statements Budgetary Information; Inspection 20
Section 6.2 Indemnification 21
Section 6.3 Key Person Insurance 21
Section 6.4 Board of Directors and Committees of the Board of
Directors 21
Section 6.5 Stock Options 21
Section 6.6 Indebtedness 21
Section 6.7 Liens 22
Section 6.8 Restrictive Covenants 24
Section 6.9 Use of Proceeds 24
Section 6.10 Confidentiality Agreements; Non-Competition Agreements 24
Section 6.11 Insurance 25
Section 6.12 Affiliated Transactions 25
Section 6.13 Employees 25
Section 6.14 Nasdaq Listing; Form S-3 Eligibility 25
Section 6.15 Nasdaq Listing Application 25
ARTICLE 7. RIGHTS TO PURCHASE 25
Section 7.1 Right to Participate in Certain Sales of Additional
Securities 25
Section 7.2 Assignment of Rights 26
ARTICLE 8. REGISTRATION RIGHTS 26
Section 8.1 Optional Registrations 26
Section 8.2 Required Registrations 27
Section 8.3 Registrable Securities 28
Section 8.4 Further Obligations of the Company 28
Section 8.5 Information by Holder 31
<PAGE>
Section 8.6 Lockup Agreement 31
Section 8.7 Indemnification; Contribution 32
Section 8.8 Rule 144 Requirements 34
Section 8.9 Transfer of Registration Rights 34
Section 8.10 Limitations on Subsequent Registration Rights 35
ARTICLE 9. TERMINATION 35
Section 9.1 Termination 35
Section 9.2 Effect of Termination 35
Section 9.3 Termination Fee 36
Section 9.4 Extension; Waiver 36
Section 9.5 Right to Proceed 36
ARTICLE 10. GENERAL 36
Section 10.1 Amendments, Waivers and Consents 36
Section 10.2 Actions or Consents of Investors 37
Section 10.3 Indemnification from the Company: Expenses 37
Section 10.4 Indemnification from the Company 38
Section 10.5 Indemnification from the Investors: Expenses 39
Section 10.6 Indemnification from the Investors 40
Section 10.7 Notice; Defense of Claims 41
Section 10.8 Survival of Representations; Warranties and Covenants;
Assignability of Rights 42
Section 10.9 Legend on Securities 42
Section 10.10 Governing Law; Jurisdiction; Venue 43
Section 10.11 Section Headings and Gender 43
Section 10.12 Counterparts 43
Section 10.13 Notices and Demands 43
Section 10.14 Remedies; Severability 44
Section 10.15 Integration 44
EXHIBITS
Exhibit A - Investors List
Exhibit B - Form of Preferred Stock Terms
Exhibit C - Form of Warrant
Exhibit D - Form of Opinion of Counsel
Exhibit E - Form of Management Agreement
Exhibit F - List of Senior Executive Officers
Exhibit G - Form of Joinder Agreement
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "Agreement") made as of this ____
day of September __, 1998, by and among The Vermont Teddy Bear Co.,
Inc., a New York corporation (the "Company"), and the investors named
herein and appearing under the heading "Investors" on Exhibit A hereto
and any other investor who becomes a party to this Agreement by
execution of a Joinder Agreement in substantially the form attached
hereto as Exhibit G (such present investors together with future
investors collectively the "Investors," and each individually, an
"Investor").
<PAGE>
WHEREAS, the Investors wish to purchase and acquire, and the Company
wishes to issue, sell and grant the securities of, and rights with
respect to, the Company and its securities, as described herein; and
WHEREAS, the parties hereto desire to set forth the terms of their
ongoing relationship in connection with the Company.
NOW THEREFORE, in consideration of the foregoing, the mutual covenants
and agreements hereinafter set forth and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE 1. PURCHASE AND SALE OF SECURITIES
Section 1.1 Description of Securities.
(a) The Company has authorized the issuance and sale to the Investors
of an aggregate 60 shares (the "Investor Preferred Shares") of its
authorized, but unissued Series C Convertible Redeemable Preferred
Stock, par value $.05 per share (the "Series C Preferred Stock"), having
the rights, preferences and other terms substantially in the form
attached hereto as Exhibit B, and warrants to purchase an aggregate of
495,868 shares (the "Investor Warrant Shares") of Common Stock, par
value $.05 per share (the "Common Stock") (collectively the "Investor
Warrants," and each individually an "Investor Warrant"), subject to the
terms and provisions set forth in the form of Warrant Certificate,
attached hereto as Exhibit C (the "Warrant Certificate"). The purchase
price per Unit (as hereinafter defined) is $10,000. A "Unit" shall
consist of one (1) share of Series C Preferred Stock and an Investor
Warrant to purchase 8,264.47 shares of Common Stock.
(b) The Company has authorized and has reserved, and covenants
to continue to reserve a sufficient number of shares of its Common Stock
to satisfy the rights of the holders of the Investor Warrants to
purchase shares of Common Stock upon the exercise thereof. The Company
has further authorized and has reserved, and covenants to continue to
reserve, a sufficient number of its Common Stock to satisfy the rights
of conversion of the Investor Preferred Shares. The Series C Preferred
Stock and the Investor Warrants are herein collectively referred to as
the "Securities."
Section 1.2 Purchase and Sale. Subject to the terms and conditions of
this Agreement and in reliance on the representations, warranties and
covenants herein set forth, at the Closing (as defined in Section 1.3
below), the Company shall issue and sell to each of the Investors, and
each Investor shall purchase and acquire from the Company, the number of
shares of Series C Preferred Stock and Investor Warrants set forth
opposite the name of such Investor in Schedule 1.2 which shall be
delivered to the Company on the Closing Date (as defined in Section 1.3
hereof) for the purchase price of $10,000 for each Unit for the
aggregate purchase price set forth opposite the name of such Investor in
such Schedule 1.2. The Investors acknowledge that the Company reserves
the right to reject the joinder of any new Investors to this Agreement
<PAGE>
if such joinder would cause unreasonable delay in the Closing due to the
Company's efforts to comply with the requirements of state blue sky
laws.
Section 1.3 Closing. The closing of the purchases and sales of the
Securities (the "Closing") shall take place at the offices of Goodwin,
Procter & Hoar LLP, Boston, MA within 30 days of the date hereof or
such other time and place as may be mutually agreed upon by the parties
hereto (the "Closing Date"). At the Closing, the Company will issue to
each Investor, and such Investor shall purchase from the Company, the
number of shares of Series C Preferred Stock and Investor Warrants set
forth opposite such Investor's name on Schedule 1.2, and the Company
shall deliver to each Investor certificates representing such Series C
Preferred Stock and Warrant Certificates, in each case against payment
to the Company of the respective purchase prices therefor by such
Investor in cash, by check, or by wire transfer as is set forth on
Schedule 1.2.
Section 1.4 Investors' Representative. The Investors hereby designate
The Shepherd Group LLC as their representative (the "Investors'
Representative") and authorize it to take all action necessary in
connection with the transactions contemplated hereby and the rights
hereunder, or the settlement of any dispute related thereto. All
decisions and actions by the Investors' Representative shall be binding
upon all of the Investors, and no Investor shall have the right to
object, dissent, protest or otherwise contest the same. The Company
shall be able to rely conclusively on the instructions and decisions of
the Investors' Representative as to any actions required or permitted to
be taken by the Investors or the Investors' Representative hereunder,
and no Investor shall have any cause of action against the Company for
any action taken by the Company in reliance upon the instructions or
decisions of the Investors' Representative. All expenses incurred by
the Investors' Representative in connection with the transactions
contemplated hereby or the rights hereunder shall be borne by the
Company.
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF COMPANY
In order to induce the Investors to enter into this Agreement, the
Company makes to each of the Investors the representations and
warranties contained in this Article 2. Such representations and
warranties are subject to the qualifications and exceptions set forth in
the disclosure schedule delivered to the Investors pursuant to this
Agreement (the "Disclosure Schedule"); provided, however, that any
information set forth in a Section of the Disclosure Schedule shall not
be incorporated (unless by specific reference) to any other Section of
the Disclosure Schedule.
Section 2.1 Organization and Corporate Power. The Company is a
corporation duly organized and validly existing under the laws of the
State of New York, and is qualified to do business as a foreign
corporation in those jurisdictions set forth in Schedule 2.1 hereto and
in each jurisdiction in which the failure to be so qualified would have
<PAGE>
a material adverse effect on its assets, liabilities, condition
(financial or other), business, results of operations or prospects (a
"Material Adverse Effect"). The Company has all required corporate
power and authority to carry on its business as presently conducted, to
enter into and perform this Agreement, the Management Agreement between
the Company and The Shepherd Group LLC, a Massachusetts limited
liability company, in the form attached hereto as Exhibit E, the
Investor Warrants and the other agreements, certificates, filings and
transactions contemplated hereby and thereby (the "Transaction
Documents") to which it is a party, including without limitation the
issuance of the Securities. The copies of the Certificate of
Incorporation and By-laws of the Company, as amended to date, which have
been furnished to counsel for the Investors by the Company, are correct
and complete at the date hereof (the "Certificate of Incorporation" and
the "Bylaws," respectively). The Company is not in violation of any
term of its Certificate of Incorporation or By-laws, or in violation of
any material term of any agreement, instrument, judgment, decree, order,
statute, rule or government regulation applicable to the Company or to
which the Company is a party.
Section 2.2 Authorization and Non-Contravention.
(a) The Transaction Documents are valid and binding obligations of
the Company, enforceable in accordance with their respective terms,
except as the indemnification provisions herein may be limited by
principles of public policy and subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules
of law governing specific performance, injunctive relief or other
matters. The execution, delivery and performance by the Company of the
Transaction Documents, and the issuance and delivery of the Securities,
the Common Stock issuable upon exercise of the Investor Warrants, and
the Common Stock issuable upon conversion of the shares of Series C
Preferred Stock have been duly authorized by all necessary corporate or
other action of the Company. Except as set forth in Schedule 2.2, the
execution, delivery and performance of the Transaction Documents and the
issuance and delivery of the Securities, the Common Stock issuable upon
exercise of the Investor Warrants, and the Common Stock issuable upon
conversion of the shares of Series C Preferred Stock do not and will
not: (A) violate, conflict with or result in a default under any
contract or obligation to which the Company is a party or by which it or
its assets are bound, or any provision of the Certificate of
Incorporation or By-laws of the Company, or cause the creation of any
encumbrance upon any of the assets of the Company; (B) violate or result
in a violation of, or constitute a default (whether after the giving of
notice, lapse of time or both) under, any provision of any law,
regulation or rule, or any order of, or any restriction imposed by, any
court or other governmental agency applicable to the Company; (C)
require from the Company any notice to, declaration or filing with, or
consent or approval of any governmental authority or other third party
(other than filings to comply with state and federal securities laws);
or (D) accelerate any obligation under, or give rise to a right of
termination of or under, any agreement, permit, license or authorization
to which the Company is a party or by which the Company is bound.
<PAGE>
Section 2.3 Capitalization.
(a) At the date of this Agreement, the authorized capital stock of
the Company consists of (i) 20,000,000 shares of Common Stock and (ii)
1,000,000 shares of Preferred Stock, par value $.05 per share, of which
90 shares have been designated as shares of Series A Preferred Stock
(the "Series A Preferred Stock") and 375,000 shares have been designated
as shares of Series B Convertible Preferred Stock (the "Series B
Preferred Stock") and the capitalization of the Company is as reflected
on Schedule 2.3 hereto. Except as reflected on Schedule 2.3 hereto, the
Company has not reserved for issuance, issued or agreed to issue and is
not obligated to issue any shares of Common Stock, Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or any other
equity security, warrants, options or other rights to purchase or
acquire any shares of its capital stock, nor any securities convertible
into such shares or any warrants, options or other rights to acquire any
such convertible securities.
(b) After giving effect to the transactions contemplated hereby, the
authorized capital stock of the Company will consist only of (i)
20,000,000 shares of Common Stock and (ii) 1,000,000 shares of Preferred
Stock, of which 90 shares have been designated as shares of Series A
Preferred Stock, 375,000 shares have been designated as shares of Series
B Preferred Stock and 110 shares have been designated as shares of
Series C Preferred Stock. The post-Closing capitalization of the
Company is reflected on Schedule 2.3 hereto. In addition, after giving
effect to the transactions contemplated hereby, the Company (i) has
authorized and reserved for issuance upon exercise of the Investor
Warrants, 495,868 shares of Common Stock and upon conversion of the
shares of Series C Preferred Stock 909,090 shares of Common Stock; (ii)
has authorized and reserved for issuance upon conversion of the shares
of the Series B Preferred Stock up to 482,441 shares of Common Stock and
upon the exercise of the warrants associated with the Series B Preferred
Stock investment, 523,692 shares of Common Stock; (iii) has authorized
and reserved for issuance upon the exercise of warrants by Green
Mountain Capital, L.P., 100,000 shares of Common Stock; (iv) has
authorized and reserved for issuance upon exercise of warrants by David
Garret, 30,000 shares of Common Stock; (v) has authorized and reserved
for issuance upon exercise of warrants by Barington Capital Group, L.P.,
124,431 shares of Common Stock; (vi) has authorized and reserved for
issuance upon exercise of warrants by URSA(VT) QRS 12-30, Inc., 223,971
shares of Common Stock; (vii) has authorized and reserved for issuance
upon exercise of warrants by Joan H. Martin, 54,822 shares of Common
Stock; and (viii) has authorized and reserved for issuance 2,400,000
shares of Common Stock to be issued to officers, directors, employees,
consultants or agents of the Company on such terms as are determined by
the Option Committee of the Board of Directors (subject in each case to
adjustments for stock splits, stock dividends, anti-dilution rights and
the like) (collectively, the "Excluded Shares"). Except as reflected on
Schedule 2.3 and except for the Excluded Shares, the Company has not
reserved for issuance, issued or agreed to issue and is not obligated to
issue any shares of Common Stock, Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock or any other equity security,
warrants, options or other rights to purchase or acquire any shares of
<PAGE>
its capital stock, nor any outstanding securities convertible into such
shares or any warrants, options or other rights to acquire any such
convertible securities. As of the Closing of the transactions
contemplated hereby, all of the outstanding shares of capital stock of
the Company will have been duly and validly authorized and issued and
will be fully paid and nonassessable and will have been offered, issued,
sold and delivered in compliance with applicable federal and state
securities laws and, except as set forth on Schedule 2.3. The Common
Stock issuable upon exercise of the Investor Warrants and the shares of
Common Stock issuable upon conversion of the Series C Preferred Stock
will upon issuance be duly and validly authorized and issued, fully paid
and nonassessable and not subject to any preemptive rights and will be
issued in compliance with federal and state securities laws. Except as
set forth on Schedule 2.3 hereto, as of the Closing of the transactions
contemplated hereby, the Company has not reserved for issuance, issued
or agreed to issue and is not obligated to issue any shares of Common
Stock or any other equity security, warrants, options or other rights to
purchase or acquire any shares of its capital stock, nor any securities
convertible into such shares or any warrants, options or other rights to
acquire any such convertible securities. The relative rights,
preferences and other provisions relating to the Investor Warrants are
as set forth in Exhibit C attached hereto. Except as set forth in
Schedule 2.3, as of the Closing and after giving effect to the
transactions contemplated hereby, there are no preemptive rights, rights
of first refusal, put or call rights or obligations or anti-dilution
rights with respect to the issuance, sale or redemption of the Company's
capital stock, other than rights to which the Investors are entitled as
set forth in this Agreement, the Warrant Certificates and the
Certificate of Incorporation. Except as set forth on Schedule 2.3
hereto, and except for the rights set forth herein, there are no rights
to have the Company's capital stock registered for sale to the public
under the laws of any jurisdiction, no agreements relating to the voting
of the Company's voting securities, and no restrictions on the transfer
of the Company's capital stock.
Section 2.4 Subsidiaries; Investments. The Company has no subsidiaries
and all corporations, joint ventures, partnerships or other entities in
which the Company has any interest are set forth in Schedule 2.4 hereto.
Section 2.5 Reports and Financial Statements.
(a) The Company has previously furnished to the Investors'
Representative complete and correct copies, including exhibits and
footnotes, of (i) its audited financial statements for the fiscal year
ended June 30, 1997 and (ii) its unaudited financial statements for the
fiscal year ended June 30, 1998.
(b) The financial statements referred to in Section 2.5(a) hereof
were prepared in conformity with generally accepted accounting
principles applied on a consistent basis ("GAAP"), are complete, correct
and consistent in all material respects with the books and records of
the Company and fairly and accurately present the financial position of
the Company as of the date thereof and the results of operations and
cash flows of the Company for the periods shown therein. The Company
<PAGE>
has made available to the Investors projections for the fiscal year 1999
(the "Projections"), dated as of August 11, 1998, which Projections will
represent good faith estimates of the Company's performance for 1999 and
future years based upon assumptions which are set forth therein and
which are in good faith believed to be reasonable when made. The
Investors acknowledge that the Projections contain forward-looking
information and that factors such as the cost to the Company of raw
materials, advertising or a disruption in the Company's telephone
service as well as changes in the economic conditions within the
Company's markets, and other factors could cause actual results to
deviate materially from the Projections.
Section 2.6 Absence of Undisclosed Liabilities. Except as and to the
extent reflected or reserved against in the audited balance sheet of the
Company at June 30, 1998 (the "Base Balance Sheet") contained in the
financial statements referred to in Section 2.5(a) hereof, including the
footnotes and schedules thereto, the Company did not as of the date of
the Base Balance Sheet and does not as of the date of this Agreement
have (i) any material liability or liabilities of any nature arising
prior to the date hereof, whether accrued, absolute, contingent or
otherwise, asserted or unasserted, and whether or not of the type or
nature required to be reflected thereon in conformity with generally
accepted accounting principles or (ii) any other liabilities arising
other than in the ordinary course of business since the date of the Base
Balance Sheet.
Section 2.7 Absence of Certain Developments. Since the date of the
Base Balance Sheet there has not been any: (i) material adverse change
in the financial condition of the Company or in the assets, liabilities,
condition (financial or other), business, results of operations or
prospects of the Company, (ii) declaration, setting aside or payment of
any dividend or other distribution with respect to, or any direct or
indirect redemption or acquisition of, any of the capital stock of the
Company (other than with respect to the dividend associated with the
Series A Preferred Stock), (iii) waiver of any valuable right of the
Company or cancellation of any debt or claim held by the Company, (iv)
loss, destruction or damage to any property which is material to the
assets, liabilities, properties, business or prospects of the Company,
whether or not insured, (v) acquisition or disposition of any assets (or
any contract or arrangement therefor) or other transaction by the
Company other than in the ordinary course of business, (vi) transaction
or agreement involving the Company and any officer, director, employee
or shareholder of the Company, (vii) other than explicitly reflected in
the Projections, material increase, direct or indirect, in the
compensation paid or payable to any officer, director, employee or agent
of the Company or any employment or severance agreement, (viii) material
loss of personnel of the Company, material change in the terms and
conditions of the employment of the Company's key personnel or any labor
trouble involving the Company, (ix) material arrangements relating to
any royalty, dividend or similar payment based on the sales volume of
the Company, whether as part of the terms of the Company's capital stock
or by any separate agreement, (x) agreement with respect to the
endorsement of the Company's products, (xi) loss or any development that
could, in the Company's reasonable business judgment, result in a loss
<PAGE>
of any significant customer, account or employee of the Company, (xii)
incurrence of indebtedness or lien, (xiii) transaction not occurring in
the ordinary course of business, (xiv) sale of Common Stock (other than
options exercised by or to be issued to officers, directors, employees,
consultants or agents of the Company on such terms as determined by the
Option Committee) or any other equity security, warrants (other than
warrants to purchase 42,500 shares of Common Stock to be issued to URSA
(VT) QRS 12-30, Inc.), options or other rights to purchase or acquire
any shares of the Company's capital stock, nor any outstanding
securities convertible into such shares or any warrants, options or
other rights to acquire any such convertible securities, or (xv) any
agreement with respect to any of the foregoing actions.
Section 2.8 Ordinary Course. Except as permitted hereby or set forth
on Schedule 2.8, since the date of the Base Balance Sheet, the Company
has conducted its business only in the ordinary course and consistent
with its prior practices.
Section 2.9 Accounts Receivable. Except as set forth in Schedule 2.9,
all of the accounts receivable of the Company, whether shown or
reflected on the Base Balance Sheet or otherwise, represent bona fide
completed sales made in the ordinary course of business, are valid and
enforceable claims, are subject to no known set-offs or counterclaims,
and are, in the best judgment of the Company, fully collectible in the
normal course of business after deducting the reserve set forth in the
Base Balance Sheet and adjusted since that date, which reserve is a
reasonable estimate of the Company's uncollectible accounts.
Section 2.10 Title to Properties. Schedule 2.10 sets forth the
addresses and uses of all real property that the Company owns, leases or
subleases. The Company has good, valid and marketable title to all of
its assets reflected on the Base Balance Sheet or acquired by it after
the date thereof (except for properties disposed of since that date in
the ordinary course of business), free and clear of all liens, claims or
encumbrances of any nature, except as set forth in Schedule 2.10. All
equipment included in such properties which is necessary to the business
of the Company is in good condition and repair (ordinary wear and tear
excepted) and all leases of real or personal property to which the
Company is a party are fully effective and afford the Company peaceful
and undisturbed possession of the subject matter of the lease. The
property and assets of the Company are sufficient for the conduct of its
business as presently conducted. The Company is not in violation of any
zoning, building or safety ordinance, regulation or requirement or other
law or regulation applicable to the operation of its owned or leased
properties, which violation would have a Material Adverse Effect, nor
has it received any notice of any such violation. There are no defaults
by the Company or by any other party, which might curtail in any
material respect the present use of the Company's property listed on
Schedule 2.10. The performance by the Company of the Transaction
Documents will not result in the termination of, or in any increase of
any amounts payable under, any lease listed on Schedule 2.10.
Section 2.11 Tax Matters. The Company has filed all federal, state,
local and foreign income, excise and franchise tax returns, real estate
and personal property tax returns, sales and use tax returns and other
<PAGE>
tax returns required to be filed by it where the failure to file such
returns would have a Material Adverse Effect and has paid all taxes
owing by it, except taxes which have not yet accrued or otherwise become
due, for which adequate provision has been made in the pertinent
financial statements referred to in Section 2.5 above or which will not
have a Material Adverse Effect. The provision for taxes on the Base
Balance Sheet is sufficient as of its date for the payment of all
accrued and unpaid federal, state, county and local taxes of any nature
of the Company, and any applicable taxes owing to any foreign
jurisdiction, whether or not assessed or disputed. All taxes and other
assessments and levies which the Company is required to withhold or
collect have been withheld and collected and have been paid over to the
proper governmental authorities except where the failure to withhold or
collect and pay over would not have a Material Adverse Effect. With
regard to the federal income tax returns of the Company, the Company has
not in the last 10 years received notice of any audit or of any proposed
deficiencies from the Internal Revenue Service, except such notice of
proposed deficiencies which have been resolved in due course or as set
forth on Schedule 2.11. There are in effect no waivers of applicable
statutes of limitations with respect to any taxes owed by the Company
for any year. Neither the Internal Revenue Service nor any other taxing
authority is now asserting or, to the best knowledge of the Company,
threatening to assert against the Company any deficiency or claim for
additional taxes or interest thereon or penalties in connection
therewith.
Section 2.12 Certain Contracts and Arrangements. Except as set forth
in Schedule 2.12 hereto (with true and correct copies delivered to the
Investors or as provided herein), the Company is not a party or subject
to or bound by:
(a) any plan or contract providing for collective bargaining or the
like, or any contract or agreement with any labor union;
(b) any contract, lease or agreement creating any obligation of the
Company to pay to any third party $100,000 or more with respect to any
single such contract or agreement;
(c) any contract or agreement for the sale, license, lease or
disposition of products in excess of $100,000;
(d) any contract containing covenants directly or explicitly limiting
the freedom of the Company to compete in any line of business or with
any person or entity;
(e) any material license agreement (as licensor or licensee);
(f) any contract or agreement for the purchase of any leasehold
improvements, equipment or fixed assets for a price in excess of
$100,000;
(g) any indenture, mortgage, promissory note, loan agreement,
guaranty or other agreement or commitment for borrowing in excess of
$100,000 or any pledge or security arrangement;
<PAGE>
(h) any material joint venture, partnership, manufacturing,
development or supply agreement;
(i) any material endorsement or any other advertising, promotional or
marketing agreement;
(j) any employment or consulting contracts, or agreements with
officers, directors or employees of the Company or persons or
organizations related to or affiliated with any such persons;
(k) any stock redemption or purchase agreements or other agreements
affecting or relating to the capital stock of the Company, including
without limitation any agreement with any shareholder of the Company
which includes without limitation, anti-dilution rights, registration
rights, voting arrangements, operating covenants or similar provisions;
(l) any pension, profit sharing, retirement or stock options plans;
(m) any material royalty, dividend or similar arrangement based on
the sales volume of the Company;
(n) any acquisition, merger or similar agreement;
(o) any contract with a governmental body under which the Company may
have an obligation for renegotiation;
(p) any material employment or consulting contracts, or agreements
with any shareholder of the Company or persons or organizations related
to or affiliated with any shareholder; or
(q) any other material contract not executed in the ordinary course
of business.
All of the Company's contracts and commitments are in full force and
effect and neither the Company, nor any other party is in material
default thereunder (nor has any event occurred which with notice, lapse
of time or both would constitute a default thereunder), except to the
extent that any such default would not have a Material Adverse Effect,
and the Company has not received notice of any alleged default under any
such contract, agreement, understanding or commitment.
Section 2.13 Intellectual Property Rights; Employee Restrictions.
Except as set forth in Schedule 2.13:
(a) The Company has exclusive ownership of, with the right to use,
sell, license, dispose of, and bring actions for infringement of, all
Intellectual Property Rights (as hereinafter defined) material to the
conduct of its business as presently conducted, which rights are
exclusive to the Company and sufficient for the conduct of its business
as presently conducted (the "Company Rights");
(b) The business of the Company as presently conducted and the
production and marketing of the products of the Company do not violate
<PAGE>
any agreements which the Company has with any third party which
violation could have a Material Adverse Effect, or infringe any patent,
trademark, copyright, trade secret or any other Intellectual Property
Rights of any third party;
(c) No claim is pending or threatened against the Company nor has the
Company received any notice or claim from any person asserting that any
of the Company's present or contemplated activities infringe or may
infringe any Intellectual Property Rights of such person, and the
Company is not aware of any infringement by any other person of any
rights of the Company under any Intellectual Property Rights; and
(d) The Company has taken all commercially reasonable steps required
to establish and preserve its ownership of all of the Company Rights.
As used herein, the term "Intellectual Property Rights" shall mean all
intellectual property rights, including, without limitation, all of the
registered rights set forth on Schedule 2.13 and all patents, patent
applications, patent rights, trademarks, trademark applications, trade
names, service marks, service mark applications, copyrights, copyright
applications, computer programs and other computer software, inventions,
designs, samples, specifications, schematics, know-how, trade secrets,
proprietary processes and formulae, including production technology and
processes, all source and object code, algorithms, promotional
materials, customer lists, supplier and dealer lists and marketing
research, and all documentation and media constituting, describing or
relating to the foregoing, including without limitation, manuals,
memoranda and records. Schedule 2.13 contains a list and brief
description of all Intellectual Property Rights owned by or registered
in the name of the Company or of which the Company is the licensor or a
licensee of a material right or in which the Company has any material
right and, in each case, a brief description of the nature of the right.
Section 2.14 Litigation. Except as set forth on Schedule 2.14, there
is no litigation or governmental proceeding or investigation pending or
threatened against the Company or affecting any of its properties or
assets or against any officer, director or key employee of the Company
in his or her capacity as an officer, director or employee of the
Company, or which may call into question the validity or hinder the
enforceability of the Transaction Documents; nor, except as set forth on
Schedule 2.14, has there occurred any event nor does there exist any
condition on the basis of which any such litigation, proceeding or
investigation might be properly instituted or commenced.
Section 2.15 Employee Benefit Plans. The Company does not maintain or
contribute to any employee benefit plan, stock option, bonus or
incentive plan, severance pay policy or agreement, deferred compensation
agreement, or any similar plan or agreement (an "Employee Benefit Plan")
other than the Employee Benefit Plans identified in Schedule 2.15. The
terms and operation of each Employee Benefit Plan comply in all material
respects with all applicable laws and regulations relating to such
Employee Benefit Plans. There are no unfunded obligations of the
Company under any retirement, pension, profit-sharing, deferred
compensation plan or similar program. The Company is not required to
<PAGE>
make any payments or contributions to any Employee Benefit Plan pursuant
to any collective bargaining agreement or any applicable labor relations
law. Except as set forth in Schedule 2.15, the Company has never
maintained or contributed to any Employee Benefit Plan providing or
promising any health or other nonpension benefits to terminated
employees.
Section 2.16 Labor Laws. The Company employs approximately 140 full-
time employees, 28 part-time employees and 3 consultants and enjoys good
employer-employee relationships. Except as disclosed in Schedule 2.16,
the Company is not delinquent in material payments to any of its
employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed for it as of the date hereof or
amounts required to be reimbursed to such employees. The Company is in
compliance in all material respects with all applicable laws and
regulations respecting labor, employment, fair employment practices,
terms and conditions of employment, and wages and hours. There are no
charges of employment discrimination or unfair labor practices or
strikes, slowdowns, stoppages of work or any other concerted
interference with normal operations existing, pending or, to the best
knowledge of the Company and the Management Shareholders, threatened
against or involving the Company.
Section 2.17 List of Certain Employees and Consultants. Schedule 2.17
contains a list of all managers, employees and consultants of the
Company who, individually, have received or are scheduled to receive
compensation from the Company for the fiscal years of the Company ending
June 30, 1998 and June 30, 1999, in excess of $70,000. In each case
such Schedule includes the current job title and aggregate annual
compensation of each such individual or entity.
Section 2.18 Hazardous Waste, Etc. To the best of the Company's
knowledge, except as set forth on Schedule 2.18, no hazardous wastes,
substances or materials or oil or petroleum products have been
generated, transported, used, disposed, stored or treated by the Company
and no hazardous wastes, substances or materials, or oil or petroleum
products have been released, discharged, disposed, transported, placed
or otherwise caused to enter the soil or water in, under or upon any
real property owned, leased or operated by the Company.
Section 2.19 Business; Compliance with Laws. The Company has all
necessary franchises, permits, licenses and other rights and privileges
necessary to permit it to own its property and to conduct its business
as it is presently or contemplated to be conducted. The Company is, and
has been during the past five years, in compliance in all material
respects with all federal, state, local and foreign laws and regulations
and applicable laws of countries in which the Company does or has done
business.
Section 2.20 Investment Banking; Brokerage. Except as set forth in
Schedule 2.20, there are no claims for investment banking fees,
brokerage commissions, finder's fees or similar compensation (exclusive
of professional fees to lawyers and accountants) in connection with the
Transaction Documents payable by the Company or based on any arrangement
<PAGE>
or agreement made by or on behalf of the Company.
Section 2.21 Transactions with Affiliates. Except as set forth in
Schedule 2.21, the Company has disclosed in the SEC Reports (as defined
in Section 2.23 hereof) each material transaction involving the transfer
of any cash, property or rights to or from the Company to or for the
benefit of any affiliate or former affiliate of the Company ("Affiliate
Transactions") during the period commencing December 31, 1993 through
the date hereof and any existing commitments of the Company to engage in
the future in any material Affiliate Transactions. Except as
contemplated by this Agreement and except pursuant to the Company's
Certificate of Incorporation and By-laws, the Company has not entered
into any indemnification agreements or arrangements with the current
directors of the Company.
Section 2.22 Customers and Distributors. Schedule 2.22 sets forth each
material customer, sales representative and distributor and/or broker of
the Company at the date hereof (whether pursuant to a commission,
royalty or other arrangement), and each potential material customer,
sales representative and distributor and/or broker of the Company with
which the Company is currently engaged in discussions and/or
negotiations (collectively, the "Customers, Distributors and Brokers").
The relationships of the Company with its Customers, Distributors and
Brokers are generally good commercial working relationships. Except as
set forth in Schedule 2.22, no Customer, Distributor or Broker of the
Company has canceled or otherwise terminated its relationship with the
Company, or has during the last twelve months decreased materially its
services, supplies or materials to the Company or its usage or purchases
of the services or products of the Company. No Customer, Distributor or
Broker has, to the best knowledge of the Company, any plan or intention
to terminate, to cancel or otherwise materially and adversely modify its
relationship with the Company or to decrease materially or limit its
services, supplies or materials to the Company or its usage, purchase or
distribution of the services or products of the Company.
Section 2.23 SEC Reports; Proxy Statement.
(a) Except as set forth in Schedule 2.23, the Company has filed all
required forms, reports and documents with the Securities and Exchange
Commission (the "Commission") since November, 1993 (collectively, the
"SEC Reports"), all of which were prepared in accordance with and
complied in all material respects with the applicable requirements of
the Securities Act of 1933, as amended (the "Securities Act"), and the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(b) None of the SEC Reports, including, without limitation, any
financial statements or schedules included therein, as of the dates
they were respectively filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading and the balance sheets (including the
related notes) included in the SEC Reports fairly present the
consolidated financial position of the Company as of the respective
dates thereof, and the other related statements (including the related
<PAGE>
notes) included therein fairly present the results of operations and
cash flows of the Company for the respective fiscal periods set forth
therein in accordance with generally accepted accounting principles
applied on a consistent basis, except in the case of interim financial
statements for normal recurring and certain non-recurring adjustments
necessary for a fair presentation of the financial position and
operating results of the Company for the interim periods.
(c) The definitive proxy statement (the "Proxy Statement") relating
to the transactions contemplated by this Agreement and the Amendment (as
defined in Section 4.2 hereof) sent to the Company's shareholders in
connection with the special meeting of the Company's shareholders (the
"Shareholders' Meeting") did not, on the date the Proxy Statement was
filed with the Commission on the date the Proxy Statement was first
mailed to the Company's shareholders and at the time of the
Shareholders' Meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading or necessary to
correct any statement in any earlier communication with respect to the
Shareholders' Meeting or the solicitation of proxies therefor which has
become false or misleading, in each case, other than with respect to
information supplied by the Investors or any of their respective
affiliates or representatives in writing expressly for inclusion in the
Proxy Statement.
On the date the Proxy Statement was filed with the SEC, on the date the
Proxy Statement was first mailed to the Company's shareholders and at
the time of the Shareholders' Meeting, none of the information supplied
in writing by the Investors or any of their respective affiliates or
representatives expressly for inclusion in the Proxy Statement contained
any untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading or necessary to correct any statement in any
earlier communication with respect to the Shareholders' Meeting or the
solicitation of proxies therefor which has become false or misleading.
The Company used its best efforts to ensure that the Proxy Statement
complied as to form in all material respects with the Exchange Act and
the rules and regulations thereunder.
(d) The Company obtained, in accordance with the laws of the State of
New York, the Exchange Act and other applicable law, the rules of the
Nasdaq National Market Inc. ("Nasdaq"), and its Certificate of
Incorporation and By-Laws, the requisite affirmative vote of its
shareholders approving (i) the transactions contemplated hereby and (ii)
the Amendment.
Section 2.24 Form S-3 Eligibility. The Company is able to satisfy and
meet all of the requirements promulgated by the Commission to use Form
S-3 for the registration of its securities under the Securities Act
which are offered in any transaction for which registration on such Form
S-3 is permitted.
<PAGE>
Section 2.25 Disclosure. Except as set forth in Schedule 2.25, the
representations and warranties made or contained in the Transaction
Documents, including the Schedules and Exhibits thereto, and the
information concerning the business of the Company delivered to the
Investors' Representative in connection with or pursuant to the
Transaction Documents, including the good faith estimates (at the time
prepared) of financial projections provided to The Shepherd Group LLC,
when taken together, do not and shall not contain any untrue statement
of a material fact and do not and shall not omit to state a material
fact required to be stated therein or necessary in order to make such
representations, warranties or other material not misleading in light of
the circumstances in which they were made or delivered. There have been
no events or transactions, or information which has come to the
attention of the Company, having a direct impact on the Company or its
assets, liabilities, financial condition, business, results of
operations or prospects which, in the reasonable judgment of the
Company, could be expected to have a Material Adverse Effect.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
Section 3.1 Compliance with Securities Laws. Each Investor represents
to the Company that it is purchasing the Securities for its own account,
for investment only and not with a view to, or any present intention of,
effecting a distribution of such Securities or any part thereof except
pursuant to a registration or an available exemption under applicable
law. Such Investor acknowledges that its respective Securities have not
been registered under the Securities Act or the securities laws of any
state or other jurisdiction and cannot be disposed of unless they are
subsequently registered under the Securities Act and any applicable state
laws or an exemption from such registration is available. Each Investor
acknowledges that it has had an opportunity to conduct due diligence and
to ask questions of the Company's management.
Section 3.2 Accredited Investor. Except as provided in a written
notification to the Company within a reasonable period of time prior to
the Closing Date, each Investor represents to the Company that he, she
or it is an "accredited investor" as the term is defined in Rule 501(a)
of Regulation D, promulgated under the Securities Act.
Section 3.3 Authorization and Non-Contravention. Each Investor that
is not an individual has full right, authority and power under its
governing partnership agreement or other governing document to enter
into, deliver and perform the applicable Transaction Documents, and the
execution, delivery and performance by such Investor of the applicable
Transaction Documents have been duly authorized by all necessary action
under such Investor's governing partnership agreement or other governing
document. Each Investor that is an individual has the capacity to enter
into, deliver and perform the applicable Transaction Documents.
The applicable Transaction Documents constitute, or when executed and
delivered will constitute, valid and binding obligations of each of the
Investors enforceable in accordance with their respective terms, except
as the indemnification provisions herein may be limited by principles of
<PAGE>
public policy and subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other matters. The
execution, delivery and performance by each Investor of the applicable
Transaction Documents and the performance of the transactions
contemplated hereby and thereby do not and will not: (A) violate,
conflict with or result in a default under any contract or obligation to
which any Investor is a party or by which it or its assets are bound, or
cause the creation of any encumbrance upon any of the assets of any
Investor; (B) violate or result in a violation of, or constitute a
default (whether after the giving of notice, lapse of time or both)
under, any provision of any law, regulation or rule, or any order of, or
any restriction imposed by, any court or other governmental agency
applicable to any Investor; (C) require from any Investor any notice to,
declaration or filing with, or consent or approval of any governmental
authority or other third party (other than filings to comply with state
and federal securities laws); or (D) accelerate any obligation under, or
give rise to a right of termination of, any agreement, permit, license
or authorization to which any Investor is a party or by which any
Investor is bound.
Section 3.4 Investment Banking; Brokerage. Each Investor represents
that, except as contemplated herein, there are no claims for investment
banking fees, brokerage commissions, finder's fees or similar
compensation (exclusive of professional fees to lawyers and accountants)
in connection with the Transaction Documents based on any arrangement or
agreement made by or on behalf of such Investor.
ARTICLE 4. CONDITIONS OF CLOSING
Each of the Investors' obligation to purchase and pay for the Securities
issued in the Closing shall be subject to compliance by the Company with
its agreements herein contained and to the fulfillment to the Investors'
satisfaction, or the waiver by the Investors, on or before the Closing
Date of the following conditions:
Section 4.1 Satisfaction of Conditions. The representations and
warranties of the Company contained in the Transaction Documents shall
be true and correct on and as of the date of this Agreement and the
Closing Date as though made on and as of the Closing Date, except to the
extent such representations and warranties speak as of an earlier date;
each of the conditions specified in this Article 4 shall have been
satisfied or waived in writing by the Investors; and, on the Closing
Date, certificates to such effect executed by the President of the
Company shall have been delivered to the Investors' Representative.
Section 4.2 Authorization; Shareholder Approval; and Dissenting
Shares. The Board of Directors and shareholders of the Company shall
have duly adopted resolutions in the form reasonably satisfactory to the
Investors and shall have taken all action necessary for the purpose of
approving the amendment to the Company's Certificate of Incorporation
pursuant to which Shareholder preemptive rights will be eliminated (the
"Amendment") and authorizing the Company to consummate the transactions
<PAGE>
contemplated hereby in accordance with the terms hereof; and the
Investors shall have received a certificate of the Secretary of the
Company setting forth a copy of the resolution and the Certificate of
Incorporation and Bylaws and such other matters as may be requested by
the Investors. The shareholders of the Company entitled to vote thereon
shall have approved the Amendment and the transactions contemplated
hereby by the requisite affirmative vote of the shareholders of the
Company, as required by the Company's Certificate of Incorporation,
Bylaws and applicable law. Three shareholders did not vote in favor of
the transaction contemplated hereby or the Amendment nor consented
thereto in writing and have demanded in writing appraisal for 12,120
shares of Common Stock in accordance with the Business Corporation Law of
New York. Notwithstanding anything to the contrary contained in the
Letter of Intent (as defined in Section 9.2 hereof), the Investors hereby
waive the closing condition that no shareholder exercise the right to
demand appraisal of his, her or its shares of Common Stock in connection
with the Company seeking shareholder approval of the transactions
contemplated hereby or the Amendment.
Section 4.3 No Company Material Adverse Effect. Since the date
hereof, there shall not have been any change or events which,
individually or in the aggregate, have a Material Adverse Effect on the
Company. In addition, since the date of the Base Balance Sheet attached
hereto as Schedule 4.3, there shall not have been any substantial change
to the state of the balance sheet of the Company.
Section 4.4 Board Matters. The Company has taken such action as is
necessary to fix the number of members of the Board of Directors of the
Company at nine (9) and to cause the Board of Directors to establish a
Compensation Committee and an Executive Committee, each consisting of no
more than three (3) Directors. Thomas R. Shepherd and T. Nathanael
Shepherd, as the nominees of the Investors, shall have been elected as
Directors of the Company (together with any subsequent nominees of the
Investors, the "Investors' Nominees"). Thomas R. Shepherd, as nominee
of the Investors, shall have been appointed to the Compensation
Committee; and Thomas R. Shepherd, as nominee of the Investors, shall
have been appointed to the Executive Committee, along with Elisabeth B.
Robert, President and Chief Executive Officer of the Company, and Fred
Marks, Chairman of the Board of Directors or such persons successors.
Section 4.5 Opinion of Counsel. The Investors shall have received
from counsel for the Company an opinion dated as of the Closing Date
substantially in the form attached hereto as Exhibit D.
Section 4.6 All Proceedings Satisfactory. All corporate and other
proceedings taken prior to or at the Closing in connection with the
Amendment and the Transaction Documents shall be reasonably satisfactory
in form and substance to the Investors.
Section 4.7 Investors Fees. The Company agrees to pay, within a
reasonable time after the Closing, on behalf of the Investors'
Representative legal and accounting fees and related expenses actually
incurred by the Investors' Representative in connection with their due
diligence, the Transaction Documents and the Closing. No other
<PAGE>
investment banking fee, brokerage commissions, finder's fee or similar
compensation (exclusive of professional fees to lawyer and accountants)
in connection with the Transaction Documents shall be payable by the
Company.
Section 4.8 No Violation or Injunction. Neither the Amendment nor the
consummation of the Transaction Documents shall be in violation of any
law or regulation, and shall not be subject to any injunction, stay or
restraining order or be the subject of any material pending or
threatened litigation or governmental proceeding or investigation.
Section 4.9 Consents, Waivers and Rescission. The Company shall have
obtained all consents or waivers necessary to execute, deliver and
perform the Transaction Documents and shall have delivered evidence
thereof to the Investors. All corporate and other action and
governmental filings necessary to effectuate the terms of the
Transaction Documents shall have occurred. The Company has obtained
from the Vermont National Bank an affirmative declaration that it will
rescind, waive or otherwise release its claim to, and unencumber, the
working capital assets of the Company, including, without limitation,
the Company's trademarks, receivables, inventory and work in progress
inventory, upon the request of the Company.
Section 4.10 Management Agreement. The Management Agreement
substantially in the form of Exhibit E hereto between the Company and
The Shepherd Group LLC, a Massachusetts limited liability company, shall
have been executed by each party thereto.
Section 4.11 Investors' Nominees Indemnification. The Company shall
indemnify and hold harmless the Investors' Nominees for actions taken as
directors of the Company on behalf of the Company to the fullest extent
permitted under the Company's Certificate of Incorporation, Bylaws and
directors' and officers' liability insurance policy. The Company shall
have provided to the Investors' Representative a copy of its existing
directors' and officers' liability insurance policy, and the Company
agrees that it shall use its best commercial efforts to maintain a
directors' and officers' liability insurance policy which will provide
the Investors' Nominees with coverage on substantially similar or better
terms as currently provided by the Company to its directors and
officers.
Section 4.12 Key Person Insurance. The Company agrees that it shall
purchase "key person" term life insurance of $1,000,000 on the life of
Elisabeth B. Robert, with the Company as beneficiary within sixty (60)
days after the Closing Date. The Company agrees that such policy shall
not be assigned, borrowed against, pledged or otherwise hypothecated.
Section 4.13 Non-competition Agreement. Except as set forth in
Schedule 4.13, each of the key senior executive officers of the Company
listed on Exhibit F hereto shall have entered and become a party to an
agreement with the Company pursuant to which, for a period of 18 months
following termination of his or her employment with the Company, he or
she agrees not to directly or indirectly engage, invest or otherwise
make a material investment in any business that develops, manufactures
<PAGE>
or markets products or performs services which are materially
competitive with or substantially similar to the products or services of
the Company.
Section 4.14 Financial Statements. The Company has furnished to the
Investors' Representative complete and correct copies, including
exhibits and footnotes, of its audited financial statements for the
fiscal year ended June 30, 1998.
ARTICLE 5. PRE-CLOSING COVENANTS
Section 5.1 Conduct of Business of the Company. Except as otherwise
contemplated by this Agreement, during the period from the date of this
Agreement to the Closing Date, the Company shall: (i) carry on its
business in the ordinary course consistent with past practice and (ii)
use all reasonable efforts consistent with good business judgment to
preserve intact its current business. Except as otherwise contemplated
by this Agreement, during the period from the date of this Agreement to
the Closing Date, the Company will not (except as expressly contemplated
or permitted by this Agreement or to the extent that at least two-thirds
in interest of the Series C Preferred Stock shall otherwise consent in
writing):
(a) Declare, set aside or pay any dividend or other distribution
(whether in cash, stock, or property or any combination thereof) in
respect of any of its capital stock, (ii) split, combine or reclassify
any of its capital stock or (iii) repurchase, redeem or otherwise
acquire any of its capital stock;
(b) Authorize for issuance, issue, sell, deliver or agree or commit
to issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise) any stock of any class or any other securities (including
indebtedness having the right to vote) or equity equivalents (including,
without limitation, stock appreciation rights), except as contemplated
by Schedule 5.1 and for options outstanding on the date of this
Agreement in accordance with their present terms;
(c) Acquire, sell, lease, encumber, transfer or dispose of any assets
outside the ordinary course of business, which are material to the
Company;
(d) Incur any indebtedness for borrowed money, guarantee any
indebtedness, issue or sell debt securities or warrants or rights to
acquire any debt securities, guarantee (or become liable for) any debt
of others, make any loans, advances or capital contributions, mortgage,
pledge or otherwise encumber any material assets, create or suffer any
material lien thereupon other than working capital borrowings pursuant
to credit facilities in existence on the date hereof;
(e) Pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than any payment, discharge, settlement or
satisfaction (i) in the ordinary course of business consistent with past
<PAGE>
practice; (ii) in connection with the transactions contemplated by this
Agreement; or (iii) in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the financial
statements (or the notes thereto) of the Company contained in the SEC
Reports;
(f) Change any of the accounting principles or practices used by it
(except as required by generally accepted accounting principles);
(g) Except as required by law or contemplated by this Agreement or as
set forth on Schedule 5.1, (i) enter into, adopt, amend or terminate any
Employee Benefit Plan, (ii) enter into, adopt, amend or terminate any
agreement, arrangement, plan or policy between the Company and one or
more of its directors or officers, (iii) increase in any manner the
compensation or fringe benefits of any employee (excluding executive
officers whose compensation or fringe benefits will be subject to clause
(iv) below) or pay any benefit not required by any plan and arrangement
as in effect as of the date hereof, except for normal increases in the
ordinary course of business consistent with past practice or (iv)
increase in any manner the compensation or fringe benefits of any
executive officer or director or pay any benefit not required by any
plan and arrangement as in effect as of the date hereof;
(h) Adopt any amendments to the Company's Certificates of
Incorporation or By-Laws;
(i) Acquire or agree to acquire (A) by merging or consolidating with,
or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership or other business
organization or (B) any assets, including real estate, except (x)
purchases of inventory, furnishings and equipment in the ordinary course
of business consistent with past practice or (y) purchases of other
assets the cost of which do not equal, in the aggregate, more than
$75,000;
(j) Make any new capital expenditure or expenditures, other than
capital expenditures not to exceed, in the aggregate, $75,000;
(k) Enter into a new agreement or amend or terminate any existing
agreement which could reasonably be expected to have a Material Adverse
Effect;
(l) Expand the number of persons on the Board of Directors of the
Company or add any other person to the Board of Directors; or
(m) Enter into an agreement to take any of the foregoing actions or
take, or enter into an agreement to take, any action that would result
in any of the conditions to the transactions contemplated herein set
forth in Article 4 not being satisfied.
Section 5.2 Best Efforts; Cooperation. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use
his, her or its best efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, all things necessary, proper or
<PAGE>
advisable by him, her or it under applicable laws and regulations to
consummate and make effective the transactions contemplated by this
Agreement including, without limitation, (i) the preparation and filing
of all forms, registrations, and notices required to be filed to
consummate the transactions contemplated hereby and (ii) the taking of
such actions as are necessary to obtain any requisite approvals,
consents, orders, exemptions, and waivers by any public or private third
party.
ARTICLE 6. POST-CLOSING COVENANTS
So long as at least 15% of the Series C Preferred Stock issued on the
Closing Date remains issued and outstanding, the Company agrees for the
benefit of the Investors that it shall comply with the following
covenants, except as otherwise set forth herein or as otherwise may be
agreed to in writing by at least two-thirds in interest of the Series C
Preferred Stock.
Section 6.1 Financial Statements Budgetary Information; Inspection.
The Company will deliver to the Investors' Representative internally
prepared unaudited monthly and quarterly financial statements and audited
annual financial statements and information relating thereto, including,
without limitation, accountant letters. The unaudited monthly and
quarterly financial information will be provided to the Investors'
Representative within 30 days after the end of each month and quarter.
The audited annual financial information will be provided to the
Investors within 85 days after each fiscal year-end of the Company. The
Company also will deliver to the Investors' Representative the annual
budgetary information for the Company on the earlier of (i) one month
after the beginning of each fiscal year of the Company or (ii) the date
on which such budgetary information is completed.
The Company will, upon reasonable prior notice to the Company, permit
authorized representatives of the Investors' Representative to visit and
inspect any of the properties of the Company, including its books of
account (and to make copies thereof and take extracts therefrom), and to
discuss its affairs, finances and accounts with its officers,
administrative employees and independent accountants, all at such
reasonable times and as often as may be reasonably requested.
Section 6.2 Indemnification. The Certificate of Incorporation and
Bylaws of the Company will at all times during which any nominee of any
of the Investors serves as director of the Company provide for
indemnification of the directors and limitations on the liability of the
directors as is currently in place. The Company shall use its best
commercial efforts to maintain a directors' and officers' liability
insurance policy which will provide the Investors' Nominees with
coverage on substantially the same or better terms as currently provided
by the Company to its directors and officers.
Section 6.3 Key Person Insurance. The Company shall maintain "key
person" term life insurance policy of $1,000,000 on the life of
Elisabeth B. Robert for so long as she remains the President or Chief
<PAGE>
Executive Officer of the Company, with the Company as beneficiary, which
shall have been purchased by the Company within sixty (60) days of the
Closing. The Company hereby agrees that such policy shall not be
assigned, borrowed against, pledged or otherwise hypothecated.
Section 6.4 Board of Directors and Committees of the Board of
Directors. The Company shall arrange conference calls of the Board of
Directors at such times as so requested by the Investors' nominees and
shall pay all reasonable out-of-pocket expenses incurred by members of
the Board of Directors in connection with attending meetings or other
functions of the Company's Board of Directors or any committees thereof.
The Company also shall cause the Board of Directors to appoint to each of
the Compensation Committee and the Executive Committee the nominee of the
Investors as set forth in Section 4.4 hereof.
Section 6.5 Stock Options. The Company will not issue stock or grant
stock options, warrants, other rights to purchase stock or phantom stock
rights in the Company to employees, Directors, consultants or advisors
of the Company except as determined by the Option Committee of the Board
of Directors, and otherwise on such terms as the Option Committee of the
Board of Directors shall determine or in accordance with the terms of
the Company's Non-Employee Directors' Stock Option Plan.
Section 6.6 Indebtedness. Except as approved by the Investors'
Representative, the Company will not directly or indirectly, incur,
create, assume, become or be liable in any manner with respect to, or
permit to exist, any Indebtedness (as hereinafter defined) or liability,
except;
(a) Indebtedness described in Schedule 2.12 hereto or set forth on
the Base Balance Sheet as in effect on the date hereof;
(b) Indebtedness with respect to trade obligations and other normal
accruals, including taxes, assessments, and other governmental charges,
arising in the ordinary course of business and not yet due and payable,
or which is being contested in good faith by appropriate proceedings;
(c) Indebtedness incurred for purchase money obligations and
capitalized lease obligations, so long as (i) the pertinent assets are
acquired in the ordinary course of the Company's business, (ii) the
Indebtedness secured thereby does not exceed the fair market value of
such assets, and (iii) the aggregate amount of such Indebtedness does
not exceed $300,000 at any one time;
(d) Indebtedness in respect of guarantees by the Company to a third
party, to the extent that any such guarantee secures Indebtedness of the
Company which is specifically permitted to be incurred or to remain
outstanding under the provisions of this Section 6.6; and
(e) Indebtedness of any other kind not exceeding in the aggregate
$250,000 at any one time.
For purposes of this Agreement, the term "Indebtedness" shall mean with
respect to any person or entity, (i) any liability, contingent or
<PAGE>
otherwise, of such person or entity (A) for borrowed money (whether or
not recourse of the lender is to the whole of the assets of such person
or entity or only to a portion thereof), (B) evidenced by a note,
debenture or similar instrument (including a purchase money obligation)
given in connection with the acquisition of any property or assets,
(C) for any letter of credit or performance bond in favor of such person
or entity, (D) for the payment of money relating to a capitalized lease
obligation, or (E) any liability, contingent or otherwise, of such
person or entity to any other person or entity for any purchase price
associated with any acquisition of assets, business or otherwise
(including any deferred purchase price, assumption of Indebtedness,
noncompetition payments or other forms of consideration); (ii) any
liability of others of the kind described in the preceding clause (i),
which the person or entity has guaranteed or which is otherwise its
legal liability, contingent or otherwise; (iii) any obligation secured
by a Lien (as defined in Section 6.7 hereof) to which the property or
assets of such person or entity are subject, whether or not the
obligations secured thereby shall have been assumed by or shall
otherwise be such person's or entity's legal liability; (iv) all other
items (except items of capital stock, capital or paid-in surplus,
retained earnings) which, in accordance with generally accepted
accounting principles, would be included as a liability on the balance
sheet of such person or entity on the date of determination; and (v) any
and all deferrals, renewals, extensions or refinancing of, or
amendments, modifications of supplements to, any liability of the kind
described in any of the preceding clauses (i), (ii), (iii) or (iv).
Section 6.7 Liens. Except as approved by the Investors'
Representative, the Company will not, directly or indirectly, create,
incur, assume or suffer to exist any Lien (as hereinafter defined) of any
nature whatsoever on any of its assets (including any leasehold interests
in property used by the Company) or ownership interests now or hereafter
owned, other than:
(a) Liens securing the payment of taxes, and other government
charges, either not yet due or the validity of which is being contested
in good faith before appropriate proceedings, and as to which the
Company shall have set aside on its books adequate reserves to the
extent required by generally accepted accounting principles and provided
that, in any event, payment of any such tax, assessment, charge, levy or
claim shall be made before any of the Company's property shall be seized
and sold in satisfaction thereof;
(b) Liens securing Indebtedness permitted under Section 6.6 above;
(c) Deposits under worker's compensation, unemployment insurance and
social security laws;
(d) Restrictions, easements, and minor irregularities in title which
do not and will not interfere with the occupation, use and enjoyment of
the properties of the Company in the normal course of business as
presently conducted or materially impair the value of such assets for
the purpose of such business;
<PAGE>
(e) Liens imposed by law, such as mechanics', materialmen's,
landlords', warehousemen's, and carriers' Liens and other similar Liens,
securing obligations incurred in the ordinary course of business which
are not past due for more than ninety (90) days or which are being
contested in good faith by appropriate proceedings and for which
appropriate reserves have been established;
(f) Liens, deposits or pledges to secure the performance of bids,
tenders, contracts (other than contracts for the payment of
indebtedness), leases (to the extent permitted under the terms of this
Agreement), public or statutory obligations, surety, stay, appeal,
indemnity, performance or other similar bonds, or other similar
obligations arising in the ordinary course of business; and
(g) Liens against the fee interest in real property leased by the
Company which are securing obligations of the owner of such property.
For purposes of this Agreement, the term "Lien" shall mean any interest
in, or claim against, property relating to an obligation owed to, or
claim by, a person or entity other than the owner of the property,
whether such interest is based on the common law, statute or contract,
and including but not limited to any security interest lien arising from
a mortgage, encumbrance, pledge, conditional sale or trust receipt or a
lease, consignment or bailment for security purposes, any rights of
first refusal, charges, claims, liabilities, limitations, conditions,
restrictions or other adverse claims. For the purposes of this
Agreement, the Company shall be deemed to be the owner of any property
which it has acquired or holds subject to a conditional sale agreement,
financing lease or other arrangement pursuant to which title to the
property has been retained by or vested in some other person or entity
for security purposes and such retention or vesting shall be deemed to
be a Lien.
Section 6.8 Restrictive Covenants. The Company will not and will not
enter into any agreement or understanding to:
(a) sell, lease, encumber, transfer or otherwise dispose of (whether
in one transaction or a series of related transactions) all or
substantially all of its assets or business;
(b) merge with or into or consolidate with another entity (other than
any reincorporation merger not involving any change in the rights and
obligations of the parties hereto), engage in any consolidation
transaction, or acquire any other company or the assets of any other
company other than in the ordinary course of business;
(c) liquidate or wind up its operations;
(d) issue any shares of stock of the Company of any class having
preferences senior to or pari passu with those of the Investor Preferred
Shares;
(e) except for the Excluded Shares, authorize, issue or grant any
options, warrants, conversion rights or other rights to purchase or
<PAGE>
acquire any shares of stock of the Company of any class;
(f) amend any of the documents governing the terms of the Investor
Warrants;
(g) enter into any agreement or arrangement or take any other action
that eliminates, amends, restricts or otherwise adversely affects the
rights of the Investors hereunder or as holders of Securities or their
ability to perform their obligations hereunder; or
(h) except as otherwise expressly provided in Exhibit B or set forth
in Schedule 6.8, hereto declare or make dividend payments on any of its
capital stock.
Section 6.9 Use of Proceeds. The Company will use the proceeds from
the sale of the Securities for general working capital purposes, which
shall include the payment of the transaction costs and expenses in
accordance with Section 4.7 hereof.
Section 6.10 Confidentiality Agreements; Non-Competition Agreements.
The Company shall cause each future employee of the Company involved in
development of any of the Company Rights, and each of the Company's
future consultants and independent contractors involved in development
of any of the Company Rights, to execute an agreement regarding
confidentiality, proprietary information and assignment of inventions
and copyrights to the Company in a form reasonably satisfactory to the
Investors. The Company also shall cause each future key senior
executive of the Company to execute an agreement regarding not competing
with products and services of the Company for a period of 18 months
following termination of such key senior executive's employment with the
Company.
Section 6.11 Insurance. The Company shall maintain fire, casualty,
product liability and business interruption and other insurance
policies, with extended coverage, sufficient in amount to allow it to
replace any of its material properties which might be damaged or
destroyed or sufficient to cover liabilities to which the Company may
reasonably become subject, and such types and amounts of other insurance
with respect to its business and properties, on both a per occurrence
and an aggregate basis, as are customarily carried by persons engaged in
the same or similar business as the Company.
Section 6.12 Affiliated Transactions. Except as otherwise expressly
provided in this Agreement or reflected in the Schedules hereto or the
Management Agreement, the Company will not engage in any material
transactions with, or make any material payments or distributions to or
for the benefit of, any persons or entities controlled by, related to or
affiliated with any of the shareholders.
Section 6.13 Employees. The Investors shall have the right to review
and to reject, in their sole and absolute discretion, any hiring decision
made with respect to the positions of the Chief Executive Officer, the
Chief Financial Officer and the Chief Operating Officer of the Company;
provided, however, that the renewal of Elisabeth B. Robert's employment
<PAGE>
agreement in the fall of 1998 shall not be subject to the Investors'
Representative's review.
Section 6.14 Nasdaq Listing; Form S-3 Eligibility. The Company shall
use its best efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, all things necessary, proper or advisable by it
under applicable laws and regulations to maintain its listing of the
Common Stock on Nasdaq or its successor, if any, and to remain eligible
to use Form S-3 for the registration of its securities.
Section 6.15 Nasdaq Listing Application. The Company, within the
requisite time period, will file with Nasdaq an additional listing
application which shall include the Securities to be issued pursuant to
the terms hereof.
ARTICLE 7. RIGHTS TO PURCHASE
Section 7.1 Right to Participate in Certain Sales of Additional
Securities. The Company agrees that it will not sell or issue any new
shares of capital stock of the Company, or other securities convertible
into or exchangeable for capital stock of the Company (subject to
appropriate adjustment in the event of stock splits, stock dividends or
other reorganizations) warrants or rights carrying any rights to
purchase capital stock of the Company other than the Excluded Shares,
unless the Company first submits a written offer to the Investors
identifying the terms of the proposed sale (including price, number or
aggregate principal amount of securities and all other material terms),
and offers to each Investor the opportunity to purchase up to his, her
or its Pro Rata Share (as hereinafter defined) of the securities
(subject to increase for over-allotment if some Investors do not fully
exercise their rights as provided below) on terms and conditions,
including price, not less favorable to the Investors than those on which
the Company proposes to sell such securities to a third party or
parties. Each Investor's "Pro Rata Share" of such securities shall be
based on the ratio which the shares of Common Stock owned by him, her or
it bears to all the issued and outstanding shares of Common Stock
calculated on a fully diluted basis assuming conversion of the
convertible securities if not converted and exercise of all warrants if
not exercised as of the date of such written offer. The Company's offer
to the Investors shall remain open and irrevocable for a period of 20
days, and Investors shall elect to purchase by giving written notice
thereof to the Company within such twenty-day period including therein
the maximum number of securities such Investor would purchase if other
Investors do not elect to purchase, with the rights of electing
Investors to purchase such additional securities to be based upon the
relative holdings of Common Stock (determined as provided above) of the
electing Investors in the case of over-subscription. Any securities so
offered which are not purchased pursuant to such offer may be sold by
the Company but only on the terms and conditions set forth in the
initial offer to the Investors, at any time within 90 days following the
termination of the above-referenced 20-day period but may not be sold to
any other person or on terms and conditions, including price, that are
more favorable to the purchaser than those set forth in such offer or
<PAGE>
after such 90-day period without renewed compliance with this Section
7.1.
Notwithstanding the foregoing, the Company may, without complying with
the first paragraph of this Section 7.1, (i) issue options and may issue
shares of its Common Stock upon the conversion or exercise, as
applicable, of the Excluded Shares, (ii) subject to Section 6.8 and
Article 8 hereof, issue securities offered to the public generally
pursuant to a registration statement or pursuant to Regulation A under
the Securities Act, (iii) subject to Section 6.8 hereof, issue
securities issued pursuant to a joint venture or the acquisition of
another company by the Company by merger, purchase of substantially all
of the assets or other reorganization whereby the Company or its
shareholders own not less than fifty percent (50%) of the voting power
of the surviving corporation or successor corporation, and (iv) subject
to Section 6.8 hereof, stock issued in connection with any stock split,
stock dividend or recapitalization by the Company.
Section 7.2 Assignment of Rights. Each Investor may assign its rights
under this Article 7 in connection with any transaction or series of
related transactions involving the transfer of capital stock of the
Company and upon any such transfer any such transferees shall be deemed
an "Investor" for purposes of Sections 7.1 and 7.2 hereof with the
rights set forth in such Sections.
ARTICLE 8. REGISTRATION RIGHTS
Section 8.1 Optional Registrations. If at any time or times after the
Closing Date, the Company shall seek to register any of its securities
(whether in connection with a public offering of securities by the
Company (a "primary offering"), a public offering of securities by a
shareholder or shareholders of the Company (a "secondary offering"), or
both), the Company will promptly give written notice thereof to each
"Holder" of "Registrable Securities" as each is hereinafter defined in
Section 8.3 below. If within 20 days after their receipt of such notice
one or more Holders request the inclusion of some or all of the
Registrable Securities owned by them in such registration, the Company
will use its best efforts to effect the registration under the
Securities Act of all Registrable Securities which such Holders may
request in a writing delivered to the Company within 20 days after their
receipt of the notice given by the Company. In the case of the
registration of shares of capital stock by the Company in connection
with any underwritten public offering, if the underwriter(s) determines
that marketing factors require a limitation on the number of Registrable
Securities to be offered, the Company shall not be required to register
Registrable Securities in excess of the amount, if any, of shares of the
capital stock which the underwriter(s) of such underwritten offering
shall reasonably and in good faith agree to include in such offering in
excess of any amount to be registered for the Company. If any
limitation of the number of shares of Registrable Securities to be
registered by the Holders is required pursuant to this Section 8.1, the
number of shares that may be included in the registration shall be
allocated pro rata among the holders of any registration rights in
<PAGE>
proportion, as nearly as practicable, to the respective amounts of
registrable securities which each holder has requested to be included in
the registration statement. If any Holder disapproves of the terms of
any such underwriting, he, she or it may elect to withdraw therefrom by
written notice to the Company and the underwriter(s). If, by such
withdrawal, a greater number of shares of Common Stock held by other
holders of registration rights may be included in such registration
statement, the Company shall offer to all holders who have a right to
include shares of Common Stock in the registration the right to include
additional shares of Common Stock. The provisions of this Section 8.1
will not apply to a registration effected solely to implement (i) an
employee benefit plan, or (ii) a transaction to which Rule 145 or any
other similar rule of the Commission under the Securities Act is
applicable.
Section 8.2 Required Registrations. If an Investor(s) holding in the
aggregate a majority of the Registrable Securities held by the Investors
notifies the Company in writing that he, she, it or they intend to offer
or cause to be offered for public sale all or a portion of their
Registrable Securities, then the Company will notify all of the Holders
who would be entitled to notice of a proposed registration under Section
8.1 above and any other holder of piggyback registration rights of its
receipt of such notification from the requesting Investor(s). Upon the
written request of any such Holder or other holder of the Company's
securities delivered to the Company within 30 days after receipt from
the Company of such notification, the Company will either (i) elect to
make a primary offering in which case the rights of such Holders shall
be as set forth in Section 8.1 above (in which case the registration
shall not count as one of the permitted demand registrations hereunder),
or (ii) use its best efforts to promptly effect the registration under
the Securities Act of such Registrable Securities as may be requested by
any Holders and any other holders of piggyback registration rights in
accordance with the terms of this Section 8.2 on Form S-3, or if such
form is not then available to the Company, such other appropriate form
for disposition in accordance with the intended method or methods of
disposition stated in such request. If the Investor(s) initiating the
registration intend to distribute the Registrable Securities by means of
an underwriting, they shall so advise the Company in their request. In
the event such registration is underwritten, the right of other holders
to participate shall be conditioned on such holders' participation in
such underwriting. Pursuant to this Section 8.2, the Company shall not
be obligated to effect (i) more than three (3) registration statements
under this Section 8.2 (exclusive of any registration the Company elects
on Form S-1) or (ii) more than one registration statement under this
Section 8.2 (exclusive of any registration the Company elects on Form
S-1) per any twelve-month period. The Company may postpone the filing
of any registration statement required hereunder for a reasonable period
of time, not to exceed 60 days during any twelve-month period, if the
Company has been advised by legal counsel that such filing would require
a special audit or the disclosure of a material impending transaction or
other matter and the Company's Board of Directors determines reasonably
and in good faith that such disclosure would have a Material Adverse
Effect on the Company. The Company shall not be required to cause a
registration statement requested pursuant to this Section 8.2 to become
<PAGE>
effective prior to 90 days following the filing date of the registration
statement initiated by the Company, if the request for registration has
been received by the Company subsequent to the giving of written notice
by the Company, made in good faith, to the Investors that the Company is
commencing to prepare a Company-initiated registration statement (other
than a registration effected solely to implement an employee benefit
plan or a transaction to which Rule 145 or any other similar rule of the
Commission under the Securities Act is applicable); provided, however,
that the Company shall use its best efforts to achieve such
effectiveness promptly thereafter.
Section 8.3 Registrable Securities. For the purposes of this Article
8, the term "Holder" or "Holders" shall mean any holder of outstanding
Registrable Securities including, without limitation, the Investors and
their permitted transferees as set forth in Section 8.9 hereof, and the
term "Registrable Securities" shall mean any shares of Common Stock held
by or subject to acquisition by an Investor upon the conversion of
shares of Preferred Stock as applicable, including any shares issued by
way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization; provided, however, that if a Holder owns Investor
Warrants or shares of Preferred Stock, the Holder may exercise its
registration rights hereunder by converting Preferred Stock or
exercising the Investor Warrants as of the closing of the relevant
offering and shall not be required (except as provided in the Company's
Certificate of Incorporation) to convert such Preferred Stock or
exercise such Investor Warrants until and unless such closing occurs, it
being understood that such exercise shall be wholly contingent upon the
closing of the relevant offering; and provided, further, that any Common
Stock that (a) is sold in a registered sale pursuant to an effective
registration statement under the Securities Act or pursuant to Rule 144
thereunder, or (b) may be sold without restriction as to volume or
otherwise pursuant to Rule 144 under the Securities Act (as confirmed by
an unqualified opinion of counsel to the Company), shall not be deemed
Registrable Securities.
Section 8.4 Further Obligations of the Company. Whenever the Company
is required hereunder to register any Registrable Securities, it agrees
that it shall also do the following:
(a) pay all expenses incurred by any party hereto in effecting the
registrations, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel for
the Company and fees of one counsel for the selling Holders of
Registrable Securities (which counsel shall be selected by the Holders
of not less than a majority of the Registrable Securities to be included
in any such registration), underwriting expenses (other than commissions
or discounts), expenses of any audits incident to or required by any
such registration and expenses of complying with the securities or blue
sky laws of any jurisdictions pursuant to Section 8.4(f) hereof;
(b) use its best efforts diligently to prepare and file with the
Commission a registration statement on the appropriate form under the
Securities Act with respect to such securities, which form shall comply
<PAGE>
as to form in all material respects with the requirements of the
applicable form and include all financial statements required by the
Commission to be filed therewith, and use its best efforts to cause such
registration statement to become and remain effective until completion
of the proposed offering;
(c) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the sale or other disposition of all securities
covered by such registration statement whenever the seller or sellers of
such securities shall desire to sell or otherwise dispose of the same,
but only to the extent provided in this Article 8;
(d) furnish to each selling Holder and the underwriters, if any,
such number of copies of such Registration Statement, any amendments
thereto, any documents incorporated by reference therein, the
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as such
selling Holder may reasonably request in order to facilitate the public
sale or other disposition of the securities owned by such selling
holder;
(e) enter into any reasonable underwriting agreement required by the
proposed underwriter for the selling Holders, if any, in such form and
containing such terms as are customary; provided, however, that if the
underwriter requires that representations or warranties be made and that
indemnification be provided in respect of the Company's business,
operations, financial information and the like and the disclosures
relating thereto in the prospectus; the Company shall make all such
representations and warranties and provide all such indemnities;
(f) use every reasonable effort to register or qualify the
securities covered by such registration statement under such other
securities or state blue sky laws of such jurisdictions as each selling
holder shall reasonably request, and do any and all other acts and
things which may be necessary under such securities or blue sky laws to
enable such selling holder to consummate the public sale or other
disposition in such jurisdictions of the securities owned by such
selling holder, except that the Company shall not for any such purpose
be required to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified;
(g) promptly notify each selling Holder of Registrable Securities,
such selling Holders' counsel and any underwriter and (if requested by
any such Person) confirm such notice in writing, of the happening of any
event which makes any statement made in the registration statement or
related prospectus untrue or which requires the making of any changes in
such registration statement or prospectus so that they will not contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein in the light of the circumstances under which they were made not
misleading; and, as promptly as practicable thereafter, prepare and file
<PAGE>
with the Commission and furnish a supplement or amendment to such
prospectus so that, as thereafter deliverable to the purchasers of such
Registrable Securities, such prospectus will not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(h) cause all such Registrable Securities to be listed on each
securities exchange or quotation system on which the Common Stock of the
Company is then listed or quoted;
(i) otherwise use its best efforts to comply with the securities
laws of the United States and other applicable jurisdictions and all
applicable rules and regulations of the Commission and comparable
governmental agencies in other applicable jurisdictions. The Company
shall make generally available to the Holders, in each case as soon as
practicable, but not later than 45 days after the close of the period
covered thereby, an earnings statement of the Company which will satisfy
the provisions of Section 11(a) of the Securities Act and which
requirement will be deemed to be satisfied if the Company timely files
complete and accurate information on Form 10-QSB, 10-KSB, and 8-K under
the Exchange Act and otherwise complies with Rule 158 under the
Securities Act;
(j) furnish to each prospective selling Holder a signed counterpart,
addressed to the prospective selling Holder, of (A) an opinion of
counsel for the Company, dated the effective date of the registration
statement, and (B) a "comfort" letter signed by the independent public
accountants who have certified the Company's financial statements
included in the registration statement, covering substantially the same
matters with respect to the registration statement (and the prospectus
included therein) and (in the case of the accountants' letter) with
respect to events subsequent to the date of the financial statements, as
are customarily covered (at the time of such registration) in opinions
of the Company's counsel and in accountants' letters delivered to the
underwriters in underwritten public offerings of securities, but only to
the extent required by the underwriting agreement;
(k) within a reasonable time before each filing of the registration
statement or prospectus or amendments or supplements thereto with the
Commission, furnish to counsel selected by the Holders of Registrable
Securities copies of such documents proposed to be filed, which
documents shall be subject to the reasonable approval of such counsel;
(l) use its best efforts to prevent the issuance of any order
suspending the effectiveness of a registration statement, and if one is
issued use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of a registration statement at the earliest
possible moment;
(m) if requested by the managing underwriter or underwriters (if
any), any selling Holder, or such selling Holder's counsel, promptly
incorporate in a prospectus supplement or post-effective amendment such
information as such person requests to be included herein, including,
<PAGE>
without limitation, with respect to the securities being sold by such
selling Holder to such underwriter or underwriters, the purchase price
being paid therefor by such underwriter or underwriters and with respect
to any other terms of an underwritten offering of the securities to be
sold in such offering, and promptly make all required filings of such
prospectus supplement or post-effective amendment; and
(n) otherwise cooperate with the underwriter or underwriters, the
Commission and other regulatory agencies and take all actions and
execute and deliver or cause to be executed and delivered all documents
necessary to effect the registration of any Registrable Securities under
this Article 8.
Section 8.5 Information by Holder. In any registered offering
(whether
or not the Registrable Securities of any Holder are included therein),
the Holders shall provide the Company in a writing signed by such Holder
such information about the Holder and the Holder's intended method of
disposition, if applicable, as the Company shall reasonably request and
as shall be required to enable the Company to comply with the Securities
Act and applicable state securities laws. Such information shall be
provided to the Company within a reasonable time after written request
is made by the Company and the Company may exclude from such
registration the Registrable Securities of any Holder that fails to
furnish such information within a reasonable time after receiving such
request, provided that the Company has notified such Holder in writing
of its intention to exclude the Holder's Registrable Securities and such
Holder has not provided the Company with such information within five
(5) business days of its receipt of such notice.
Section 8.6 Lockup Agreement. For so long as the Holders have the
right to have Registrable Securities included in any registration
pursuant to this Agreement, each Holder agrees in connection with any
registration of the Company's securities upon the request of the
underwriters managing any underwritten offering of the Company's
securities, not to sell, make any short sale of, pledge, grant any option
for the purchase of or otherwise dispose of any Registrable Securities
(other than those included in such registration) without the prior
written consent of the Company or such underwriters, as the case may be,
during the 90-day period beginning on the effective date of such
registration as the Company or the underwriters may specify. This
provision shall apply whether or not any Registrable Securities of the
Holder are included in the offering. This Section 8.6 shall not be
deemed to apply to (i) transfers by a Holder to affiliates of the Holder
or (ii) transfers to a third party that do not involve a public offering
and in which the transferor agrees to be bound by the terms of this
provision.
Section 8.7 Indemnification; Contribution.
(a) Incident to any registration statement referred to in this
Article 8, the Company will indemnify and hold harmless each
underwriter, each Holder who offers or sells any such Registrable
Securities in connection with such registration statement (including its
<PAGE>
partners (including partners of partners and stockholders of any such
partners), and directors, officers, employees and agents of any of them
(a "Selling Holder"), and each person who controls any of them within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act (a "Controlling Person"), from and against any and all
losses, claims, damages, expenses and liabilities, joint or several
(including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit
or proceeding or any claim asserted, as the same are incurred), to which
they, or any of them, may become subject under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based on (i) any untrue statement or
alleged untrue statement of a material fact contained in such
registration statement (including any related preliminary or definitive
prospectus, or any amendment or supplement to such registration
statement or prospectus), (ii) any omission or alleged omission to state
in such document a material fact required to be stated in it or
necessary to make the statements in it not misleading, or (iii) any
violation by the Company of the Securities Act, any state securities or
"blue sky" laws or any rule or regulation thereunder in connection with
such registration; provided, however, that the Company will not be
liable to the extent that such loss, claim, damage, expense or liability
arises from and is based on an untrue statement or omission or alleged
untrue statement or omission made in reliance on and in conformity with
information furnished in writing to the Company by such underwriter,
Selling Holder or Controlling Person expressly for use in such
registration statement. With respect to such untrue statement or
omission or alleged untrue statement or omission in the information
furnished in writing to the Company by such Selling Holder expressly for
use in such registration statement, such Selling Holder will indemnify
and hold harmless each other underwriter, the Company (including its
directors, officers, employees, shareholders and agents), each other
Holder (including its partners (including partners of partners and
stockholders of such partners) and directors, officers, employees and
agents of any of them, and each person who controls any of them within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, damages,
expenses and liabilities, joint or several, to which they, or any of
them, may become subject under the Securities Act, the Exchange Act or
other federal or state statutory law or regulation, at common law or
otherwise to the same extent provided in the immediately preceding
sentence. In no event, however, shall the liability of a Selling Holder
for indemnification under this Section 8.7(a) exceed the lesser of (i)
that proportion of the total of such losses, claims, damages or
liabilities indemnified against equal to the proportion of the total
securities sold under such registration statement which is being sold by
such Selling Holder or (ii) the proceeds received by such Selling Holder
from its sale of Registrable Securities under such registration
statement.
(b) In the event the Company, any selling Holder or other person
receives a complaint, claim or other notice of any liability or action,
giving rise to a claim for indemnification under Section 8.7(a) above,
<PAGE>
the person claiming indemnification under such paragraph shall promptly
notify the person against whom indemnification is sought of such
complaint, notice, claim or action, and such indemnifying person shall
have the right to investigate and defend any such loss, claim, damage,
liability or action. No indemnifying person in the defense of any such
claim or litigation, shall, except with the consent of each indemnified
person, consent to entry of any judgement or enter into any settlement
which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified person of a release from
all liability in respect of such claim or litigation. The person
claiming indemnification shall have the right to employ separate counsel
in any such action and to participate in the defense thereof but the
fees and expenses of such counsel shall not be at the expense of the
person against whom indemnification is sought (unless the indemnifying
party fails to promptly defend, in which case the fees and expenses of
such separate counsel shall be borne by the person against whom
indemnification is sought). In no event shall a person against whom
indemnification is sought be obligated to indemnify any person for any
settlement of any claim or action effected without the indemnifying
person's prior written consent.
(c) If the indemnification provided for in Section 8.7(a) above for
any reason is held by a court of competent jurisdiction to be
unavailable to an indemnified party in respect of any losses, claims,
damages, expenses or liabilities referred to therein, then each
indemnifying party under this Section 8.7, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims,
damages, expenses or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company,
the other Selling Holders and the underwriters from the offering of the
Registrable Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company, the other
Selling Holders and the underwriters in connection with the statements
or omissions which resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable considerations.
The relative benefits received by the Company, the Selling Holders and
the underwriters shall be deemed to be in the same respective
proportions that the net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Holders and the
underwriting discount received by the underwriters, in each case as set
forth in the table on the cover page of the applicable prospectus, bear
to the aggregate public offering price of the Registrable Securities.
The relative fault of the Company, the Selling Holders and the
underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Holders or the
underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
<PAGE>
The Company, the Selling Holders, and the underwriters agree that it
would not be just and equitable if contribution pursuant to this Section
8.7(c) were determined by pro rata or per capita allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. In
no event, however, shall a Selling Holder be required to contribute any
amount under this Section 8.7(c) in excess of the lesser of (i) that
proportion of the total of such losses, claims, damages or liabilities
indemnified against equal to the proportion of the total Registrable
Securities sold under such registration statement which are being sold
by such Selling Holder or (ii) the proceeds received by such Selling
Holder from its sale of Registrable Securities under such registration
statement. No person found guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person who was not found guilty of
such fraudulent misrepresentation.
(d) The amount paid by an indemnifying party or payable to an
indemnified party as a result of the losses, claims, damages and
liabilities referred to in this Section 8.7 shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim, payable as the same
are incurred. The indemnification and contribution provided for in this
Section 8.7 will remain in full force and effect regardless of any
investigation made by or on behalf of the indemnified parties or any
officer, director, employee, agent or controlling person of the
indemnified parties.
(e) The indemnification provided by this Section 8.7 shall be a
continuing right to indemnification and shall survive the registration
and sale of any Registrable Securities by any person entitled to
indemnification hereunder and the expiration or termination of this
Agreement.
Section 8.8 Rule 144 Requirements. The Company shall use its best
efforts to take all action as may be required as a condition to the
availability of Rule 144 under the Securities Act (or any successor or
similar exemptive rules hereafter in effect). The Company shall use its
best efforts to facilitate and expedite transfers of Registrable
Securities pursuant to Rule 144 under the Securities Act, which efforts
shall include, but not be limited to, timely notice to its transfer
agent to expedite such transfers of Registrable Securities; provided,
however, that the Holder shall pay the cost of any legal opinion
necessary to expedite such transfers of Registrable Securities. The
Company shall furnish to any Holder, within 15 days of a written
request, a written statement executed by the Company as to the steps it
has taken to comply with the current public information requirement of
Rule 144 or such successor rules.
Section 8.9 Transfer of Registration Rights. The registration rights
and related obligations under this Article 8 of the Holders with respect
to their Registrable Securities may be assigned in connection with any
transaction or series of related transactions involving the Transfer of
<PAGE>
capital stock of the Company, other than pursuant to an effective
registration statement under the Securities Act or pursuant to Rule 144
thereunder, and upon any such Transfer such transferee shall be deemed
to be included within the definition of a "Holder" for purposes of this
Article 8 with the rights set forth herein. The relevant Holder as the
case may be, shall notify the Company at the time of such Transfer.
Section 8.10 Limitations on Subsequent Registration Rights. After the
date hereof, the Company shall not enter into any agreement granting any
holder or prospective holder of any securities of the Company
registration rights with respect to such securities unless such new
registration rights, including standoff obligations, are subordinate or
pari pasu to the registration rights granted to the Holders hereunder.
ARTICLE 9. TERMINATION
Section 9.1 Termination. This Agreement may be terminated at any time
prior to the Closing Date, whether before or after approval of the
transactions contemplated hereby by the shareholders of the Company:
(a) by mutual consent of the Company and the Investors;
(b) by the Investors, if the Company has failed to perform in any
material respect any of its obligations required to be performed by it
under this Agreement and such failure continues for five (5) business
days after receipt by the Company of a written notice from the Investors
describing such failure, unless failure to so perform has been caused by
or results from a breach of this Agreement by the Investors;
(c) by the Company, if the Investors shall have failed to perform in
any material respect any of their respective obligations under this
Agreement and such failure continues for five (5) business days after
receipt by the Investors of a written notice from the Company describing
such failure, unless failure to so perform has been caused by or results
from a breach of this Agreement by the Company;
(d) by the Company, if the closing price of the Common Stock of the
Company quoted on Nasdaq on the day prior to the Closing Date is greater
than $1.625; or
(e) by the Investors, if the average of the closing price of the
Common Stock of the Company, as recorded on the Nasdaq SmallCap Market,
for the period commencing on the date hereof and ending on the Closing
Date in which an actual trade was executed is less than $.9375.
Section 9.2 Effect of Termination. In the event of the termination
and
abandonment of this Agreement pursuant to Section 9.1 hereof, this
Agreement shall forthwith become void and have no effect, without any
liability on the part of any party hereto or its affiliates, directors,
officers or stockholders, other than the provisions of Section 9.3
hereof and the Letter of Intent, dated as of May 21, 1998, by and
between the Company and The Shepherd Group LLC (the "Letter of Intent").
<PAGE>
Nothing contained in this Section 9.2 shall relieve any party from
liability for any breach of this Agreement.
Section 9.3 Termination Fee. As a condition to the willingness of the
Investors to enter into this Agreement and to compensate the Investors
for entering into this Agreement, taking action to consummate the
transactions hereunder and incurring the costs and expense related
thereto, the Company shall pay to the Investors an amount equal to all
reasonable legal and accounting fees and related expenses actually
incurred by the Investors in connection with the Transaction Documents
and their due diligence in connection with the transactions contemplated
hereby if the Company or the Investors shall have terminated this
Agreement pursuant to the provisions of Section 9.1(a), 9.1(b) or 9.1(d)
hereof. No such payment shall be made to the Investors if the Company
shall have terminated this Agreement pursuant to the provisions of
Section 9.1(c) or if the Investors shall have terminated this Agreement
pursuant to the provisions of Section 9.1(e) hereof. The Company also
shall pay to the Investors One Hundred Thousand Dollars ($100,000) if
the Company shall have terminated this Agreement pursuant to the
provisions of Section 9.1(d) hereof. Any payments required by this
Section 9.3 shall be payable by the Company to the Investors (by wire
transfer of immediately available funds to an account designated by the
Investors) within two (2) business days after demand by the Investors.
Section 9.4 Extension; Waiver. At any time prior to the Closing Date,
the parties hereto may, to the extent legally allowed, (i) extend the
time for the performance of any of the obligations or other acts of the
other parties hereto, (ii) waive any inaccuracies in the representations
and warranties contained herein or in any document delivered pursuant
hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto
to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party.
Section 9.5 Right to Proceed. Notwithstanding anything in this
Agreement to the contrary, if any of the conditions specified in Article
4 hereof have not been satisfied, the Investors shall have the right to
proceed with the transactions contemplated hereby without waiving any of
their rights hereunder.
ARTICLE 10. GENERAL
Section 10.1 Amendments, Waivers and Consents. For the purposes of the
Transaction Documents, no course of dealing between or among any of the
parties hereto and no delay on the part of any party hereto in
exercising any rights hereunder or thereunder shall operate as a waiver
of the rights hereof and thereof. No provision hereof may be waived
otherwise than by a written instrument signed by the parties so waiving
such covenant or other provision; provided, however, changes in or
additions to, and any consents required by, this Agreement may be made,
and compliance with any term, covenant, condition or provision set forth
herein may be omitted or waived (either generally or in a particular
instance and either retroactively or prospectively) by a consent of the
<PAGE>
Investors and/or the Company, as applicable, in accordance with Section
10.2. Any amendment or waiver effected in accordance with this Section
10.1 shall be binding upon each party to this Agreement and each
assignee of such a party.
Section 10.2 Actions or Consents of Investors. Any actions required to
be taken or consents, approvals, votes or waivers required or
contemplated to be given herein by the Investors shall require a vote of
Investors holding at least two-thirds in interest of the Series C
Preferred Stock held by the Investors.
Section 10.3 Indemnification from the Company: Expenses.
(a) Without limitation of any other provision of this Agreement, the
Company agrees to defend, indemnify and hold the Investors and their
affiliates and their respective direct and indirect partners, members,
stockholders, directors, officers, employees and agents and each person
who controls any of them within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act (parties receiving the
benefit of the indemnification agreement in this Section 10.3 shall be
referred to collectively as the "Company Indemnified Parties" and
individually as a "Company Indemnified Party") harmless from and against
any and all losses, claims, damages, obligations, liens, assessments,
judgments, fines, liabilities, diminution in value, and other costs and
expenses (including without limitation interest, penalties and any
investigation, legal and other expenses incurred in connection with, and
any amount paid in settlement of, any action, suit or proceeding or any
claim asserted, as the same are incurred) of any kind or nature
whatsoever which may be sustained or suffered by any such Company
Indemnified Party, without regard to any investigation by any of the
Company Indemnified Parties, based upon, arising out of, by reason of or
otherwise in respect of or in connection with any third party or
governmental action relating to any action taken or omitted to be taken
or alleged to have been taken or omitted to have been taken by any
Company Indemnified Party as shareholder, director, agent,
representative or controlling person of the Company, including, without
limitation, any and all losses, claims, damages, expenses and
liabilities, joint or several (including any investigation, legal and
other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, as
the same may be incurred) arising or alleged to arise under the
Securities Act, the Exchange Act or other federal or state statutory law
or regulation, at common law or otherwise, including without limitation
any such claim alleging so-called control person liability or securities
law liability; provided, however, that the Company will not be liable to
the extent that such loss, claim, damage, expense or liability arises
from and is based on (a) an untrue statement or omission or alleged
untrue statement or omission in a registration statement or prospectus
which is made in reliance on and in conformity with written information
furnished to the Company in an instrument duly executed by or on behalf
of such Company Indemnified Party specifically stating that it is for
use in the preparation thereof or (b) a knowing and willful violation of
the federal securities laws by a Company Indemnified Party, as finally
determined by a court of competent jurisdiction.
<PAGE>
(b) If the indemnification provided for in Section 10.3(a) above for
any reason is held by a court of competent jurisdiction to be
unavailable to a Company Indemnified Party in respect of any losses,
claims, damages, expenses or liabilities referred to therein, then the
Company, in lieu of indemnifying such Company Indemnified Party
thereunder, shall contribute to the amount paid or payable by such
Company Indemnified Party as a result of such losses, claims, damages,
expenses or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Investors,
or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the
relative fault of the Company and the Investors in connection with the
action or inaction which resulted in such losses, claims, damages,
expenses and liabilities, as well as any other relevant equitable
considerations. In connection with any registration of the Company's
securities, the relative benefits received by the Company and the
Investors shall be deemed to be in the same respective proportions that
the net proceeds from the offering (before deducting expenses) received
by the Company and the Investors, in each case as set forth in the table
on the cover page of the applicable prospectus, bear to the aggregate
public offering price of the securities so offered. The relative fault
of the Company and the Investors shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or the Investors and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Investors agree that it would not be just and
equitable if contribution pursuant to this Section 10.3(b) were
determined by pro rata or per capita allocation or by any other method
of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. In
connection with the registration of the Company's securities, in no
event shall an Investor be required to contribute any amount under this
Section 10.3(b) in excess of the lesser of (i) that proportion of the
total of such losses, claims, damages or liabilities indemnified against
equal to the proportion of the total securities sold under such
registration statement which is being sold by such Investor or (ii) the
proceeds received by such Investor from its sale of securities under
such registration statement. No person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not found
guilty of such fraudulent misrepresentation.
Section 10.4 Indemnification from the Company.
(a) Without limitation of any other provision of this Agreement, the
Company agrees to defend, indemnify and hold harmless the Company
Indemnified Parties from and against any and all losses, claims,
damages, obligations, liens, assessments, judgments, fines, liabilities,
diminution in value, and other costs and expenses (including without
<PAGE>
limitation interest, penalties and any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement
of, any action, suit or proceeding or any claim asserted, as the same
are incurred) of any kind or nature whatsoever which may be sustained or
suffered by any such Company Indemnified Party, without regard to any
investigation by any of the Company Indemnified Parties, based upon,
arising out of, by reason of or otherwise in respect of or in connection
with (i) any inaccuracy in or breach of any representation or warranty
made by the Company in the Transaction Documents or (ii) any breach of
any covenant or agreement made by the Company in the Transaction
Documents.
(b) The indemnification provided for in this Section 10.4 will
remain in full force and effect regardless of any investigation made by
or on behalf of the Company Indemnified Parties or any officer,
director, partner, employee, agent or controlling person of the Company
Indemnified Parties or any knowledge of the Company Indemnified Parties
or such individuals of any facts or circumstances contributing to such
indemnification.
Section 10.5 Indemnification from the Investors: Expenses.
(a) Without limitation of any other provision of this Agreement, the
Investors agree to defend, indemnify and hold the Company (the "Investor
Indemnified Party") harmless from and against any and all losses,
claims, damages, obligations, liens, assessments, judgments, fines,
liabilities, diminution in value, and other costs and expenses
(including without limitation interest, penalties and any investigation,
legal and other expenses incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim
asserted, as the same are incurred) of any kind or nature whatsoever
which may be sustained or suffered by any such Investor Indemnified
Party, without regard to any investigation by the Investor Indemnified
Party, based upon, arising out of, by reason of or otherwise in respect
of or in connection with any third party or governmental action relating
to any action taken or omitted to be taken or alleged to have been taken
or omitted to have been taken by any Investor Indemnified Party as
shareholder, director, agent, representative or controlling person of
the Investors, including, without limitation, any and all losses,
claims, damages, expenses and liabilities, joint or several (including
any investigation, legal and other expenses incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or
any claim asserted, as the same may be incurred) arising or alleged to
arise under the Securities Act, the Exchange Act or other federal or
state statutory law or regulation, at common law or otherwise, including
without limitation any such claim alleging so-called control person
liability or securities law liability; provided, however, that the
Investors will not be liable to the extent that such loss, claim,
damage, expense or liability arises from and is based on (a) an untrue
statement or omission or alleged untrue statement or omission in a
registration statement or prospectus which is made in reliance on and in
conformity with written information furnished to the Investors in an
instrument duly executed by or on behalf of such Investor Indemnified
Party specifically stating that it is for use in the preparation thereof
<PAGE>
or (b) a knowing and willful violation of the federal securities laws by
an Investor Indemnified Party, as finally determined by a court of
competent jurisdiction.
(b) If the indemnification provided for in Section 10.5(a) above for
any reason is held by a court of competent jurisdiction to be
unavailable to the Investor Indemnified Party in respect of any losses,
claims, damages, expenses or liabilities referred to therein, then the
Investors, in lieu of indemnifying such Investor Indemnified Party
thereunder, shall contribute to the amount paid or payable by such
Investor Indemnified Party as a result of such losses, claims, damages,
expenses or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Investors,
or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the
relative fault of the Company and the Investors in connection with the
action or inaction which resulted in such losses, claims, damages,
expenses and liabilities, as well as any other relevant equitable
considerations. In connection with any registration of the Company's
securities, the relative benefits received by the Company and the
Investors shall be deemed to be in the same respective proportions that
the net proceeds from the offering (before deducting expenses) received
by the Company and the Investors, in each case as set forth in the table
on the cover page of the applicable prospectus, bear to the aggregate
public offering price of the securities so offered. The relative fault
of the Company and the Investors shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or the Investors and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Investors agree that it would not be just and
equitable if contribution pursuant to this Section 10.5(b) were
determined by pro rata or per capita allocation or by any other method
of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. No
person found guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not found guilty of such fraudulent
misrepresentation.
Section 10.6 Indemnification from the Investors.
(a) Without limitation of any other provision of this Agreement, the
Investors agree to defend, indemnify and hold harmless the Investor
Indemnified Party from and against any and all losses, claims, damages,
obligations, liens, assessments, judgments, fines, liabilities,
diminution in value, and other costs and expenses (including without
limitation interest, penalties and any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement
of, any action, suit or proceeding or any claim asserted, as the same
are incurred) of any kind or nature whatsoever which may be sustained or
<PAGE>
suffered by any such Investor Indemnified Party, without regard to any
investigation by the Investor Indemnified Party, based upon, arising out
of, by reason of or otherwise in respect of or in connection with (i)
any inaccuracy in or breach of any representation or warranty made by
the Investors in the Transaction Documents or (ii) any breach of any
covenant or agreement made by the Investors in the Transaction
Documents.
(b) The indemnification provided for in this Section 10.6 will
remain in full force and effect regardless of any investigation made by
or on behalf of the Investor Indemnified Party or any officer, director,
partner, employee, agent or controlling person of the Investor
Indemnified Party or any knowledge of the Investor Indemnified Party or
such individuals of any facts or circumstances contributing to such
indemnification.
Section 10.7 Notice; Defense of Claims. Either a Company Indemnified
Party or an Investor Indemnified Party (collectively, the "Indemnified
Party") may make claims for indemnification hereunder by promptly giving
written notice thereof to the indemnifying party within the period in
which indemnification claims can be made hereunder. If indemnification
is sought for a claim or liability asserted by a third party, the
Indemnified Party shall also give written notice thereof to the
indemnifying party promptly after receipt by an Indemnified Party of
notice of any claim or liability being asserted, but the omission to so
notify the indemnifying party promptly will not relieve the indemnifying
party from any liability except to the extent that the indemnifying
party shall have been prejudiced as a result of the failure or delay in
giving such notice. Such notice shall state the information then
available regarding the amount and nature of such claim, liability or
expense and shall specify the provision or provisions of this Agreement
under which the liability or obligation is asserted. If within twenty
(20) days after receiving such notice the indemnifying party gives
written notice to the Indemnified Party stating that (a) it would be
liable under the provisions hereof for indemnity in the amount of such
claim if such claim were successful and (b) that it disputes and intends
to defend against such claim, liability or expense at its own cost and
expense, then counsel for the defense shall be selected by the
indemnifying party (subject to the consent of the Indemnified Party
which consent shall not be unreasonably withheld) and the Indemnified
Party shall not be required to make any payment with respect to such
claim, liability or expense as long as the indemnifying party is
conducting a good faith and diligent defense at its own expense;
provided, however, that the assumption of defense of any such matters by
the indemnifying party shall relate solely to the claim, liability or
expense that is subject or potentially subject to indemnification. The
indemnifying party shall have the right, with the consent of the
Indemnified Party, which consent shall not be unreasonably withheld, to
settle all indemnifiable matters related to claims by third parties
which are susceptible to being settled provided its obligation to
indemnify the Indemnified Party therefor will be fully satisfied. The
indemnifying party shall keep the Indemnified Party apprised of the
status of the claim, liability or expense and any resulting suit,
proceeding or enforcement action, shall furnish the Indemnified Party
with all documents and information that the Indemnified Party shall
<PAGE>
reasonably request and shall consult with the Indemnified Party prior to
acting on major matters, including settlement discussions.
Notwithstanding anything herein stated to the contrary, the Indemnified
Party shall at all times have the right to fully participate in such
defense at its own expense directly or through counsel; provided,
however, if the named parties to the action or proceeding include both
the indemnifying party and the Indemnified Party and representation of
both parties by the same counsel would be inappropriate under applicable
standards of professional conduct, the expense of separate counsel for
the Indemnified Party shall be paid by the indemnifying party. If no
such notice of intent to dispute and defend is given by the indemnifying
party, or if such diligent good faith defense is not being or ceases to
be conducted, the Indemnified Party shall, at the expense of the
indemnifying party, undertake the defense of (with counsel selected by
the Indemnified Party), and shall have the right to compromise or settle
(exercising reasonable business judgment), such claim, liability or
expense. If such claim, liability or expense is one that by its nature
cannot be defended solely by the indemnifying party, then the
Indemnified Party shall make available all information and assistance
that the indemnifying party may reasonably request and shall cooperate
with the indemnifying party in such defense.
Section 10.8 Survival of Representations; Warranties and Covenants;
Assignability of Rights. All covenants, agreements, representations and
warranties of the Company and the Investors made herein and in the
certificates, exhibits and schedules delivered to the Investors'
Representative or the Company in connection herewith (a) are material
and shall be deemed to have been relied upon by the Company or such
Investor, as applicable, and shall survive the delivery and acceptance
of the Securities and (b) shall bind the Company's or the Investors', as
applicable, successors and assigns, whether so expressed or not, and,
except as otherwise provided in this Agreement, all such covenants,
agreements, representations and warranties shall inure to the benefit of
the Company's or the Investors', as applicable, successors and assigns
and to the Investors' transferees of the Securities, whether so
expressed or not, subject to the provisions of Sections 7.2 and 8.9
hereof. Notwithstanding the foregoing, indemnification with respect to
losses arising pursuant to Section 10.4(a)(i) or Section 10.6(a)(i)
shall expire on the date that is two weeks following the delivery to the
Investors' Representative of the audited financial statements of the
Company for the fiscal year ending June 30, 1999; provided, however,
that if such loss is due to a knowing breach by the Company of a
representation in the Transaction Documents or a breach by the Company
of a representation in the Transaction Documents involving fraud or
intentional misrepresentation, indemnification shall not expire on the
date that is two weeks following the delivery to the Investors'
Representative of the audited financial statements of the Company for
the fiscal year ending June 30, 1999; and provided further, that in each
case if prior to the applicable date of expiration a specific state of
facts shall have become known which may constitute or give rise to any
claim by an Indemnified Party or Parties as to which indemnity may be
payable to such Indemnified Party or Parties shall have given notice of
such facts to the other party, then the right to indemnification with
respect thereto shall remain in effect until such matter shall have been
<PAGE>
finally determined and disposed of, and any indemnification due in
respect thereof shall have been paid, according to the date on which
notice of the applicable claim is given.
Section 10.9 Legend on Securities. The Company and the Investors
acknowledge and agree that the following legend shall be typed on each
certificate evidencing any of the securities issued hereunder held at
any time by an Investor:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES
OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED
OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT
WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2)
PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT
RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES AND BLUE SKY LAWS.
Section 10.10 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 Commonwealth of Massachusetts without
giving effect to conflict of laws principles thereof. The Company
hereby agrees that the state and federal court of The Commonwealth of
Massachusetts or, at the option of the Investors, any other court in
which the Investors shall initiate legal or equitable proceedings, to
the extent such court otherwise has jurisdiction, shall have
jurisdiction to hear and determine any claims or disputes between the
Investors and the Company pertaining directly or indirectly to this
Agreement and all documents, instruments and agreements executed
pursuant hereto, or to any matter arising therefrom (unless otherwise
expressly provided for therein). To the extent permitted by law, the
Company hereby expressly submits and consents in advance to such
jurisdiction in any action or proceeding commenced by the Investors in
any of such courts, and agrees that service of such summons and
complaint or other process or papers may be made by registered or
certified mail addressed to the Company at the address to which notices
are to be sent pursuant to this Agreement. The Company waives any claim
that Boston, Massachusetts is an inconvenient forum or an improper forum
based on lack of venue. To the extent permitted by law, should the
Company, after being so served, fail to appear or answer to any summons,
complaint, or process or papers so served within 30 days after the
mailing thereof, the Company shall be deemed in default and an order
and/or judgment may be entered by the Investors against the Company as
demanded or prayed for in such summons, complaint, process or papers.
The exclusive choice of forum set forth in this Section 10.8 shall not
be deemed to preclude the enforcement of any judgment obtained in such
forum or the taking of any action to enforce the same in any other
appropriate jurisdiction.
Section 10.11 Section Headings and Gender. The descriptive headings
in this Agreement have been inserted for convenience only and shall not
be deemed to limit or otherwise affect the construction of any provision
thereof or hereof. The use in this Agreement of the masculine pronoun in
reference to a party hereto shall be deemed to include the feminine or
<PAGE>
neuter, and vice versa, as the context may require.
Section 10.12 Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which when so
executed and delivered shall be taken to be an original; but such
counterparts shall together constitute but one and the same document.
Section 10.13 Notices and Demands. Any notice or demand which is
required or provided to be given under this Agreement shall be deemed to
have been sufficiently given and received for all purposes when
delivered by hand, telecopy, telex or other method of facsimile, or five
days after being sent by certified or registered mail, postage and
charges prepaid, return receipt requested, or two days after being sent
by overnight delivery providing receipt of delivery, to the following
addresses:
If to the Company: The Vermont Teddy Bear Co., Inc.
6655 Shelburne Road
Shelburne, VT 05482
Facsimile: (802) 985-1304
with a copy to: Dinse, Knapp & McAndrew, P.C.
209 Battery Street, P.O. Box 988
Burlington, VT 05402
Facsimile: (802) 864-1603
Attn: Spencer Knapp, Esq.
If to an Investor: at the mailing address as shown on Exhibit A
hereto
with a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109-2881
Facsimile: (617) 523-1231
Attn: H. David Henken, Esq.
or at any other address designated by the Company or the Investors to
the other party in writing;
Section 10.14 Remedies; Severability. It is specifically understood
and agreed that any breach of the provisions of this Agreement by any
person subject hereto will result in irreparable injury to the other
parties hereto, that the remedy at law alone will be an inadequate
remedy for such breach, and that, in addition to any other legal or
equitable remedies which they may have, such other parties may enforce
their respective rights by actions for specific performance (to the
extent permitted by law) and the Company may refuse to recognize any
unauthorized transferee as one of its shareholders for any purpose,
including, without limitation, for purposes of dividend and voting
rights, until the relevant party or parties have complied with all
applicable provisions of this Agreement. Whenever possible, each
provision of this Agreement shall be interpreted in such a manner as to
be effective and valid under applicable law, but if any provision of
this Agreement shall be deemed prohibited or invalid under such
<PAGE>
applicable law, such provision shall be ineffective to the extent of
such prohibition or invalidity, and such prohibition or invalidity shall
not invalidate the remainder of such provision or the other provisions
of this Agreement.
Section 10.15 Integration. This Agreement and the Letter of Intent
(specifically paragraphs 2 and 3 of the Letter of Intent), including the
exhibits, documents and instruments referred to herein or therein,
constitutes the entire agreement, and supersedes all other prior
agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof. Upon the Closing, the Letter
of Intent shall be completely superseded by the representations,
warranties and covenants of the Company contained herein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
COMPANY:
THE VERMONT TEDDY BEAR CO., INC.
By:
Name:
Title:
INVESTORS:
THE SHEPHERD GROUP LLC
By:
Name:
Title:
SHEPHERD VENTURE FUND I, L.P.
By: The Shepherd Group LLC, its general partner
By:
Name:
Title:
Thomas R. Shepherd
T. Nathanael Shepherd
<PAGE>
EXHIBIT A
INVESTORS LIST
The Shepherd Group LLC
636 Great Road
Stow, MA 01775
Facsimile: (978) 461-9909
Shepherd Venture Fund I, L.P.
c/o The Shepherd Group LLC
636 Great Road
Stow, MA 01775
Facsimile: (978) 461-9909
Thomas R. Shepherd
c/o The Shepherd Group LLC
636 Great Road
Stow, MA 01775
Facsimile: (978) 461-9909
T. Nathanael Shepherd
c/o The Shepherd Group LLC
636 Great Road
Stow, MA 01775
Facsimile: (978) 461-9909
EXHIBIT B
FORM OF
PREFERRED STOCK TERMS
The designations and the powers, preferences and rights of the Series C
Convertible Redeemable Preferred Stock are as follows:
Section 1. Designation and Amount. The shares of this series of
Preferred Stock of the Corporation shall be designated as "Series C
Convertible Redeemable Preferred Stock" (the "Series C Preferred Stock")
and the number of shares constituting such series shall be 110, with a
par value per share of $.05.
Section 2. Accumulation and Payment of Dividends. The holders of the
Series C Preferred Stock shall be entitled to receive, out of funds
legally available therefor, cumulative dividends at an annual rate of
six percent (6%) compounded on a quarterly basis (the "Series C
Preferred Dividends") on the sum of (i) each outstanding share of the
Series C Preferred Stock multiplied by (ii) $10,000. Series C Preferred
Dividends shall accrue on outstanding shares of the Series C Preferred
Stock from the date of issuance of such shares on a daily basis whether
or not the Corporation shall have earnings or surplus at any time. The
accumulation of Series C Preferred Dividends shall not bear interest or
accrue additional Series C Preferred Dividends. In addition to Series C
<PAGE>
Preferred Dividends, the holders of the Series C Preferred Stock shall
be entitled to receive dividends at the same rate as dividends (other
than dividends paid in additional shares of Common Stock) are paid with
respect to the Common Stock (treating each share of Series C Preferred
Stock as being equal to the number of shares of Common Stock into which
each such share of Series C Preferred Stock could be converted
(regardless of whether such shares of Series C Preferred Stock are then
presently convertible) pursuant to the provisions of Section 5 hereof
with such number determined as of the record date for the determination
of holders of Common Stock entitled to receive such dividend) (the
"Participating Dividends")). So long as any shares of the Series C
Preferred Stock shall be outstanding, the Corporation shall not declare
or pay or set apart for payment any dividends or make any other
distributions on, or make any payment on account of the purchase,
redemption, exchange or other retirement of any other class of stock or
series thereof of the Corporation ranking junior to the Series C
Preferred Stock as to the payment of dividends unless each of the
holders of the Series C Preferred Stock shall have been paid all accrued
Series C Preferred Dividends in full with respect to each share of
Series C Preferred Stock. For the period commencing on ______________,
1998 [THE DATE OF ISSUANCE] and ending on the date that is the fifth
(5th) anniversary thereof, annually on each such anniversary, the Series
C Preferred Dividends shall be paid to the holders of the Series C
Preferred Stock in additional shares of Series C Preferred Stock in a
number equal to the quotient of (A) the amount equal to accrued and
unpaid Series C Preferred Dividends through the relevant anniversary
divided by (B) $10,000. Commencing with the sixth (6th) anniversary of
the date hereof, the Series C Preferred Dividends, in the discretion of
the Corporation, shall be paid to the holders of the Series C Preferred
Stock in (i) additional shares of Series C Preferred Stock in a number
of shares calculated as provided in the immediately preceding sentence
or (ii) cash.
Section 3. Liquidation, Dissolution or Winding Up.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation or any subsidiary, whether voluntary or involuntary, each
holder of outstanding shares of Series C Preferred Stock shall be
entitled to be paid out of the assets of the Corporation available for
distribution to stockholders, whether such assets are capital, surplus,
or earnings as follows, and before any amount shall be paid or
distributed to the holders of any class of Common Stock or of any other
stock ranking on liquidation junior to the Series C Preferred Stock, the
greater of: (i) an amount in cash equal to $10,000 per share (adjusted
appropriately for stock splits, stock dividends and the like) together
with accrued but unpaid dividends (including all Series C Preferred
Dividends and Participating Dividends) to which the holders of
outstanding shares of Series C Preferred Stock are entitled pursuant to
Section 2 hereof (the "Minimum Liquidation Amount"); provided, however,
that if, upon any liquidation, dissolution or winding up of the
Corporation, the amounts payable with respect to the Series C Preferred
Stock and any other stock ranking as to any such distribution on a
parity with the Series C Preferred Stock are not paid in full, the
holders of the Series C Preferred Stock and such other stock shall share
<PAGE>
ratably in any distribution of assets in proportion to the full
respective preferential amounts to which they are entitled; or (ii) cash
in an amount equal to the portion of the assets of the Corporation
remaining for distribution to stockholders which such holder would have
received if each share of Series C Preferred Stock had been converted
into the number of shares of Common Stock issuable upon the conversion
of a share of Series C Preferred Stock immediately prior to any such
liquidation, dissolution or winding up of the Corporation after taking
into account the rights of holders of any other class or series of
capital stock of the Corporation (including the Common Stock) entitled
to share in such distribution in either case, plus any declared but
unpaid dividends (including Series C Preferred Dividends and
Participating Dividends) to which the holders of outstanding shares of
Series C Preferred Stock are entitled pursuant to Section 2 hereof (the
"Aggregate Liquidation Amount").
(b) A consolidation, merger or capital reorganization of the
Corporation (except (i) into or with a wholly-owned subsidiary of the
Corporation with requisite shareholder approval or (ii) a merger in
which the beneficial owners of the Corporation's outstanding capital
stock immediately prior to such transaction hold no less than fifty-one
percent (51%) of the voting power in the resulting entity) or a sale of
all or substantially all of the assets of the Corporation or any
subsidiary thereof shall be regarded as a liquidation, dissolution or
winding up of the affairs of the Corporation within the meaning of this
Section 3; provided, however, that each holder of the Series C Preferred
Stock shall have the right to elect the benefits of the provisions of
Section 5(i) hereof in lieu of receiving payment in liquidation,
dissolution or winding up of the Corporation pursuant to this Section 3.
(b) For purposes of this Section 3 "capital reorganization" shall
mean any reorganization of the capital stock of the Company such that
the powers, preferences and rights of the Series C Preferred Stock are
materially altered, changed or impaired so as to adversely affect the
holders thereof.
Section 4. Voting Power.
(a) Election of Directors. The Board of Directors of the Corporation
shall consist of not greater than nine (9) members as long as any shares
of Series C Preferred Stock are outstanding. For so long as at least
fifteen percent (15%) of the shares of Series C Preferred Stock issued
on the date hereof remain issued and outstanding, the holders of
outstanding shares of Series C Preferred Stock shall, voting as a
separate class, be entitled to elect two (2) of the nine (9) (or such
lesser number) Directors of the Corporation. Such Directors shall be
the candidates receiving the highest number of affirmative votes (with
each holder of Series C Preferred Stock entitled to cast one vote for or
against each candidate with respect to each share of Series C Preferred
Stock) of the outstanding shares of Series C Preferred Stock (the
"Series C Preferred Stock Director Designees"), with votes cast against
such candidates and votes withheld having no legal effect. The election
of the Series C Preferred Stock Director Designees by the holders of the
Series C Preferred Stock shall occur (i) at the annual meeting of
<PAGE>
holders of capital stock, (ii) at any special meeting of holders of
capital stock, (iii) at any special meeting of holders of Series C
Preferred Stock called by holders of a majority of the outstanding
shares of Series C Preferred Stock or (iv) by the written consent of the
holders of two-thirds of the outstanding shares of Series C Preferred
Stock. If at any time when any share of Series C Preferred Stock is
outstanding any Series C Preferred Stock Director Designee should cease
to be a Director for any reason, the vacancy shall only be filled by the
vote or written consent of the holders of the outstanding shares of
Series C Preferred Stock, voting as a separate class, in the manner and
on the basis specified above. The holders of outstanding shares of
Series C Preferred Stock may, in their sole discretion, determine to
elect fewer than two (2) Series C Preferred Stock Director Designees
from time to time, and during any such period the Board of Directors
nonetheless shall be deemed duly constituted.
(b) Other Voting. Except as otherwise expressly provided herein or
as required by law, the holder of each share of Series C Preferred Stock
shall be entitled to vote on all matters on which any holder of Common
Stock is entitled to vote. Each share of Series C Preferred Stock shall
entitle the holder thereof to such number of votes per share as shall
equal the number of shares of Common Stock into which each share of
Series C Preferred Stock would be converted if it were converted
pursuant to the provisions of Section 5 hereof, regardless of whether
such shares of Series C Preferred Stock are then presently convertible.
Except as otherwise expressly provided herein (including without
limitation the provisions of Section 7 hereof) or as required by law,
the holders of shares of the Series C Preferred Stock and the Common
Stock shall vote together as a single class on all matters.
Section 5. Conversion. The holders of the Series C Preferred Stock
shall have the following conversion rights:
(a) Optional Conversion. Each holder of shares of Series C Preferred
Stock may elect to convert each share of Series C Preferred Stock then
held by such holder into a number of shares of Common Stock computed by
multiplying the number of shares of Series C Preferred Stock to be
converted by $10,000 and dividing the result by the applicable
Conversion Price then in effect. The"Conversion Price" shall be $1.21.
The Conversion Price shall be subject to adjustment from time to time
pursuant to this Section 5. If a holder of Series C Preferred Stock
elects to convert Series C Preferred Stock at a time when there are any
accrued and unpaid dividends or other amounts due on such shares
(including Series C Preferred Dividends and Participating Dividends),
such dividends and other amounts shall be paid in full by the
Corporation in connection with such conversion.
(b) Conversion Procedures. The holders of Series C Preferred Stock
shall surrender the certificate or certificates representing the Series
C Preferred Stock being converted, duly assigned or endorsed for
transfer to the Corporation (or accompanied by duly executed stock
powers relating thereto), at the principal executive office of the
Corporation or the offices of the transfer agent for the Series C
Preferred Stock or such office or offices in the continental United
States of an agent for conversion as may from time to time be designated
<PAGE>
by notice to the holders of the Series C Preferred Stock by the
Corporation, accompanied by written notice of conversion and the payment
to the Corporation of a sum sufficient to cover any tax or governmental
charge imposed with respect to the issuance of Common Stock in a name
other than that of the holder of the Series C Preferred Stock being
converted. Such notice of conversion shall specify (i) the number of
shares of Series C Preferred Stock to be converted, (ii) the name or
names in which such holder wishes the certificate or certificates for
Common Stock and for any shares of Series C Preferred Stock not to be so
converted to be issued and (iii) the address to which such holder wishes
delivery to be made of such new certificates to be issued upon such
conversion. Upon surrender of a certificate representing Series C
Preferred Stock for conversion, the Corporation shall issue and send by
hand delivery, by courier or by first class mail (postage prepaid) to
the holder thereof or to such holder's designee, at the address
designated by such holder in the notice, a certificate or certificates
for the number of shares of Common Stock to which such holder shall be
entitled upon conversion. In the event that there shall have been
surrendered a certificate or certificates representing Series C
Preferred Stock, only part of which are to be converted, the Corporation
shall issue and send to such holder or such holder's designee, in the
manner set forth in the preceding sentence, a new certificate or
certificates representing the number of shares of Series C Preferred
Stock which shall not have been converted.
(c) Effective Date of Conversion. The issuance by the Corporation of
shares of Common Stock upon a conversion of Series C Preferred Stock
into shares of Common Stock pursuant to Section 5(a) hereof shall be
effective as of the date of the surrender of the certificate or
certificates representing the Series C Preferred Stock to be converted,
duly assigned or endorsed for transfer to the Corporation (or
accompanied by duly executed stock powers relating thereto). On and
after the effective date of conversion, the person or persons entitled
to receive the Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares
of Common Stock.
(d) Fractional Shares. The Corporation shall not be obligated to
deliver to holders of Series C Preferred Stock any fractional share of
Common Stock issuable upon any conversion of such Series C Preferred
Stock, but in lieu thereof may make a cash payment in respect thereof in
any manner permitted by law.
(e) Reservation of Common Stock. The Corporation shall at all times
reserve and keep available out of its authorized and unissued Common
Stock, solely for issuance upon the conversion of Series C Preferred
Stock as herein provided, free from any preemptive rights or other
obligations, such number of shares of Common Stock as shall from time to
time be issuable upon the conversion of all the Series C Preferred Stock
then outstanding. The Corporation shall prepare and shall use its best
efforts to obtain and keep in force such governmental or regulatory
permits or other authorizations as may be required by law, and shall
comply with all requirements as to registration, qualification or
listing of the Common Stock, in order to enable the Corporation lawfully
to issue and deliver to each holder of record of Series C Preferred
<PAGE>
Stock such number of shares of its Common Stock as shall from time to
time be sufficient to effect the conversion of all Series C Preferred
Stock then outstanding and convertible into shares of Common Stock.
(f) Adjustments to Conversion Price. The Conversion Price in effect
from time to time shall be subject to adjustment as follows:
(i) Stock Dividends, Subdivisions and Combinations. Upon the
issuance of additional shares of Common Stock as a dividend or other
distribution on outstanding Common Stock, the subdivision of outstanding
shares of Common Stock into a greater number of shares of Common Stock,
or the combination of outstanding shares of Common Stock into a smaller
number of shares of the Common Stock, the Conversion Price shall,
simultaneously with the happening of such dividend, subdivision or split
be adjusted by multiplying the then effective Conversion Price by a
fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such event and the denominator of
which shall be the number of shares of Common Stock outstanding
immediately after such event. An adjustment made pursuant to this
Section 5(f)(i) shall be given effect, upon payment of such a dividend
or distribution, as of the record date for the determination of
stockholders entitled to receive such dividend or distribution (on a
retroactive basis) and in the case of a subdivision or combination shall
become effective immediately as of the effective date thereof.
(ii) Sale of Common Stock. In the event the Corporation shall at any
time or from time to time, issue, sell or exchange any shares of Common
Stock (including shares held in the Corporation's treasury but excluding
(i) any Common Stock which may be issued upon conversion of the Series B
Preferred Stock or the Series C Preferred Stock (including shares of
Common Stock issuable upon exercise of warrants associated therewith);
(ii) up to 2,400,000 shares of Common Stock to be issued upon exercise
of options to be issued to officers, directors, employees, consultants
or agents of the Company pursuant to the terms of the Company's Employee
Stock Option Plan or Non-Employee Directors' Stock Option Plan; (iii) up
to 100,000 shares of Common Stock to be issued to Green Mountain
Capital, L.P. upon exercise of warrants; (iv) up to 30,000 shares of
Common Stock to be issued to David Garret upon exercise of warrants; (v)
up to 124,431 shares of Common Stock to be issued to Barington Capital
Group, L.P. upon exercise of warrants; (vi) up to 223,971 shares of
Common Stock to be issued to URSA (VT) QRS 12-30, Inc. upon exercise of
warrants; and (vii) up to 54,822 shares of Common Stock to be issued to
Joan H. Martin upon exercise of warrants (subject in each case to
appropriate adjustments for stock splits, stock dividends, anti-dilution
rights and the like) (collectively, the "Excluded Shares"), for a
consideration per share less than the Conversion Price then in effect
immediately prior to the issuance, sale or exchange of such shares,
then, and thereafter successively upon each such issuance, sale or
exchange, the Conversion Price in effect immediately prior to the
issuance, sale or exchange of such shares shall forthwith be decreased
to an amount determined by multiplying the Conversion Price by a
fraction:
(A) the numerator of which shall be (i) the number of shares of
<PAGE>
Common Stock of all classes outstanding immediately prior to the
issuance of such additional shares of Common Stock (excluding treasury
shares, but including all shares of Common Stock issuable upon
conversion or exercise of any outstanding Preferred Stock (regardless of
whether such shares of Preferred Stock are then presently convertible),
options, warrants, rights or convertible securities), plus (ii) the
number of shares of Common Stock which the net aggregate consideration
received by the Corporation for the total number of such additional
shares of Common Stock so issued would purchase at the then effective
Conversion Price (prior to adjustment) per share; and
(B) the denominator of which shall be (i) the number of shares of
Common Stock of all classes outstanding immediately prior to the
issuance of such additional shares of Common Stock (excluding treasury
shares, but including all shares of Common Stock issuable upon
conversion or exercise of any outstanding Preferred Stock (regardless of
whether such shares of Preferred Stock are then presently convertible),
options, warrants, rights or convertible securities), plus (ii) the
number of such additional shares of Common Stock so issued.
(iii) Sale of Options, Rights or Convertible Securities. In the
event the Corporation shall at any time or from time to time, issue
options, warrants or rights to subscribe for shares of Common Stock
(other than any options or warrants for Excluded Shares), or issue any
securities convertible into or exchangeable for shares of Common Stock,
for a consideration per share (determined by dividing the Net Aggregate
Consideration (as determined below) by the aggregate number of shares of
Common Stock that would be issued if all such options, warrants, rights
or convertible securities were exercised or converted to the fullest
extent permitted by their terms) less than the Conversion Price per
share in effect immediately prior to the issuance of such options,
warrants or rights or securities, then the Conversion Price in effect
immediately prior to such issuance shall be decreased to an amount
determined by multiplying the Conversion Price by a fraction:
(A) the numerator of which shall be (i) the number of shares of
Common Stock of all classes outstanding immediately prior to the
issuance of such options, rights or convertible securities (excluding
treasury shares, but including all shares of Common Stock issuable upon
conversion or exercise of any outstanding Preferred Stock (regardless of
whether such shares of Preferred Stock are then presently convertible),
options, warrants, rights or convertible securities), plus (ii) the
number of shares of Common Stock which the total amount of consideration
received by the Corporation for the issuance of such options, warrants,
rights or convertible securities, plus the minimum amount set forth in
the terms of such security as payable to the Corporation upon the
exercise or conversion thereof (the "Net Aggregate Consideration"),
would purchase at the Conversion Price prior to adjustment; and
(B) the denominator of which shall be (i) the number of shares of
Common Stock of all classes outstanding immediately prior to the
issuance of such options, warrants, rights or convertible securities
(excluding treasury shares, but including all shares of Common Stock
issuable upon conversion or exercise of any outstanding Preferred Stock
<PAGE>
(regardless of whether such shares of Preferred Stock are then presently
convertible), options, warrants, rights or convertible securities), plus
(ii) the aggregate number of shares of Common Stock that would be issued
if all such options, warrants, rights or convertible securities were
exercised or converted.
(iv) Expiration or Change in Price. If the consideration per share
provided for in any options or rights to subscribe for shares of Common
Stock or any securities exchangeable for or convertible into shares of
Common Stock, changes at any time, the Conversion Price in effect at the
time of such change shall be readjusted to the Conversion Price which
would have been in effect at such time had such options or convertible
securities provided for such changed consideration per share (determined
as provided in Section 5(f)(iii) hereof), at the time initially granted,
issued or sold; provided, that such adjustment of the Conversion Price
will be made only as and to the extent that the Conversion Price
effective upon such adjustment remains greater than or equal to the
Conversion Price that would be in effect if such options, rights or
securities had not been issued. No adjustment of the Conversion Price
shall be made under this Section 5 upon the issuance of any additional
shares of Common Stock which are issued pursuant to the exercise of any
warrants, options or other subscription or purchase rights or pursuant
to the exercise of any conversion or exchange rights in any convertible
securities if an adjustment shall previously have been made upon the
issuance of such warrants, options or other rights. Any adjustment of
the Conversion Price shall be disregarded if, as, and when the rights to
acquire shares of Common Stock upon exercise or conversion of the
warrants, options, rights or convertible securities which gave rise to
such adjustment expire or are canceled without having been exercised, so
that the Conversion Price effective immediately upon such cancellation
or expiration shall be equal to the Conversion Price in effect at the
time of the issuance of the expired or canceled warrants, options,
rights or convertible securities, with such additional adjustments as
would have been made to that Conversion Price had the expired or
canceled warrants, options, rights or convertible securities not been
issued.
(g) Other Adjustments. If the Common Stock issuable upon the
conversion of the Series C Preferred Stock shall be changed into the
same or different number of shares of any class or classes of stock,
whether by reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend provided for above, or a
reorganization, merger, consolidation or sale of assets provided for
elsewhere in Section 3(b) or in this Section 5), then and in each such
event the holder of each share of Series C Preferred Stock shall have
the right thereafter to convert such share into (i) the right to receive
the Minimum Liquidation Amount, or (ii) the kind and amount of shares of
stock and other securities and property receivable upon such
reorganization, reclassification or other change, by holders of the
number of shares of Common Stock into which such shares of Series C
Preferred Stock might have been converted immediately prior to such
reorganization, reclassification or change (regardless of whether such
shares of Series C Preferred Stock are then presently convertible), all
subject to further adjustment as provided herein.
<PAGE>
(h) Mergers and Other Reorganizations. If at any time or from time
to time there shall be a capital reorganization of the Common Stock
(other than a subdivision, combination, reclassification or exchange of
shares provided for elsewhere in this Section 5) or a merger or
consolidation of the Corporation or any subsidiary with or into another
corporation or the sale of all or substantially all of the assets of the
Corporation or any subsidiary thereof to any other person, then, as a
part of and as a condition to the effectiveness of such reorganization,
merger, consolidation or sale, lawful and adequate provision shall be
made so that the holders of the Series C Preferred Stock shall
thereafter be entitled to receive upon conversion of the Series C
Preferred Stock (1) the Minimum Liquidation Amount or (2) the number of
shares of stock or other securities or property of the Corporation or of
the successor corporation resulting from such merger or consolidation or
sale, to which a holder of Common Stock deliverable upon such conversion
would have been entitled on such capital reorganization, merger,
consolidation, or sale. In any such case, appropriate provisions shall
be made with respect to the rights of the holders of the Series C
Preferred Stock after the reorganization, merger, consolidation or sale
to the end that the provisions of this Section 5 (including without
limitation provisions for adjustment of the Conversion Price and the
number of shares purchasable upon conversion of the Series C Preferred
Stock) shall thereafter be applicable, as nearly as may be, with respect
to any shares of stock, securities or assets to be deliverable
thereafter upon the conversion of the Series C Preferred Stock.
Each holder of Series C Preferred Stock upon the occurrence of a capital
reorganization, merger or consolidation of the Corporation or any
subsidiary thereof or the sale of all or substantially all of the assets
of the Corporation or any subsidiary thereof as such events are more
fully set forth in the first paragraph of this Section 5(h), shall have
the option of electing treatment of his, her or its shares of Series C
Preferred Stock under either this Section 5(h) or Section 3 hereof,
notice of which election shall be submitted in writing to the
Corporation at its principal offices no later than ten (10) days before
the effective date of such event, provided that any such notice shall be
effective if given not later than fifteen (15) days after the date of
the Corporation's notice pursuant to Section 9 hereof, with respect to
such event.
(i) Certificate as to Adjustments. In each case of an adjustment or
readjustment of the Conversion Price, the Corporation at its expense
will furnish each holder of Series C Preferred Stock with a certificate,
prepared by the chief financial officer of the Corporation, showing such
adjustment or readjustment in accordance with the terms hereof, and
stating in detail the facts upon which such adjustment or readjustment
is based. The Corporation shall, upon the written request at any time
of any holder of Series C Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price at the time in
effect, and (iii) the number of shares of Common Stock, the Minimum
Liquidation Amount and the amount, if any, of other property which at
the time would be received upon the conversion of Series C Preferred
Stock.
<PAGE>
Section 6. Redemption.
(a) Redemption Events.
(i) On or After [ ], 2003 Upon Election of Holders.
Upon the election of any holder of shares of Series C Preferred Stock at
any time following _____________, 2003 [THE FIFTH ANNIVERSARY OF
ISSUANCE DATE], the Corporation shall redeem some or all, as specified
by such holder, of such holder's outstanding shares of Series C
Preferred Stock at the Redemption Price specified in Section 6(b) below;
provided, however, the Corporation shall not be required to redeem in
the aggregate shares of Series C Preferred Stock with an aggregate
Redemption Price in excess of the greater of (I) twenty-five percent
(25%) of the Net Earnings (as defined below) of the Corporation for the
twelve (12) consecutive calendar month period ended immediately prior to
such redemption or (II) (25%) of the Corporation's Net Worth (as defined
below) determined as of the end of the twelve (12) month period referred
to in clause (I). The foregoing election shall be made by such holder
giving the Corporation not less than thirty (30) days prior written
notice, which notice shall set forth the date for such redemption and
the number of shares to be redeemed. "Net Earnings" shall mean with
respect to the period in question, the after tax net income of the
Corporation as determined in accordance with generally accepted
accounting principles consistently applied. "Net Worth" shall mean for
the period in question, the stockholders' equity in the Corporation as
of the end of such period, as determined in accordance with generally
accepted accounting principles consistently applied.
(ii) On or After [ ], 2003 Upon Election of
Corporation. At any time following _____________, 2003 [THE FIFTH
ANNIVERSARY OF ISSUANCE DATE] upon the election of the Corporation, the
Corporation may redeem all (and not less than all) of the outstanding
shares of Series C Preferred Stock at the Traded FMV Redemption Price,
specified in Section 6(b) below. The foregoing election shall be made by
the Corporation giving each of the holders of Series C Preferred Stock
not less than thirty (30) days prior written notice, which notice shall
set forth the date for such redemption.
(iii) On [ ], 2008. On [THE TENTH ANNIVERSARY OF
ISSUANCE DATE] the Corporation shall, without any further action by the
holders of the outstanding shares of Series C Preferred Stock, redeem
all (and not less than all) of the outstanding shares of Series C
Preferred Stock at the Traded Redemption Price or the Non-Traded FMV
Redemption Price, as applicable, specified in Section 6(b) below.
(b) Redemption Date; Redemption Price. Any date upon which a
redemption shall actually occur in accordance with this Section 6 shall
be referred to as a "Redemption Date." The redemption price for each
share of Series C Preferred Stock redeemed pursuant to Section 6(a)(i)
shall be the per share Minimum Liquidation Amount (the "Redemption
Price").
The redemption price for each share of Series C Preferred Stock redeemed
<PAGE>
pursuant to Section 6(a)(ii) hereof shall be the greater of (i) the per
share Minimum Liquidation Amount or (ii) the product of the number of
shares of Common Stock into which a share of Series C Preferred Stock is
then convertible pursuant to Section 5 hereof on the Redemption Date
(the "Conversion Shares") and the average of the closing price of the
Common Stock on the sixty (60) days preceding the Redemption Date in
which an actual trade was executed (the greater of (i) or (ii) the
"Traded FMV Redemption Price"); provided, however, that in the event the
Common Stock of the Corporation is not listed on The Nasdaq Stock
Market, Inc.'s SmallCap Market ("Nasdaq") or its successor, if any, or
on any over-the-counter market, on the Redemption Date for the
redemption of Series C Preferred Stock pursuant to Section 6(a)(ii)
hereof, then the redemption price for each share of Series C Preferred
Stock redeemed pursuant to Section 6(a)(ii) hereof shall be the greater
of (i) the per share Minimum Liquidation Amount or (ii) the Fair Market
Value of the Conversion Shares, as determined pursuant to Section
6(b)(i) below (the greater of (i) or (ii) the "Non-Traded FMV Redemption
Price").
The redemption price for each share of Series C Preferred Stock
redeemed pursuant to Section 6(a)(iii) hereof shall be the per share
Minimum Liquidation Amount (the "Traded Redemption Price"); provided,
however, that in the event the Common Stock of the Corporation is not
listed on Nasdaq or its successor, if any, or on any over-the-counter
market, on the Redemption Date for the redemption of Series C Preferred
Stock pursuant to Section 6(a)(iii), then the redemption price for each
share of Series C Preferred Stock redeemed pursuant to Section 6(a)(iii)
hereof shall be equal to the Non-Traded FMV Redemption Price.
If at a Redemption Date shares of Series C Preferred Stock are unable to
be redeemed (as contemplated by Section 6(c) below), then holders of
Series C Preferred Stock shall also be entitled to dividends and
interest pursuant to Sections 6(c) and (d). The aggregate applicable
redemption price shall be payable in cash in immediately available funds
to the respective holders of the Series C Preferred Stock on the
applicable Redemption Date (subject to Section 6(c)). Upon any
redemption of the Series C Preferred Stock as provided herein, holders
of fractional shares shall receive proportionate amounts in respect
thereof. Until the aggregate applicable redemption price has been paid
for all shares of Series C Preferred Stock being redeemed pursuant to
this Section 6: (A) no dividend whatsoever shall be paid or declared,
and no distribution shall be made, on any capital stock of the
Corporation ranking on liquidation junior to the Series C Preferred
Stock; and (B) no shares of capital stock of the Corporation (other than
the Series C Preferred Stock in accordance with this Section 6) shall be
purchased, redeemed or acquired by the Corporation and no monies shall
be paid into or set aside or made available for a sinking fund for the
purchase, redemption or acquisition thereof.
(i) Fair Market Value. The Fair Market Value of the Conversion
Shares shall be determined according to the following procedure:
(A) The Board of Directors of the Corporation and the holders of a
majority in interest of the then outstanding shares of Series C
<PAGE>
Convertible Preferred Stock shall negotiate in good faith in an effort
to reach an agreement upon the Fair Market Value of the Conversion
Shares for a period of ten (10) days beginning at any time or times
following written notice of the holders of a majority in interest of the
then outstanding shares of Series C Convertible Preferred Stock to the
Corporation, or vice versa, of its desire to determine the Fair Market
Value at that time.
(B) If the Board of Directors and such holders of Series C
Convertible Preferred Stock are unable to reach agreement under the
foregoing subsection (A), the Fair Market Value of the Conversion Shares
shall be determined by appraisal. Within fifteen (15) days after the
expiration of the ten-day period in subsection (A) above, the Board of
Directors and holders of the Conversion Shares to be redeemed shall
elect as an appraiser (the "Selected Appraiser") a third party who is a
nationally recognized investment banking firm and that is experienced in
the appraisal of companies. The Selected Appraiser shall establish the
Fair Market Value of the Conversion Shares. Such Fair Market Value of
the Conversion Shares shall be calculated with no discount for minority
interests or lack of marketability thereof. The Selected Appraiser
shall render his, her or its appraisal within twenty (20) days of his,
her or its appointment hereunder. The Fair Market Value of the
Conversion Shares shall be equal to the appraisal made by the Selected
Appraiser. All appraisals delivered pursuant to this subsection (i)
shall be in writing and signed by the appraiser. The fees, costs and
expenses of the Selected Appraiser will be borne equally by the
Corporation and the holders of Conversion Shares to be redeemed.
(c) Redemption Prohibited. If, at a Redemption Date, the Corporation
is prohibited under the Business Corporation Law of the State of New
York from redeeming, or otherwise fails to redeem, all shares of Series
C Preferred Stock for which redemption is required hereunder, then it
shall redeem such shares on a pro-rata basis among the holders of Series
C Preferred Stock in proportion to the full respective redemption
amounts to which they are entitled hereunder to the extent possible and
shall redeem the remaining shares to be redeemed as soon as the
Corporation is not prohibited from redeeming some or all of such shares
under the Business Corporation Law of the State of New York. Any shares
of Series C Preferred Stock not redeemed shall remain outstanding and
entitled to all of the rights and preferences provided herein. The
Corporation shall take such action as shall be necessary and appropriate
under the circumstances to review and promptly remove any impediment to
its ability to redeem Series C Preferred Stock under the circumstances
contemplated by this Section 6(c). In the event that the Corporation
fails for any reason to redeem shares for which redemption is required
pursuant to this Section 6(c), including without limitation due to a
prohibition of such redemption under the Business Corporation Law of the
State of New York, then during the period from the applicable Redemption
Date through the date on which such shares are redeemed, the applicable
redemption price of such shares that the Corporation has failed to
redeem shall bear interest, with such interest to accrue daily in
arrears and to be compounded quarterly at the rate per annum of fifteen
percent (15%) until the applicable redemption price (as so increased) is
paid in full; provided, however, that in no event shall such interest
<PAGE>
exceed the maximum permitted rate of interest under applicable law (the
"Maximum Permitted Rate"). In the event that fulfillment of any
provision hereof results in such rate of interest being in excess of the
Maximum Permitted Rate, the obligation to be fulfilled shall
automatically be reduced to eliminate such excess; provided, however,
that any subsequent increase in the Maximum Permitted Rate shall be
retroactively effective to the applicable redemption date.
(d) Dividend After Redemption Date. From and after a Redemption
Date, no shares of Series C Preferred Stock subject to redemption shall
be entitled to dividends, if any, as contemplated by Section 2;
provided, however, that in the event that shares of Series C Preferred
Stock are unable to be redeemed and continue to be outstanding in
accordance with Section 6(c), such shares shall continue to be entitled
to dividends and interest thereon as provided in Sections 2 and 6(c)
until the date on which such shares are actually redeemed by the
Corporation.
(e) Surrender of Certificates. Upon receipt of the applicable
redemption price by certified check or wire transfer, each holder of
shares of Series C Preferred Stock to be redeemed shall surrender the
certificate or certificates representing such shares to the Corporation,
duly assigned or endorsed for transfer (or accompanied by duly executed
stock powers relating thereto), or, in the event the certificate or
certificates are lost, stolen or missing, shall deliver an affidavit or
agreement satisfactory to the Corporation to indemnify the Corporation
from any loss incurred by it in connection therewith (an "Affidavit of
Loss") with respect to such certificates at the principal executive
office of the Corporation or the office of the transfer agent for the
Series C Preferred Stock or such office or offices in the continental
United States of an agent for redemption as may from time to time be
designated by notice to the holders of Series C Preferred Stock, and
each surrendered certificate shall be canceled and retired; provided,
however, that if the Corporation is prohibited from redeeming all shares
of Series C Preferred Stock as provided in Section 6(c) or, pursuant to
Section 6(a)(i), is redeeming less than all of the shares of Series C
Preferred Stock held by a particular holder, the holder shall not be
required to surrender said certificate(s) to the Corporation until said
holder has received a new stock certificate for those shares of Series C
Preferred Stock not so redeemed.
Section 7. Restrictions and Limitations.
(a) So long as at least fifteen percent (15%) of the shares of the
Series C Preferred Stock issued on the date hereof remain issued and
outstanding, the Corporation shall not without the affirmative vote or
written consent of the holders of a majority in interest of the then
outstanding shares of the Series C Preferred Stock (adjusted
appropriately for stock splits, stock dividends and the like):
(i) Redeem, purchase or otherwise acquire for value (or pay into or
set aside for a sinking fund for such purpose) any of the Common Stock
of any class or any other capital stock of the Corporation (other than
the Series A Preferred Stock, the Series B Preferred Stock and the
<PAGE>
Series C Preferred Stock);
(ii) Declare any dividends on the Common Stock or any other equity
security other than the Series A Preferred Stock, the Series B Preferred
Stock and the Series C Preferred Stock;
(iii) Authorize or issue, or obligate itself to issue, any other
equity security senior to or on a parity with the Series C Preferred
Stock as to liquidation preferences, redemptions, or dividend rights or
with any special voting rights;
(iv) Increase or decrease (other than by conversion as permitted
hereby) the total number of authorized shares of Preferred Stock as
Series C Preferred Stock; or
(v) Amend the Certificate of Incorporation or By-Laws of the
Corporation in a manner that adversely affects the rights of the holders
of the Series C Preferred Stock.
(b) So long as at least fifteen percent (15%) of the shares of the
Series C Preferred Stock issued on the date hereof remain issued and
outstanding, the Corporation shall not without giving at least 15 days
prior written notice, by registered mail, postage prepaid to the holders
of the Series C Preferred Stock at their then current addresses,
authorize any merger or consolidation of the Corporation or any
subsidiary with or into any other corporation or entity (except into or
with a wholly-owned subsidiary of the Corporation), authorize the
liquidation, dissolution or winding up of the Corporation or any
subsidiary, or authorize the sale of all or substantially all of the
assets of the Corporation or any subsidiary. Notice of such event shall
be mailed at least 15 days prior to the date on which any such merger,
consolidation, liquidation, dissolution, winding up or sale is expected
to be effective.
Section 8. No Reissuance of Series C Preferred Stock. No share or
shares of the Series C Preferred Stock acquired by the Corporation by
reason of redemption, purchase, conversion or otherwise shall be
reissued, and all such shares shall be canceled, retired, and eliminated
from the shares which the Corporation shall be authorized to issue. The
Corporation may from time to time take such appropriate corporate action
as may be necessary to reduce the authorized number of shares of the
Series C Preferred Stock accordingly.
Section 9. Notices of Record Date. In the event (i) the Corporation
establishes a record date to determine the holders of any class of
securities who are entitled to receive any dividend or other
distribution, or (ii) there occurs any capital reorganization of the
Corporation, any reclassification or recapitalization of the capital
stock of the Corporation,
any merger or consolidation of the Corporation, and any transfer of all
or substantially all of the assets of the Corporation to any other
corporation, or any other entity or person, or any voluntary or
involuntary dissolution, liquidation or winding up of the Corporation,
the Corporation shall mail to each holder of Series C Preferred Stock at
<PAGE>
least twenty (20) days prior to the record date specified therein, a
notice specifying (a) the date of such record date for the purpose of
such dividend or distribution and a description of such dividend or
distribution, (b) the date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up is expected to become effective, and (c) the
time, if any, that is to be fixed, as to when the holders of record of
Common Stock (or other securities) shall be entitled to exchange their
shares of Common Stock (or other securities) for securities or other
property deliverable upon such reorganization, reclassification,
transfer, consolidation, merger, dissolution, liquidation or winding up.
Section 10. Other Rights. Except as otherwise provided in this
Certificate of Incorporation, each share of Series C Preferred Stock and
each share of Common Stock shall be identical in all respects, shall
have the same powers, preferences and rights, without preference of any
such class or share over any other such class or share, and shall be
treated as a single class of stock for all purposes.
EXHIBIT C
FORM OF
WARRANT
WARRANT NO. WARRANTS
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED,
SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1)
PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES
WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE
EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND
BLUE SKY LAWS.
VERMONT TEDDY BEAR CO., INC.
This warrant certificate (the "Warrant Certificate") certifies that, for
value received, [NAME OF HOLDER] or registered assigns under Section 8
hereof (the "Holders") is the owner of [NUMBER OF WARRANTS] specified
above (the "Warrants") each of which entitles the Holder thereof to
purchase 8,264.47 fully paid and nonassessable shares of Common Stock,
par value $.05 per share, of The Vermont Teddy Bear Co., Inc., a
corporation organized under the laws of the State of New York (the
"Company"), or such other number of shares as may be determined pursuant
to an adjustment in accordance with Section 4 hereof, at the price per
share set forth in Section 4 hereof, subject to adjustment from time to
<PAGE>
time pursuant to Section 4 hereof (the "Warrant Price") and subject to
the provisions and upon the terms and conditions set forth herein.
1. Term of Warrant.
Each Warrant is exercisable, in whole or in part, at any time between
the date hereof and September __, 2005 [the date which is the seventh
year anniversary of the date hereof] by the Holder hereof.
2. Method of Exercise and Payment; Issuance of New Warrant
Certificate; Contingent Exercise; Fractional Shares.
(a) In connection with any exercise pursuant to Section 1 hereof,
this Warrant Certificate shall be surrendered (with the notice of
exercise form attached hereto as Exhibit 1 duly executed) at the
principal office of the Company together with payment in full, as set
forth below, to the Company of the then applicable Warrant Price for
each Warrant in respect of which such Warrants are being exercised.
Such Warrant Price shall be paid in full by (i) cash or a certified
check or a wire transfer in same day funds in an amount equal to the
then applicable Warrant Price multiplied by the number of shares of
Common Stock then being purchased or (ii) delivery to the Company of
that number of shares of Common Stock having a Fair Market Value (as
hereinafter defined) equal to the Warrant Price multiplied by the number
of shares of Common Stock then being purchased. In the alternative, the
Holder hereof may exercise his, her or its right to purchase some or all
of the Warrants subject to this Warrant Certificate, on a net basis,
such that, without the exchange of any funds, such Holder receives that
number of shares of Common Stock subscribed to pursuant to this Warrant
Certificate less that number of shares of Common Stock having an
aggregate Fair Market Value at the time of exercise equal to the
aggregate Warrant Price that would otherwise have been paid by such
Holder for the number of shares of Common Stock subscribed to pursuant
to such Warrant Certificate (hereinafter, a "Net Cashless Exercise").
As used herein: (a) the term "Fair Market Value," on a per share basis,
means the Closing Price (as hereinafter defined) of the Common Stock on
the Date of Exercise (as hereinafter defined); provided that if no
actual trade is executed on the Date of Exercise, then "Fair Market
Value," on a per share basis, shall mean the Closing Price of the Common
Stock on the Trading Day (as hereinafter defined) immediately preceding
the Date of Exercise; (b) the term "Date of Exercise" with respect to
any Warrant means the date on which such Warrant is exercised as
provided herein; (c) the term "Closing Price" for any date shall mean
the last sale price reported on The Nasdaq Stock Market, Inc.'s National
Market ("Nasdaq") or its successor, if any, or if the Common Stock is
not so reported, the average of the reported bid and asked prices in the
over-the-counter market, as furnished by the National Quotation Bureau,
Inc., or if such firm is not then engaged in the business of reporting
such prices, as furnished by any similar firm then engaged in such
business and selected by the Company or, if there is no such firm, as
furnished by any member of the National Association of Securities
Dealers, Inc. ("NASD") selected by the Company or, if the Common Stock
is not quoted in the over-the-counter market, the fair value, thereof
<PAGE>
determined in good faith by the Company's Board of Directors and the
Investors Representative (as defined in the Securities Purchase
Agreement (as defined in Section 6 hereof)) as of a date which is within
15 days of the date as of which the determination is to be made; and (d)
the term "Trading Day" with respect to the Common Stock means (i) if the
Common Stock is quoted on Nasdaq or any similar system of automated
dissemination of quotations of securities prices, days on which trades
may be made on such system and on which a trade occurs or (ii) if the
Common Stock is listed or admitted for trading on any national
securities exchange, days on which such national securities exchange is
open for business and on which a trade occurs.
(b) The Company agrees that the shares of Common Stock so purchased
shall be deemed to be issued to the Holder hereof as the record owner of
such shares as of the close of business on the date on which this
Warrant Certificate shall have been surrendered and payment made for
such shares as aforesaid. In the event of any exercise of the rights
represented by this Warrant Certificate, certificates for the shares of
Common Stock so purchased shall be delivered to the Holder hereof within
10 days thereafter and, unless all of the Warrants represented by this
Warrant Certificate have been fully exercised or have expired pursuant
to Section 1 hereof, a new Warrant Certificate representing the shares
of Common Stock, if any, with respect to which the Warrants represented
by this Warrant Certificate shall not then have been exercised, shall
also be issued to the Holder hereof within such 10 day period.
(c) The Company shall not be obligated to deliver to the Holder any
fractional share of Common Stock issuable upon the exercise of this
Warrant, but in lieu thereof may make a cash payment in respect thereof
in any manner permitted by law.
3. Common Stock Fully Paid; Reservation of Shares.
The Company covenants and warrants that all Common Stock which may be
issued upon the exercise of the Warrants will, upon issuance, be fully
paid and nonassessable, and free from all taxes, liens and charges with
respect to the issue thereof. During the period within which the rights
represented by this Warrant Certificate may be exercised, the Company
further covenants and warrants that it will at all times have
authorized, and reserved for the purpose of the issuance upon exercise
of the purchase rights evidenced by this Warrant Certificate, a
sufficient number of shares of its Common Stock to provide for the
exercise of the Warrants.
4. Warrant Price; Adjustment of Warrant Price and Number of Shares.
The Warrant Price shall be $1.21 per share of Common Stock. The Warrant
Price and the number of shares of Common Stock purchasable upon exercise
of the Warrants shall be subject to adjustment from time to time, as
follows:
(a) Reclassification, Consolidation or Merger. In case of any
reclassification or change of outstanding securities of the class
issuable upon exercise of the Warrants, or in case of any consolidation
or merger of the Company with or into another corporation or entity,
other than a consolidation or merger with another corporation or entity
<PAGE>
in which the Company is the continuing corporation and which does not
result in any reclassification, conversion or change of outstanding
securities issuable upon exercise of the Warrants, the Company, or such
successor corporation, as the case may be, shall execute a new warrant
certificate (the "New Warrant Certificate"), providing that the Holder
of this Warrant Certificate shall have the right to exercise such new
warrants and procure upon such exercise, in lieu of each share of Common
Stock theretofore issuable upon exercise of the Warrants, the kind and
amount of shares of stock, other securities, money and property
receivable upon such reclassification, conversion, change,
consolidation, or merger by a holder of one share of Common Stock. Such
New Warrant Certificate shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for
in this Section 4. The provisions of this Section 4(a) shall similarly
apply to successive reclassifications, changes, consolidations, mergers
and transfers.
(b) Subdivisions, Combinations and Stock Dividends. If the Company
shall subdivide or combine its Common Stock, or shall pay a dividend
with respect to Common Stock payable in, or make any other distribution
with respect to its Common Stock consisting of, shares of Common Stock,
then the Warrant Price shall be adjusted, from and after the date of
determination of shareholders entitled to receive such dividend or
distribution, to that price determined by multiplying the Warrant Price
in effect immediately prior to such date of determination by a fraction
(i) the numerator of which shall be the total number of shares of Common
Stock outstanding immediately prior to such dividend or distribution and
(ii) the denominator of which shall be the total number of shares of
Common Stock outstanding immediately after such dividend or
distribution. Such adjustment shall be made successively whenever such
a dividend or distribution occurs.
Upon each adjustment in the Warrant Price pursuant to this Section 4(b)
hereof, the number of shares of Common Stock purchasable hereunder shall
be adjusted to the product obtained by multiplying the number of shares
purchasable immediately prior to such adjustment in the Warrant Price by
a fraction (i) the numerator of which shall be the Warrant Price
immediately prior to such adjustment and (ii) the denominator of which
shall be the Warrant Price immediately thereafter.
(c) Sale of Securities. Except with respect to the Excluded Shares,
in the event the Company shall at any time or from time to time issue,
sell or exchange (i) any shares of Common Stock at a price per share, or
(ii) any rights, options, warrants or convertible or exchangeable
securities entitling the holders thereof to purchase shares of Common
Stock at an exercise price per share, less than the Warrant Price, the
Warrant Price shall be adjusted immediately thereafter so that it shall
equal the price determined by multiplying the Warrant Price in effect
immediately prior thereto by a fraction, of which the numerator shall be
the number of shares of Common Stock outstanding immediately prior to
such issuance, sale or exchange plus the number of shares of Common
Stock which the aggregate offering price of the total number of shares
of Common Stock so issued or issuable would purchase at the Warrant
Price per share (prior to adjustment), and of which the denominator
<PAGE>
shall be the number of shares of Common Stock outstanding immediately
prior to such issuance, sale or exchange plus the number of additional
shares of Common Stock so issued or issuable. Such adjustment shall be
made successively whenever such an issuance, sale or exchange is made.
To the extent that any such rights, options, warrants or convertible or
exchangeable securities are not so issued or expire unexercised, the
Warrant Price then in effect shall be readjusted to the Warrant Price
which would then be in effect if such unissued or unexercised rights,
options, warrants or convertible or exchangeable securities had not been
issuable.
5. Notice of Adjustments.
Whenever any adjustment shall be made pursuant to Section 4 hereof, the
Company shall prepare a certificate signed by its chief financial
officer setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such
adjustment was calculated, the Warrant Price after giving effect to such
adjustment and the number of shares of Common Stock then purchasable
upon exercise of the Warrants, and shall cause copies of such
certificate to be mailed to the Holder hereof at the address specified
in Section 9(d) hereof, or at such other address as may be provided to
the Company in writing by the Holder hereof.
6. Other Agreements; Definitions.
For purposes of this Warrant Certificate, all capitalized terms that are
used herein without definition shall have the respective meanings
ascribed thereto in the Securities Purchase Agreement, dated as of
September __, 1998, by and among the Holder, the Company and certain
other parties named therein (the "Securities Purchase Agreement"). The
Holder of this Warrant Certificate shall be entitled to the rights and
subject to the terms and conditions of the Securities Purchase Agreement
and in the event of any inconsistency between the terms hereof and the
terms of the Securities Purchase Agreement, the terms of the Securities
Purchase Agreement shall control.
7. Compliance with Securities Act.
The Holder of this Warrant Certificate, by acceptance hereof, agrees
that the Warrants and the shares of Common Stock to be issued upon
exercise thereof are being acquired for investment and that it will not
offer, sell or otherwise dispose of the Warrants or any shares of Common
Stock to be issued upon exercise thereof except under circumstances
which will not result in a violation of the Act. Upon exercise of the
Warrants, the Holder hereof shall, if requested by the Company, confirm
in writing that the shares of Common Stock so purchased are being
acquired for investment and not with a view toward distribution or
resale. This Warrant Certificate and all shares of Common Stock issued
upon exercise of the Warrants (unless registered under the Act) shall be
stamped or imprinted with a legend substantially in the following form:
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
<PAGE>
"ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED,
SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1)
PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES
WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE
EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE DISPOSITION OF
SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND
BLUE SKY LAWS.
8. Transfer.
Subject to compliance with the terms of Section 7 above, the Warrants
and all rights under this Warrant Certificate are transferable, in whole
or in part, at the principal office of the Company by the Holder hereof,
in person or by its duly authorized attorney, upon surrender of this
Warrant Certificate properly endorsed (with the instrument of transfer
form attached hereto as Exhibit 2 duly executed). Each Holder of this
Warrant Certificate, by taking or holding the same, consents and agrees
that this Warrant Certificate, when endorsed in blank, shall be deemed
negotiable; provided, however, that the last Holder of this Warrant
Certificate as registered on the books of the Company may be treated by
the Company and all other persons dealing with this Warrant Certificate
as the absolute owner of the Warrants for any purposes and as the person
entitled to exercise the rights represented by this Warrant Certificate
or to transfer the Warrants on the books of the Company, any notice to
the contrary notwithstanding, unless and until such Holder seeks to
transfer registered ownership of the Warrants on the books of the
Company and such transfer is effected.
9. Miscellaneous.
(a) Replacement. On receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this
Warrant Certificate and, in the case of loss, theft or destruction, on
delivery of an indemnity agreement or bond reasonably satisfactory in
form and amount to the Company or, in the case of mutilation, on
surrender and cancellation of this Warrant Certificate, the Company, at
its expense, will execute and deliver, in lieu of this Warrant
Certificate, a new warrant certificate of like tenor.
(b) Notice of Capital Changes. In case:
(i) the Company shall declare any dividend or distribution payable to
the holders of shares of Common Stock;
(ii) there shall be any capital reorganization or reclassification of
the capital of the Company, or consolidation or merger of the Company
with, or sale of all or substantially all of its assets to, another
corporation or business organization;
(iii) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(iv) the Company shall propose to commence a public offering;
<PAGE>
then, in any one or more of said cases, the Company shall give the
Holder hereof prior written notice of such event, in the manner set
forth in Section 9(d) below, at least 30 days prior to the date on which
a record shall be taken for such dividend or distribution or for
determining shareholders entitled to vote upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation,
winding up or the date when any such transaction shall take place, as
the case may be.
(d) Notice. Any notice to be given to either party under this
Warrant Certificate shall be in writing and shall be deemed to have been
given to the Company or the Holder hereof, as the case may be, when
delivered in hand or when sent by first class mail, postage prepaid,
addressed, if to the Company, at its principal office and, if to the
Holder hereof, at its address as set forth in the Company's books and
records or at such other address as the Holder hereof may have provided
to the Company in writing.
(e) No Impairment. The Company will not, by amendment of its
Articles of Incorporation, Bylaws or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant
Certificate.
(f) 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 Commonwealth of Massachusetts without giving
effect to conflict of laws principles thereof. The Company hereby
agrees that the state and federal court of The Commonwealth of
Massachusetts or, at the option of the Holder, any other court in which
the Holder shall initiate legal or equitable proceedings, to the extent
such court otherwise has jurisdiction, shall have jurisdiction to hear
and determine any claims or disputes between the Holder and the Company
pertaining directly or indirectly to this Agreement and all documents,
instruments and agreements executed pursuant hereto, or to any matter
arising therefrom (unless otherwise expressly provided for therein). To
the extent permitted by law, the Company hereby expressly submits and
consents in advance to such jurisdiction in any action or proceeding
commenced by the Holders in any of such courts, and agrees that service
of such summons and complaint or other process or papers may be made by
registered or certified mail addressed to the Company at the address to
which notices are to be sent pursuant to this Agreement. The Company
waives any claim that Boston, Massachusetts is an inconvenient forum or
an improper forum based on lack of venue. To the extent permitted by
law, should the Company, after being so served, fail to appear or answer
to any summons, complaint, or process or papers so served within 30 days
after the mailing thereof, the Company shall be deemed in default and an
order and/or judgment may be entered by the Investors against the
Company as demanded or prayed for in such summons, complaint, process or
papers. The exclusive choice of forum set forth in this Section 9(f)
shall not be deemed to preclude the enforcement of any judgment obtained
<PAGE>
in such forum or the taking of any action to enforce the same in any
other appropriate jurisdiction.
This Warrant Certificate has been executed as of ______________, 1998.
THE VERMONT TEDDY BEAR CO., INC.
By:
Name:
Title:
EXHIBIT 1
NOTICE OF EXERCISE
TO: The Vermont Teddy Bear Co., Inc.
1. The undersigned hereby [Circle One] partially/fully exercises the
attached Warrant by including herein payment in the amount of $_______
representing the exercise price for [Fill in number of shares]
__________ shares of Common Stock, par value $.05 per share, of The
Vermont Teddy Bear Co., Inc. The undersigned has chosen the following
form(s) of payment:
[ ] 1. Cash
[ ] 2. Certified or Bank Check payable to The Vermont Teddy Bear Co.,
Inc.
[ ] 3. Wire Transfer
[ ] 4. Net Cashless Exercise (as defined in the Warrant)
2. Please issue a certificate or certificates representing said shares
of Common Stock in the name of the undersigned or in such other name as
is specified below:
(Name)
(Address)
3. The undersigned represents that the aforesaid shares of Common Stock
are being acquired for the account of the undersigned for investment and
not with a view to, or for resale in connection with, the distribution
thereof and that the undersigned has no present intention of distributing
or reselling such shares.
<PAGE>
Dated: Signature
EXHIBIT 2
FORM OF ASSIGNMENT
For value received, the undersigned hereby sells, assigns and transfers
unto the rights represented by the within Warrant
Certificate to purchase [___________] shares of Common Stock, par value
$.05 per share, of The Vermont Teddy Bear Co., Inc. to which the within
Warrant Certificate relates and appoints _______________________ to
transfer such rights on the books of The Vermont Teddy Bear Co., Inc.
with full power of substitution in the premises.
Dated:
Signature
EXHIBIT D
FORM OF OPINION OF COUNSEL
(1) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of New York, and is
qualified to do business as a foreign corporation in each jurisdiction
in which the failure to be so qualified would have a material adverse
effect on its assets, liabilities, condition (financial or other),
business, results of operations or prospects (a "Material Adverse
Effect").
(2) The Company has all requisite corporate power to execute, deliver
and perform its obligations under the terms of (i) the Securities
Purchase Agreement, dated as of the date hereof, by and among the
Company and the Investors identified therein (the "Securities Purchase
Agreement") and (ii) each of the other Transaction Documents (as defined
in the Securities Purchase Agreement).
(3) The Company has all requisite corporate power to authorize, sell,
issue and deliver the 60 shares of Series C Convertible Redeemable
Preferred Stock, par value $10,000 per share, of the Company (the
"Shares"), the Warrants to purchase an aggregate of 495,868 shares of
Common Stock, par value $.05 per share ("Common Stock"), of the Company
(the "Warrant Shares") and the 991,736 shares of Common Stock issuable
upon conversion of the Shares and exercise of the Warrants (such shares
of Common Stock, collectively the "Conversion Shares").
<PAGE>
(4) All corporate action on the part of the Company, its directors,
and its stockholders necessary for the authorization, execution,
delivery, and performance by the Company of the Securities Purchase
Agreement and the other Transaction Documents, for the consummation of
the transactions contemplated therein, and for the authorization, sale,
issuance, and delivery of the Shares, the Conversion Shares, the
Warrants and the Warrant Shares has been taken. Each of the Securities
Purchase Agreement and the other Transaction Documents to which the
Company is a party is a valid and legally binding obligation of the
Company, enforceable against the Company in accordance with its
respective terms. The Company has reserved 1,404,958 shares of Common
Stock (subject to adjustments for stock splits, stock dividends and the
like) for issuance of the Conversion Shares and such shares (i) have
been duly and validly reserved and, upon issuance in accordance with the
terms of the Securities Purchase Agreement and the Warrants, will be
validly issued, fully paid, and nonassessable and (ii) will not be
subject to any preemptive rights. The Company has reserved (i) 495,868
shares of Common Stock for issuance upon exercise of the Warrants,
(ii) 50 shares of Series C Preferred Stock for issuance as dividends on
the shares of Series C Preferred Stock, and (iii) 413,223 shares of
Common Stock for issuance upon conversion of such shares of Series C
Preferred Stock which may be issued as dividends (collectively, the
"Dividend Shares"), all of such shares to be fully paid and
nonassessable when issued in accordance with the terms of the Securities
Purchase Agreement and the Warrants.
(5) The execution, delivery and performance by the Company of the
Securities Purchase Agreement and the other Transaction Documents, and
compliance therewith, and the issuance and sale of the Shares, the
Conversion Shares, the Warrants, the Warrant Shares and the Dividend
Shares do not (A) violate, conflict with or result in a default under
any contract or obligation to which the Company is a party or by which
it or its assets are bound, or any provision of the Certificate of
Incorporation or By-laws of the Company, as amended, or cause the
creation of any encumbrance upon any of the assets of the Company; (B)
violate or result in a violation of, or constitute a default (whether
after the giving of notice, lapse of time or both) under, any provision
of any law, regulation or rule, or any order of, or any restriction
imposed by, any court or other governmental agency applicable to the
Company; (C) require from the Company any notice to, declaration or
filing with, or consent or approval of any governmental authority or
other third party (other than filings to comply with state and federal
securities laws); or (D) accelerate any obligation under, or give rise
to a right of termination of or under, any agreement, permit, license or
authorization to which the Company is a party or by which the Company is
bound.
(6) Immediately prior to the Closing (as defined in the Securities
Purchase Agreement), the Company's authorized capital stock consisted of
(i) 20,000,000 shares of Common Stock of which _____ shares were issued
and outstanding on October __, 1998, and (ii) 1,000,000 shares of
preferred stock, par value $.05 per share, of which 90 shares have been
designated as shares of Series A Preferred Stock and 375,000 shares have
been designated as shares of Series B Convertible Preferred Stock by
virtue of the Certificate of Incorporation, as amended. Except as
<PAGE>
reflected on Schedule 2.3 to the Securities Purchase Agreement and
except for the Excluded Shares (as defined in the Securities Purchase
Agreement), immediately prior to the Closing, the Company has not
reserved for issuance, issued or agreed to issue and is not obligated to
issue any shares of Common Stock or any other equity security, warrants,
options or other rights to purchase or acquire any shares of its capital
stock, nor any securities convertible into such shares or any warrants,
options or other rights to acquire any such convertible securities.
(7) As of the Closing and after giving effect to the transactions
contemplated by the Securities Purchase Agreement, the authorized
capital stock of the Company will consist only of (i) 20,000,000 shares
of Common Stock of which _____________ shares will be issued and
outstanding and (ii) 1,000,000 shares of Preferred Stock (a) of which 90
shares have been designated as shares of Series A Preferred Stock and of
which 90 shares will be issued and outstanding, (a) of which 375,000
shares have been designated as shares of Series B Preferred Stock and of
which 204,912 will be issued and outstanding and (iv) of which 110
shares have been designated as shares of Series C Preferred Stock and of
which 60 shares will be issued and outstanding.
(8) No consent, approval, or authorization of, or designation,
declaration, or filing with, any governmental authority on the part of
the Company is required in connection with (i) the valid execution,
delivery and performance of the Securities Purchase Agreement or the
other Transaction Documents, (ii) the offer, sale, and issuance of the
Shares, Warrants, Warrant Shares, Dividend Shares and the Conversion
Shares, or (iii) the consummation of any other transaction contemplated
to occur on the Closing Date by the Securities Purchase Agreement, other
than the filing of the Certificate of Incorporation with the Secretary
of State of the State of New York (which has been made.)
(9) Based upon the representations and warranties of each Investor in
the Securities Purchase Agreement, the offering, issuance, sale, and
delivery of the Shares, Conversion Shares, Warrants, Warrant Shares and
Dividend Shares in the manner contemplated in the Securities Purchase
Agreement are exempt from the registration requirements of the
Securities Act of 1933, as amended.
(10) To our knowledge, there is no litigation or governmental
proceeding or investigation pending or threatened against the Company
that may have any Material Adverse Effect or that could prevent or
hinder the consummation of the transactions contemplated by the
Securities Purchase Agreement and the other Transaction Documents
EXHIBIT E
FORM OF
MANAGEMENT AGREEMENT
Management Agreement (the "Agreement") dated as of October __, 1998, by
and between The Vermont Teddy Bear Co., Inc., a New York corporation
(the "Company"), and The Shepherd Group LLC, a Massachusetts limited
<PAGE>
liability company (the "Shepherd Group"). For purposes of this
Agreement, all capitalized terms that are used herein without definition
shall have the meanings ascribed thereto in that certain Securities
Purchase Agreement, dated as of September __, 1998, (the "Securities
Purchase Agreement"), by and among the Company and the Investors
identified therein.
W I T N E S S E T H:
WHEREAS, the Company 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 the
Company, 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 hereto 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 Investors
cease to own at least 15% of its original Series C Preferred Stock
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 the Shepherd Group
shall in no event be obligated to devote more than fifteen (15) hours
per month to providing to the Company the services described herein.
Section 3. Management Fee
Commencing as of the date hereto, the Company shall pay the Shepherd
Group for its services hereunder an annual management fee (the
"Management Fee") of $25,000, plus any travel and other reasonable
expenses approved by the Company in advance. The Management Fee shall
accrue daily and be paid monthly in arrears, on the last day of the
month beginning on the date hereof.
Section 4. Financing Fees
(a) The Company shall pay the Shepherd Group a 1-1/2% financing fee
(the "Financing Fee") with respect to any capital raised by the Company
or its subsidiaries with the assistance of the Shepherd Group (other
than through the Shepherd Group's direct participation on the Board of
Directors of the Company) or from sources identified, introduced or
otherwise brought to the Company's attention by the Shepherd Group at
any time after the date hereof other than capital raised directly from
the Shepherd Group or affiliates directly under the Shepherd Group's
<PAGE>
control. The Shepherd Group shall immediately provide written
notification to the Company when the Shepherd Group believes that it is
assisting the Company in the Company's capital raising efforts in a
capacity other than as members of the Board of Directors of the Company.
Upon the Company's receipt of such written notification, the Company
promptly shall provide the Shepherd Group with written acknowledgment
regarding the capacity in which the Shepherd Group has or is providing
such assistance to the Company. Notwithstanding anything to the
contrary contained herein, should it be determined (based upon a written
opinion of counsel reasonable to the Shepherd Group) that the payment of
a Financing Fee with respect to a particular issuance would prevent the
Company from qualifying for applicable federal or state private
placement exceptions, the payment of such Financing Fee shall be waived
by the Shepherd Group.
(b) The Company acknowledges that it is in the process of obtaining
certain credit facilities to finance working capital expenditures and
refinance certain of its debt and agrees to pay the Shepherd Group the
Financing Fee with respect to any such credit facility that it enters
into with the Imperial Bank or any other source with the assistance of
the Shepherd Group or otherwise identified, introduced or brought to the
Company's attention by the Shepherd Group.
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 Commonwealth of
Massachusetts without giving effect to conflict of laws principles
thereof. The Company hereby agrees that the state and federal court of
The Commonwealth of Massachusetts or, at the option of the Shepherd
Group, any other court in which the Shepherd Group shall initiate legal
or equitable proceedings, to the extent such court otherwise has
jurisdiction, shall have jurisdiction to hear and determine any claims
or disputes between the Shepherd Group and the Company pertaining
directly or indirectly to this Agreement and all documents, instruments
and agreements executed pursuant hereto, or to any matter arising
therefrom (unless otherwise expressly provided for therein). To the
extent permitted by law, the Company hereby expressly submits and
consents in advance to such jurisdiction in any action or proceeding
commenced by the Shepherd Group in any of such courts, and agrees that
service of such summons and complaint or other process or papers may be
made by registered or certified mail addressed to the Company at the
address to which notices are to be sent pursuant to the Securities
Purchase Agreement. The Company waives any claim that Boston,
Massachusetts is an inconvenient forum or an improper forum based on
<PAGE>
lack of venue. To the extent permitted by law, should the Company,
after being so served, fail to appear or answer to any summons,
complaint, or process or papers so served within 30 days after the
mailing thereof, the Company shall be deemed in default and an order
and/or judgement may be entered by the Investors against the Company as
demanded or prayed for in such summons, complaint, process or papers.
The exclusive choice of forum set forth in this Section 6 shall not be
deemed to preclude the enforcement of any judgment obtained in such
forum or the taking of any action to enforce the same in any other
appropriate jurisdiction.
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:
Title:
THE SHEPHERD GROUP LLC
By:
Name:
Title:
Appendix A
Management Services description:
To provide:
1. Analytical and Qualitative analysis regarding brand development,
financing alternatives and strategic efforts;
2. Ad hoc advisory assistance via the Executive Committee;
3. Liaisons with credit institutions and the financial market;
4. Access to alternative sources of established equity capital;
5. Transaction experience in secondary stock offerings, mergers and
acquisitions;
6. Other networking, analytical and qualitative services pertaining to
the development and growth of the company; and
<PAGE>
7. Recruitment of candidates for the Board.
EXHIBIT F
LIST OF SENIOR EXECUTIVE OFFICERS
Elisabeth R. Robert
Spencer C. Putnam
Robert D. Delsandro, Jr.
EXHIBIT G
FORM OF JOINDER AGREEMENT
In order to induce The Vermont Teddy Bear Co., Inc. (the "Company") to
enter into that certain Securities Purchase Agreement (the "Agreement"),
dated as of September __, 1998, by and among the Company and the parties
named therein to issue the Securities, the undersigned hereby joins in
the Agreement and agrees that the undersigned is a party to the
Agreement as of the date hereof and for all purposes of the Agreement,
the undersigned shall be included within the term "Investor" with all
the rights and obligations of an Investor under the Agreement.
At the Closing, the undersigned will purchase and acquire from the
Company, the number of shares of Series C Preferred Stock and Investor
Warrants set forth opposite the name of the undersigned on Schedule 1.2
for the purchase price of $10,000 for each Unit for the aggregate
purchase price set forth opposite the name of the undersigned on
Schedule 1.2.
In addition, the undersigned hereby makes, severally with respect to
itself/himself/herself and not jointly, the representations and
warranties contained in Article 3 of the Agreement.
The address and facsimile number to which notice may be sent to the
undersigned is as follows:
______________________________________________________________________
________________________________________________________________________
_____
Facsimile No.________________.
All capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Agreement.
__________________________________
<PAGE>
[New Investor]
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE JUNE 30, 1998 BALANCE SHEET
AND THE TWELVE MONTH STATEMENT OF OPERATIONS ENDED
JUNE 30, 1998 FOR THE VERMONT TEDDY BEAR CO., INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,527,052
<SECURITIES> 0
<RECEIVABLES> 51,538
<ALLOWANCES> 0
<INVENTORY> 2,396,245
<CURRENT-ASSETS> 4,652,267
<PP&E> 12,145,684
<DEPRECIATION> 3,301,209
<TOTAL-ASSETS> 14,487,352
<CURRENT-LIABILITIES> 3,264,707
<BONDS> 6,543,370
0
1,054,245
<COMMON> 259,787
<OTHER-SE> 3,588,911
<TOTAL-LIABILITY-AND-EQUITY> 14,487,352
<SALES> 17,207,543
<TOTAL-REVENUES> 17,207,543
<CGS> 7,397,450
<TOTAL-COSTS> 7,397,450
<OTHER-EXPENSES> 10,869,316
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 624,446
<INCOME-PRETAX> (1,683,669)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,755,669)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<PAGE>
<NET-INCOME> (1,755,669)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
