U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[ X ] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 1998 .
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
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
(Address of principal executive offices)
(802) 985-3001
(Issuer's telephone number)
Not Applicable
(Former name, former address, and former fiscal year, if changed since
last report)
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 .
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: 5,214,329 shares of
Common Stock, $.05 par value per share, as of December 31, 1998.
Transitional Small Business Disclosure Format (check one):
Yes ; No X .
The Vermont Teddy Bear Co., Inc.
Index to Form 10-QSB
December 31, 1998
Page No.
Part I - Financial Information
Financial Statements
Balance Sheet as of December 31, 1998
3
Statements of Operations for the Three and Six
Months ended December 31, 1998
4
Statements of Cash Flows for the Three and Six
Months ended December 31, 1998
5
Notes to Financial Statements
6
Management's Discussion and Analysis
10
Part II - Other Information
Item 4. Submission of Matters to a Vote of Stockholders
14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K
15
Signatures 18
<PAGE>
<TABLE>
THE VERMONT TEDDY BEAR CO., INC.
Balance Sheet
December 31, 1998
(Unaudited)
ASSETS
<S> <C>
Cash, cash equivalents(includes restricted $1,836,851
cash of $362,000)
Accounts receivable, trade 152,158
Inventories 2,378,908
Prepaid expenses and other current assets 578,587
Deferred income taxes 233,203
Total Current Assets 5,179,707
Property and equipment, net 8,437,378
Deposits and other assets 978,572
Note receivable 72,500
Total Assets $14,668,157
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of:
Long-term debt 221,490
Capital lease obligations 236,960
Accounts payable 1,873,377
Accrued expenses 688,251
Total Current Liabilities 3,020,078
Long-term debt, net of current portion 252,471
Capital lease obligations, net of current portion 5,626,829
Deferred income taxes 233,203
Total Liabilities $9,132,581
Series C Preferred Stock 342,633
Stockholders' Equity:
Preferred stock, $.05 par value:
Authorized 1,000,000 shares Series A; issued and
outstanding, 90 shares. 1,080,000
Authorized 375,000 shares Series B; issued and
outstanding, 204,912 shares. 10,245
Common stock, $.05 par value:
Authorized 20,000,000 shares: issued 5,238,449 shares,
outstanding 5,214,329 shares 261,923
Additional paid-in capital 10,900,626
Treasury stock at cost: 24,120 shares (117,500)
Accumulated deficit (6,942,351)
Total Stockholders' Equity 5,192,943
Total Liabilities and Stockholders' Equity $14,668,157
The accompanying notes are an integral part of these financial
statements.
</TABLE>
<PAGE>
<TABLE>
THE VERMONT TEDDY BEAR CO., INC.
Statements of Operations
For the Three and Six Months Ended December 31,
1998 and 1997
(Unaudited)
Three Months Ended
Six Months Ended
Dec 31,1998 Dec 31,1997
Dec 31,1998 Dec 31,1997
<S> <C> <C>
<C> <C>
Net Revenues $4,805,029 $4,100,161
$7,851,749 $7,041,865
Cost of Goods Sold 1,868,581 1,758,523
3,128,055 2,972,564
Gross Profit 2,936,448 2,341,638
4,723,694 4,069,301
Selling, General and Administrative Expenses:
Selling Expenses 1,937,085 2,315,841
3,035,031 3,673,113
General and
Administrative Expenses 743,856 925,496
1,397,349 1,526,859
2,680,941 3,241,337
4,432,380 5,199,972
Operating Income(Loss) 255,507 (899,699)
291,314 (1,130,671)
Interest Income 9,691 7,930
20,216 15,255
Interest Expense (154,332) (163,349)
(312,185) (323,153)
Other Income 361 13,690
966 15,931
Income(Loss) Before
Income Taxes 111,227 (1,041,428)
311 (1,422,638)
Income Tax Provision 0 0
0 0
Net Income(Loss) 111,227 (1,041,428)
311 (1,422,638)
Preferred Stock Dividends (24,000) (18,000)
(42,000) (36,000)
Accretion of Warrants Issued in connection with
Series C preferred stock (9,082) 0
(9,082) 0
Net Income (Loss)-Common
Stockholders 78,145 (1,059,428)
(50,771) (1,458,638)
Basic Net Income(Loss) Per
Common Share $0.02 ($0.20)
($0.01) ($0.28)
Diluted Net Income(Loss) Per
Common Share $0.01 ($0.20)
($0.01) ($0.28)
Weighted Average Number of
Shares Outstanding 5,195,908 5,173,327
5,189,820 5,168,230
Weighted Average Number of Diluted
Common Shares Outstanding 6,685,968 5,173,327
5,189,820 5,168,230
The accompanying notes are an integral part of these
financial statements.
</TABLE>
<PAGE>
<TABLE>
THE VERMONT TEDDY BEAR CO., INC.
Statements of Cash Flows
For the Six Months Ended December 31, 1998 and 1997
(Unaudited)
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net Income (loss) $311 $(1,422,638)
Adjustments to reconcile net income (loss) to net cash
provided by(used for) operating activities:
Depreciation and amortization 482,501 485,010
Loss on disposal of fixed assets 29,315 137,633
Changes in assets and liabilities:
Accounts receivable,trade (100,620) 3,945
Inventories 17,337 (110,729)
Prepaid and other current assets (134,358) (98,792)
Deposits and other assets (95,640) (582,485)
record due from officer here
Note Receivable 15,000 0
Accounts payable 27,335 (239,903)
Accrued expenses and other liabilities (227,940) 217,627
Net cash provided by(used for) operating activities
13,241 (1,610,332)
Cash flows from investing activities:
Acquisition of property and equipment (86,292) (56,155)
Proceeds from sale of fixed assets 1,751 38,888
Net cash used for investing activities (84,541) (17,267)
Cash flows from financing activities:
Borrowings of short-term debt 0 313,136
Borrowings of long-term debt 0 200,000
Payments of short-term debt (45,603) (684,961)
Payments of long-term debt (95,489) (3,369,152)
Proceeds from sale-leaseback
of building and property 0 5,863,874
Principal payments on capital lease obligations
(110,130) (98,175)
Issuance of common stock,
exercise of stock option 42,997 13,008
Issuance of preferred stock 600,000 0
Acquisition of Treasury Stock (10,676) 0
Net cash provided by financing activities 381,099 2,237,730
Net increase in cash and cash equivalents 309,799 610,131
Cash and cash equivalents, beginning of period 1,527,052 441,573
Cash and cash equivalents, end of period $ 1,836,851 $1,051,704
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest 311,135 326,844
Supplemental Disclosures of Non-cash Investing
and Financing Activities:
Capital lease from
sale-leaseback of building and property 0 5,863,874
The accompanying notes are an integral part of these
financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
Basis of Presentation
The interim financial statements of The Vermont Teddy Bear Co.,
Inc. (the "Company") included herein have been prepared, without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, reflect
all adjustments necessary to present fairly the financial condition and
results of operations for such interim periods. Certain information and
footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
It is suggested that these financial statements be read in conjunction
with the audited financial statements and notes thereto for the fiscal
year ended June 30, 1998, included in the Company's filing with the SEC
on Form 10-KSB. The Company's sales are seasonal in nature and,
therefore, the results for these interim periods are not necessarily
indicative of the results for the respective years.
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.
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:
Three Months Ended Six Months Ended
12/31/98 12/31/97 12/31/98
12/31/97
Weighted average 5,195,908 5,173,327 5,189,820
5,168,230
number of shares used
in basic EPS calculation
Add: Incremental weighted
average common shares
issuable upon exercise of
stock options and warrants
outstanding 1,490,060 --
_______-- _______--
Weighted average
number of shares used in
diluted EPS calculation 6,685,968 5,173,327 5,189,820
5,168,230
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. The Company had
257,241 and 1,526,461 potential common shares outstanding as of December
31, 1998 and 1997, respectively, that were excluded from the net income
(loss) per common share computation as their effect would have been
anti-dilutive.
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 or the
six months ended December 31, 1998.
The Financial Accounting Standards Board issued SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information, in
June 1997. The statement establishes standards for the way that public
business enterprises report information and operating segments in annual
financial statements and requires reporting of selected information in
interim financial reports. The required disclosures for SFAS No. 131,
which are effective for fiscal years beginning after December 15, 1997,
will be included in the Company's fiscal 1999 annual report on Form 10-
K.
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.
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.
Inventories
Inventories are stated at the lower of cost or market using the
first-in, first-out method. Inventories consisted of the following at
December 31, 1998:
Raw materials $ 517,217
Work in process 165,259
Finished goods 1,696,432
$ 2,378,908
Debt and Borrowings
The Company has been operating without a working capital line of
credit since July 18, 1997.
On November 3, 1998, the Company closed on a private placement of
$600,000 of its Series C Convertible Redeemable Preferred Stock ("Series
C Preferred Stock") to an investor group lead by The Shepherd Group LLC.
Accompanying the Series C Preferred Stock are warrants to purchase
495,868 shares of the Company's Common Stock at an exercise price of
$1.05 per share, which will expire seven years from the date of issuance.
In connection with the issuance of the Series C Preferred Stock, a
warrant to purchase 42,500 shares of the Company's Common Stock was
issued at an exercise price of $1.05 to the Company's lessor in the sale-
leaseback transaction. Because of the mandatory redemption provision,
the Series C Preferred Stock net of the value of the warrants has been
classified as long term debt on the accompanying balance sheet. The
Company has valued the warrants using the Black Scholes valuation model.
The Company will accrete, over a five year period, an aggregate of
approximately $270,000.
Each of the sixty shares of Series C Preferred Stock has a
liquidation value of $10,000 per share, and is convertible into 9,523
shares of the Company's Common Stock. The Series C Preferred Stock
requires redemption upon the tenth anniversary of its issuance, with both
the Company and the Series C Preferred stockholders having call and put
rights, respectively, beginning on the fifth anniversary of issuance.
The Series C Preferred stock carries voting rights on an as-converted
basis, and, as a class, has the right to elect two members to the
Company's Board of Directors. Both the Series C Preferred Stock and the
accompanying warrants carry certain anti-dilution provisions. The
Series C Preferred Stock has a cumulative preferred dividend of six
percent per annum, payable quarterly. The dividends are required to be
paid in additional shares of Series C Preferred Stock for the first two
and one-half years after issuance, and thereafter may be paid in cash or
additional shares of Series C Preferred Stock, at the Company's option.
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.
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 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
$591,000 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. The transaction was
accounted for under the financing method in accordance with Statement of
Financial Accounting Standard No. 98, "Accounting for Leases."
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.
Management's Discussion and Analysis
The following discussion and analysis provides information that
the Company's management believes is relevant to an assessment and
understanding of the Company's results of operations and financial
condition. The discussion should be read in conjunction with the
financial statements and footnotes which appear elsewhere in this
report, as well as the 10-KSB filing for the fiscal year ending June 30,
1998. 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 which are predictions of
or indicate future events and trends and which 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 the three-month periods ended December 31, 1998 and 1997.
Net revenues for the Company for the three-month period ended
December 31, 1998 totaled $4,805,000, a 17.2 percent increase from net
revenues of $4,100,000 for the three-month period ended December 31,
1997. By business segment, Bear-Gram revenues, which include internet
revenues, rose $516,000, attributable primarily to increased sales from
the Company's www.vermontteddybear.com website. Direct mail revenues
rose $155,000, due primarily to improved demand-per-catalog for the 1998
Holiday catalog. Wholesale and corporate sales revenues rose $308,000
as the Company added several new customers in the wholesale and
corporate affinity markets, while licensing revenues increased $32,000.
Retail revenues decreased $306,000. Revenue for the quarter ended
December 31, 1997 included results from the Company's New York City and
Freeport, Maine retail stores, which were not in operation during the
quarter ended December 31, 1998, as well as results from the Company's
North Conway, New Hampshire retail store, which was closed during the
December 31, 1998 quarter.
Gross margin increased to $2,936,000 for the quarter ended
December 31, 1998, from $2,342,000 for the quarter ended December 31,
1997. As a percentage of net revenues, gross margin increased to 61.1
percent from 57.1 percent for the three-month periods ended December 31,
1998, and 1997, respectively. Factors contributing to improved gross
margin include a reduction in goods purchased for resale and lower
product distribution costs associated with the curtailment of off-site
retail store operations, the introduction of new products with higher
unit margins, and lower costs for freight paid on deliveries.
Selling expenses decreased to $1,937,000 for the three-month
period December 31, 1998, from $2,316,000 for the three-month period
ended December 31, 1997. This $379,000 reduction was primarily due to
the curtailment of operational expenses related to the Company's New
York City, Freeport, Maine, and North Conway, New Hampshire retail
locations. As a percentage of net revenues, selling expenses were 40.3
percent and 56.5 percent for the three months ended December 31, 1998,
and 1997, respectively. The percentage improvement is attributed to
lower Bear-Gram advertising costs as a percentage of net revenue in
addition to the curtailment of expenses related to the Company's off-
site retail stores.
General and administrative expenses were $744,000 for the quarter
ended December 31, 1998, compared to $925,000 for the quarter ended
December 31, 1997. The Company recognized the $181,000 decrease
primarily because on December 31, 1997 the Company had accrued and
expensed the entire amount due R. Patrick Burns, former Chief Executive
Officer of the Company, under his consulting agreement. As a percentage
of net revenues, general and administrative expenses were 15.5 percent
and 22.6 percent for the three months ended December 31, 1998, and 1997,
respectively.
Preferred Stock dividends increased by $6,000 during the quarter
ended December 31, 1998. This increase is attributed to the six percent
cumulative dividend on the Series C Preferred Stock. Warrant accretion
increased by $9,000 for the quarter ended December 31, 1998. This
increase is the result of accretion of the net valuation attributed to
the warrant issued in connection with the Series C Preferred Stock of
approximately $270,000, which is accreting ratably over a five year
period.
As a result of the foregoing factors, net income to common
stockholders totaled $78,000, or two cents per common share outstanding,
for the quarter ended December 31, 1998, compared to a net loss to
common stockholders of $1,059,000, or twenty cents per common share
outstanding for the quarter ended December 31, 1997.
Comparison of the six-month periods ended December 31, 1998 and 1997.
Net revenues for the Company for the six-month period ended
December 31, 1998 totaled $7,852,000, an 11.5 percent increase from net
revenues of $7,042,000 for the six-month period ended December 31, 1997.
By business segment, Bear-Gram revenues, which include internet
revenues, increased $679,000 and wholesale and corporate sales revenues
increased $360,000. Direct mail revenues increased $253,000 due to
improved demand-per-catalog for both the 1998 Holiday catalog and the
residual performance of the 1998 Mother's Day catalog. Licensing
revenues rose $35,000. Retail revenues decreased $517,000, with New
York City closed, and Freeport, Maine and North Conway, New Hampshire
closing during this six month period.
Gross margin increased to $4,724,000 for the six months ended
December 31, 1998 from $4,069,000 for the six months ended December 31,
1997. As a percentage of net revenues, gross margin increased to 60.1
percent from 57.8 percent, for the six months ended December 31, 1998
and 1997, respectively. This improvement is primarily attributed to a
reduction in goods purchased for resale and lower product distribution
costs associated with the curtailment of off-site retail store
operations.
Selling expenses decreased by $638,000 to $3,035,000 for the six
month period December 31, 1998 from $3,673,000 for the six month period
ended December 31, 1997. This reduction was primarily due to the
curtailment of operational expenses related to the Company's New York
City, Freeport, Maine, and North Conway, New Hampshire retail locations,
as well as reduced spending on radio and other advertising media. As a
percentage of net revenues, selling expenses were 38.7 percent and 52.2
percent for the six months ended December 31, 1998 and 1997,
respectively.
General and administrative expenses decreased $130,000 to
$1,397,000 for the six months ended December 31, 1998, compared to
$1,527,000 for the six months ended December 31, 1997. Higher legal
fees and costs associated with the Company's Special Meeting of
Shareholders held on September 11, 1998 were more than offset by the
fact that on December 31, 1997, the Company had accrued and expensed the
entire amount due to R. Patrick Burns, former Chief Executive Officer of
the Company, under his consulting agreement. As a percentage of net
revenues, general and administrative expenses were 17.8 percent and 21.7
percent for the six months ended December 31, 1998 and 1997,
respectively.
Preferred Stock dividends increased by $6,000 for the six months
ended December 31, 1998. This increase is attributed to the six percent
cumulative dividend on the Series C Preferred Stock. Warrant accretion
increased by $9,000 for the six months ended December 31, 1998. This
increase is the result of accretion of the net valuation attributed to
the warrant issued in connection with the Series C Preferred Stock of
approximately $270,000, which is accreting ratably over a five year
period.
As a result of the foregoing factors, the net loss to common
stockholders totaled $51,000 or one cent per common share, for the six
months ended December 31, 1998, compared to a net loss to common
stockholders of $1,459,000 or twenty-eight cents per common share, for
the six months ended December 31, 1997.
Liquidity and Capital Resources
The Company has been operating without a working capital line of
credit facility since July 18, 1997.
As of December 31, 1998, the Company's cash position increased to
$1,837,000, from $1,527,000 at June 30, 1998. Restricted cash balances
at these dates were $362,000 and $361,000, respectively. The largest
component of restricted cash at December 31, 1998 and June 30, 1998 was
a $300,000 certificate of deposit required in connection with the
Company's sale-leaseback transaction on July 18, 1997. The cash
increase from the sale of Series C Preferred Stock more than offset a
decrease to accrued expenses and payments on debts and capital leases.
Inventories decreased to $2,379,000 at December 31, 1998, from
$2,396,000 at June 30, 1998. Accounts payable totaled $1,873,000 at
December 31, 1998, compared to $1,846,000 at June 30, 1998.
On November 3, 1998, the Company closed on a private placement of
$600,000 of its Series C Convertible Redeemable Preferred Stock
("Series C Preferred Stock") to an investor group lead by The Shepherd
Group LLC. Accompanying the Series C Preferred Stock are warrants to
purchase 495,868 shares of the Company's Common Stock at an exercise
price of $1.05 per share, which will expire seven years from the date of
issuance. In connection with the issuance of the Series C Preferred
Stock, a warrant to purchase 42,500 shares of the Company's Common Stock
was issued at an exercise price of $1.05 to the Company's lessor in the
sale-leaseback transaction. Because of the mandatory redemption
provision, the Series C Preferred Stock net of the value of the warrants
has been classified as long term debt on the accompanying balance sheet.
The Company has valued the warrants using the Black Scholes valuation
model. The Company will accrete, over a five year period, an aggregate
of approximately $270,000.
Each of the sixty shares of Series C Preferred Stock has a
liquidation value of $10,000 per share, and is convertible into 9,523
shares of the Company's Common Stock. The Series C Preferred Stock
requires redemption upon the tenth anniversary of its issuance, with both
the Company and the Series C Preferred stockholders having call and put
rights, respectively, beginning on the fifth anniversary of issuance.
The Series C Preferred Stock carries voting rights on an as-converted
basis, and, as a class, has the right to elect two members to the
Company's Board of Directors. Both the Series C Preferred Stock and the
accompanying warrants carry certain anti-dilution provisions. The
Series C Preferred Stock has a cumulative preferred dividend of six
percent per annum, payable quarterly. The dividends are required to be
paid in additional shares of Series C Preferred Stock for the first two
and one-half years after issuance, and thereafter may be paid in cash or
additional shares of Series C Preferred Stock, at the Company's option.
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 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.
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.
Contingency
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 the Company has
not made any rent payments on the lease since December, 1997. On
December 24, 1998, the Company received a notice from its landlord
alleging that it was in default under the lease for failure to resume
occupancy and demanding back rent for the period July 8, 1998 to December
31, 1998 in the amount of $144,355, and on January 4, 1999 it received a
demand to resume rent payments beginning January, 1999. The Company
disputes the landlord's position and believes it is not obligated to
resume occupancy or pay rent under the lease. The Company has accrued
management's estimated cost to settle this contingency of $145,000 but no
assurance can be given that this dispute can be settled for this amount.
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 for system upgrades to handle additional capacity,
is expected to be approximately $500,000, based on management's best
estimates and may be changed as additional information becomes available.
If the project is not completed on time, the Company is subject to
certain risks, including the manual processing and fulfillment of orders,
which could detract from efficiency. 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 4. Submission of Matters to a Vote of Stockholders
On September 11, 1998, the Company held a Special Meeting of
Shareholders, at which the following matters were voted upon:
(1) Amendment of the Company's Certificate of Incorporation to
eliminate preemptive rights subject to the condition that dissenters'
rights were not exercised by a number of the Company's shareholders
determined by the Board of Directors, in its discretion, to be excessive.
Votes cast for: 2,953,839 Votes cast against: 60,260
Abstentions: 11,906
(2) Approval of the sale of Series C Redeemable Convertible
Preferred Stock and Warrants to The Shepherd Group, LLC.
Votes cast for: 2,943,877 Votes cast against: 53,971
Abstentions: 28,517
Both matters were approved by the Company's Shareholders.
Item 5. Other Information
As of November 10, 1998, the Company and Ms. Robert signed an
agreement providing for her continued employment as President and Chief
Executive Officer of the Company through October 22, 2001. Under this
new agreement, Ms. Robert is entitled to receive: i) A base salary of
$120,000, increasing to $135,000 on October 23, 1999, and to $150,000 on
October 23, 2000; ii) an annual cash bonus equal to three percent of the
Company's pre-tax profit, so long as the Company's pre-tax profit is at
least $100,000; iii) options to purchase 225,000 shares of Common stock
at an exercise price of $1.00 per share, being above the fair market
value on the date of grant, with 75,000 shares vesting when the Company's
closing stock price averages $2.00 for a three-month period, 75,000
shares vesting when the Company's closing stock price averages $3.00 for
a three-month period, and 75,000 shares vesting when the Company's
closing stock price averages $4.00 for a three-month period, except that
the options will fully vest seven years from date of grant if Ms. Robert
remains employed by the Company; iv) any benefits generally available to
the officers of the Company from time to time, including, without
limitation, a $30,000 life insurance policy, and a company car of Ms.
Robert's choice. The agreement prohibits Ms. Robert from directly or
indirectly engaging in any business that competes with the Company,
during the course of her employment agreement and for a period of
eighteen months thereafter. Ms. Robert's existing agreement for her
employment as Treasurer and Chief Financial Officer of the Company was
cancelled upon the signing of this new agreement, though Ms. Robert
continues to serve as Treasurer and Chief Financial Officer of the
Company.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
3.5 Restated Certificate of Incorporation of the Company (filed with
the Securities and Exchange Commission as exhibit 3.5 to the Company's
10-QSB for the quarter ended September 30, 1998 and incorporated herein
by reference).
3.6 Amended and Restated By-Laws of the Company (filed with the
Securities and Exchange Commission as exhibit 3.6 to the Company's 10-QSB
for the quarter ended September 30, 1998 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).
4.3 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 with
the Securities and Exchange Commission as exhibit 4.7 to the Company's
1997 Annual Report on Form 10-KSB (File No. 33-69898) and incorporated
herein by reference).
4.8 Stock Purchase Warrant Agreement, dated December 31, 1997, in
connection with the $200,000 Term Loan of Green Mountain Capital (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.)
4.9 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 with the Securities and Exchange Commission as
exhibit 10.47 to the Company's 1998 Annual Report 10-KSB (File No. 33-
69898) and incorporated herein by reference).
4.10 Amendment, dated November 3, 1998, between the Company and The
Shepherd Group LLC, to the Securities Purchase Agreement dated September
25, 1998 (filed with the Securities and Exchange Commission as exhibit
4.10 to the Company's 10-QSB for the quarter ended September 30, 1998 and
incorporated herein by reference).
4.11 Form of Warrant, issued in connection with the private placement of
the Company's Series C Convertible Redeemable Preferred Stock (filed with
the Securities and Exchange Commission as exhibit 4.11 to the Company's
10-QSB for the quarter ended September 30, 1998 and incorporated herein
by reference).
4.12 Warrant to purchase 42,500 shares of the Company's Common Stock,
issued to URSA (VT) QRS 12-30, Inc., dated November 3, 1998, in
connection with the issuance of the Company's Series C Convertible
Redeemable Preferred Stock (filed herein).
10.2 Stock warrants issued to Edmund H. Shea, Jr. IRA, Allan Lyons and
William Maines in connection with the bridge financing prior to the
initial public offering of the Company's Common Stock in November 1993 (a
form of which was filed with the Securities and Exchange Commission as
exhibit 10.2 to the Company's Registration Statement on Form SB-2 (File
No. 33-69898) and incorporated herein by reference).
10.10 Incentive Stock Option Plan adopted by the Company on August 16,
1993, with form of Incentive Stock Option Agreement (filed with the
Securities and Exchange Commission as exhibit 10.10 to the Company's
Registration Statement on Form SB-2 (File No. 33-69898) and incorporated
herein by reference).
10.12 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).
10.24 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).
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).
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 December 31, 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 with the Securities and Exchange
Commission as exhibit 10.46 to the Company's 1998 Annual Report 10-KSB
(File No. 33-69898) and incorporated herein by reference).
10.47 Employment Agreement, dated November 9, 1998, between the Company
and Elisabeth B. Robert (filed with the Securities and Exchange
Commission as exhibit 10.47 to the Company's 10-QSB for the quarter ended
September 30, 1998 and incorporated herein by reference).
Reports on Form 8-K
There were no reports filed on Form 8-K during the three-month
period ended December 31, 1998.
Signatures
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
The Vermont Teddy Bear Co., Inc.
Date: February 9, 1999 /s/ Elisabeth B. Robert
,
Elisabeth B. Robert,
Chief Executive Officer and
Chief Financial Officer
THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND NEITHER THIS WARRANT NOR ANY SUCH SHARES MAY BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM
UNDER SUCH ACT.
WARRANT
To Purchase Common Stock of
THE VERMONT TEDDY BEAR CO., INC.
THIS IS TO CERTIFY that URSA (VT) QRS 12-30, Inc. ("QRS:12-30") or
registered assigns, is entitled upon the due exercise hereof at any time
during the Exercise Period (as hereinafter defined) to purchase 42,500
shares of Common Stock (subject to adjustment as provided herein) of The
Vermont Teddy Bear Co., Inc., a New York corporation, at the Exercise
Price (as hereinafter defined) (such Exercise Price and the number of
shares of Common Stock purchasable hereunder being subject to adjustment
as provided herein), and to exercise the other rights, powers and
privileges hereinafter provided, all on the terms and subject to the
conditions hereinafter set forth.
ARTICLE I
DEFINITIONS
The terms defined in this ARTICLE I, whenever used in this Warrant,
shall have the respective meanings hereinafter specified.
"Affiliate" of any Person means a Person which directly or indirectly
through one or more intermediaries controls, or is controlled by, or is
under common control with, the Company. The term "control," as used
with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of
voting securities, by contract or otherwise.
"Assignment" means the form of Assignment appearing at the end of this
Warrant.
"Cashless Exercise Ratio" means a fraction, the numerator of which is
the difference between the Current Market Price per share of Common
Stock on the date of the exercise of this Warrant and the Exercise Price
and the denominator of which is the Current Market Price per share of
Common Stock on the date of the exercise of this Warrant.
"Closing Date" means November 3, 1998.
"Commission" means the Securities and Exchange Commission or any other
Federal agency from time to time administering the Securities Act.
"Common Stock" means shares of the Company's Common Stock, $0.05 par
value, any stock into which such stock shall have been changed or any
stock resulting from any reclassification of such stock and any class of
capital stock of the Company now or hereafter authorized having the
right to share in distributions either of earnings or assets of the
Company without limit as to amount or percentage.
"Company" means The Vermont Teddy Bear Co., Inc., a New York
corporation, and any successor corporation.
"Convertible Securities" means evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable
for, with or without payment of additional consideration, additional
shares of Common Stock, either immediately or upon the arrival of a
specified date or the happening of a specified event.
"Current Market Price" as of any date herein specified as to any
security means the average of the daily closing prices for the thirty
(30) consecutive trading days commencing forty-five (45) trading days
before the day in question. The closing price for each day shall be (i)
the closing price of any such security in the over-the-counter market as
shown by the National Association of Securities Dealers, Inc. Automated
Quotation System, or any similar system of automated dissemination of
quotations of securities prices then in common use, if so quoted, as
reported by any member firm of the New York Stock Exchange selected by
the Company, or (ii) if not quoted as described in clause (i), the mean
between the high bid and low asked quotations for any such security as
reported by the National Quotation Bureau Incorporated or any similar
successor organization, as reported by any member firm of the New York
Stock Exchange selected by the Company, or (iii) if any such security is
listed or admitted for trading on any national securities exchange, the
last sale price of any such security, regular way, or the mean of the
closing bid and asked prices thereof if no such sale occurred, in each
case as officially reported on the principal securities exchange on
which any such security is listed. If any such security is quoted on a
national securities or central market system in lieu of a market or
quotation system described above, the closing price shall be determined
in the manner set forth in clause (ii) of the preceding sentence if bid
and asked quotations are reported but actual transactions are not, and
in the manner set forth in clause (iii) of the preceding sentence if
actual transactions are reported.
"Default Rate" shall mean the rate of interest specified in Paragraph
7(a)(iv) of the Lease.
"Event of Default" means (a) the breach of any warranty, or the
inaccuracy of any representation, made by the Company herein, (b) the
failure by the Company to comply with any covenant contained herein or
(c) an Event of Default (as such term is defined in the Lease).
"Exercise Period" means (subject to the provisions of Section 8.12
below) the period commencing on the Closing Date and ending on
November 3, 2005.
"Exercise Price" means $1.05, as such price may be adjusted pursuant to
ARTICLE IV.
"Fair Value" means the fair value of the appropriate security, property,
assets, business or entity as determined by an opinion of an independent
investment banking firm or firms in accordance with the following
procedure: In the case of any event which gives rise to a requirement
to determine "Fair Value" pursuant to the provisions hereof, whether
in connection with an adjustment to the Exercise Price or otherwise, the
Company shall be responsible for initiating the process by which Fair
Value shall be determined as promptly as practicable following such
event, and if the procedures contemplated in connection with obtaining
such opinion have not been complied with fully, then any such
determination of Fair Value for any purpose of this Warrant (and any
such resulting adjustment to the Exercise Price) shall be deemed to be
preliminary and subject to adjustment pending full compliance with such
procedures. The Company and the holder of this Warrant or Issued
Warrant Shares (who, if more than one, shall agree among themselves by a
two-thirds majority) shall each retain a separate independent investment
banking firm (which firm, in either case, may be the independent
investment banking firm regularly retained by the Company or any of such
holders); provided, that the holder may, at its option, elect to rely on
the firm retained by the Company in lieu of retaining its own firm.
Such firms shall determine the fair value of the security, property,
assets, business or entity, as the case may be, in question and deliver
their opinion in writing to the Company and to such holder. If such
firms cannot jointly make such determination (or in the event that the
holder has elected to rely upon the firm retained by the Company and
disagrees with the determination made by such firm), then, unless
otherwise directed by agreement of the Company and a two-thirds majority
of such holders, such firms (or firm), in their (or its) sole
discretion, shall choose another independent investment banking firm of
the Company or such holders, which firm shall make such determination
and render such an opinion. In either case the determination so made
shall be conclusive and binding on the Company and such holders. The
fees and expenses of any such determination made by the independent
investment banking firm selected by such independent banking firms (or
firm) shall be borne by the Company.
"Initial Holder" means QRS:12-30.
"Issuable Warrant Shares" means the number of shares of Common Stock
issuable from time to time upon exercise of this Warrant.
"Issued Warrant Shares" means any shares of Common Stock issued pursuant
to this Warrant.
"Lease" means the Lease Agreement, dated as of July 18, 1997, between
the Initial Holder and the Company, as the same may be amended from time
to time in accordance with the terms thereof.
"Notice of Exercise" means the form of Notice of Exercise appearing at
the end of this Warrant.
"Opinion of Counsel" means the opinion of counsel experienced in
Securities Act or bank regulatory matters, as the case may be, chosen by
the holder of this Warrant or the holder of Issued Warrant Shares, which
counsel may be counsel to such holder.
"Other Securities" means any stock and other securities of the Company
(other than Common Stock, Convertible Securities or Stock Purchase
Rights) or any other Person which shall become subject to issue or sale
upon the conversion or exchange of any stock or other securities of the
Company.
"Person" means any unincorporated organization, association,
corporation, individual, sole proprietorship, partnership, joint
venture, trust institution, entity, party or government (including any
instrumentality, division, agency, body or department thereof).
"Piggy-Back Shares" has the meaning set forth in Section 5.3.
"Preferred Stock" means shares of the Company's Preferred Stock.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor Federal statute and the rules and regulations of the
Commission promulgated thereunder, all as the same shall be in effect
from time to time.
"Series A Preferred Stock" means shares of the Company's Series A
Preferred Stock, $.05 par value.
"Series B Preferred Stock" means shares of the Company's Series B
Preferred Stock, $.05 par value.
"Series C Preferred Stock" means shares of the Company's Series C
Convertible Redeemable Preferred Stock, $.05 par value.
"Stock Purchase Rights" means any warrants, options or other rights to
subscribe for, purchase or otherwise acquire any shares of Common Stock
or any Convertible Securities.
"Subsidiary" means any corporation or association (a) more than fifty
percent (50%) (by number of votes) of the Voting Stock of which is at
the time owned by the Company or by one or more Subsidiaries or by the
Company and one or more Subsidiaries, or any other business entity in
which the Company or one or more Subsidiaries or the Company and one or
more Subsidiaries owns more than a fifty percent (50%) interest either
in the profits or capital of such business entity or (b) whose net
earnings, or portions thereof, are consolidated with the net earnings of
the Company and are recorded on the books of the Company for financial
reporting purposes in accordance with generally accepted accounting
principles.
"Voting Stock" means securities of any class or series of a corporation
or association the holders of which are ordinarily, in the absence of
contingencies, entitled to participate in the election of a majority of
the directors or persons performing similar functions of such
corporation or association.
"Warrant" means the warrant dated as of Closing Date issued to the
Initial Holder and all warrants issued upon the partial exercise,
transfer or division of or in substitution for any Warrant.
"Warrant Shares" means the Issuable Warrant Shares plus the Issued
Warrant Shares, but only during such time as certificates representing
such shares of this Warrant are required to bear the legend contained in
Section 5.8 hereof.
Whenever used in this Warrant, any noun or pronoun shall be deemed to
include both the singular and plural and to cover all genders, and the
words "herein", "hereof", and "hereunder" and words of similar import
shall refer to this instrument as a whole, including any amendments
hereto.
ARTICLE II
EXERCISE OF WARRANT
2.1 Right to Exercise; Notice. On the terms and subject to
the conditions of this ARTICLE II, the holder hereof shall have the
right, at its option, to exercise this Warrant in whole or in part at
any time during the Exercise Period by delivery to the Company of a
Notice of Exercise duly executed by such holder specifying the number of
shares of Common Stock to be purchased.
2.2 Manner of Exercise; Issuance of Common Stock. To
exercise this Warrant, the holder hereof shall (i) deliver to the
Company (a) a Notice of Exercise duly executed by the holder hereof
specifying the number of shares of Common Stock to be purchased, (b) an
amount equal to the aggregate Exercise Price for all shares of Common
Stock as to which this Warrant is then being exercised and (c) this
Warrant or (ii) in connection with the exercise of this Warrant without
the payment of the Exercise Price, deliver to the Company (a) a Notice
of Exercise duly executed by the holder hereof specifying the number of
shares of Common Stock for which this Warrant is being exercised and the
number of shares of Common Stock deliverable upon such exercise, which
shall equal the product of (x) the number of shares of Common Stock for
which this Warrant is being exercised and (y) the Cashless Exercise
Ratio and (b) this Warrant. At the option of the holder hereof, if this
Warrant is being exercised in the manner described in clause (i) of the
immediately preceding sentence, payment of the Exercise Price shall be
made by (a) wire transfer of funds to an account in a bank located in
the United States designated by the Company for such purpose,
(b) certified or official bank check payable to the order of the Company
and drawn on a member of the New York Clearing House or (c) by any
combination of such methods.
Upon receipt of the required deliveries, the Company
shall, as promptly as practicable, and in any event within five (5) days
thereafter, cause to be issued and delivered to the holder hereof (or
its nominee) or, subject to ARTICLE V, the transferee designated in the
Notice of Exercise, a certificate or certificates representing shares of
Common Stock equal in the aggregate to the number of shares of Common
Stock specified in the Notice of Exercise (but not exceeding the maximum
number of shares issuable upon exercise of this Warrant). Such
certificates shall be registered in the name of the holder hereof (or
its nominee) or in the name of such transferee, as the case may be.
If this Warrant is exercised in part, the Company
shall, at the time of delivery of such certificate or certificates,
unless the Exercise Period has expired, issue and deliver to the holder
hereof or, subject to ARTICLE V, the transferee so designated in the
Notice of Exercise a new warrant evidencing the right of the holder
hereof or such transferee to purchase the aggregate number of shares of
Common Stock for which this Warrant shall not have been exercised, and
this Warrant shall be canceled.
2.3 Effectiveness of Exercise. Unless otherwise requested
by the holder hereof, this Warrant shall be deemed to have been
exercised and such certificate or certificates shall be deemed to have
been issued, and the holder or transferee so designated in the Notice of
Exercise shall be deemed to have become a holder of record of such
shares for all purposes, as of the close of business on the date the
Notice of Exercise, together with payment of the Exercise Price and this
Warrant, is received by the Company.
2.4 Fractional Shares. The Company shall not issue
fractional shares of Common Stock or scrip representing fractional
shares of Common Stock upon any exercise of this Warrant. As to any
fractional share of Common Stock which the holder hereof would otherwise
be entitled to purchase from the Company upon such exercise, the Company
shall purchase from the holder such fractional share at a price equal to
an amount calculated by multiplying such fractional share (calculated to
the nearest .001 of a share) by the Current Market Price calculated as
of the date of the Notice of Exercise. Payment of such amount shall be
made at the time of delivery of any certificate or certificates
deliverable upon such exercise in cash or by check payable to the order
of the holder hereof or, subject to ARTICLE V, the transferee designated
in the Notice of Exercise, as the case may be.
2.5 Continued Validity. A holder of shares of Common Stock
issued upon the exercise of this Warrant, in whole or in part, shall
continue to be entitled to all rights to which a holder of this Warrant
is entitled pursuant to the provisions of this Warrant, except such
rights as their terms apply solely to the holder of a Warrant. The
Company will, at the time of any exercise of this Warrant, upon the
request of the holder of the shares of Common Stock issued upon the
exercise hereof, acknowledge in writing, in a form reasonably
satisfactory to such holder, its continuing obligation to afford to such
holder all rights to which such holder shall continue to be entitled
after such exercise in accordance with the provisions of this Warrant;
provided, however, that if such holder shall fail to make any such
request, such failure shall not affect the continuing obligation of the
Company to afford to such holder all such rights.
ARTICLE III
REGISTRATION, TRANSFER AND EXCHANGE
3.1 Maintenance of Registration Books. The Company shall
keep at its principal office in Shelburne, Vermont, a register in which,
subject to such reasonable regulations as it may prescribe, the Company
shall provide for the registration, transfer and exchange of this
Warrant. The Company shall not at any time except upon the dissolution,
liquidation or winding up of the Company, close such register so as to
result in preventing or delaying the exercise or transfer of this
Warrant.
3.2 Transfer and Exchange. Upon surrender for registration
or transfer of this Warrant at such office, the Company shall execute
and deliver, subject to ARTICLE V, in the name of the designated
transferee or transferees, one or more new Warrants representing the
right to purchase a like aggregate number of shares of Common Stock. At
the option of the holder hereof, this Warrant may be exchanged for other
Warrants representing the right to purchase a like aggregate number of
shares of Common Stock upon surrender of this Warrant at such office.
Whenever this Warrant is so surrendered for exchange, the Company shall
execute and deliver the Warrants which the holder making the exchange is
entitled to receive.
Every Warrant presented or surrendered for
registration of transfer or exchange shall be accompanied by an
Assignment duly executed by the holder thereof or its attorney duly
authorized in writing.
All Warrants issued upon any registration of transfer
or exchange of Warrants shall be the valid obligations of the Company,
evidencing the same rights, and entitled to the same benefits, as the
Warrants surrendered upon such registration of transfer or exchange.
3.3 Replacement. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant and (a) in the case of any such loss, theft
or destruction upon delivery of indemnity reasonably satisfactory to the
Company in form and amount or (b) in the case of any such mutilation,
upon surrender of such Warrant for cancellation at the principal office
of the Company, the Company, at its expense, will execute and deliver,
in lieu thereof, a new Warrant.
3.4 Ownership. The Company and any agent of the Company may
treat the Person in whose name this Warrant is registered on the
register kept at the principal office of the Company as the owner and
holder thereof for all purposes, notwithstanding any notice to the
contrary, except that, if and when this Warrant is properly assigned in
blank, the Company may (but shall not be obligated to) treat the bearer
thereof as the owner of this Warrant for all purposes, notwithstanding
any notice to the contrary. This Warrant, if properly assigned, may be
exercised by a new holder without first having a new Warrant issued.
ARTICLE IV
ANTIDILUTION PROVISIONS
4.1 Adjustment of Number of Shares Purchasable. Upon any
adjustment of the Exercise Price as provided in Section 4.2, the holder
hereof shall thereafter be entitled to purchase, at the Exercise Price
resulting from such adjustment, the number of shares of Common Stock
(calculated to the nearest 1/100th of a share) obtained by multiplying
the Exercise Price in effect immediately prior to such adjustment by the
number of shares of Common Stock purchasable hereunder immediately prior
to such adjustment and dividing the product thereof by the Exercise
Price resulting from such adjustment. It is the intent of the Company
that, after giving effect to any exercise of this Warrant, the holder
hereof would be the owner of (or have the right to acquire pursuant
hereto) an aggregate of a minimum of 42,500/9,187,388 percent (0.4625%)
the Common Stock outstanding on a fully diluted basis.
4.2 Adjustment of Exercise Price. The Exercise Price shall
be subject to adjustment from time to time as hereinafter set forth.
(a) Stock Dividends, Subdivisions and Combinations. In the
event that the Company subsequent to the Closing Date shall:
(i) declare a dividend upon, or make any distribution
in respect of, any of its stock, payable in Common Stock, Convertible
Securities or Stock Purchase Rights, or
(ii) subdivide its outstanding shares of Common Stock
into a larger number of shares of Common Stock, or
(iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock,
then the Exercise Price shall be adjusted to that price determined by
multiplying the Exercise Price per share of Common Stock immediately
prior to such event by a fraction (A) the numerator of which shall be
the total number of outstanding shares of Common Stock of the Company
immediately prior to such event, and (B) the denominator of which shall
be the total number of outstanding shares of Common Stock of the Company
immediately after such event, treating as outstanding all shares of
Common Stock issuable upon conversions or exchanges of such Convertible
Securities and exercises of such Stock Purchase Rights.
(b) Issuance of Additional Shares of Common Stock. In case
the Company shall issue or sell any shares of Common Stock after the
Closing Date for a consideration less than the then Current Market
Price, the Exercise Price upon each such issuance or sale shall be
adjusted as follows:
by dividing (A) an amount equal to the sum of (1) the number of shares
of Common Stock outstanding immediately prior to such issue or sale
multiplied by the then existing Current Market Price plus (2) the
aggregate consideration, if any, received by the Company upon such issue
or sale, by (B) the total number of shares of Common Stock outstanding
immediately after such issue or sale;
The provisions of this Subsection (b) shall not apply to any
additional shares of Common Stock which are distributed to holders of
Common Stock pursuant to a stock dividend or subdivision for which an
adjustment is provided for under Subsection (a) of this Section 4.2. No
adjustment of the Exercise Price shall be made under this Subsection
upon the issuance of any additional shares of Common Stock which are
issued pursuant to the exercise of any Stock Purchase Rights or pursuant
to the conversion or exchange of any Convertible Securities to the
extent that such adjustment shall previously have been made upon the
issuance of such Stock Purchase Rights or Convertible Securities
pursuant to Subsection (a), (c) or (d) of this Section 4.2.
(c) Issuance of Stock Purchase Rights. In case the Company
shall issue or sell any Stock Purchase Rights and the consideration per
share at which additional shares of Common Stock may at any time
thereafter be issuable upon exercise thereof (or, in the case of Stock
Purchase Rights exercisable for the purchase of Convertible Securities,
upon the subsequent conversion or exchange of such Convertible
Securities) shall be less than the then Current Market Price, the
Exercise Price shall be adjusted as provided in subsection (b) of this
Section 4.2 on the basis that (1) the maximum number of additional
shares of Common Stock issuable upon exercise of such Stock Purchase
Rights (or upon conversion or exchange of such Convertible Securities
following such exercise) shall be deemed to have been issued as of the
date of the determination of the Current Market Price, and (2) the
aggregate consideration received for such additional shares of Common
Stock shall be deemed to be the minimum consideration received and
receivable by the Company in connection with the issuance and exercise
of such Stock Purchase Rights (or upon conversion or exchange of such
Convertible Securities).
(d) Issuance of Convertible Securities. In case the Company
shall issue or sell any Convertible Securities and the consideration per
share for such shares of Convertible Securities shall be less than the
then Current Market Price, the Exercise Price shall be adjusted as
provided in Subsection (b) of this Section 4.2 on the basis that (1) the
maximum number of additional shares of Common Stock necessary to effect
the conversion or exchange of all such Convertible Securities shall be
deemed to have been issued as of the date for the then Current Market
Price, and (2) the aggregate consideration received for such additional
shares of Common Stock shall be deemed to be equal to the minimum
consideration received and receivable by the Company in connection with
the issuance and exercise of such Convertible Securities. No adjustment
of the Exercise Price shall be made under this Subsection upon the
issuance of any Convertible Securities which are issued pursuant to the
exercise of any Stock Purchase Rights, if an adjustment shall previously
have been made upon the issuance of such Stock Purchase Rights pursuant
to Subsection (c) of this Section 4.2.
(e) Minimum Adjustment. In the event any adjustment of the
Exercise Price pursuant to this Section 4.2 shall result in an
adjustment of less than one cent ($.01) per share of Common Stock, no
such adjustment shall be made, but any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried
forward, shall amount to one cent ($.01) or more per share of Common
Stock; provided, however, that upon any adjustment of the Exercise Price
resulting from (i) the declaration of a dividend upon, or the making of
any distribution in respect of, any stock of the Company payable in
Common Stock or Convertible Securities or (ii) the reclassification by
subdivision, combination or otherwise, of the Common Stock into a
greater or smaller number of shares, the foregoing figure of one cent
($.01) per share (or such figure last adjusted) shall be proportionately
adjusted; provided, further, upon the exercise of this Warrant, the
Company shall make all necessary adjustments (to the nearest .001 of a
cent) not theretofore made to the Exercise Price up to and including the
date upon which this Warrant is exercised.
(f) Readjustment of Exercise Price. In the event (i) the
purchase price payable for any Stock Purchase Rights or Convertible
Securities referred to in Subsection (c) or (d) above, (ii) the
additional consideration, if any, payable upon exercise of such Stock
Purchase Rights or upon the conversion or exchange of such Convertible
Securities or (iii) the rate at which any Convertible Securities above
are convertible into or exchangeable for additional shares of Common
Stock shall change, the Exercise Price in effect at the time of such
event shall forthwith be readjusted to the Exercise Price which would
have been in effect at such time had such Stock Purchase Rights or
Convertible Securities provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold. On the expiration of any such
Stock Purchase Rights not exercised or of any such right to convert or
exchange under such Convertible Securities not exercised, the Exercise
Price then in effect hereunder shall forthwith be increased to the
Exercise Price which would have been in effect at the time of such
expiration or termination had such Stock Purchase Rights or Convertible
Securities never been issued. No readjustment of the Exercise Price
pursuant to this Subsection (f) shall have the effect of increasing the
Exercise Price by an amount in excess of the adjustment originally made
to the Exercise Price in respect of the issue, sale or grant of the
applicable Stock Purchase Rights or Convertible Securities.
(g) Reorganization, Reclassification or Recapitalization of
Company. In case of any capital reorganization or reclassification or
recapitalization of the capital stock of the Company (other than in the
cases referred to in Subsection (a) of this Section 4.2), or in case of
the consolidation or merger of the Company with or into another
corporation, or in case of the sale or transfer of the property of the
Company as an entirety or substantially as an entirety, there shall
thereafter be deliverable upon the exercise of this Warrant or any
portion thereof (in lieu of or in addition to the number of shares of
Common Stock theretofore deliverable, as appropriate) the number of
shares of stock or other securities or property to which the holder of
the number of shares of Common Stock which would otherwise have been
deliverable upon the exercise of this Warrant or any portion thereof at
the time would have been entitled upon such capital reorganization or
reclassification of capital stock, consolidation, merger or sale, and at
the same aggregate Exercise Price.
Prior to and as a condition of the consummation of any
transaction described in the preceding sentence, the Company shall make
equitable, written adjustments in the application of the provisions
herein set forth satisfactory to the holders of Warrants with respect to
the rights and interests of holders of Warrants so that the provisions
set forth herein shall thereafter be applicable, as nearly as possible
in relation to any shares of stock or Other Securities or other property
thereafter deliverable upon exercise of this Warrant. Any such
adjustment shall be made by and set forth in a supplemental agreement
between the Company and/or the successor entity, as applicable, which
agreement shall bind each such entity, shall be accompanied by an
Opinion of Counsel as to the enforceability of such agreement.
(h) Dilution in Case of Other Securities. In case any Other
Securities shall be issued or sold or shall become subject to issuance
or sale upon the conversion or exchange of any stock (or other
securities) of the Company (or any issuer of Other Securities or any
other Person referred to in Subsection (g)) or becomes subject to
subscription, purchase or other acquisition pursuant to any options or
rights issued or granted by the Company (or by any such other issuer or
Person) for a consideration such as to dilute, within the standards
established in the other provisions of this ARTICLE IV, the purchase
rights granted by this Warrant, then, and in each such case, the
computations, adjustments and readjustments provided for in this
ARTICLE IV with respect to the Exercise Price shall be made as nearly as
possible in the manner so provided and applied to determine the amount
of Other Securities from time to time receivable upon the exercise of
this Warrant, so as to protect the holders of the Warrant against the
effect of such dilution.
(i) Other Dilutive Events. In case any event shall occur as
to which the other provisions of this ARTICLE IV are not strictly
applicable but the failure to make any adjustment would not fairly
protect the purchase rights represented by this Warrant in accordance
with the essential intent and principles hereof, then, in each such
case, the Company shall appoint a firm of independent public accountants
of recognized national standing (which may be the regular auditors of
the Company), which shall give their opinion as to the adjustment, if
any, on a basis consistent with the essential intent and principles
established in this ARTICLE IV, necessary to preserve, without dilution,
the purchase rights represented by this Warrant. Upon receipt of such
opinion, the Company will promptly mail a copy thereof to the holder of
this Warrant and shall make the adjustments described therein.
(j) Determination of Consideration. For purposes of this
ARTICLE IV, the consideration received or receivable by the Company for
the issuance, sale, grant or assumption of additional shares of Common
Stock, Stock Purchase Rights or Convertible Securities, irrespective of
the accounting treatment of such consideration, shall be valued as
follows:
(1) Cash Payment. In the case of cash, the net amount
received by the Company after deduction of any accrued interest,
dividends or any expenses paid or incurred or any underwriting
commissions or concessions paid or allowed by the Company.
(2) Securities or Other Property. In the case of
securities or other property, at the lesser of (i) the Current Market
Price of the security for which such consideration was received, and
(ii) the Fair Value of such consideration (in both cases as of the date
immediately preceding the issuance, sale or grant in question).
(3) Allocation Related to Common Stock. In the event
additional shares of Common Stock are issued or sold together with other
securities or other assets of the Company for a consideration which
covers both, the consideration received (computed as provided in (1) and
(2) above) shall be allocable to such additional shares of Common Stock
as determined in good faith by the Board of Directors of the Company.
(4) Allocation Related to Stock Purchase Rights and
Convertible Securities. In case any Stock Purchase Rights or
Convertible Securities shall be issued or sold together with other
securities or other assets of the Company, together comprising one
integral transaction in which no specific consideration is allocated to
the Stock Purchase Rights or Convertible Securities, such Stock Purchase
Rights or Convertible Securities shall be deemed to have been issued
without consideration.
(5) Dividends in Securities. In case the Company
shall declare a dividend or make any other distribution upon any stock
of the Company (other than Common Stock) payable in either case in
Common Stock, Convertible Securities or Stock Purchase Rights, such
Common Stock, Convertible Securities or Stock Purchase Rights, as the
case may be, issuable in payment of such dividend or distribution shall
be deemed to have been issued or sold without consideration.
(6) Stock Purchase Rights and Convertible Securities.
The consideration for which shares of Common Stock shall be deemed to be
issued upon the issuance of any Stock Purchase Rights or Convertible
Securities shall be determined by dividing (i) the total consideration,
if any, received or receivable by the Company as consideration for the
granting of such Stock Purchase Rights or the issuance of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration payable to the Company upon the exercise of such Stock
Purchase Rights, or, in the case of such Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable
upon the conversion or exchange thereof, in each case after deducting
any accrued interest, dividends, or any expenses paid or incurred or any
underwriting commissions or concessions paid or allowed by the Company
by (ii) the maximum number of shares of Common Stock issuable upon the
exercise of such Stock Purchase Rights or upon the conversion or
exchange of all such Convertible Securities.
(7) Merger, Consolidation or Sale of Assets. In case
any shares of Common Stock or Convertible Securities or any Stock
Purchase Rights shall be issued in connection with any merger or
consolidation in which the Company is the surviving corporation, the
amount of consideration therefor shall be deemed to be the Fair Value of
such portion of the assets and business of the non-surviving corporation
as shall be attributable to such Common Stock, Convertible Securities or
Stock Purchase Rights, as the case may be. In the event of any merger
or consolidation of the Company in which the Company is not the
surviving corporation or in the event of any sale of all or
substantially all of the assets of the Company for stock or other
securities of any corporation, the Company shall be deemed to have
issued a number of shares of its Common Stock for stock or securities of
the other corporation computed on the basis of the actual exchange ratio
on which the transaction was predicated and for a consideration equal to
the Fair Value on the date of such transaction of such stock or
securities of the other corporation, and if any such calculation results
in adjustment of the Exercise Price, the determination of this number of
shares of Common Stock issuable upon exercise of this Warrant
immediately prior to such merger, consolidation or sale, for the
purposes of Subsection (g) above, shall be made after giving effect to
such adjustment of the Exercise Price.
(k) Record Date. In case the Company shall take a record of
the holders of the Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock or in
Convertible Securities or (ii) to subscribe for or purchase Common Stock
or Convertible Securities, then all references in this ARTICLE IV to the
date of the issue or sale of the shares of Common Stock deemed to have
been issued or sold upon the declaration of such dividend or the making
of such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be, shall be deemed to be
references to such record date.
(l) Shares Outstanding. The number of shares of Common
Stock deemed to be outstanding at any given time shall not include
(i) shares of Common Stock in the treasury of the Company or any
wholly-owned Subsidiary and (ii) any of the Issuable Warrant Shares or
the Issued Warrant Shares.
(m) Maximum Exercise Price. At no time shall the Exercise
Price per share of Common Stock exceed the amount set forth in the first
paragraph of the Preamble of this Warrant except as provided in
Subsection (a) or (g) of this Section 4.2.
(n) Application. Except as otherwise provided herein, all
Subsections of this Section 4.2 are intended to operate independently of
one another. If an event occurs that requires the application of more
than one Subsection, all applicable Subsections shall be given
independent effect.
(o) No Adjustments under Certain Circumstances. Anything
herein to the contrary notwithstanding, the Company shall not be
required to make any adjustment of the Exercise Price in the case of:
(i) the issuance of shares of Common Stock upon the
exercise in whole or part of this Warrant; or
(ii) the issuance of shares of Common Stock pursuant
to a rights offering in which the holder hereof elects to participate
under the provisions of Section 4.3; or
(iii) the issuance of shares of common stock pursuant
to the Company's Incentive Stock Option Plan or its Non-Employee
Directors Stock Option Plan, or any successor plan thereto or
replacement thereof; or
(iv) the issuance of shares of common stock upon
conversion of any of the shares of the Company's Series B or Series C
Convertible Preferred Stock issued and outstanding as of the date of
this Warrant or upon conversion of any shares of the Series C Preferred
Stock issued as dividends on outstanding shares of Series C Preferred
Stock;
(v) the issuance of Series C Preferred Stock as a
dividend on shares of Series C Preferred Stock; or
(vi) the issuance of shares of common stock pursuant
to any other stock Purchase Right issued and outstanding as of the date
of this Warrant.
4.3 Rights Offering. In the event the Company shall effect
an offering of Common Stock pro rata among its stockholders, the holder
hereof shall be entitled, at its option, to elect to participate in each
and every such offering as if this Warrant had been exercised and such
were, at the time of any such rights offering, then a holder of that
number of shares of Common Stock to which such holder is then entitled
on the exercise hereof.
4.4 Certificates and Notices.
(a) Adjustments to Exercise Price. Upon any adjustment
under this ARTICLE IV of the number of shares of Common Stock
purchasable upon exercise of this Warrant or of the Exercise Price, a
certificate, signed (i) by the President or a Vice President and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Company, or (ii) by any independent firm of certified
public accountants of recognized national standing selected by, and at
the expense of, the Company, setting forth in reasonable detail the
events requiring the adjustment and the method by which such adjustment
was calculated, shall be mailed to the holder of this Warrant specifying
the adjusted Exercise Price and the number of shares of Common Stock
purchasable upon exercise of such holder's Warrant after giving effect
to such adjustment.
The certificate of any independent firm of certified public
accountants of recognized national standing selected by the Board of
Directors of the Company shall be conclusive evidence of the correctness
of any computation made under ARTICLE IV, absent manifest error.
(b) Extraordinary Corporate Events. In case the Company
after the date hereof shall propose to (i) pay any dividend payable in
stock to the holders of shares of Common Stock or to make any other
distribution to the holders of shares of Common Stock, (ii) offer to the
holders of shares of Common Stock rights to subscribe for or purchase
any additional shares of any class of stock or any other rights or
options or (iii) effect any reclassification of the Common Stock (other
than a reclassification involving merely the subdivision or combination
of outstanding shares of Common Stock), or any capital reorganization or
any consolidation or merger (other than a merger in which no distribu-
tion of securities or other property is to be made to holders of shares
of Common Stock), or any sale, transfer or other disposition of its
property, assets and business as an entirety or substantially as an
entirety, or the liquidation, dissolution or winding up of the Company,
then, in each such case, the Company shall mail to the holder of this
Warrant notice of such proposed action, which shall specify the date on
which the stock transfer books of the Company shall close, or a record
shall be taken, for determining the holders of Common Stock entitled to
receive such stock dividends or other distribution or such rights or
options, or the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, other disposition, liquidation,
dissolution or winding up shall take place or commence, as the case may
be, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to receive securities or other property
deliverable upon such action, if any such date is to be fixed. Such
notice shall be mailed in the case of any action covered by clause (i)
or (ii) above at least ten (10) days prior to the record date for
determining holders of Common Stock for purposes of receiving such
payment or offer, or in the case of any action covered by clause (iii)
above at least thirty (30) days prior to the date upon which such action
takes place and twenty (20) days prior to any record date to determine
holders of Common Stock entitled to receive such securities or other
property.
(c) Effect of Failure. Failure to file any certificate or
notice or to mail any notice, or any defect in any certificate or notice
pursuant to this Section 4.4 shall not affect the legality or validity
of the adjustment of the Exercise Price or the number of shares
purchasable upon exercise of this Warrant, or any transaction giving
rise thereto.
ARTICLE V
RESTRICTIONS ON TRANSFER
Neither this Warrant nor any Issued Warrant Shares
shall be transferable except (a) to an Affiliate of the holder hereof,
(b) to a successor corporation to the holder hereof as a result of a
merger or consolidation with, or sale of all or substantially all of the
assets of, the holder hereof, (c) as is or may be required by the holder
hereof to comply with any Federal or state law or any rule or regulation
of any governmental or public body or authority, or (d) on thirty (30)
days prior written notice to the Company for a period of ninety (90)
days immediately following the date of such notice, to any other Person.
Any notice given by the holder hereof or of any Issued
Warrant Shares pursuant to Subsection (d) of the first paragraph of this
ARTICLE V shall contain (i) the name and address of the proposed bona
fide purchaser, (ii) the proposed purchase price for this Warrant or
portion hereof or Issued Warrant Shares proposed to be sold, (iii) the
portion of this Warrant or the number of Issued Warrant Shares proposed
to be sold and (iv) a brief description of such proposed transfer.
The conditions contained in the following sections of
this ARTICLE V are intended to ensure compliance with the Securities Act
in respect of the transfer of this Warrant or Issued Warrant Shares.
Reference in this ARTICLE V to Issued Warrant Shares includes Issued
Warrant Shares theretofore issued upon the exercise of this Warrant or
otherwise which are then evidenced by certificates required to bear the
legend set forth in Section 5.8.
5.1 Notice of Proposed Transfer; Registration Not Required.
The holder hereof or the holder of any Issued Warrant Shares bearing the
legend set forth in Section 5.8, by acceptance hereof or thereof, agrees
to give written notice to the Company, prior to any transfer of this
Warrant (other than transfers referred to in Subsection (d) of the first
paragraph of this ARTICLE V), such Issued Warrant Shares or any portion
hereof or thereof, of its intention to make such transfer as required by
the preamble of this ARTICLE V.
Such holder shall request an Opinion of Counsel (which
shall be rendered by counsel reasonably acceptable to the Company) that
the proposed transfer may be effected without registration or
qualification under any Federal or state securities or blue sky law.
Counsel shall, as promptly as practicable, notify the Company and the
holder of such opinion of the terms and conditions, if any, to be
observed in such transfer, whereupon the holder shall be entitled to
transfer this Warrant or such Issued Warrant Shares (or portion thereof)
in accordance with the terms of the notice delivered to the Company. In
the event this Warrant shall be exercised as an incident to such
transfer, such exercise shall relate back and for all purposes of this
Warrant be deemed to have occurred as of the date of such notice
regardless of delays incurred by reason of the provisions of this
ARTICLE V which may result in the actual exercise on any later date.
5.2 [Intentionally Omitted]
5.3 Incidental Registration and Qualification. If the
Company proposes to register any of its securities under the Securities
Act on its behalf or on behalf of any of its security holders on any
registration form (otherwise than for the registration of securities to
be offered and sold pursuant to (a) an employee benefit plan, (b) a
dividend or interest reinvestment plan, (c) other similar plans or
(d) reclassifications of securities, mergers, consolidations and
acquisitions of assets) permitting a secondary offering or distribution
of Issued Warrant Shares, not less than ninety (90) days prior to each
such registration the Company shall give to the holder hereof and the
holders of Issued Warrant Shares bearing the legend required by
Section 5.8 hereof written notice of such proposal which shall describe
in detail the proposed registration and distribution (including those
jurisdictions where registration or qualification under the securities
or blue sky laws is intended) and, upon the written request of the
holder hereof or a holder of such Issued Warrant Shares furnished within
thirty (30) days after the date of any such notice, proceed to include
in such registration all of the Warrant Shares ("Piggy-Back Shares")
subject to the limitation contained in the next paragraph. The holder
hereof or any holder of such Issued Warrant Shares shall in its request
describe briefly the proposed disposition of such shares of Common
Stock. The Company will in each instance use its best efforts to cause
all such Piggy-Back Shares to be registered under the Securities Act and
qualified under the securities or blue sky laws of any jurisdiction
requested by a prospective seller, all to the extent necessary to permit
the sale or other disposition thereof in the manner stated in such re-
quest by a prospective seller of the securities so registered.
If the managing underwriter selected by the Company
(if such distribution is a primary offering) or the security holders (if
such security holders are exercising demand registration rights) to
manage the distribution of the shares of Common Stock being registered
advises the Company in writing that, in its opinion, the inclusion of
the Piggy-Back Shares with the securities being registered by the
Company and/or other prospective sellers would materially adversely
affect the distribution of all such securities, then (a) if such
distribution is a primary offering on behalf of the Company, the Company
shall first be entitled to have all of the shares proposed to be sold by
it before any shares (including Piggy-Back Shares) proposed to be sold
by any other prospective sellers are included in such distribution and
any shares in excess of such numbers of shares proposed to be sold by
the Company which are permitted by such managing underwriter to be
included in such distribution shall be allocated among such other
prospective sellers in such proportion as the number of shares proposed
to be sold by each such prospective seller bears to the aggregate number
of shares of Common Stock proposed to be sold by all such other
prospective sellers; and (b) if such distribution is initiated pursuant
to the exercise of demand registration rights granted by the Company to
any of its security holders, the Company and each prospective seller may
sell that proportion of the shares of Common Stock to be sold in the
proposed distribution which the number of shares of Common Stock
proposed to be sold by such prospective seller bears to the aggregate
number of shares of Common Stock proposed to be sold by all prospective
sellers (including the Company). In the event that some or all of the
Piggy-Back Shares proposed to be sold by prospective sellers are not
included in such distribution, the Company shall use its best efforts to
effect and maintain any such registration or qualification under the
Securities Act and the securities or blue sky laws of any jurisdiction
as may be necessary to permit such prospective seller to make its
proposed offering and sale following the end of a period not to exceed
ninety (90) days after the effective date of such registration and shall
pay all expenses related thereto in accordance with Section 5.6.
The holder hereof and any holder of Issued Warrant
Shares who has requested shares of Common Stock to be included in a
registration pursuant to this Section 5.3, by acceptance hereof or
thereof, agrees to (a) the selection by the Company or such other
security holders of an underwriter to manage such registration and
(b) execute an underwriting agreement with such underwriter that is
(i) reasonably satisfactory to such holder and (ii) in customary form.
Nothing in this Section 5.3 shall be deemed to require
the Company to proceed with any primary registration of its securities
after giving the notice as provided herein; provided, however, that the
Company shall pay all expenses incurred pursuant to such notice (in
accordance with Section 5.6.)
5.4 Registration and Qualification Procedures. Whenever
the Company is required by the provisions of Section 5.3 to use its best
efforts to effect the registration of any of its securities under the
Securities Act, the Company will, as expeditiously as is possible:
(a) prepare and file with the Commission a registration
statement with respect to such securities in connection with which the
Company will give the sellers, their underwriters, if any, their
respective counsel and accountants the opportunity to participate in the
preparation of such registration statement, each prospectus included
therein or filed with the Commission, and each amendment thereof or
supplement thereto, and will give each of them access to its books and
records and such opportunities to discuss the business of the Company
with its officers and the independent public accountants who have
certified its financial statements as shall be necessary, in the opinion
of such sellers' and such underwriters' respective counsel, to conduct a
reasonable investigation within the meaning of the Securities Act;
(b) 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 the prospectus current and to comply with the
provisions of the Securities Act with respect to the sale of all
securities covered by such registration statement whenever the seller of
such securities shall desire to sell the same; provided, however, that
the Company shall have no obligation to file an amendment or supplement
at its own expense more than nine (9) months after the effective date of
such registration statement;
(c) furnish to each seller such numbers of copies of
preliminary prospectuses and prospectuses and each supplement or
amendment thereto and any other documents as each seller may reasonably
request in order to facilitate the sale or other disposition of the
securities owned by such seller in conformity with (i) the requirements
of the Securities Act and (ii) the seller's proposed method of
distribution;
(d) register or qualify the securities covered by such
registration statement under the securities or blue sky laws of such
jurisdictions within the United States as each seller shall request, and
do such other reasonable acts and things as may be required of it to
enable each seller to consummate the sale or other disposition in such
jurisdictions of the securities owned by such seller; provided, however,
that the Company shall not be required to (i) qualify as a foreign
corporation or consent to a general and unlimited service of process in
any such jurisdiction, or (ii) qualify as a dealer in securities;
(e) furnish, at the request of any seller on the date such
securities are delivered to the underwriters for sale pursuant to such
registration or, if such securities are not being sold through
underwriters, on the date the registration statement with respect to
such securities becomes effective, (i) an opinion, dated such date, of
counsel representing the Company for the purposes of such registration,
addressed to the underwriters, if any, and to the seller making such
request, covering such legal matters with respect to the registration in
respect of which such opinion is being given as the seller of such
securities may reasonably request and are customarily included in such
opinions and (ii) letters, dated, respectively, (1) the effective date
of the registration statement and (2) the date such securities are
delivered to the underwriters, if any, for sale pursuant to such
registration, from a firm of independent certified public accountants of
recognized national standing selected by the Company, addressed to the
underwriters, if any, and to the seller making such request, covering
such financial, statistical and accounting matters with respect to the
registration in respect of which such letters are being given as the
seller of such securities may reasonably request and are customarily
included in such letters;
(f) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders as soon as reasonably practicable, but not later
than sixteen (16) months after the effective date of the registration
statement, an earnings statement covering a period of at least twelve
(12) months beginning after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act;
(g) enter into and perform an underwriting agreement with
the managing underwriter, if any, selected as provided in Section 5.3,
containing customary (i) terms of offer and sale of the securities,
payment provisions, underwriting discounts and commissions, and
(ii) representations, warranties, covenants, indemnities, terms and
conditions; the sellers may, at their option, require that any or all of
the representations and warranties by, and the other agreements on the
part of, the Company to and for the benefit of such underwriters shall
also be made to and for the benefit of such sellers and that any or all
of the conditions precedent to the obligations of such underwriters
under such underwriting agreement be conditions precedent to the
obligations of such sellers; such sellers shall not be required to make
any representations or warranties to or agreements with the Company or
the underwriters other than representations, warranties or agreements
regarding such seller and such seller's intended method of distribution
and any other representation required by law;
(h) notify each seller at any time when a prospectus
relating to the registration is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event
as a result of which, the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in the light
of the circumstances under which they were made, at the request of any
such seller promptly prepare and furnish to such seller a reasonable
number of copies of a supplement to or an amendment of such prospectus
as may be necessary so that, as thereafter delivered to the purchasers
of such securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made;
and
(i) keep each seller advised in writing as to the
initiation and progress of any registration under Section 5.3.
5.5 Holdback Agreement. The Company agrees not to effect
any public sale or distribution of its equity securities or securities
convertible into or exchangeable or exercisable for any of such
securities during the seven (7) days prior to or ninety (90) days after
any underwritten registration pursuant to Section 5.3 has become
effective, except as part of such underwritten registration and except
pursuant to registrations on Form S-8 or S-4 or any successor or similar
forms thereto, and to cause each Person who purchases its equity
securities or any securities convertible into or exchangeable or
exercisable for any of such securities at any time after the date of
this Warrant (other than in a public offering) to agree not to effect
any such public sale or distribution of such securities, during such
period.
5.6 Allocation of Expenses. If the Company is required by
the provisions of Section 5.3 to use its best efforts to effect the
registration or qualification under the Securities Act or any state
securities or blue sky laws of any of the Warrant Shares, the Company
shall pay all expenses (i) other than the fees and expenses set forth in
clauses (1) and (2) of the proviso set forth below, which expenses shall
include, without limitation, (a) all expenses incident to filing with
the National Association of Securities Dealers, Inc., (b) registration
fees, (c) printing expenses, (d) accounting and legal fees and expenses,
(e) expenses of any special audits incident to or required by any such
registration or qualification, (f) premiums for insurance in such
amount, if any, deemed appropriate by the managing underwriter and
(g) expenses of complying with the securities or blue sky laws of any
jurisdictions in connection with registration or qualification;
provided, however, that the following fees and expenses shall be treated
as set forth above and (x) and (y) below: (1) any discounts or
commissions to any underwriter attributable to securities being sold by
or on behalf of Persons other than the Company; (2) any stock transfer
taxes incurred in respect of the Warrant Shares sold by the sellers;
(3) the reasonable legal fees of any holder of this Warrant or shares
issued or issuable hereunder; provided further, that in any required
registration pursuant to Section 5.3 hereof, the incremental expenses of
the nature set forth in clauses (ii)(a) through (g) above (including
those set forth in clauses (1), (2) and (3) above) attributable to the
inclusion of Piggy-Back Shares shall be borne pro rata by the holders of
Warrant Shares whose Warrant Shares are included therein in proportion
to their respective numbers of Warrant Shares included therein.
5.7 Indemnification. In connection with any registration
or qualification of securities under Section 5.3, the Company agrees to
indemnify the holder hereof and the holders of any Issued Warrant Shares
and each underwriter thereof, including each person, if any, who
controls the holder or such stockholder or underwriter within the
meaning of Section 15 of the Securities Act, against all losses, claims,
damages, liabilities and expenses (including reasonable costs of
investigation) caused by any untrue, or alleged untrue, statement of a
material fact contained in any registration statement, preliminary
prospectus, prospectus or notification or offering circular (as amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) or caused by any omission, or alleged omission, to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses are caused by any
untrue statement or alleged untrue statement or omission or alleged
omission based upon information furnished in writing to the Company by
the holder or any such stockholder or underwriter expressly for use
therein. The Company and each officer, director and controlling person
of the Company shall be indemnified by the holder of this Warrant and by
the holders of any Issued Warrant Shares for all such losses, claims,
damages, liabilities and expenses (including the costs of reasonable
investigation) caused by any such untrue, or alleged untrue, statement
or any such omission or alleged omission, based upon information
furnished in writing to the Company by the holder hereof or any such
stockholder expressly for use therein.
Promptly upon receipt by a party indemnified under
this Section 5.7 of notice of the commencement of any action against
such indemnified party in respect of which indemnity or reimbursement
may be sought against any indemnifying party under this Section 5.7,
such indemnified party shall notify the indemnifying party in writing of
the commencement of such action, but the failure so to notify the
indemnifying party shall not relieve it of any liability which it may
have to any indemnified party otherwise than under this Section 5.7
unless such failure shall materially adversely affect the defense of
such action. In case notice of commencement of any such action shall be
given to the indemnifying party as above provided, the indemnifying
party shall be entitled to participate in and, to the extent it may
wish, jointly with any other indemnifying party similarly notified, to
assume the defense of such action at its own expense, with counsel
chosen by it and satisfactory to such indemnified party. The
indemnified party shall have the right to employ separate counsel in any
such action and participate in the defense thereof, but the fees and
expenses of such counsel (other than reasonable costs of investigation)
shall be paid by the indemnified party unless (a) the indemnifying party
agrees to pay the same, (b) the indemnifying party fails to assume the
defense of such action with counsel reasonably satisfactory to the
indemnified party or (c) the named parties to any such action (including
any impleaded parties) have been advised by such counsel that
representation of such indemnified party and the indemnifying party by
the same counsel would be inappropriate under applicable standards of
professional conduct (in which case the indemnifying party shall not
have the right to assume the defense of such action on behalf of such
indemnified party). No indemnifying party shall be liable for any
settlement entered into without its consent.
If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party in
respect of any losses, claims, damages, liabilities, expenses or actions
in respect thereof referred to herein, then each indemnifying party
shall in lieu of indemnifying such indemnified party as a result of such
losses, claims, damages, liabilities, expenses or actions in such
proportion as is appropriate to reflect the relative fault of the
Company, on the one hand, and the sellers of such Common Stock, on the
other, in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities, expenses or actions as well
as any other relevant equitable considerations, including the failure to
give the notice required hereunder. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact relates to information
supplied by the Company, on the one hand, or the sellers of such Common
Stock, on the other hand, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission. The Company and the holder hereof agree that it
would not be just and equitable if contribution pursuant to this
Section were determined by pro rata allocation (even if all of the
sellers of such Common Stock were treated as one entity for such
purpose) or by any other method of allocation which did not take account
of the equitable considerations referred to above. The amount paid or
payable by an indemnified party as a result of the losses, claims,
damages, liabilities or actions in respect thereof referred to above
shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the contribution
provisions of this Section 5.7, in no event shall the amount contributed
by any seller of Common Stock exceed the aggregate gross offering
proceeds received by such seller from the sale of Common Stock to which
such contribution claim relates. No person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who is
not guilty of such fraudulent misrepresentation.
Each holder of this Warrant and each holder of Issued
Warrant Shares bearing the legend required by Section 5.8, by acceptance
hereof or thereof, as the case may be, agrees to the indemnification and
contribution provisions of this Section 5.7.
5.8 Legend on Warrants and Certificates. Each Warrant
shall bear a legend in substantially the following form:
"This Warrant and any shares of Common Stock issuable upon
the exercise of this Warrant have not been registered under
the Securities Act of 1933, as amended, and neither this
Warrant nor any such shares may be transferred in the
absence of such registration or any exemption therefrom
under such Act."
Warrant Shares which are issued upon the exercise in
whole or in part of this Warrant or otherwise, or are thereafter
transferred, in either case under such circumstances that no
registration under the Securities Act is required, shall bear on the
face thereof the following legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
any transfer thereof is subject to the conditions specified
in the Warrant dated as of September 21, 1998, originally
issued by The Vermont Teddy Bear Co., Inc. (the "Company")
to URSA (VT) QRS 12-30, Inc. to purchase shares of Common
Stock, $.05 par value, of the Company. A copy of the form of
such Warrant is on file with the Secretary of the Company at
6655 Shelburne Road, Shelburne, Vermont 05482, and will be
furnished without charge by the Company to the holder of
this certificate upon written request to the Secretary of
the Company at such address."
5.9 Termination of Restrictions. The restrictions imposed
under this ARTICLE V upon the transferability of this Warrant, or of
Issuable Warrant Shares or Issued Warrant Shares, shall cease when (a) a
registration statement covering such Issuable Warrant Shares or Issued
Warrant Shares becomes effective under the Securities Act or (b) the
Company receives an Opinion of Counsel that such restrictions are no
longer required in order to ensure compliance with the Securities Act.
When such restrictions terminate, the Company shall, or shall instruct
its transfer agent and registrar to, issue new certificates in the name
of the holder not bearing the legends required under Section 5.8.
5.10 Supplying Information. The Company, the holder hereof
and each holder of Issued Warrant Shares shall cooperate with each other
in supplying such information as may be necessary for any of such
parties to complete and file any information reporting forms presently
or hereafter required by the Commission or any commissioner or other
authority administering the blue sky or securities laws of any
jurisdiction where shares of Common Stock are proposed to be sold
pursuant to Section 5.2 or 5.3.
5.11 Liquidated Damages. In the event the Company fails to
comply with any provision of Section 5.3 or 5.4, upon written request of
the holder of this Warrant or any holder of Issued Warrant Shares
entitled to the benefits of this ARTICLE V, the Company shall promptly
obtain an opinion of an independent investment banking firm reasonably
satisfactory to such holder estimating the net proceeds which such
Person would have received (after deducting underwriting commissions and
discounts and any other expenses that would have been solely
attributable to the registration or qualification of such shares of
Common Stock) upon the sale of shares of Common Stock proposed to be
sold pursuant to such registration or qualification. Such opinion of an
independent investment banking firm shall be (a) delivered in writing to
the Company, with a copy to such person, within seven (7) days after the
date of the request of such person to the Company and (b) conclusive and
binding on the Company and such Person.
Within thirty (30) days of receipt by the Company of
such estimate, the Company shall pay to such Person an amount equal to
(a) such estimated net proceeds minus (b) in the case of Warrants or
portions thereof that have not been exercised, the aggregate Exercise
Price payable upon the exercise of such Warrants. Payment of such
amount shall be made by a certified or official bank check payable to
the order of such person and drawn on a member of the New York Clearing
House. Upon payment to such Person of such liquidated damages, such
Person shall assign to the Company this Warrant and the Issued Warrant
Shares proposed to be sold pursuant to the registration or qualification
in question without any representation or warranty (other than that the
holder has not taken any action which would impair its ownership of or
right to transfer to the Company the Warrant or such shares of Common
Stock). If less than all of the Issued Warrant Shares were proposed to
be sold pursuant to the registration or qualification in question, the
Company shall cancel this Warrant and issue in the name of, and deliver
to, the holder, pursuant to Section 2.2, a new Warrant for the shares of
Issuable Warrant Shares not required to be assigned to the Company
pursuant to the provisions of the preceding sentence. The Company
agrees that the amount of actual damages that would be sustained by the
holder as a result of the failure of the Company to comply with any
provisions of Section 5.3 or 5.4 is not capable of ascertainment on any
other basis.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company hereby represents and warrants to the Initial
Holder and each subsequent holder of this Warrant that as of the Closing
Date:
6.1 Organization and Capitalization of the Company. The
Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York. The authorized
capital of the Company consists of twenty million (20,000,000) shares of
Common Stock, ninety (90) shares of Series A Preferred Stock, three
hundred seventy-five thousand (375,000) shares of Series B Preferred
Stock, one hundred ten (110) shares of Series C Preferred Stock and six
hundred twenty-four thousand, eight hundred (624,800) shares of
undesignated preferred stock. As of the date hereof, there are five
million, one hundred ninety-five thousand, seven hundred thirty-two
(5,195,732) shares of Common Stock issued and outstanding, ninety (90)
shares of Series A Preferred Stock issued and outstanding and two
hundred four thousand nine hundred twelve (204,912) shares of Series B
Preferred Stock issued and outstanding, sixty (60) shares of Series C
Preferred Stock issued and outstanding and twelve thousand (12,000)
shares of the Company's capital stock are held in its treasury. No
unissued shares of Common Stock are reserved for any purpose other than
for issuance upon the exercise of this Warrant with the exception of two
million (2,000,000) shares of common stock reserved for issuance
pursuant to options granted under the Company's Incentive Stock Option
Plan and four hundred thousand (400,000) shares of common stock reserved
for issuance pursuant to options granted under the Company's 1996
Non-Employee Directors' Stock Option Plan and the shares necessary to
meet the Company's obligations under the Stock Purchase Rights included
on Schedule 6.1. The Company has not issued or agreed to issue any
Stock Purchase Rights, other than pursuant to this Warrant, or
Convertible Securities, and there are no preemptive rights in effect
with respect to the issuance of any shares of Common Stock, except as
listed in Schedule 6.1. All the outstanding shares of the Company's
capital stock have been validly issued without violation of any
preemptive or similar rights and are fully paid and nonassessable.
6.2 Authority. The Company has full corporate power and
authority to execute and deliver this Warrant and to perform all of its
obligations hereunder, and the execution, delivery and performance
hereof have been duly authorized by all necessary corporate action on
its part. This Warrant has been duly executed on behalf of the Company
and constitutes the legal, valid and binding obligation of the Company
enforceable in accordance with its terms.
6.3 No Legal Bar. Neither the execution, delivery or
performance of this Warrant will (a) conflict with or result in a
violation of the certificate of incorporation or Bylaws of the Company,
(b) conflict with or result in a violation of any law, statute,
regulation, order or decree applicable to the Company or any Affiliate,
(c) require any consent or authorization or filing with, or other act by
or in respect of, any governmental authority, or (d) result in a breach
of, constitute a default under or constitute an event creating rights of
acceleration, termination or cancellation under any mortgage, lease,
contract, franchise, instrument or other agreement to which the Company
is a party or by which it is bound, other than applicable restrictions
contained in any of such documents relating to indebtedness of the
Company.
ARTICLE VII
VARIOUS COVENANTS OF THE COMPANY
7.1 No Impairment or Amendment. The Company shall not by
any action including, without limitation, amending its certificate of
incorporation, 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 of this Warrant, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such action
as may be necessary or appropriate to protect the rights of the holder
hereof against impairment. Without limiting the generality of the
foregoing, the Company will (a) not increase the par value of any shares
of Common Stock issuable upon the exercise of this Warrant above the
amount payable therefor upon such exercise, (b) take all such action as
may be necessary or appropriate in order that the Company may validly
issue fully paid and nonassessable shares of Common Stock upon the
exercise of this Warrant, (c) obtain all such authorizations, exemptions
or consents from any public regulatory body having jurisdiction thereof
as may be necessary to enable the Company to perform its obligations
under this Warrant, and (d) not undertake any reverse stock split,
combination, reorganization or other reclassification of the capital
stock which would have the effect of making this Warrant exercisable for
less than 42,500/9,187,388 percent (0.4625%) of the outstanding shares
of Common Stock.
Upon the request of the holder hereof the Company will
at any time during the period this Warrant is outstanding acknowledge in
writing, in form satisfactory to such holder, the continued validity of
this Warrant and the Company's obligations hereunder.
7.2 Reservation of Common Stock. The Company will at all
times reserve and keep available, solely for issuance, sale and delivery
upon the exercise of this Warrant a number of shares of Common Stock
equal to the number of shares of Common Stock issuable upon the exercise
of this Warrant. All such shares of Common Stock shall be duly
authorized and, when issued upon exercise of this Warrant, shall be
validly issued and fully paid and non-assessable with no liability on
the part of the holders thereof.
7.3 Listing on Securities Exchange. If the Company shall
list any shares of Common Stock on any securities exchange it will, at
its expense, list thereon, maintain and increase when necessary such
listing of, all Issued Warrant Shares so long as any shares of Common
Stock shall be so listed. The Company will also so list on each
securities exchange, and will maintain such listing of, any other
securities which the holder of this Warrant shall be entitled to receive
upon the exercise thereof if at the time any securities of the same
class shall be listed on such securities exchange by the Company.
7.4 Availability of Information. The Company will cooperate
with the holder hereof and of Issued Warrant Shares in supplying such
information as may be necessary for such holder to complete and file any
information reporting forms presently or hereafter required by the
Commission as a condition to the availability of an exemption from the
Securities Act for the sale of this Warrant or such Issued Warrant
Shares.
7.5 Indemnification. If the Company fails to make when due
any payments provided for in this Warrant, the Company shall pay to the
holder hereof (a) interest at the Default Rate on any amounts due and
owing to such holder and (b) such further amounts as shall be sufficient
to cover any costs and expenses including, but not limited to,
reasonable attorneys' fees and expenses incurred by such holder in
collecting any amounts due hereunder.
The Company shall indemnify, save and hold harmless
the holder hereof from and against any and all liability, loss, cost,
damage, reasonable attorneys' and accountants' fees and expenses, court
costs and all other out-of-pocket expenses (excluding consequential
damages) incurred in connection with or arising from an Event of
Default.
7.6 Certain Expenses. The Company shall pay all expenses in
connection with, and all taxes (other than stock transfer taxes) and
other governmental charges that may be imposed in respect of, the issue,
sale and delivery of (a) this Warrant, (b) the Issuable Warrant Shares,
or (c) the Issued Warrant Shares.
ARTICLE VIII
MISCELLANEOUS
8.1 Nonwaiver. No course of dealing or any delay or failure
to exercise any right, power or remedy hereunder on the part of the
holder hereof shall operate as a waiver of or otherwise prejudice such
holder's rights, powers or remedies.
8.2 Holder Not a Stockholder. Prior to the exercise of this
Warrant as hereinbefore provided, the holder hereof shall not be
entitled to any of the rights of a stockholder of the Company including,
without limitation, the right as a stockholder to (a) vote on or consent
to any proposed action of the Company or (b) receive (i) dividends or
any other distributions made to stockholders, (ii) notice of or attend
any meetings of stockholders of the Company (except as provided in
ARTICLE IV) or (iii) notice of any other proceedings of the Company
(except as provided in ARTICLE IV).
8.3 Notices. Any notice, demand or delivery to be made
pursuant to the provisions of this Warrant shall be sufficiently given
or made if sent by first class mail, postage prepaid, addressed to (a)
the holder of this Warrant or Issued Warrant Shares at its last known
address appearing on the books of the Company maintained for such
purpose or (b) the Company at its principal office at 6655 Shelburne
Road, Shelburne, Vermont 05482. The holder of this Warrant and the
Company may each designate a different address by notice to the other
pursuant to this Section 8.3.
8.4 Like Tenor. All Warrants shall at all times be
identical, except as to the Preamble.
8.5 Remedies. The Company stipulates that the remedies at
law of the holder of this Warrant or of Issued Warrant Shares in the
event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of this Warrant are
not and will not be adequate and that, to the fullest extent permitted
by law, such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
8.6 Successors and Assigns. This Warrant and the rights
evidenced hereby shall inure to the benefit of and be binding upon the
successors and assigns of the Company, the holder hereof and the holders
of Issued Warrant Shares, to the extent provided herein, and shall be
enforceable by any such holder.
8.7 Modification and Severability. If, in any action before
any court or agency legally empowered to enforce any provision contained
herein, any provision hereof is found to be unenforceable, then such
provision shall be deemed modified to the extent necessary to make it
enforceable by such court or agency. If any such provision is not
durable as set forth in the preceding sentence, the unenforceability of
such provision shall not affect the other provisions of this Agreement,
but this Agreement shall be construed as if such unenforceable provision
had never been contained herein.
8.8 Integration. This Warrant replaces all prior
agreements, supersedes all prior negotiations and constitutes the entire
agreement of the parties with respect to the transactions contemplated
herein.
8.9 Amendment. This Warrant may not be modified or amended
except by written agreement of the Company and the holder hereof.
8.10 Headings. The headings of the Articles and Sections of
this Warrant are for the convenience of reference only and shall not,
for any purpose, be deemed a part of this Warrant.
8.11 Governing Law. This Warrant shall be governed by the
laws of the State of New York.
Dated as of November 3, 1998.
ATTEST: THE VERMONT TEDDY BEAR CO., INC.
By: By:
Title: Title:
NOTICE OF EXERCISE FORM
(To be executed only upon partial or full
exercise of the within Warrant)
The undersigned registered holder of the within Warrant irrevocably
exercises the within Warrant for and purchases ____ shares of Common
Stock of The Vermont Teddy Bear Co., Inc. and herewith makes payment
therefor in the amount of $ , all at the price and on the terms and
conditions specified in the within Warrant, and requests that a
certificate (or _____ certificates in denominations of shares)
for the shares of Common Stock of The Vermont Teddy Bear Co., Inc.
hereby purchased be issued in the name of and delivered to (choose one)
the undersigned or (b), whose address is and, if such shares of
Common Stock shall not include all the shares of Common Stock issuable
asprovided in the within Warrant, that a new Warrant of like tenor for the
number of shares of Common Stock of The Vermont Teddy Bear Co., Inc. not being
purchased hereunder be issued in the name of and delivered to (choose one) (a)
the undersigned or
(b)________________________, whose address is
___________________________________________________.
Dated: ,
Signature Guaranteed: By:
(Signature of Registered
Holder)
- ------------------------------
By:
[Title:]
NOTICE: The signature to this Notice of Exercise must correspond
with the name as written upon the face of the within Warrant
in every particular, without alteration or enlargement or
any change whatever.
The signature to this Notice of Exercise must be guaranteed
by a commercial bank or trust company in the United States
or a member firm of the New York Stock Exchange.
ASSIGNMENT FORM
(To be executed only upon the assignment
of the within Warrant)
FOR VALUE RECEIVED, the undersigned registered holder of the within
Warrant hereby sells, assigns and transfers unto
, whose address is
________________________________ all of the rights of the undersigned
under the within Warrant, with respect to shares of Common Stock
of The Vermont Teddy Bear Co., Inc. (the "Company") and, if such shares
of Common Stock shall not include all the shares of Common Stock
issuable as provided in the within Warrant, that a new Warrant of like
tenor for the number of shares of Common Stock of The Vermont Teddy Bear
Co., Inc. not being transferred hereunder be issued in the name of and
delivered to the undersigned, and does hereby irrevocably constitute and
appoint Attorney to register such transfer on the books
of the Company maintained for the purpose, with full power of
substitution in the premises.
Dated: ,
Signature Guaranteed: By:
(Signature of Registered
Holder)
- -----------------------------
By:
[Title:]
NOTICE: The signature to this Assignment must correspond with the
name as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change
whatever.
The signature to this Assignment must be guaranteed by a
commercial bank or trust company in the United States or a
member firm of the New York Stock Exchange.
SCHEDULE 6.1
The holders of the Company's Series B Preferred Stock have
preemptive rights to participate in any subsequent private placements of
the Company's securities after the issuance of the warrant. The holders
of the Company's Series B Preferred Stock (excluding future dividends)
and Series C Preferred Stock have the right to convert their shares into
a total of 1,117,857 shares of Common Stock.
With the exception of all options issued under the Company's
Incentive Stock Option Plan and Non-Employee Directors Stock Option
Plan, all of the Company's currently outstanding options and warrants
adjusted for the issuance of the Series C Preferred Stock and the Series
C warrant and the warrant are listed below.
Warrants to purchase common stock:
1. Holder: Barington Capital
Adjusted Number of Shares: 116,116
Adjusted Exercise Price: $15.3510
Expiration Date: November 23, 1998
2. Holder: Green Mountain Capital
Number of Shares: 100,000
Exercise Price: $1.00
Expiration Date: December 31, 2004
3. Holder: Joan Hixon Martin
Adjusted Number of Shares: 49,047
Adjusted Exercise Price: $2.5689
Expiration Date: April 12, 2001
4. Holder: Holders of the Company's Series B Convertible Preferred
Stock
Adjusted Number of Shares: 523,692
Adjusted Exercise Price: $1.00
Expiration Date: July 3, 1999
5. Holder: URSA (VT) QRS 12-30, Inc.
Number of Shares: 150,603
Exercise Price: $1.3103
Expiration Date: July 18, 2004
6. Holder: Holders of the Company's Series C Convertible Redeemable
Preferred Stock
Number of Shares: 495,868
Exercise Price: $1.05
Expiration Date: November 3, 2005
Options to purchase common stock:
1. Holder: David Garrett
Number of shares: 30,000
Exercise Price: $2.75
Expiration Date: November 22, 2006
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE DECEMBER 31, 1998 BALANCE SHEET
AND THE SIX MONTH STATEMENT OF OPERATIONS ENDED
DECEMBER 31, 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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,836,851
<SECURITIES> 0
<RECEIVABLES> 152,158
<ALLOWANCES> 0
<INVENTORY> 2,378,908
<CURRENT-ASSETS> 5,179,707
<PP&E> 12,156,047
<DEPRECIATION> 3,718,669
<TOTAL-ASSETS> 14,668,157
<CURRENT-LIABILITIES> 3,020,078
<BONDS> 6,337,750
0
1,090,245
<COMMON> 261,923
<OTHER-SE> 3,840,775
<TOTAL-LIABILITY-AND-EQUITY> 14,668,157
<SALES> 7,851,749
<TOTAL-REVENUES> 7,851,749
<CGS> 3,128,055
<TOTAL-COSTS> 3,128,055
<OTHER-EXPENSES> 4,431,414
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 291,969
<INCOME-PRETAX> 311
<INCOME-TAX> 0
<INCOME-CONTINUING> (50,771)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50,771)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
