FORM OF COMMITMENT LETTER FROM BANKNORTH, N.A.
DATED AUGUST 19, 2002
EXHIBIT (B)-1
August 19, 2002
The Vermont Teddy Bear Co., Inc.
6655 Shelburne Road
P.O. Box 965
Shelburne, Vermont 05482
Attention: Elisabeth B. Robert, President
Dear Ms. Robert:
On behalf of Banknorth, National Association (the "Bank"), I am pleased to
inform you that The Vermont Teddy Bear Co., Inc.'s request for financing has
been approved. Outlined below are the basic terms for the financing. Other terms
are outlined in the attached Exhibit A, which is incorporated herein by
reference.
TERMS OF CREDIT
There will be two loans to The Vermont Teddy Bear Co., Inc. and one mortgage
loan to URSA (VT) QRS 12-30, Inc. (the "Loans"). The mortgage loan proposed to
be made to URSA (VT) QRS 12-30, Inc. ("URSA") is set forth in a separate letter
and will be for the purpose of refinancing the existing mortgage loan for The
Vermont Teddy Bear Co. Inc.'s main headquarters and retail/manufacturing
facility in Shelburne, Vermont. All such Loans shall close contemporaneously.
FACILITY I - TERM LOAN
BORROWER: The Vermont Teddy Bear Co., Inc.
AMOUNT: Up to $3,000,000
PURPOSE: Repurchase of capital stock in the Borrower on the open market
or through a tender offer and in each case consistent with the
projections submitted to the Bank
INTEREST: The Borrower will have an option to, prior to the Closing,
select one of three options:
Option I - (i) the Bank's Prime Rate (adjusted daily) or (ii)
LIBOR (for 30, 60 or 90 day interest periods) plus 2.20 %; or
Option II - the Prime Rate minus 0.5%; or
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August 19, 2002
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Option III - A fixed rate per annum to be determined at
closing equal to the 2.5 year term Federal Home Loan Bank rate
plus 2.00%.
The "Prime Rate" is the rate from time to time announced and
made effective by Bank as the Prime Rate. The interest rate
for Prime Rate borrowing would change as and when the Prime
Rate changes. Interest on Prime Rate borrowings would be
payable monthly in arrears. Interest on LIBOR based borrowings
would be payable monthly in arrears and upon the end of the
applicable interest period. Interest would be calculated on
the basis of a 360 day year. If option I is selected, there
will be no more than three LIBOR based borrowings allowed at
any one time.
If Option I or Option II is selected, the Borrower shall have
an option, during the term of the Loan, to convert the
interest rate to a fixed rate quoted by the Bank and based
upon the available Federal Home Loan Bank rate with a term
most closely approximating one-half of the remaining term, in
years, of the Loan, plus 2.0%.
PREPAYMENT FEE: There will be a Prepayment Fee equal to 2% and 1% of the
principal amount of the Loan in years 1 and 2, respectively,
if the loan is paid in full from a sale of the Borrower (or a
substantial portion of its assets) or from financing from any
source other than the Bank. In addition, if the LIBOR option
is selected, there would be a prepayment fee for any
prepayment prior to the expiration of the applicable LIBOR
interest period. If the fixed rate option is selected, either
before the Closing or during the term of the Loan, and the
Borrower makes any prepayment, the Borrower shall reimburse
the Bank for any resulting loss, lost income or profit, or
expense incurred by the Bank, including without limitation any
loss or expense incurred in obtaining, liquidating or
reemploying deposits from third parties.
MATURITY: Five Years from Closing
AMORTIZATION: Facility I shall have principal repayment based upon the
following schedule:
Year 1 - 12 monthly principal payments of $65,250 plus
interest;
Year 2 - 12 monthly principal payments of $65,250 plus
interest;
Year 3 - 12 monthly principal payments of $37,825 plus
interest;
Year 4 - 12 monthly principal payments of $39,825 plus
interest;
Year 5 - 12 monthly principal payments of $41,850 plus
interest; and
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August 19, 2002
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a final payment at maturity equal to the remaining principal
balance plus all accrued and unpaid interest.
EXCESS
CASH FLOW
PREPAYMENT: In addition to the scheduled monthly repayments, the Borrower
will make an annual repayment equal to 25 percent of excess
cash flow, defined as EBITDA minus principal payments of long
term debt, interest expense, un-financed capital expenditures,
taxes and dividends. The annual mandatory prepayment would not
apply if certain loan to value ratios are met, as will be
established by the Bank and set forth in the applicable Loan
Documents.
ORIGINATION
FEE: The Borrower shall pay the Bank, at or prior to closing, an
origination fee equal to 0.25% of the principal amount of the
Term Loan, and an origination fee of 0.25% of the principal
amount of the mortgage loan made to URSA.
FACILITY II - REVOLVING LINE OF CREDIT
BORROWER: The Vermont Teddy Bear Co., Inc.
AMOUNT: Up to $4,000,000
PURPOSE: Working capital needs
MATURITY: The Line of Credit will have a two-year term from closing at
which time all principal outstanding, together with all
accrued and unpaid interest, shall be due. The Borrower will
have the right to draw on the Line of Credit, upon terms and
conditions set forth in the Loan Documents for the Line of
Credit.
INTEREST: The Borrower will have an option to, prior to the Closing,
select one of two options:
Option I - (i) the Bank's Prime Rate (adjusted daily) or (ii)
LIBOR (for 30, 60 or 90 day interest periods) plus 2.20 %; or
Option II - the Prime Rate minus 0.5%.
Interest will be paid during the term of the Line of Credit on
a monthly basis. The interest rate for Prime Rate borrowings
would change as and
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August 19, 2002
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when the Prime Rate changes. Interest on Prime Rate borrowings
would be payable monthly in arrears. Interest on LIBOR based
borrowings would be payable monthly in arrears and upon the
end of the applicable interest period. Interest would be
calculated on the basis of a 360 day year. If option I is
selected, there will be no more than three LIBOR based
borrowings allowed at any one time.
PREPAYMENT
FEE: There will be a Prepayment Fee equal to 2% and 1% of the
maximum principal amount committed under the Line of Credit in
years 1 and 2, respectively, if the loan is paid in full from
a sale of the Borrower (or a substantial portion of its
assets) or from financing from any source other than the Bank.
In addition, if the LIBOR option is selected, there would be a
prepayment fee for any prepayment prior to the expiration of
the applicable LIBOR interest period.
DISBURSEMENTS: Drawings under the Line of Credit will be disbursed in
accordance with the terms and conditions as the Bank may
establish in the Loan Documents.
ORIGINATION
FEE: The Borrower shall pay to the Bank, at or prior to closing, an
origination fee equal to 0.25% of the principal amount of the
Line of Credit.
UNUSED
FACILITY FEE: None
GENERAL
Please recognize that the Bank has not attempted to define all the legal terms
of this transaction in this letter. The closing of the credit facilities
described herein is conditioned upon the closing of the mortgage loan with URSA
and satisfaction of all conditions to such loan. The Borrower will execute and
deliver to the Bank all documents, instruments, certificates, opinions and
assurances as the Bank might request in connection with closing the loans on the
basis outlined herein and the closing of the proposed mortgage loan to URSA. The
loan documents will contain such warranties, covenants and conditions as usually
are contained in documents relating to credit facilities similar to this
accommodation and as the Bank may require, consistent with prudent lending
practice. It is understood that the Bank may revise the structure, terms and
conditions of the credit facilities and its documents to its satisfaction and
that of its counsel. The use of loan proceeds shall be consistent with the
projections previously submitted by the
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August 19, 2002
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Borrower to the Bank. It is further understood that the choice of governing law
for this transaction and the location of negotiations, closing and funding this
transaction shall be satisfactory to the Bank and its counsel.
The availability of this proposal is subject to the usual condition that there
be no material adverse change in the financial condition or business operations
of either the Borrower or URSA, or a material adverse change in any of VTB or
URSA's assets, including any collateral to be pledged to the Bank, in each case,
since the date of the Borrower's submission of documents and financial
statements to the Bank. This proposal is further subject to any changes in
government regulation or monetary policy. Without limiting the generality of the
foregoing, if there is any material adverse change in the business operations of
the Borrower, the condition of its assets, or its prospects for performance, the
Bank may terminate this proposal without liability to the Borrower or URSA. This
proposal supersedes all prior proposals presented by the Bank to the Borrower.
If you would find this proposal acceptable, please so indicate by signing in the
space provided below as well as on Exhibit A and returning this letter and
Exhibit A, to my attention by the close of business August 23, 2002.
Unless the Loans are closed or the commitment is otherwise extended by the Bank
(in its discretion), this proposal will expire on September 30, 2002.
Very truly yours,
Banknorth, National Association
By: s/H. Ellery Perkinson
H. Ellery Perkinson
Vice President
ACCEPTED AND AGREED TO:
The Vermont Teddy Bear Co., Inc.
By: /s/Elisabeth B. Robert
----------------------------------
President and duly
Authorized Agent
The Vermont Teddy Bear Co., Inc.
August 19, 2002
Page 6 of 10
EXHIBIT A
Security. The Bank shall receive a collateral assignment of the Borrower's lease
with URSA for the Borrower's retail/manufacturing facility located at what is
known as 6655 Shelburne Road, Route 7, Shelburne, VT, and currently leased from
URSA (the "Property"), a second mortgage of the Borrower's real estate located
at Shelburne South Commercial Park Condominium (the "Additional Real Estate"),
which mortgage shall be a first with respect to the Mortgage Loan contemplated
to be made to URSA and a second with respect to Borrower's obligations with
respect to the Term Loan and the Revolving Line of Credit, a first perfected
security interest in all assets of the Borrower, collateral assignments of all
intellectual property, a stock pledge in all of the Borrower's subsidiary
corporations, and collateral assignments of all leases and rents associated with
Borrower's leased properties. The existing loan documents between URSA and
Chittenden Bank shall be duly and validly assigned to the Bank and shall all be
in form and substance satisfactory to the Bank and its counsel. URSA shall
subordinate any lien it has in the Borrower's assets, other than the Additional
Real Estate, to the Bank's lien and security interest in Borrower's assets.
For the Mortgage Loan contemplated to be made to URSA, the Borrower shall pledge
(subject to no other liens) to the Bank a certificate of deposit with the Bank
in such amount as the Bank may reasonably require such that the loan to value
ratio of the Mortgage Loan meets the Bank's standards for loans of similar size
and credit. It is currently expected that the certificate of deposit shall be in
the approximate amount of $410,000. The certificate of deposit shall also serve
as collateral for the Term Loan and the Revolving Line of Credit.
Life Insurance. The Bank shall have received a collateral assignment of a
key-person life insurance policy insuring the life of Elisabeth Robert, which
policy shall be in a minimum amount of $3,500,000, issued by an insurance
company licensed in the State of Vermont, in each case satisfactory to the Bank.
Assignment of Leases. All leases associated with the business assets of the
Borrower, including the Property, must be in form and substance satisfactory to
the Bank and its counsel. All such leases shall be validly assigned to the Bank
and subordinated to the Bank's mortgage interest in the Property.
Financial
Covenants: Financial covenants required will include the following:
Minimum Fixed Charge Coverage: Measured quarterly on a
trailing four quarter basis, the Borrower must realize a
minimum Fixed Charge Coverage Ratio level equal to or greater
than the following:
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August 19, 2002
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For all fiscal quarters through 6-30-2004: 1.15 to 1;
for the fiscal quarter ending 9-30-2004 and for each fiscal
quarter thereafter, 1.75:1.
Fixed Charge Coverage is defined as EBITDA minus taxes minus
un-financed capital expenditures minus dividends all divided
by the sum of interest expense plus principal payments on all
long-term debt and capital leases. "EBITDA" means, with
respect to any fiscal period, Borrower's and its subsidiaries'
consolidated net earnings (or loss), minus extraordinary
gains, plus interest expense, income taxes, and depreciation
and amortization, for such period, and less any investment
income and so called "other income", as determined in
accordance with generally accepted accounting principles,
consistently applied.
Maximum Total Funded Debt to EBITDA: The ratio of Total Funded
Debt to EBITDA, measured quarterly, can not exceed the
following ratio levels:
For all Fiscal quarters through 6-30-2003: 2.6 to 1;
for all fiscal quarter commencing 9-30-2003 through 6-30-2004:
2.0 to 1;
for all fiscal quarters beginning 9-30-2004 and ending
6-30-2005:1.5 to 1; and
for the fiscal quarter ending 9-30-2005 and for all fiscal
quarters thereafter: 1.0 to 1.
Minimum Tangible Net Worth:
The Borrower shall maintain a minimum tangible net worth of
not less than $3,000,000, at all times. Beginning with the
fiscal year period ending June 30, 2003, said amount shall be
increased by 50% of net income on an annual basis, and shall
not be reduced by net losses (if any).
Maximum Capital Expenditures
The Borrower shall not make any capital expenditures in excess
of $1,750,000 in the aggregate in any year.
Negative Covenants. The loan documents will contain prohibitions against
assuming liabilities or obligations of others; restrictions on dividend
payments; limitations on the purchase or sale of equipment and fixed assets;
limitations on compensation of officers and owners; limitations on selling
assets without the concurrence of the Bank; restrictions concerning
acquisitions, consolidations, mergers, investments or similar transactions,
restrictions on changing its
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August 19, 2002
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organizational structure, and restrictions on change in management or failure of
the Borrower to continue to employ Elisabeth B. Robert in her current capacity.
Appraisal. The Bank will require a satisfactory appraisal of the Property. The
loan to value ratio for all collateral must be acceptable to the Bank.
Environmental. The Bank will require satisfactory environmental due diligence,
including but not limited to, an environmental site assessment report for the
Property.
Subordination Agreement. All debt due and owing by the Borrower to third parties
(other than trade payable incurred in the ordinary course) shall be subordinated
to the Bank debt, by a subordination agreement in form and substance
satisfactory to the Bank.
Legal Opinions. The Borrower shall provide to the Bank opinions of counsel in
form and substance satisfactory to the Bank and its counsel.
Operating Accounts. All operating accounts of the Borrower shall be maintained
with the Bank.
Financial Reports. The Borrower shall provide the Bank with the following
financial reports, in form satisfactory to the Bank:
A. Borrower agrees to provide monthly financial
statements within 45 days of the close of each month
during the term of the Loans;
B. Borrower agrees to provide copies of its annual
audited financial statements, complete with all
schedules, within 90 days of the close of each fiscal
year during the term of the Loans;
C. The Borrower will provide quarterly compliance
certificate within 45 days of the end of each fiscal
quarter, except for the fiscal quarter ending June
30, in which case the compliance certificate shall be
due within 90 days of such date;
D. The Borrower will, within 90 days of the end of each
fiscal year, provide an annual budget and financial
projections for the following fiscal year; and
E. The Borrower agrees to furnish to the Bank such
additional financial statements, data and information
concerning the Property, and the financial condition
of the Borrower and URSA as may be reasonably
requested by the Bank.
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August 19, 2002
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Additional Provisions. The Borrower shall: (a) comply with all governmental
laws, rules and regulations, including but not limited to federal and state
securities laws, and state and federal environmental laws; (b) provide proof of
adequate property and liability insurance coverage on all of the Borrower's
properties and business operations, which certificates shall name the Bank as a
loss payee (with respect to property insurance) and as an additional insured
(with respect to liability insurance).
Costs and Expenses. The Borrower shall reimburse the Bank for any and all
reasonable costs and expenses, including fees and expenses of legal counsel
selected by the Bank, incurred in connection with the Loans, and including the
proposed Loan to URSA. The Borrower shall be responsible for reimbursing the
Bank for the costs of the appraisals and environmental site assessments
performed. All such costs, fees and expenses shall be due and payable,
regardless of whether or not the loan transaction is consummated. The Borrower
will be responsible for paying any prepayment or yield maintenance fees
associated with any prepayment of the Mortgage Loan contemplated to be made by
the Bank to URSA.
Environmental Compliance. The Borrower shall keep its business and the Property
in full compliance with all environmental laws, including without limitation,
those relating to hazardous waste or hazardous substances.
Indemnification. The Borrower shall hold harmless and indemnify the Bank from
any loss, cost, damage, or expense for injury or death to persons or damage to
property which may arise in connection with the construction, use, maintenance
or occupancy of the Property, other than those due to the acts of the Bank, its
employees or agents. Borrower shall also indemnify the Bank for any liability,
loss, cost, damage, or expense arising from any violations of the Superfund and
hazardous waste laws, rules or regulations or any other environmental law. The
Borrower shall also indemnify the Bank for any loss, cost, damage, or expense
suffered or incurred by the Bank as a result of any misrepresentation made in
connection with the Loans or the breach of any representation, warranty, or
agreement made by Borrower under the Loan Documents.
Loan Documents. The Bank's proposal to provide the Loans will be subject to
negotiation and completion of definitive documentation, including, but not
limited to a loan agreement, security agreement, mortgage, promissory notes,
subordination agreements, collateral assignments, each containing appropriate
representations, covenants and conditions (the "Loan Documents"). Such Loan
Documents shall be satisfactory to the Bank and its counsel, consistent with
prudent lending practice. The Loan Documents shall contain, among other things,
covenants requiring Borrower to maintain its existence, maintain insurance, keep
the collateral free of liens and encumbrances (except the Bank's lien) and
payment of taxes and assessments. In addition, the Loan Documents shall contain
events of default deemed appropriate by the Bank and provide remedies to the
Bank upon any such default.
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August 19, 2002
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Without limiting the generality of the foregoing, the Bank's proposal and any
obligation to fund any Loan under the Loan Documents is expressly conditioned
upon (1) the accuracy and freedom from omissions of the information provided to
the Bank by or on behalf of the Borrower, (2) the absence of any material
adverse changes to the Borrower's business, the Property, operations, or
financial condition, or the financial condition or operations of URSA (3)
satisfactory review of applicable permits and licenses, and appropriate
assignments and certifications.
ACCEPTED AND AGREED TO:
The Vermont Teddy Bear Co., Inc.
By: /s/Elisabeth B. Robert
------------------------------------
President and duly
Authorized Agent