<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1997.
REGISTRATION NO. 333-22959
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JAYMARK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 8748 33-0744824
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
9775 TOWNE CENTRE DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 535-3100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ERIC P. WENAAS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JAYMARK, INC.
9775 TOWNE CENTRE DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 535-3100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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CAMERON JAY RAINS, ESQ. JAMES R. TANENBAUM, ESQ.
DOUGLAS J. REIN, ESQ. GLENN D. SMITH, ESQ.
DAVID R. YOUNG, ESQ. STROOCK & STROOCK & LAVAN LLP
GRAY CARY WARE & FREIDENRICH 2029 CENTURY PARK EAST,
A PROFESSIONAL CORPORATION SUITE 1800
4365 EXECUTIVE DRIVE, SUITE 1600 LOS ANGELES, CA 90067-3086
SAN DIEGO, CA 92121-2189 (310) 556-5800
(619) 677-1400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
SUBJECT TO COMPLETION, DATED JUNE 9, 1997
PROSPECTUS
1,300,000 SHARES
LOGO
CLASS A COMMON STOCK
------------------------
ALL OF THE 1,300,000 SHARES OF CLASS A COMMON STOCK, PAR VALUE $0.001 PER
SHARE, OFFERED HEREBY ARE BEING SOLD BY JAYMARK, INC. ("JAYMARK" OR THE
"COMPANY"). THE COMPANY'S COMMON STOCK CONSISTS OF CLASS A COMMON STOCK AND
CLASS B COMMON STOCK. OTHER THAN THE CONVERSION OF ALL SHARES OF CLASS B COMMON
STOCK INTO SHARES OF CLASS A COMMON STOCK OVER A FOUR-YEAR PERIOD COMMENCING
UPON THE CLOSING OF THIS OFFERING, THE RIGHTS, PREFERENCES AND PRIVILEGES OF
EACH CLASS OF COMMON STOCK ARE IDENTICAL IN ALL RESPECTS.
Prior to this offering, there has been no public market for the Class A
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $12.00 and $14.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Company's Class A Common Stock has been approved for
quotation on the Nasdaq National Market under the symbol "JMRK."
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
- -------------------------------------------------------------------------------------------------
Per Share....................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)........................ $ $ $
</TABLE>
================================================================================
(1) Excludes the value of warrants to be issued to the representative of the
Underwriters (the "Representative") to purchase up to 130,000 shares of
Class A Common Stock (the "Representative's Warrants"). The Company has
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
to be $1,025,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 195,000 additional shares of Class A Common Stock on the
same terms and conditions as the Class A Common Stock offered hereby solely
to cover over-allotments, if any. If the Underwriters exercise this option
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Class A Common Stock offered hereby are offered by the
Underwriters, subject to prior sale when, as and if delivered to and accepted by
the Underwriters and subject to certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the certificates
representing shares of Class A Common Stock will be made at the offices of Brean
Murray & Co., Inc. in New York, New York on or about , 1997.
------------------------
BREAN MURRAY & CO., INC.
------------------------
The date of this Prospectus is , 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE> 3
FIBRESTAR(TM) FIBRE CHANNEL
GIGABIT SOLUTIONS FOR TODAY AND THE FUTURE
Up to 126 Users Per Loop
Simultaneous Network & Storage Products
[Schematic diagram illustrating a computer network in three buildings of various
sizes using Fibre
Channel technology.]
Full Utilization of Link Speed (1063 Mbps), Even with Multiple Users
Network Attached Offsite Storage (Up to 6 Miles)
Expands Up to 16 Million Users
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<CAPTION>
POTENTIAL APPLICATIONS
<S> <C>
- - Airline Reservation Systems [Legend depicting figures used to represent
- - Stock Brokerage and Loan Processing the following items in the above schematic
- - Broadcast Video and Video Editing diagram: FibreStar adapters, Disk
- - Geographical and Thermal Mapping Array/RAID, Hub, Switch, Super Server,
- - Point of Sale Transaction Processing Server, Supercomputer and Workstation.]
- - Semiconductor Chip Design and Testing
- - Multi-Facility (Campus) Networks
- - Scientific Computing and Simulation
- - Medical Imaging FIBRESTAR PRODUCT FAMILY
- - Data Warehouses
- - Robotics Control [Picture of FibreStar adapter cards.]
</TABLE>
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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PAGE
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Prospectus Summary............................................................ 4
Risk Factors.................................................................. 7
Use of Proceeds............................................................... 14
Dividend Policy............................................................... 14
Capitalization................................................................ 15
Dilution...................................................................... 16
Selected Consolidated Financial Data.......................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 18
Business...................................................................... 24
Management.................................................................... 41
Certain Transactions.......................................................... 49
Principal Stockholders........................................................ 50
Description of Capital Stock.................................................. 52
Shares Eligible for Future Sale............................................... 53
Underwriting.................................................................. 55
Legal Matters................................................................. 56
Experts....................................................................... 56
Additional Information........................................................ 56
Glossary...................................................................... 58
Index to Consolidated Financial Statements.................................... F-1
</TABLE>
------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than in connection with the offer made by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the shares of
Class A Common Stock offered hereby in any jurisdiction in which such an offer
or solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any time subsequent to
its date.
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
FibreStar and Auto-Arrestor are trademarks of the Company. This Prospectus
also contains trade names and trademarks of other companies that are the
property of their respective holders.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus, including information under "Risk Factors." The
shares of Class A Common Stock offered hereby involve a high degree of risk and
investors should carefully consider information set forth in "Risk Factors."
Unless otherwise indicated, all information in this Prospectus (i) gives effect
to a three-for-five reverse stock split consummated in connection with the
Company's reincorporation in Delaware in May 1997, and (ii) assumes that the
Underwriters' over-allotment option as described in "Underwriting" is not
exercised. See "Glossary" for the definition of certain terms used herein.
THE COMPANY
Jaymark provides advanced technology products and services to the
Department of Defense (the "DoD") and other government agencies, and
commercializes selected government-funded technologies following a disciplined
evaluation of market size and profitability. The Company's first products
developed under this commercialization strategy are high-speed digital
communication adapters, which have been sold in production quantities since
December 1996. These products, marketed under the FibreStar brand, are designed
to the ANSI Fibre Channel standard. The Fibre Channel standard has become well
supported in the industry because of its high performance, which includes (i)
the highest commercially available speed (2125 megabits per second ("Mbps") in
full duplex), (ii) scalability (up to 126 nodes on a single loop), (iii)
simplicity of installation and maintenance, (iv) multiprotocol transport
(simultaneously within both storage and network environments), (v) long
connection distance (up to six miles), and (vi) high reliability of data
reception and absence of congestion with multiple users. FibreStar products
provide essential hardware and software to reduce network congestion, thereby
delivering substantial performance improvement to users requiring high-bandwidth
data transmission capabilities, including multimedia, in such applications as
(i) business and scientific computing, (ii) high volume database access for the
financial and retail industries, and (iii) multistream digital video
transmission and editing for the entertainment and broadcast industries.
With over twenty years of government-funded advanced technology
development, the Company has established several core competencies, including
(i) electronic and electro-optic system design, (ii) communications engineering,
(iii) electromagnetic effects, and (iv) nuclear and high-explosive weapon
effects (e.g., blast and shock effects on structures). In 1991, under the
leadership of new management, the Company began to target government contracts
involving the development of proprietary technologies with potential commercial
applications ("dual-use technologies").
The Company's objective is to increase profitability by leveraging its core
competencies and its advanced government-funded research through
commercialization of dual-use technologies. The key elements of the Company's
strategy are to:
- Establish FibreStar as a leading line of adapters in the emerging market
for networking and storage products utilizing the Fibre Channel standard.
- Selectively identify and commercialize additional dual-use technologies
and products with compelling market potential, and establish separate
business entities, when appropriate, to provide dedicated management and
focused business objectives.
- Maintain and expand core competencies to provide new proprietary
technologies, products and resources through the pursuit of
government-funded research and strategic acquisitions.
The Company has recently formed a wholly owned subsidiary, Jaycor Networks,
Inc. ("JNI" or "Jaycor Networks"), to which it contributed its FibreStar
products and technology in order to capitalize on the commercial potential of
these products. The efficient and rapid transfer of information throughout
networks has become increasingly critical to the daily operation of business.
The annual market for Fibre Channel adapters, such as the FibreStar products, is
projected to grow from $68 million in 1996 to over $200 million in 1997 and to
exceed $1 billion by the year 2000, according to an industry study by emf
Associates and Andrew Prophet Research & Consulting, two networking consulting
groups. The Company believes that only a small portion of this market is
currently associated with independent suppliers of Fibre Channel adapters. In
the future, however, the Company believes that independent suppliers, such as
JNI, will supply a larger portion of the market. As an example of how widely the
Fibre Channel standard has been adopted, JNI and 35 other companies exhibited a
variety of their Fibre Channel product lines at the Comdex computer trade show
meeting in November 1996, including Adaptec, Ancor Communications, Box Hill
Systems, Digital Equipment Corporation, Emulex, Gadzoox Microsystems,
Hewlett-Packard, Intel, Interphase, LSI Logic, QLogic, Quantum, Seagate
Technology, Sun Microsystems, Texas Instruments, Unisys, Vitesse Semiconductor,
and XPoint Technology. From December 1996 to April 1997, JNI shipped over
$750,000 of FibreStar products.
The Company's government contract business is performed through Jaycor,
Inc. ("Jaycor"), its wholly owned subsidiary. Jaycor's objective is to maintain
and expand its advanced technology government research base, which will
4
<PAGE> 6
provide both the technology and resources for further product commercialization.
In addition to FibreStar, Jaycor has developed other dual-use technologies that
have the potential for successful commercial applications, including: (i) a
bomb-resistant luggage container designed for aircraft safety, (ii) an
Auto-Arrestor to prevent or terminate dangerous high-speed chases, (iii) several
non-lethal weapon applications for military and domestic security purposes, and
(iv) several weapon detection systems. Jaycor intends to focus on areas in which
government funding is likely to remain stable or increase, while simultaneously
identifying problems and providing solutions to the government in areas in which
its core competencies provide a competitive advantage. Jaycor maintains active
relationships with the Departments of Defense, State, Justice, Transportation,
and Energy, and had approximately 200 contracts or subcontracts that generated
revenue during the fiscal year ended January 31, 1997, which were funded by
approximately 40 different government agencies, most of which are within the
DoD.
An investment in the Class A Common Stock is subject to a number of risks
associated with the Company and its business, including, among others, (i) risks
associated with entering commercial markets, (ii) the Company's dependence upon
government contracts and, in particular, contracts funded by the DoD, (iii)
JNI's limited operating history, (iv) JNI's dependence upon the Fibre Channel
standard, (v) anticipated fluctuations in operating results, and (vi) risks
associated with government contracts, including, among others, possible early
termination by the government and risks related to government audits of
contracts costs. See "Risk Factors."
Unless the context otherwise requires, the "Company" or "Jaymark" refers to
Jaymark, Inc. and its consolidated subsidiaries. The Company's principal
executive offices are located at 9775 Towne Centre Drive, San Diego, California
92121, and its telephone number at that location is (619) 535-3100. The Company
reincorporated in Delaware in May 1997.
THE OFFERING
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Common Stock Offered by the Company.......... 1,300,000 shares of Class A Common Stock
Common Stock Outstanding After the
Offering(1)................................ 1,648,306 shares of Class A Common Stock(2)
1,393,334 shares of Class B Common Stock(2)
Use of Proceeds.............................. For general corporate purposes, including product
development, working capital and potential acquisitions,
for repayment of indebtedness outstanding under the
Company's bank line of credit, and to finance the
Company's repurchase, subject to certain conditions, of
120,000 shares of Common Stock
Nasdaq National Market Symbol................ "JMRK"
</TABLE>
- ---------------
(1) Unless the context otherwise requires, the term "Common Stock" collectively
refers to the Class A Common Stock and Class B Common Stock of the Company.
Other than the conversion of the Class B Common Stock into Class A Common
Stock over a four-year period commencing upon the closing of this offering,
the rights, preferences and privileges of each class of Common Stock are
identical in all respects. Approximately 95% of such outstanding shares of
Class B Common Stock are held directly or indirectly by executive officers
and directors of the Company, current and former employees of the Company
and the Company's Employee Stock Ownership Plan (the "ESOP"). See "Principal
Stockholders," "Management -- Benefit Plans" and "Description of Capital
Stock."
(2) Approximately 25% of such outstanding shares of Class B Common Stock will
convert into shares of Class A Common Stock upon each of the first four
anniversaries of the closing of this offering. Gives effect to the Company's
repurchase, subject to certain conditions, of 120,000 shares of Common Stock
to be consummated within 30 days of the closing of this offering. Excludes
1,215,225 shares of Class B Common Stock issuable upon the exercise of
outstanding options at April 30, 1997 at a weighted average exercise price
of $4.92 per share, 1,050,450 of which were exercisable as of such date. The
shares of Class B Common Stock issuable upon exercise of such options
convert into shares of Class A Common Stock over a four-year period
commencing on the closing of this offering. Also excludes (i) 130,000 shares
of Class A Common Stock issuable upon exercise of the Representative's
Warrants, (ii) 10,928 shares of Common Stock reserved for issuance pursuant
to the terms of an acquisition which was completed in October 1995, and
(iii) 8,596 shares of Common Stock potentially issuable pursuant to the
terms of an Employment Agreement. See "Use of Proceeds," "Capitalization,"
"Management -- Benefit Plans," "Underwriting" and Notes 6 and 9 of Notes to
Consolidated Financial Statements.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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<CAPTION>
THREE MONTHS ENDED
APRIL 30, YEAR ENDED JANUARY 31,
--------------------- ---------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
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CONSOLIDATED STATEMENT OF
INCOME DATA:
Revenues....................... $ 13,430 $ 13,224 $ 54,403 $ 52,928 $ 57,656 $ 55,901 $ 57,695
Costs and expenses:
Cost of revenues............. 10,579 10,644 44,192 43,523 47,846 46,656 48,684
Selling, general and
administrative............ 2,104 1,941 7,187 6,257 7,363 6,592 6,733
Research and
development(1)............ 269 80 532 560 228 206 365
--------- --------- --------- --------- --------- --------- ---------
12,952 12,665 51,911 50,340 55,437 53,454 55,782
--------- --------- --------- --------- --------- --------- ---------
Operating income............... 478 559 2,492 2,588 2,219 2,447 1,913
Interest expense............... 460 488 1,888 2,018 1,721 1,632 568
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes..... 18 71 604 570 498 815 1,345
Provision for income
taxes(2)..................... 7 36 247 234 176 95 562
--------- --------- --------- --------- --------- --------- ---------
Net income..................... $ 11 $ 35 $ 357 $ 336 $ 322 $ 720 $ 783
========= ========= ========= ========= ========= ========= =========
Net earnings per share......... $ 0.01 $ 0.02 $ 0.17 $ 0.16 $ 0.15 $ 0.30 $ 0.30
========= ========= ========= ========= ========= ========= =========
Shares used in per share
calculation.................. 2,010,995 2,040,492 2,043,243 2,075,852 2,131,439 2,678,436 3,093,587
========= ========= ========= ========= ========= ========= =========
</TABLE>
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<CAPTION>
APRIL 30, 1997
------------------------------
ACTUAL AS ADJUSTED(3)
----------- --------------
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CONSOLIDATED BALANCE SHEET DATA:
Cash...................................................................... $ 63 $ 8,822
Working capital (deficit)................................................. (908) 12,615
Total assets.............................................................. 32,444 41,203
Bank line of credit....................................................... 4,764 --
Mortgage debt, less current portion....................................... 13,058 13,058
Long-term liabilities, excluding mortgage debt............................ 1,371 1,371
Mandatorily redeemable ESOP shares(4)..................................... 5,067 --
Stock repurchase obligation............................................... 1,000 --
Total stockholders' equity (deficit)...................................... (751) 18,839
</TABLE>
- ---------------
(1) Most of the Company's research and development efforts are funded directly
under development contracts with the U.S. government and are included in
cost of revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) Provision for income taxes in fiscal year 1994 includes a credit of $231
from a change in method of accounting for income taxes.
(3) Adjusted to reflect the sale by the Company of 1,300,000 shares of Class A
Common Stock offered hereby at an assumed initial public offering price of
$13.00 per share, after deduction of underwriting discounts and commissions
and estimated offering expenses and the application of the estimated net
proceeds therefrom (including the potential repurchase of 120,000 shares).
See "Use of Proceeds" and "Capitalization."
(4) Represents the Company's potential obligation prior to the closing of this
offering to repurchase shares of Class B Common Stock upon distribution by
the ESOP of vested shares to retiring or terminated plan participants due to
the fact that such shares are not readily tradeable. Following the closing
of this offering, this potential obligation may, at the Company's option, be
satisfied by the distribution from the ESOP of shares of Class A Common
Stock which are readily tradeable, and therefore such amount will be
reclassified to stockholders' equity. See "Management -- Benefit Plans" and
Notes 6 and 9 of Notes to Consolidated Financial Statements.
6
<PAGE> 8
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of the Securities Act of 1933. Actual results could differ materially
from those projected in the forward-looking statements as a result of certain
risks and uncertainties set forth below and elsewhere in this Prospectus. An
investment in the shares of Class A Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information set forth in this Prospectus,
in connection with an investment in the shares of Class A Common Stock offered
hereby.
RISKS ASSOCIATED WITH ENTERING COMMERCIAL MARKETS
Historically, the Company's business has been focused on providing advanced
technology products and services to the DoD and other government agencies. The
Company believes that its future growth and increased profitability are largely
dependent upon its success in commercial markets, especially in the computer
networking market, in which it has only recently begun to compete. The Company
believes that while the technologies used in its defense and commercial sectors
have similarities, the business aspects of operating in such sectors differ
significantly. As a result, the Company is subject to risks inherent in the
operation of a new business enterprise, including risks associated with
attracting and servicing a new customer base, developing and manufacturing
products in a cost-effective and profitable manner, managing the expansion of a
business operation, and attracting and retaining qualified engineering,
marketing and managerial personnel with industry experience. Any of such risks
could adversely affect the Company's business, operating results and financial
condition. See "-- Risks Associated with JNI."
DEPENDENCE ON GOVERNMENT MARKET
To date, nearly all of the Company's revenues have been derived from
contracts or subcontracts funded by agencies of the U.S. government, in
particular the DoD. Contracts or subcontracts funded by the DoD accounted for
approximately 91%, 89%, 88% and 75% of the Company's revenues during the years
ended January 31, 1995, 1996, and 1997 and the three months ended April 30,
1997, respectively. The Company expects, at least in the near term, to continue
to derive the majority of its revenues from its government contracts business.
As a result, the Company's revenues could be adversely impacted by a decrease in
defense spending by the U.S. government. Any failure by the Company to replace
revenues attributable to a significant defense program or contract at the end of
such program or contract, whether due to cancellation, spending cuts, budgetary
constraints or otherwise, could have an adverse effect upon the Company's
business, operating results and financial condition in future periods. See
"-- Risks Associated with Government Contracts."
RISKS ASSOCIATED WITH JNI
- Limited Operating History. Shipment of FibreStar adapters in limited
commercial quantities began in December 1996. Due in part to its lack of
operating history, JNI is unable to predict the level of demand for its
FibreStar adapters, or whether or not such products will be able to
achieve broad acceptance in the computer networking market. The likelihood
of success of JNI must be considered in light of the problems, expenses,
complications and delays frequently encountered by early-stage companies
and the competitive environment in which JNI intends to operate. Such
problems could have an adverse effect on JNI's business, operating results
and financial condition and, accordingly, on the Company's business and
future prospects.
- Dependence on Fibre Channel Standard. JNI's future financial performance
and, to a large extent, the Company's future prospects will depend on the
growth in the market for products designed to the Fibre Channel standard.
Because the market for Fibre Channel products is new and evolving, it is
difficult to assess or predict with any assurance its size or growth rate.
The development or emergence of standards which compete with or are
superior to Fibre Channel, whether on the basis of cost, speed,
flexibility or otherwise, could have an adverse effect on JNI's and,
accordingly, the Company's business, operating results and financial
condition. If the market for Fibre Channel products fails to develop as
rapidly as expected or if JNI's products fail to achieve market
acceptance, JNI's business, operating results and financial condition and,
accordingly, the Company's business and future prospects would be
adversely affected.
7
<PAGE> 9
- Management of Growth. Growth and expansion will place a strain on JNI's
management, administrative, operational and financial resources and will
impose increased demands on its systems, controls and personnel. In
particular, there can be no assurance that the Company will be able to
retain or recruit in a timely manner qualified engineering and managerial
personnel. There can be no assurance that JNI will be able to effectively
manage any future growth, and any failure to do so would have an adverse
effect on JNI's business, operating results and financial condition and,
accordingly, on the Company's business and future prospects. See
"Business -- Company Strategy" and "Management."
- Competition. The computer networking industry is intensely competitive,
subject to rapid change, and significantly affected by new product
introductions and other market activities of industry participants. JNI
competes with companies offering products based on the Fibre Channel
standard, as well as companies offering products based on competing
standards. Many of JNI's current and potential competitors have
significantly greater financial, technical, marketing and other resources,
and possess a larger installed base of customers than JNI. The computer
networking industry has witnessed many acquisitions pursuant to which
several large companies have emerged with comprehensive networking
solutions. These acquisitions may permit JNI's competitors to devote
significantly greater resources to the development and marketing of new
competitive products and the marketing of existing products to their
larger installed bases of customers. The Company expects that competition
will increase, in particular as companies that are well established in the
computer networking industry increase their focus on the emerging market
for Fibre Channel adapters. There can be no assurance that JNI will be
able to compete successfully in the future with existing or new
competitors or that competitive pressures faced by JNI will not adversely
affect its business, operating results and financial condition and,
accordingly, the Company's business and future prospects. See
"Business -- Fibre Channel Network Products -- Competition."
- Limited Source Components. Certain key components used in JNI's
products, such as application-specific integrated circuits ("ASICs") and
controller chips, are currently available only from a single source or a
limited number of sources. In particular, JNI has designed into its
products a Fibre Channel controller chip available only from
Hewlett-Packard and a PCI interface chip available only from Applied Micro
Circuits Corporation. Similar chips are available from other vendors, but
incorporation of such chips into JNI's products would require alterations
to hardware design and driver software to accommodate the characteristics
of the new chips and, accordingly, would substantially delay product
shipments. In addition, JNI incorporates integrated circuits from Texas
Instruments and Advanced Micro Devices and oscillators from NEL Frequency
Controls, Inc. into its products. Although the functions of these
components can be duplicated using other components available on the
market, the unavailability of any of these components could substantially
delay product shipments. JNI has not entered into purchase agreements with
the suppliers of these components, which subjects JNI to potential
shortages of components and reduced control over delivery schedules and
costs. Any such shortage, delivery problem or cost increase could cause
JNI to seek other suppliers, and the process of identifying and qualifying
such other suppliers could be lengthy. Future difficulty in obtaining any
of these key components could result in delays or reductions in product
shipments which, in turn, could have an adverse effect on JNI's business,
operating results and financial condition and, accordingly, on the
Company's business and future prospects.
- Contract Manufacturing. JNI's use of third-party manufacturers to
assemble and test its products involves certain risks, including the lack
of adequate capacity, the unavailability of access to certain process
technologies, and reduced control over delivery schedules, manufacturing
yields, quality and costs. In the event that any significant contractor
were to become unable or unwilling to continue to manufacture or test
JNI's products in required volumes, JNI would have to identify and qualify
acceptable replacements. This process of qualifying manufacturing
contractors and other suppliers could be lengthy, and no assurance can be
given that any additional sources would become available to JNI on a
timely basis, if at all. Any delay or reduction in component shipments or
delay or increase in costs of the assembly and testing of products by
contractors could adversely affect JNI's business, operating results and
financial condition and, accordingly, the Company's business and future
prospects.
8
<PAGE> 10
- Dependence on OEMs and Resellers. JNI has developed and is dependent on
sales and marketing channels consisting primarily of resellers and
original equipment manufacturers ("OEMs"). Any failure of such OEMs and
resellers to adequately market, promote and sell JNI's products, whether
due to competition, insolvency, lack of attention to or understanding of
JNI's products, or otherwise, would have an adverse effect on JNI's
business, operating results and financial condition and, accordingly, on
the Company's business and future prospects. See "Business -- Fibre
Channel Network Products -- Sales and Marketing."
- Rapid Technological Change. The computer networking industry is
characterized by rapidly changing technologies and frequent new product
introductions. The rapid development of new technologies increases the
risk that current or new competitors could develop products that would
reduce the competitiveness of JNI's products. JNI's success will depend to
a substantial degree upon its ability to respond to changes in technology
and customer requirements. This will require the timely selection,
development and marketing of new products and enhancements on a
cost-effective basis. There can be no assurance that JNI will be
successful in developing, introducing or managing the transition to new or
enhanced products, or that any such products will be responsive to
technological changes or will gain market acceptance. If JNI were to be
unsuccessful or to incur significant delays in developing and introducing
such new products or enhancements, JNI's business, operating results and
financial condition and, accordingly, the Company's business and future
prospects could be adversely affected. See "Business -- Fibre Channel
Network Products -- Research and Development."
RISKS ASSOCIATED WITH GOVERNMENT CONTRACTS
- Early Termination. Jaycor's contracts with the U.S. government and its
subcontracts with government prime contractors are subject to modification
or termination at the convenience of the government. Moreover, while many
of Jaycor's government contracts and subcontracts extend over several
years, such contracts are typically funded for no more than one year at a
time. There can be no assurance any such modifications or terminations
will not have an adverse effect on the Company's business, operating
results and financial condition in the future.
- Competition. The advanced technology products and services market is
competitive and is characterized by rapid technological change,
developments and advancements, as well as the evolving budgetary
priorities of the U.S. government. Jaycor's competitors are diverse and
generally differ among each of its core competencies. Many of Jaycor's
competitors have substantially greater technical, financial, marketing and
other resources than the Company, as well as superior name recognition.
The Company believes that the critical success factors in the advanced
technology government solutions market include developing proprietary
technology, demonstrating technological superiority, maintaining customer
satisfaction, adapting to evolving governmental budgetary priorities,
identifying future government problems, providing cost-effective solutions
for such problems, and recruiting and retaining highly skilled personnel.
No assurance can be given that these competitors will not develop new
technologies or introduce new solutions that will offer superior pricing
or performance features or that new solutions or technologies will not
impair the competitiveness of Jaycor's solutions. See
"Business -- Advanced Technology Products and Services -- Competition."
- Contract Costs Subject to Government Audits; Government Compliance. All
contract costs, including indirect costs, for services under contracts or
subcontracts funded by agencies of the U.S. government are subject to
audit, and the acceptance of such costs as allowable and allocable is
subject to federal regulatory guidelines. Contract revenues have been
recorded in amounts which the Company expects to be realized upon final
audit settlement. There can be no assurance, however, that audits and
adjustments will not result in decreased revenues and net income for those
years, and any disallowance of costs by the government could have an
adverse effect on the Company's business, operating results and financial
condition. Because of its participation in government contracts, Jaycor is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit
Agency, the Defense Investigative Service and the Office of Federal
Control Compliance Programs. These and other governmental agencies may
also, from time to time, conduct inquiries or investigations that may
cover a broad range of Company activity. Responding to any such
9
<PAGE> 11
audits, inquiries or investigations may involve significant expense and divert
management attention. In addition, an adverse finding in any such audit, inquiry
or investigation could involve penalties that may have an adverse effect on the
Company's business, operating results and financial condition.
- At-Risk Contract Costs. Certain revenues associated with services
performed prior to execution of a government contract or a modification of
such a contract have been recorded in the Company's financial statements
based upon the expectation that the costs of these services will be fully
recovered. These costs are incurred at the Company's risk, and it is
possible that such costs will not be reimbursed by the U.S. government. As
a result, there can be no assurance that the underlying contracts or
contract modifications will be executed or that such costs will be
recovered. Any failure to recover such costs could have an adverse effect
on the Company's business, operating results and financial condition.
- Fixed-Price Contract Exposure. During the fiscal years ended January 31,
1995, 1996, and 1997 and the three months ended April 30, 1997, 17%, 11%,
14% and 13%, respectively, of the Company's revenues were derived from
fixed-price contracts. Because Jaycor assumes the risk of performing such
contracts at the stipulated price, any failure to accurately estimate
ultimate costs or to control costs during contract performance could
result in losses or reduced profits for particular fixed-price contracts,
which, in turn, could have an adverse effect on the Company's business,
operating results and financial condition. See "Business -- Advanced
Technology Products and Services -- Procurement of Government Contracts."
- Lengthy Sales Cycles. The decision-making process for government
agencies, which constitute the majority of Jaycor's customers, is often
complex and time-consuming. The period between initial discussions
concerning a particular project and the customer's purchase commitment
typically ranges from six to twelve months. In addition, follow-ons to
existing contracts are often subject to lengthy delays. These delays could
have an adverse effect on the Company's business, operating results and
financial condition and, in particular, could contribute to significant
fluctuations in its operating results on a quarterly basis. See
"Business -- Advanced Technology Products and Services -- Procurement of
Governmental Contracts."
- Dependence on Government Contract Coverage. To maintain competitive
overhead rates and historical levels of profitability, Jaycor typically
establishes budgets wherein 75% to 85% of the cost of its non-
administrative employees is anticipated to be directly billed to customers
through existing contracts, with the remaining amount allocated to
overhead. Given the lengthy government contract approval process and
associated uncertainty of the timing of contract modifications or awards,
Jaycor may be unable to meet such utilization goals. The long-term needs
of Jaycor may make it impractical to effect short-term work force
reductions when such under-utilization occurs. Accordingly, no assurance
can be given that Jaycor will meet its desired level of utilization, and
if any resulting increased overhead costs cannot be recovered within
Jaycor's overhead rates, the Company's business, operating results and
financial condition could be adversely affected.
RISK RELATED TO GROWTH THROUGH ACQUISITIONS
One of the Company's strategies is to increase its revenues and expand the
markets it serves through acquisitions. There can be no assurance, however, that
the Company will be able to identify, acquire or profitably manage suitable
acquisition candidates or successfully integrate such businesses, if acquired,
into its operations without substantial costs, delays or other problems. In
addition, there can be no assurance that any acquired businesses will be
profitable at the time of their acquisition or will achieve or maintain
profitability levels that justify the investment therein or that the Company
will be able to realize expected operating and economic efficiencies following
such acquisitions. Acquisitions may involve a number of special risks, including
adverse effects on the Company's reported operating results, diversion of
management's attention, increased burdens on the Company's management resources
and financial controls, dependence on the retention and hiring of key personnel,
risks associated with unanticipated problems or legal liabilities, and
amortization of acquired intangible assets. Any such risks could have an adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Company Strategy."
10
<PAGE> 12
DEPENDENCE ON CERTAIN CUSTOMERS
For the year ended January 31, 1997 and the three months ended April 30,
1997, approximately 32% and 28%, respectively of the Company's revenues were
derived from approximately 40 contracts or subcontracts funded by the Defense
Special Weapons Agency ("DSWA"), an agency of the DoD, and approximately 14% and
16%, respectively of the Company's revenues were derived from contracts with the
Air Force Sacramento Air Logistics Command ("SM-ALC"). While no individual
contract with DSWA is material to the Company's business, the Company would be
materially affected if all or a substantial portion of the funding from DSWA or
SM-ALC were lost. There have been events in the past which have called into
question the continuation of government funding of DSWA. In November 1993,
Congress directed the Rand Corporation to evaluate alternative ways of
accomplishing the functions which were being performed by DSWA, which was then
called the Defense Nuclear Agency. Based in part on the recommendations in the
Rand Corporation's report, Congress elected to continue funding the agency at a
lower level. There can be no assurance that DSWA will continue to provide
funding to the Company at current levels, if at all, and a material decrease in
such funding could have an adverse effect on the Company's business, operating
results and financial condition. See "-- Risks Associated with Government
Contracts" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
significant fluctuations in its quarterly operating results. The Company's
future operating results are dependent upon a number of factors, including, but
not limited to, the demand for its products and services, the number of
government contracts it successfully obtains, the size and timing of specific
contracts, the level of price competition that it encounters in the government
contract bidding process, the length of its sales cycles, the timing and
development of new solution proposals by the Company and its competitors,
acquisitions by the Company and its competitors, the timing of new hires, the
Company's ability to develop and market new solutions, technological changes and
economic conditions, both generally and in specific industry segments. In
particular, JNI does not expect to have a material backlog of unfilled orders,
so any shortfall in demand for FibreStar products in relation to the Company's
expectations, or any material delay in customer orders, could have an almost
immediate impact on the Company's business, operating results and financial
condition. The Company believes that quarterly comparisons of its operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON KEY EMPLOYEES
The Company's success will depend in part on the continued services of its
key employees, including, among others, Eric P. Wenaas, Chairman, President and
Chief Executive Officer of the Company, and Terry M. Flanagan, President and
Chief Executive Officer of JNI. The Company does not have employment agreements
with any of its key employees and does not maintain any key person life
insurance, with the exception of a $1.0 million policy on Dr. Wenaas. The loss
of one or more of the Company's key employees could have an adverse effect on
the Company's business, operating results and financial condition. In
particular, if any one or more of such key employees were to join a competitor
or form a competing company, any resulting loss of existing or potential
business to any such competitor would magnify the adverse effect caused by the
loss of such key employee or employees. In the event of the loss of any such
employee or employees, there can be no assurance that the Company would be able
to prevent the unauthorized disclosure or use of the Company's or its customers'
technical knowledge, practices or procedures by such employee or employees, or
that such disclosure or use would not have an adverse effect on the Company's
business, operating results and financial condition. See "Management."
PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company relies on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality procedures and certain
contractual provisions to establish and protect its proprietary rights. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy, design around or reverse engineer aspects of the Company's
products or to obtain and use information that the Company
11
<PAGE> 13
regards as proprietary. Under certain standard provisions in government
contracts, the government may retain certain rights, which are often limited, in
technology developed under or arising out of work performed under such
contracts. In addition, the laws of certain foreign countries do not protect the
Company's proprietary rights to the same extent as the laws of the United
States. Accordingly, there can be no assurance that unauthorized use of the
Company's technology will not occur. In the future, litigation may be necessary
to protect trade secrets and other intellectual property rights owned by the
Company, to defend the Company against claimed infringement of the rights of
others, and to determine the scope and validity of the proprietary rights of
others. Any such litigation could be costly and result in a diversion of
management's attention and adverse determinations in any such litigation could
result in the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third parties
or prevent the Company from manufacturing or selling its products, any of which
could have an adverse effect on the Company's business, operating results and
financial condition.
ENVIRONMENTAL REGULATIONS AND RISKS
The Company is subject to a variety of local, state and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances. In
the conduct of the Company's business, certain solvents, cleaning agents,
paints, oils and chemicals, as well as certain other hazardous substances, are
handled on a regular basis. The failure to comply with current or future
regulations could result in the imposition of substantial fines on the Company,
suspension of production, alteration of its processes or cessation of
operations, which, in turn, could have an adverse effect on the Company's
business, financial condition and operating results.
BROAD DISCRETION IN ALLOCATION OF NET PROCEEDS
The Company intends to use the net proceeds of this offering primarily for
general corporate purposes, including product development and working capital.
The Company may use a portion of the net proceeds of the offering to acquire or
invest in businesses, technologies or products complementary to the Company's
business. As of April 30, 1997, the outstanding balance under the Company's bank
line of credit was approximately $4.8 million. Other than the repayment of such
outstanding balance and the anticipated use of $1.0 million to repurchase shares
of Common Stock held by a former executive of the Company, the Company has no
other specific plans to use the net proceeds of this offering. Accordingly,
management will retain broad discretion to allocate the net proceeds of this
offering. See "Use of Proceeds" and "Certain Transactions."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Prior to this offering, there has been no public market for the Company's
Class A Common Stock, and there can be no assurance that an active trading
market will develop or be sustained after this offering. The initial public
offering price will be determined through negotiations among the Company and the
Representative and may not be indicative of the market price of the Class A
Common Stock after this offering. The trading price of the Class A Common Stock
is likely to be volatile and may be significantly affected by factors such as
actual or anticipated fluctuations in the Company's operating results;
announcements of technological innovations, new products or new contracts by the
Company or its competitors; developments with respect to patents, copyrights or
proprietary rights; conditions and trends in the Company's markets; changes in
financial estimates by securities analysts; general market conditions; and other
factors. In addition, the public equity markets have from time to time
experienced significant price and volume fluctuations that have particularly
affected the market prices for the stocks of technology companies. These broad
market fluctuations, as well as shortfalls in sales or earnings as compared with
public market analysts' expectations, changes in such analysts' recommendations
or projections and general economic and market conditions, may adversely affect
the market price of the Company's Class A Common Stock. See "Underwriting."
DILUTION
Purchasers of the Class A Common Stock offered hereby will incur immediate
substantial dilution in pro forma net tangible book value per share from the
initial offering price in the amount of $6.81. To the extent outstanding options
to purchase the Company's Common Stock are exercised, there will be further
dilution to such new investors. See "Dilution."
12
<PAGE> 14
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER EFFECTS
Immediately following this offering, the Company's executive officers and
directors will beneficially own approximately 34% of the outstanding shares of
the Company's Common Stock (including shares held by the ESOP), assuming no
exercise of the Underwriters' over-allotment option. As a result, such persons
will have the ability to exercise significant influence over matters regarding
the Company. Such influence may have a significant effect in delaying, deferring
or preventing a change in control of the Company. In addition, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company. In addition, certain provisions
of the Company's Certificate of Incorporation and Bylaws, as well as other
provisions of Delaware law, could have the effect of delaying, deferring or
preventing a change in control of the Company. See "Principal Stockholders" and
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Class A Common Stock in the public market
after this offering, or the possibility of such sales occurring, could adversely
affect prevailing market prices of the Class A Common Stock or the future
ability of the Company to raise capital through an offering of equity
securities. After this offering, the Company will have outstanding 1,648,306
shares of Class A Common Stock and 1,393,334 shares of Class B Common Stock,
after giving effect to the Company's repurchase, subject to certain conditions,
of 120,000 shares of Common Stock. Of such shares, the 1,300,000 shares of Class
A Common Stock offered hereby will be freely tradeable in the public market
without restriction under the Securities Act, unless such shares are held by
"affiliates" of the Company, as defined in Rule 144 under the Securities Act.
The remaining 348,306 shares of Class A Common Stock and the 1,393,334 shares of
Class B Common Stock outstanding upon completion of this offering will be
"restricted securities," as defined in Rule 144. All outstanding shares of the
Company's Class B Common Stock will convert into shares of the Company's Class A
Common Stock over a four-year period commencing upon the closing of this
offering at the rate of 348,306 shares on the closing of this offering and on
each of the first three anniversaries of such closing, and 348,416 shares on the
fourth anniversary of such closing. Subject to the lock-up agreements discussed
below, substantially all of the shares of Class A Common Stock issued upon
conversion of the Class B Common Stock will generally be freely tradeable,
subject in certain instances to the volume limitations imposed by Rule 144.
Pursuant to certain "lock-up" agreements, all of the executive officers and
directors of the Company, as well as certain officers of the Company's
subsidiaries and certain spouses of the executive officers of the Company, who,
following the closing of this offering, will collectively hold an aggregate of
61,332 shares of Class A Common Stock and 245,333 shares of Class B Common
Stock, have agreed, subject to certain limited exceptions, not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of any such
shares for a period of one year from the date of this Prospectus. Certain
additional stockholders of the Company, including the ESOP, who, following the
closing of this offering, will collectively hold an aggregate of 237,338 shares
of Class A Common Stock and 949,440 shares of Class B Common Stock, have entered
into similar lock-up agreements covering a period of 180 days following the date
of this Prospectus. Such agreements provide that Brean Murray & Co., Inc. may,
in its sole discretion and at any time without notice, release all or a portion
of the shares subject to these lock-up agreements. As of April 30, 1997, options
to purchase 1,215,225 shares of Class B Common Stock were outstanding under the
Company's stock option plans, 1,050,450 of which were exercisable as of such
date and approximately 1,059,900 of which are subject to lock-up agreements. The
shares of Class B Common Stock issuable upon exercise of such options convert
into shares of Class A Common Stock over a four-year period commencing on the
closing of this offering. The Company intends to file after the effective date
of this offering Registration Statements on Form S-8 to register an aggregate of
2,443,765 shares of Class A Common Stock reserved for issuance under its stock
option and stock purchase plans or upon conversion of shares of Class B Common
Stock issued under such plans. See "Shares Eligible for Future Sale" and
"Underwriting."
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<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,300,000 shares of
Class A Common Stock offered hereby by the Company are estimated to be
approximately $14,523,000 ($16,855,000 if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of
$13.00 per share (which is the mid-point of the filing range) and after
deducting underwriting discounts and commissions and estimated offering
expenses.
The Company intends to use the net proceeds of this offering primarily for
general corporate purposes, including product development and working capital.
The Company also intends to use a portion of the net proceeds of this offering
to repay indebtedness outstanding under the Company's bank line of credit,
which, as of April 30, 1997, was approximately $4,764,000 and accrued interest
at a rate of 9.125%. The indebtedness outstanding under the bank line of credit
is due and payable in full on October 1, 1997. In addition, the Company has
agreed to repurchase 120,000 shares of Class B Common Stock from Robert P.
Sullivan, a retired Executive Vice President of the Company, for $1,000,000
($8.33 per share). Although the Company is obligated to repurchase such shares
within 30 days of the closing of this offering, such obligation is postponed in
the event that such repurchase would impair the Company's ability to qualify for
listing on the Nasdaq National Market. The Company may also use a portion of the
net proceeds to acquire or invest in businesses, technologies or products
complementary to the Company's business. While from time to time the Company
evaluates potential acquisitions of such businesses, technologies or products,
there are no present understandings, commitments or agreements with respect to
any such transaction. Pending such uses, the Company intends to invest the net
proceeds from the offering in investment-grade, interest-bearing securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Transactions."
DIVIDEND POLICY
The Company has never paid or declared any cash dividends. The Company
intends to retain future earnings, if any, to finance the development and
expansion of its business and, therefore, does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. In addition, the
Company's bank line of credit contains certain restrictions with respect to the
payment of dividends.
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<PAGE> 16
CAPITALIZATION
The following table sets forth, as of April 30, 1997, the capitalization of
the Company on an actual basis and as adjusted to give effect to (i) the sale
and issuance of the 1,300,000 shares of Class A Common Stock offered by the
Company hereby (after deducting the estimated underwriting discounts and
commissions and estimated offering expenses) at an assumed public offering price
of $13.00 and the application of the net proceeds therefrom as described in "Use
of Proceeds," and (ii) the reclassification of the shares of Common Stock held
under the Company's ESOP to stockholders' equity. This table should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
APRIL 30, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Bank line of credit.................................................... $ 4,764 $ --
======= =======
Long-term debt and capital lease obligations, less current portion..... $13,491 $13,491
------- -------
Mandatorily redeemable shares:
Shares held by ESOP, at fair value, 487,241 shares (actual) and no
shares (as adjusted) issued and outstanding(1).................... 5,067 --
Stock repurchase obligation, 120,000 shares (actual) and no shares
(as adjusted) issued and outstanding.............................. 1,000 --
------- -------
Total mandatorily redeemable shares.......................... 6,067 --
------- -------
Stockholders' equity:
Class A Common Stock, par value $0.001; 12,000,000 shares authorized,
no shares (actual) and 1,648,306 shares (as adjusted) issued and
outstanding(2).................................................... -- 2
Class B Common Stock, par value $0.001; 4,000,000 shares authorized,
1,254,399 shares (actual) and 1,393,334 shares (as adjusted)
issued and outstanding(2)......................................... 1 1
Additional paid-in capital........................................... 471 15,499
Stock subscription receivable........................................ (150) (150)
Retained earnings.................................................... 3,487 3,487
Adjustment for mandatorily redeemable ESOP shares(1)................. (4,560) --
------- -------
Total stockholders' equity (deficit)......................... (751) 18,839
------- -------
Total capitalization.................................... $18,807 $32,330
======= =======
</TABLE>
- ---------------
(1) Represents the Company's potential obligation prior to the closing of this
offering to repurchase shares of Class B Common Stock upon distribution by
the ESOP of vested shares to retiring or terminated plan participants due to
the fact that such shares are not readily tradeable. Following the closing
of this offering, this potential obligation may, at the Company's option, be
satisfied by the distribution from the ESOP of shares of Class A Common
Stock which are readily tradeable, and therefore such amount will be
reclassified to stockholders' equity. See "Management -- Benefit Plans" and
Notes 6 and 9 of Notes to Consolidated Financial Statements.
(2) Excludes (i) 120,000 shares of Common Stock which the Company has agreed to
repurchase, subject to certain conditions, (ii) 1,215,225 shares of Class B
Common Stock issuable upon the exercise of stock options outstanding as of
April 30, 1997 at a weighted average exercise price of $4.92 per share,
(iii) 575,000 shares of Class A Common Stock and 453,540 shares of Class B
Common Stock reserved for issuance under the Company's stock option plans,
(iv) 200,000 shares of Class A Common Stock reserved for issuance under the
Company's 1997 Employee Stock Purchase Plan, (v) 130,000 shares of Class A
Common Stock reserved for issuance upon exercise of the Representative's
Warrants, (vi) 10,928 shares of Common Stock reserved for issuance pursuant
to the terms of an acquisition which was completed in October 1995, and
(vii) 8,596 shares of Common Stock potentially issuable pursuant to the
terms of an Employment Agreement. Actual shares of Common Stock also
excludes 487,241 shares of Common Stock held by the ESOP. See
"Management -- Benefit Plans," "Certain Transactions," "Underwriting" and
Notes 6 and 9 of Notes to Consolidated Financial Statements.
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<PAGE> 17
DILUTION
The pro forma net tangible book value of the Company as of April 30, 1997
was $4,316,000 or $2.48 per share of Common Stock. Pro forma net tangible book
value per share represents the amount of net tangible assets, less total
liabilities, divided by the number of shares of Common Stock outstanding
assuming reclassification of all mandatorily redeemable ESOP shares to
stockholders' equity and the repurchase of 120,000 shares. After giving effect
to (i) the sale by the Company of 1,300,000 shares of Class A Common Stock
offered hereby at an assumed initial public offering price of $13.00 per share,
and (ii) repayment in full of the Company's bank line of credit with an
outstanding balance of $4,764,000 at April 30, 1997, the pro forma net tangible
book value of the Company as of April 30, 1997 would have been $18,839,000, or
$6.19 per share. This represents an immediate increase in such net tangible book
value of $3.71 per share to existing stockholders and an immediate dilution of
$6.81 per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share at April 30,
1997................................................... $2.48
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 3.71
-----
Pro forma net tangible book value per share after this
offering.................................................. 6.19
------
Dilution per share to new investors......................... $ 6.81
======
</TABLE>
The following table summarizes, as of April 30, 1997, the differences in
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price paid per share by
existing and new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 1,741,640 57% $ 979,000 5% $ 0.56
New investors.............. 1,300,000 43 16,900,000 95 $ 13.00
--------- ---- ----------- ----
Total............ 3,041,640 100% $17,879,000 100%
========= ==== =========== ====
</TABLE>
- ---------------
(1) All existing stockholders of the Company hold shares of Class B Common
Stock, which shares will convert into shares of Class A Common Stock over a
four-year period commencing upon the closing of this offering. Includes
487,241 mandatorily redeemable shares held by the ESOP and 36,000 shares
issued in return for a $150,000 recourse note receivable. Excludes 120,000
shares which the Company will repurchase, subject to certain conditions,
within 30 days of the closing of this offering. See "Description of Capital
Stock."
The foregoing assumes no exercise of options after April 30, 1997. As of
April 30, 1997, there were outstanding options to purchase 1,215,225 shares of
Class B Common Stock at a weighted average exercise price of $4.92 per share. To
the extent outstanding options are exercised, there will be further dilution to
new investors. See "Capitalization," "Management -- Benefit Plans,"
"Compensation of Directors" and Note 6 of Notes to Consolidated Financial
Statements.
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's consolidated statement of income for each of the years in the
three-year period ended January 31, 1997, and with respect to the consolidated
balance sheet at January 31, 1997 and 1996, are derived from the consolidated
financial statements audited by Price Waterhouse LLP, independent accountants,
which are included elsewhere in this Prospectus and are qualified by reference
to such consolidated financial statements. The consolidated statement of income
data for the years ended January 31, 1994 and 1993 and the consolidated balance
sheet data at January 31, 1995, 1994, and 1993 are derived from audited
consolidated financial statements not included in this Prospectus. The
consolidated statement of income data for the three months ended April 30, 1997
and 1996, and the consolidated balance sheet data at April 30, 1997 are derived
from unaudited consolidated financial statements which are included elsewhere in
this Prospectus. The unaudited consolidated financial statement data includes
all adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the consolidated financial
position and results of operations for such periods. Consolidated operating
results for the three months ended April 30, 1997 are not necessarily indicative
of the results that may be expected for any other interim period or for the year
ending January 31, 1998. The data set forth below should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Result of
Operations and the Consolidated Financial Statements and related notes included
herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30, YEAR ENDED JANUARY 31,
--------------------- ---------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues.................................. $ 13,430 $ 13,224 $ 54,403 $ 52,928 $ 57,656 $ 55,901 $ 57,695
Costs and expenses:
Cost of revenues........................ 10,579 10,644 44,192 43,523 47,846 46,656 48,684
Selling, general and administrative..... 2,104 1,941 7,187 6,257 7,363 6,592 6,733
Research and development................ 269 80 532 560 228 206 365
--------- --------- --------- --------- --------- --------- ---------
12,952 12,665 51,911 50,340 55,437 53,454 55,782
--------- --------- --------- --------- --------- --------- ---------
Operating income.......................... 478 559 2,492 2,588 2,219 2,447 1,913
Interest expense.......................... 460 488 1,888 2,018 1,721 1,632 568
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes................ 18 71 604 570 498 815 1,345
Provision for income taxes(1)............. 7 36 247 234 176 95 562
--------- --------- --------- --------- --------- --------- ---------
Net income................................ $ 11 $ 35 $ 357 $ 336 $ 322 $ 720 $ 783
========= ========= ========= ========= ========= ========= =========
Net earnings per share.................... $ 0.01 $ 0.02 $ 0.17 $ 0.16 $ 0.15 $ 0.30 $ 0.30
========= ========= ========= ========= ========= ========= =========
Shares used in per share calculation...... 2,010,995 2,040,492 2,043,243 2,075,852 2,131,439 2,678,436 3,093,587
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AT JANUARY 31,
AT APRIL 30, ---------------------------------------------------
1997 1997 1996 1995 1994 1993
------------ ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash.................................................. $ 63 $ 85 $ 53 $ 134 $ 41 $ 8
Working capital (deficit)............................. (908) (806) 241 525 (56) (176)
Total assets.......................................... 32,444 31,870 34,779 33,942 35,285 21,875
Bank line of credit................................... 4,764 4,286 4,953 2,552 3,411 2,928
Mortgage debt, less current portion................... 13,058 13,217 13,615 13,964 14,843 --
Long-term liabilities, excluding mortgage debt........ 1,371 1,281 2,137 2,027 2,462 3,765
Mandatorily redeemable ESOP shares(2)................. 5,067 3,159 2,579 2,149 2,108 2,310
Stock repurchase obligation........................... 1,000 1,000 -- -- -- --
Total stockholders' equity (deficit).................. (751) 1,132 2,813 3,195 3,005 2,586
</TABLE>
- ---------------
(1) Provision for income taxes in fiscal year 1994 includes a credit of $231,000
from a change in method of accounting for income taxes.
(2) Represents the Company's potential obligation prior to the closing of this
offering to repurchase shares of Class B Common Stock upon distribution by
the ESOP of vested shares to retiring or terminated plan participants due to
the fact that such shares are not readily tradeable. Following the closing
of this offering, this potential obligation may, at the Company's option, be
satisfied by the distribution from the ESOP of shares of Class A Common
Stock which are readily tradeable, and therefore such amount will be
reclassified to stockholders' equity. See "Management -- Benefit Plans" and
Notes 6 and 9 of Notes to Consolidated Financial Statements.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements with respect to
the Company's future financial performance. These forward-looking statements are
subject to various risks and uncertainties, including the factors described
under "Risk Factors" and elsewhere in this Prospectus, that could cause actual
results to differ materially from historical results or those currently
anticipated.
OVERVIEW
Jaymark provides advanced technology products and services to the DoD and
other government agencies, and commercializes selected government-funded
technologies following a disciplined evaluation of market size and
profitability. The Company's government contract business is performed through
Jaycor, its wholly owned subsidiary. The Company has recently formed a wholly
owned subsidiary, Jaycor Networks, to which it contributed its FibreStar
products and technology in order to capitalize on the commercial potential of
these products.
The Company operates and reports its results of operations on the basis of
52 or 53 week periods ending on the Friday closest to January 31. The Company's
fiscal quarters generally end on the Friday closest to the last day of the month
of the fiscal quarter. For presentation purposes, the Company has indicated its
fiscal year as ending on January 31 and its fiscal quarters as ending on April
30, July 31, and October 31.
The Company has historically derived over 90% of its revenues from
contracts or subcontracts funded by agencies of the U.S. government. Contract
costs reimbursed under government contracts include allocated indirect costs
which are subject to audit and adjustment by the U.S. government. Contract
revenues have been recorded in amounts which are expected to be realized upon
final audit.
Government contracts generally are one of three types: (i) cost plus fixed
fee ("CPFF"), (ii) time and materials ("T&M"), and (iii) fixed-price. CPFF
contracts provide for reimbursement for all of Jaycor's allowable costs and a
fixed profit. T&M contracts require Jaycor to provide a certain number of labor
hours at a rate prescribed by the contract. Jaycor is reimbursed for the hours
spent on T&M contracts at the prescribed labor rate for each category and all
materials utilized. The fee in a T&M contract is generally slightly higher than
for CPFF contracts. Fixed-price contracts require Jaycor to deliver the work
product described in the work statement at a fixed price, which has the largest
risk to Jaycor, but also generally has the largest potential profit margin. In
the year ended January 31, 1997, approximately 78%, 8% and 14% and in the three
months ended April 30, 1997, approximately 82%, 5% and 13% of Jaycor's
government contract revenues were derived from CPFF, T&M, and fixed-price
contracts, respectively. Government contract revenues are generally recognized
as costs are incurred and include a portion of the total estimated earnings to
be realized based upon the relationship between contract costs incurred to date
and total estimated contract costs at completion.
The Company maintains active relationships with the Departments of Defense,
State, Justice, Transportation, and Energy, and had approximately 200 contracts
or subcontracts that generated revenue during the fiscal year ended January 31,
1997, which were funded by approximately 40 different government agencies, most
of which are within the DoD. Contracts or subcontracts funded by the DoD
accounted for approximately 91%, 89%, 88% and 75% of the Company's revenues
during the years ended January 31, 1995, 1996 and 1997 and the three months
ended April 30, 1997, respectively. During the fiscal year ended January 31,
1997, approximately 32% of the Company's revenues were derived from
approximately 40 contracts or subcontracts funded by DSWA, and approximately 14%
of the Company's revenues were derived from contracts with SM-ALC.
Since the Company's inception in 1975 until the early 1990s, a significant
portion of the Company's revenues were associated with nuclear-related
government programs. Since fiscal year 1991, however, the Company's base of
nuclear-related revenues has decreased substantially. In the year ended January
31, 1997, approximately 8% of total revenues ($4.3 million) were derived from
nuclear-related programs, as compared to over 43% ($24.6 million) in fiscal year
1993. Growth of revenues over the last four years related to certain
18
<PAGE> 20
of the Company's competencies, including communications engineering, electronic
warfare, and information systems, has substantially offset the nuclear-related
revenue decrease.
The Company's cost of revenues is comprised primarily of direct contract
costs and overhead expenses. Since a majority of the cost of revenues is
reimbursed by the Company's customers under cost-reimbursable contracts, the
cost of revenues element remains relatively constant from year to year as a
percentage of total revenues. Direct contract costs consist of labor and
non-labor costs. Overhead expenses consist primarily of operating division
administration, business development and proposal activities, and
facility-related expenses. Selling, general and administrative ("SG&A") costs
generally consist of corporate management and administrative support costs.
Research and development ("R&D") costs are those associated with the
Company's R&D efforts which are not funded under specific contracts. A majority
of the Company's R&D efforts are funded directly under contracts, resulting in
relatively low company-expended R&D costs. The Company believes that the
company-expended R&D costs will increase in the future as the Company increases
its efforts to commercialize products.
The Company's accounting policies with respect to JNI are consistent with
industry standards applicable to manufacturers of computer networking products.
In addition, the Company anticipates that various costs and expenses applicable
to the generation of JNI's revenues will differ significantly from those
reflected in the Company's historical results of operations, and JNI's results
of operations will be more comparable to other computer networking companies at
a similar stage of development.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
consolidated income statement data for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED APRIL 30, YEAR ENDED JANUARY 31,
--------------- -----------------------------------------
1997 1996 1997 1996 1995 1994 1993
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues.................... 78.8 80.5 81.2 82.3 83.0 83.4 84.4
Selling, general and
administrative................... 15.6 14.7 13.2 11.8 12.8 11.8 11.7
Research and development............ 2.0 0.6 1.0 1.1 0.4 0.4 0.6
----- ----- ----- ----- ----- -----
96.4 95.8 95.4 95.2 96.2 95.6 96.7
----- ----- ----- ----- ----- -----
Operating income...................... 3.6 4.2 4.6 4.8 3.8 4.4 3.3
Interest expense...................... 3.4 3.7 3.5 3.8 2.9 2.9 1.0
----- ----- ----- ----- ----- -----
Income before income taxes............ 0.2 0.5 1.1 1.0 0.9 1.5 2.3
Provision for income taxes, net(1).... 0.1 0.3 0.4 0.4 0.3 0.2 0.9
----- ----- ----- ----- ----- -----
Net income............................ 0.1% 0.2% 0.7% 0.6% 0.6% 1.3% 1.4%
===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Provision for income taxes in fiscal year 1994 includes a credit from a
change in method of accounting for income taxes.
THREE MONTHS ENDED APRIL 30, 1997 VS. THREE MONTHS ENDED APRIL 30, 1996
Revenues. Revenues increased by $0.2 million, or 1.5%, from $13.2 million
in the three months ended April 30, 1996 to $13.4 million in the three months
ended April 30, 1997, due principally to increased revenues in the network
products segment and advanced technology areas partially offset by a decline in
contract revenues related to information systems and environmental remediation
activity.
Cost of revenues. Cost of revenues remained constant at $10.6 million;
however, cost of revenues as a percentage of revenues improved from 80.5% in the
three months ended April 30, 1996 to 78.8% in the three
19
<PAGE> 21
months ended April 30, 1997. The reduction in cost of revenues as a percentage
of revenues is due principally to reduced overhead costs, including reduced
facility expenses.
Selling, general and administrative expenses. SG&A increased from $1.9
million, or 14.7% of revenues, in the three months ended April 30, 1996 to $2.1
million, or 15.6% of revenues, in the three months ended April 30, 1997,
resulting from increased selling and administrative activity in the network
products segment.
Research and development expenses. R&D expenses increased from $0.1, or
0.6% of revenues, in the three months ended April 30, 1996 to $0.3, or 2.0% of
revenues, in the three months ended April 30, 1997. The increase in R&D costs
was attributable to increased R&D activity in the network products segment.
Interest expense. Interest expense remained constant at $0.5 million in the
three month periods ended April 30, 1996 and 1997. The Company's average
borrowing levels and interest rates were generally consistent during the two
periods.
Provision for income taxes. The Company's effective tax rate was 50.3% for
the three months ended April 30, 1996 and 39.5% for the three months ended April
30, 1997. The R&D tax credit expired June 30, 1995 and were not reinstated until
July 1, 1996, resulting in a higher effective tax rate for the three months
ended April 30, 1996. With the reinstatement of R&D credits in July 1996, the
effective tax rate for the Company for the fiscal year ended January 31, 1997
was 40.9%.
FISCAL YEAR ENDED JANUARY 31, 1997 VS. FISCAL YEAR ENDED JANUARY 31, 1996
Revenues. Revenues increased by $1.5 million, or 2.8%, from $52.9 million
in the fiscal year ended January 31, 1996 to $54.4 million in the fiscal year
ended January 31, 1997. Approximately $2.2 million in increased revenue was
associated with scheduled hardware resales under communications engineering
contracts and $1.6 million in revenues was contributed by two additional
business lines which were added in the third quarter of the fiscal year ended
January 31, 1996 and the first quarter of the fiscal year ended January 31,
1997, respectively. These increases were partially offset by a $2.0 million
decline in revenues from decreased environmental remediation contract activity.
Cost of revenues. Cost of revenues increased from $43.5 million, or 82.3%
of revenues, in the fiscal year ended January 31, 1996 to $44.2 million, or
81.2% of revenues, in the fiscal year ended January 31, 1997. This increase in
cost of revenues of $0.7 million is associated primarily with scheduled hardware
resales under communications engineering contracts partially offset by a
decrease in cost of sales under environmental remediation contracts.
Selling, general and administrative expenses. SG&A increased from $6.3
million, or 11.8% of revenues, in the fiscal year ended January 31, 1996 to $7.2
million, or 13.2% of revenues, in the fiscal year ended January 31, 1997. The
increase is due to additional administrative and selling costs associated with
activity in the network products segment, and with two additional business lines
which were added in the third quarter of the fiscal year ended January 31, 1996
and the first quarter of the fiscal year ended January 31, 1997, respectively.
Research and development expenses. R&D expenses remained relatively
unchanged from $0.6 million, or 1.1% of revenues, in the fiscal year ended
January 31, 1996 compared to $0.5 million, or 1.0% of revenues, in the fiscal
year ended January 31, 1997. Since most of the Company's research and
development efforts were funded directly under development contracts,
company-expended R&D costs represent a relatively minor portion of the Company's
total costs.
Interest expense. Interest expense remained relatively constant at $2.0
million and $1.9 million in the fiscal years ended January 31, 1996 and 1997,
respectively. The Company's borrowing levels and interest rates were generally
constant over the two periods.
Provision for income taxes. The Company's effective tax rate was 41.1% for
the fiscal year ended January 31, 1996 and 40.9% for the fiscal year ended
January 31, 1997.
20
<PAGE> 22
FISCAL YEAR ENDED JANUARY 31, 1996 VS. FISCAL YEAR ENDED JANUARY 31, 1995
Revenues. Revenues decreased by $4.8 million, or 8.2%, from $57.7 million
in the fiscal year ended January 31, 1995 to $52.9 million in the fiscal year
ended January 31, 1996, primarily due to reduced scheduled hardware resales
under the Company's communications engineering contracts resulting in reductions
in revenues of $4.6 million.
Cost of revenues. Cost of revenues decreased from $47.8 million, or 83.0%
of revenues, in the fiscal year ended January 31, 1995, to $43.5 million, or
82.3% of revenues, in the fiscal year ended January 31, 1996. This reduction in
cost of revenues is consistent with the revenue decrease during the period.
Selling, general and administrative expenses. SG&A decreased from $7.4
million, or 12.8% of revenues, in the fiscal year ended January 31, 1995, to
$6.3 million, or 11.8% of revenues, in the fiscal year ended January 31, 1996.
This reduction is attributable in part to a one-time payment in the fiscal year
ended January 31, 1995 of $0.9 million relating to settlement of certain
contract disputes arising from events occurring prior to 1991. In addition, the
Company reduced the number of administrative support personnel during the fiscal
year ended January 31, 1996, resulting in a cost savings of approximately $0.5
million.
Research and development expenses. R&D expenses increased from $0.2
million, or 0.4% of revenues, in the fiscal year ended January 31, 1995 to $0.6
million, or 1.1% of revenues, in the fiscal year ended January 31, 1996. This
increase is due principally to increased development effort of the Company's
networking products.
Interest expense. Interest expense increased from $1.7 million in the
fiscal year ended January 31, 1995 to $2.0 million in the fiscal year ended
January 31, 1996. The increase of $0.3 million in interest expense reflects the
cost of higher working capital borrowings under the Company's bank line of
credit, partially due to the U.S. government's temporary shutdown.
Provision for income taxes. The Company's effective tax rate was 41.1% in
the fiscal year ended January 31, 1996, as compared to 35.3% for the fiscal year
ended January 31, 1995. The variation in the effective tax rate is primarily
attributable to a revision of prior years' tax estimates which reduced the
effective tax rate for the fiscal year ended January 31, 1995.
FISCAL YEAR ENDED JANUARY 31, 1995 VS. FISCAL YEAR ENDED JANUARY 31, 1994
Revenues. Revenues increased by $1.8 million, or 3.1%, from $55.9 million
in the fiscal year ended January 31, 1994 to $57.7 million in the fiscal year
ended January 31, 1995. The change in revenues includes an increase in revenues
associated with the Company's communications engineering and information systems
business areas, offset in part by reductions in revenues from nuclear-related
programs.
Cost of revenues. Cost of revenues increased from $46.7 million, or 83.4%
of revenues, in the fiscal year ended January 31, 1994 to $47.8 million, or
83.0% of revenues, primarily due to the increase in revenues.
Selling, general and administrative expenses. SG&A expenses increased from
$6.6 million, or 11.8% of revenues, in the fiscal year ended January 31, 1994,
to $7.4 million, or 12.8% of revenues, in the fiscal year ended January 31,
1995. This increase was due entirely to a one-time payment of $0.9 million
relating to settlement of certain contract disputes arising from events
occurring prior to 1991.
Research and development expenses. R&D expenses were unchanged from the
fiscal year ended January 31, 1994 to the fiscal year ended January 31, 1995 at
$0.2 million, representing 0.4% of revenues in both years.
Interest expense. Interest expense was relatively unchanged at $1.7
million in the fiscal year ended January 31, 1995 as compared to $1.6 million in
the fiscal year ended January 31, 1994.
Provision for income taxes. The Company's effective tax rate was 35.3% in
the fiscal year ended January 31, 1995. During the fiscal year ended January 31,
1994, the Company adopted a change in method of accounting for income taxes as
required by Statement of Financial Accounting Standards ("SFAS") No. 109. The
adoption of this standard resulted in a credit to income of $0.2 million.
Without the effect of this one-time
21
<PAGE> 23
credit, the effective tax rate was 40.0% in the fiscal year ended January 31,
1994. The variation in the effective tax rate is primarily attributable to a
revision of prior years' tax estimates which reduced the effective tax rate for
the fiscal year ended January 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations and the purchase of property and
equipment through borrowings under a short-term line of credit and term loans
and from generation of cash from operations. The Company has a bank line of
credit under which the Company may borrow up to $6.0 million, limited to
specified percentages of eligible accounts receivable, at 7/8% over the bank's
prime rate. As of April 30, 1997, the Company had $4.8 million outstanding under
such line of credit, which accrued interest at an annual rate of 9.375%, and an
additional $0.8 million was available for borrowing. The credit agreement
relating to the credit line requires the Company to maintain certain financial
ratios, limits the amount of dividends that the Company may pay, and prohibits
the Company from further pledging any of its assets unless such pledge is in
conjunction with obtaining term financing for the acquisition of new property
and equipment. The credit line matures in October 1997, at which time the
Company intends to seek renewal. While the Company believes that the line will
be fully renewed, there can be no assurance that such renewal will occur. The
Company has a zero-balance bank account arrangement whereby the Company makes
daily borrowings under the credit line as necessary and all cash collections
received are applied against the credit line balance on a daily basis. See Note
4 of Notes to Consolidated Financial Statements.
In addition to the working capital credit line which the Company intends to
fully repay using proceeds of the offering, the Company borrows from secondary
lenders for the acquisition of property and equipment. Such term debt is secured
by purchased property and equipment and is payable in monthly principal and
interest installments over a three-year term. During 1997 the acquisition of
property and equipment was financed entirely by the working capital credit line.
The Company also has a mortgage loan secured by its owned facility in San
Diego, California. The mortgage requires monthly payments of principal,
amortized over a 17-year period, and interest, which was payable at an annual
rate of 8.96% as of April 30, 1997. See Note 5 of Notes to Consolidated
Financial Statements.
The Company had a working capital deficit of $908,000 at April 30, 1997.
The working capital deficit arose from the Company's use of its short-term
working capital credit line to finance purchases of non-current assets during
the fiscal year ended January 31, 1997, including approximately $1.0 million in
property and equipment and $0.3 million for the acquisition of certain other
assets, and to finance the repurchase of Common Stock during the fiscal year
ended January 31, 1997 for $0.5 million. The purchase of non-current assets
during the three months ended April 30, 1997 was offset by proceeds from new
term debt during the period.
In the fiscal year ended January 31, 1997, net cash provided by operating
activities was $3.9 million, including cash generated from a reduction in
accounts receivable of $2.7 million. During the same period, $2.1 million in
cash was used to repay short-term and long-term debt, $1.0 million was expended
for property and equipment, and $0.5 million was used to finance the repurchase
of Common Stock. In the three months ended April 30, 1997, net cash used in
operating activities was $0.1 million.
Traditionally, the Company's primary need for working capital has been
driven only by the need to finance government accounts receivable. Because
government contracts generally provide for reimbursement of costs as they are
incurred, and the Company's contracting efforts have not typically required
significant investment in capital equipment, research and development, or
extensive marketing activities, there has not been a need for significant
amounts of working capital in the past. As the Company's commercialization
efforts increase and the need for additional personnel, equipment, inventory,
research and development and marketing efforts grows, additional working capital
beyond traditional levels will be required. Additionally, the Company's strategy
of acquiring complementary companies may require additional capital.
The Company believes that the net proceeds of the offering, together with
the Company's capacity to borrow under existing working capital loan
arrangements and secondary borrowings for property and equipment, will be
sufficient for its working capital and capital expenditure needs for at least
the twelve-month
22
<PAGE> 24
period following this offering. Thereafter, if the Company's spending plans
change, the Company may find it necessary to seek to obtain additional sources
of financing to support its capital needs, but there can be no assurance that
such financing will be available on commercially reasonable terms, if at all.
NEW ACCOUNTING PRONOUNCEMENT
Earnings per Share. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share." SFAS No. 128 will be adopted by the Company as required in
the fourth quarter of fiscal 1998. Upon adoption of SFAS No. 128, the Company
will present basic earnings per share and diluted earnings per share. Basic
earnings per share will be computed based on the weighted average number of
shares outstanding during the period. Diluted earnings per share will be
computed based on the weighted average number of shares outstanding during the
period increased by the dilutive effect of potential common stock. Management is
currently evaluating the impact that the adoption of SFAS No. 128 will have on
the Company's financial statements.
23
<PAGE> 25
BUSINESS
OVERVIEW
Jaymark provides advanced technology products and services to the DoD and
other government agencies, and commercializes selected government-funded
technologies following a disciplined evaluation of market size and
profitability. The Company's first products developed under this
commercialization strategy are high-speed digital communication adapters which
have been sold in production quantities since December 1996. These products,
marketed under the FibreStar brand, are designed to the ANSI Fibre Channel
standard. The Fibre Channel standard has become well supported in the industry
because of its high performance, which includes (i) the highest
commercially-available speed (2125 Mbps in full duplex), (ii) scalability (up to
126 nodes on a single loop), (iii) simplicity of installation and maintenance,
(iv) multiprotocol transport (simultaneously within both storage and network
environments), (v) long connection distance (up to six miles), and (vi) high
reliability of data reception and absence of congestion with multiple users.
FibreStar products provide essential hardware and software to reduce network
congestion, thereby delivering substantial performance improvement to users
requiring high-bandwidth data transmission capabilities, including multimedia,
in such applications as (i) business and scientific computing, (ii) high volume
database access for the financial and retail industries, and (iii) multistream
digital video transmission and editing for the entertainment and broadcast
industries.
With over twenty years of government-funded advanced technology
development, the Company has established several core competencies, including
(i) electronic and electro-optic system design, (ii) communications engineering,
(iii) electromagnetic effects, and (iv) nuclear and high-explosive weapon
effects (e.g., blast and shock effects on structures). In 1991, under the
leadership of new management, the Company began to target government contracts
involving the development of proprietary technologies with potential commercial
applications ("dual-use technologies").
The Company's objective is to increase profitability by leveraging its core
competencies and its advanced government-funded research through
commercialization of dual-use technologies. The key elements of the Company's
strategy are to:
- Establish FibreStar as a leading line of adapters in the emerging market
for networking and storage products utilizing the Fibre Channel standard.
- Selectively identify and commercialize additional dual-use technologies
and products with compelling market potential, and establish separate
business entities, when appropriate, to provide dedicated management and
focused business objectives.
- Maintain and expand core competencies to provide new proprietary
technologies, products and resources through the pursuit of
government-funded research and strategic acquisitions.
The Company has recently formed a wholly owned subsidiary, Jaycor Networks,
to which it contributed its FibreStar products and technology in order to
capitalize on the commercial potential of these products. The efficient and
rapid transfer of information throughout networks has become increasingly
critical to the daily operation of business. The annual market for Fibre Channel
adapters, such as the FibreStar products, is projected to grow from $68 million
in 1996 to over $200 million in 1997 and to exceed $1 billion by the year 2000,
according to an industry study by emf Associates and Andrew Prophet Research &
Consulting, two networking consulting groups. The Company believes that only a
small portion of this market is currently associated with independent suppliers
of Fibre Channel adapters. In the future, however, the Company believes that
independent suppliers, such as JNI, will supply a larger portion of the market.
As an example of how widely the Fibre Channel standard has been adopted, JNI and
35 other companies exhibited a variety of their Fibre Channel product lines at
the Comdex computer trade show meeting in November 1996, including Adaptec,
Ancor Communications, Box Hill Systems, Digital Equipment Corporation, Emulex,
Gadzoox Microsystems, Hewlett-Packard, Intel, Interphase, LSI Logic, QLogic,
Quantum, Seagate Technology, Sun Microsystems, Texas Instruments, Unisys,
Vitesse Semiconductor, and XPoint Technology. From December 1996 to April 1997,
JNI shipped over $750,000 of FibreStar products.
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<PAGE> 26
The Company's government contract business is performed through Jaycor, its
wholly owned subsidiary. Jaycor's objective is to maintain and expand its
advanced technology government research base, which in turn will provide both
the technology and resources for further product commercialization. Jaycor
intends to focus on areas in which government funding is likely to remain stable
or increase, while simultaneously identifying problems and providing solutions
to the government in areas in which its core competencies provide a competitive
advantage. Jaycor maintains active relationships with the Departments of
Defense, State, Justice, Transportation, and Energy, and had approximately 200
contracts or subcontracts that generated revenue during the fiscal year ended
January 31, 1997, which were funded by approximately 40 different government
agencies, most of which are within the DoD.
COMPANY STRATEGY
The Company's strategy is to commercialize emerging technologies by
leveraging its government-funded development efforts, which provide a source of
dual-use technologies and the resources to develop such technologies. The key
elements of this strategy are as follows:
Establish FibreStar as a Leading Line of Adapters. FibreStar is the first
technology to be commercialized by the Company from its government-funded
research after both internal and independent analysis indicated significant
market potential. The Company intends to establish JNI as a leading independent
supplier of Fibre Channel adapters by (i) developing additional OEM and reseller
arrangements, (ii) expanding and enhancing its product line, (iii) leveraging
its existing relationships with resellers and OEMs with respect to SBus-to-Fibre
Channel products to promote and market PCI-to-Fibre Channel products, (iv)
developing timely responses to new market needs, and (v) continuing its
commitment to product quality and customer service. See "-- Fibre Channel
Network Products -- Strategy."
Selectively Identify and Commercialize Dual-Use Technologies and
Products. In 1991, under the leadership of new management, the Company adopted
a strategy of developing dual-use technologies. As a result, the Company began
to target government contracts involving development of proprietary technologies
with commercial applications, and began to apply for patents to protect its
proprietary position. Over the past six years, the Company has developed
additional dual-use technologies which it believes have the potential for
successful commercial applications, including: (i) a bomb-resistant luggage
container designed for aircraft safety, (ii) an Auto-Arrestor to prevent or
terminate dangerous high-speed chases, (iii) several non-lethal weapon
applications for military and domestic security purposes, and (iv) several
weapon detection systems. The Company intends to commercialize its technologies,
but only after a disciplined evaluation of market size and profitability by both
the Company and independent market consultants indicates a high probability of
success. The Company will establish separate subsidiaries, when appropriate, to
commercialize proprietary technologies in order to provide dedicated management
and focused business objectives.
Maintain and Expand Core Competencies. The Company focuses on government
contracting opportunities in areas in which the Company's core competencies can
provide unique solutions and in which the Company's reputation and experience
provide a competitive advantage. The maintenance of its government services
business is vital to the Company as a source of new proprietary technologies and
products for commercialization, and the resources needed to successfully
commercialize such technologies and products. In order to expand its advanced
technology products and services business, the Company's strategy is to (i)
target contracting opportunities in areas of increased funding, (ii) focus on
high-technology contracting opportunities, and (iii) pursue acquisitions. To
implement this strategy, the Company intends to foster key government
relationships, retain key management and technical personnel, and remain cost
competitive. See "-- Advanced Technology Products and Services -- Strategy."
ADVANCED TECHNOLOGY PRODUCTS AND SERVICES
OVERVIEW
The Company provides advanced technology products and services to the DoD
and other government agencies through its wholly owned subsidiary, Jaycor, which
was founded in 1975. In 1991, under the leadership of new management, Jaycor
refocused its technology base to pursue problems and solutions
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<PAGE> 27
relevant to the post-Cold War era and to emphasize, where possible, the
development of dual-use technologies.
Over 90% of Jaycor's revenues are generated through contracts funded by the
DoD budget categories of research, development, test and evaluation ("RDT&E")
and, to a lesser extent, operations and maintenance ("O&M"). While the overall
defense budget declined following the Cold War by 17% in constant dollars from
1990 to 1997, the RDT&E budget category declined by only 5% over the same
period. The RDT&E budget stabilized at approximately $35 billion in 1995, and is
now increasing in certain areas relevant to Jaycor's core competencies. Such
areas include intelligence and communications, systems research and development,
electronic warfare, information systems, security, chemical and biological
defense, and Advanced Concept Test Demonstrations, which include, among others,
countermine, counterproliferation and cruise missile defense.
STRATEGY
Jaycor's objective is to maintain and expand its core competencies, which
will provide both the technology and resources for further product
commercialization. The key elements of Jaycor's strategy include the following:
Target Contracting Opportunities in Areas of Increased Funding. Jaycor
focuses marketing resources on areas in which government funding is likely to
remain stable or increase, both within and outside of the DoD. Jaycor remains
current on existing and emerging problems of interest in various government
agencies and follows the budgeting and funding allocation process through
Congress down to the agencies. As a result of this approach, Jaycor believes
that increased funding opportunities will be available in its areas of interest,
including: communications installation and maintenance, land mine warfare and
countermine systems, electronic and information warfare, aviation safety and
counterterrorism, law enforcement, chemical/ biological defense and the
environment.
Focus on Advanced Technology Opportunities. Jaycor pursues contracts in
areas in which its proprietary technologies or hardware provide: (i) innovative
solutions to government problems, (ii) a competitive advantage, and (iii)
opportunities for developing dual-use technologies. To maximize this advantage,
Jaycor often demonstrates the viability of proposed technical solutions as a
part of government-reimbursable internal research and development ("IR&D")
efforts, leading to either unsolicited or solicited proposals. For example,
Jaycor developed the Auto-Arrestor to safely stop fleeing vehicles with IR&D
funds as a part of a preproposal effort for the Department of Justice.
Pursue Acquisitions. Jaycor plans to broaden its contracting base and
enter new markets by acquiring other contracting companies that augment Jaycor's
government contracting activities. For example, in 1996 Jaycor enhanced its
ability to deliver complete microwave systems by acquiring the Power Systems
Design Group, which designs and manufactures specialty power supplies.
CORE COMPETENCIES AND CUSTOMER SOLUTIONS
Jaycor pursues contracting opportunities in areas in its core competencies,
which are:
Electronic and Electro-Optic System Design. Jaycor has expertise in the
design and manufacture of electronic and electro-optic systems, including
communications, surveillance and weapon detection sensors, mine detection
radars, directed-energy systems and electronic warfare. Jaycor uses these
capabilities in a wide variety of government contracts such as the design and
fabrication of radiation-hardened space-borne computers for potential use on
military satellites, and the design and manufacture of electronic power supplies
for use with directed-energy weapon systems.
Communications Engineering. Jaycor has significant experience in fixed and
mobile communication systems design, installation, maintenance, logistics
support and related personnel training. These systems include telephone,
microwave, VHF/UHF and satellite systems. For example, Jaycor currently provides
engineering, provisioning, testing, training, upgrades, repair, security,
equipment configuration management,
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<PAGE> 28
and operations support at a facility for an Air Force agency. Jaycor is also
designing and installing upgraded telecommunications systems at various military
facilities around the world.
Electromagnetic Effects. Jaycor applies its understanding of
electromagnetic effects on the operation of electronic systems to design weapon
system concepts to defeat adversaries' electronic systems, and to develop design
techniques to protect U.S. systems from adverse effects resulting from natural
and man-made sources of RF energy. Jaycor has contracts to design and
demonstrate electromagnetic and electronic warfare weapon concepts, and to
develop design techniques to prevent degradation of system performance in
hostile electromagnetic environments.
Weapon Effects. Through 20 years of contracting for the DoD, Jaycor has
developed an understanding of the effects of a broad range of military weapons
on electronic systems and mechanical structures such as satellites, missiles,
missile silos and other structures. Jaycor has contracts to design and test
techniques that allow electronic and electro-optic systems to operate in hostile
radiation environments characteristic of post-Cold War weapon threats. Jaycor is
using this technology to develop non-military products for post-Cold War
applications such as bomb containment and weapon detection systems.
Other Core Competencies. Jaycor also maintains a depth of experience in
information systems database management, large-scale interactive computing,
security and counterterrorism, biological/chemical defense and environmental
remediation. These core competencies have supported a wide variety of contracts,
such as the management of a database for military personnel medical histories,
large-scale interactive computer simulations for war gaming, the design of
security systems for U.S. embassies and simulation of chemical/biological agent
dispersion.
POTENTIAL COMMERCIAL OPPORTUNITIES
As part of its government-funded research, Jaycor develops innovative
dual-use technologies and products. The Company's first commercial products, its
FibreStar adapters, were developed from Jaycor's experience in developing and
delivering specialized high-speed data transmission systems for the DoD. See
"-- Fibre Channel Network Products." Jaycor currently is involved in several
additional government-funded product development efforts that the Company
believes may lead to commercial applications.
Hardened Luggage Container. Current airport security equipment cannot
detect certain smaller explosive devices that are capable of causing significant
damage. Under a contract with the Federal Aviation Agency ("FAA"), Jaycor has
developed and successfully tested prototype units of a hardened luggage
container which is capable of containing the detonation and suppressing the
fires caused by such devices. This container conforms to International Air
Transport Association specifications for luggage containers and is designed to
provide greater durability than existing containers used in ordinary commercial
service. Because this hardened luggage container will cost more to purchase and
to operate due to its increased weight over existing luggage containers, Jaycor
believes that commercial airlines will not readily purchase the containers until
FAA regulations require the mandatory use of such a hardened luggage container.
The FAA has purchased two additional prototype units from the Company. In
addition, Jaycor submitted a proposal in response to a Request for Proposal
("RFP") issued by the FAA, to acquire up to 60 units over a 12-month period for
test and evaluation by the airlines. The resulting information will be used to
determine cost and reliability data as part of the regulatory process. Jaycor is
also pursuing additional applications of this containment technology.
Handheld Acoustic Weapon Detector. Jaycor has developed an ultrasonic
imaging device under DoD contract that can detect small objects, including
concealed weapons, on individuals at distances from three to ten feet. Currently
there is no low-cost product known to the Company to image concealed weapons in
a nonintrusive manner. The objective of the current contract is to fabricate a
pre-prototype system for test and evaluation. The Company plans to continue
development under government contract.
Auto-Arrestor. Using IR&D funds, Jaycor designed and tested the
Auto-Arrestor as part of its pre-proposal effort to the Department of Justice to
develop technologies to stop fleeing motor vehicles quickly and safely. Law
enforcement officials estimate that each year there are over 40,000 high-speed
chases between police and motorists on the roadways, resulting in approximately
400 deaths, millions of dollars in property
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<PAGE> 29
damages, and personal injuries. The Auto-Arrestor uses an electromagnetic pulse
to disrupt the ignition of a motor vehicle, causing it to come to a controlled
stop. The Auto-Arrestor has been tested, generally with success, on highways in
Colorado, at the border crossing in San Diego, California, and in safety and
effectiveness tests at the Army Research Laboratory in Adelphi, Maryland.
Non-Lethal Projectiles. Pursuant to a contract with the Defense Advanced
Research Projects Agency, Jaycor has developed and demonstrated a low-velocity
blunt prototype electrical projectile which can be used by the military and
police with existing weapons to subdue suspects with non-lethal force. With IR&D
funds, Jaycor has developed and demonstrated the ability to deliver pepper spray
at distances up to 50 feet quickly and accurately by encapsulating the pepper
spray in small spherical gel balls. The Company has applied for a patent, and
the military is planning to test and evaluate this weapon in the coming year.
Ground-Penetration Radar for Buried Land Mine Detection. In 1996, Jaycor
completed a contract for a proof-of-principle standoff mine detection system.
Pursuant to a new contract issued by the DoD in August 1996, Jaycor is now
developing a prototype system to be used in an advanced technology development
program. Approximately $7 million in funding has been earmarked for this
contract, which will last a minimum of 27 months. Jaycor's proprietary system is
the only system known by the Company that can detect mines at ranges up to
approximately 100 feet.
CUSTOMERS
Jaycor maintains active relationships with the Departments of Defense,
State, Justice, Transportation, and Energy, and had approximately 200 contracts
or subcontracts that generated revenue during the fiscal year ended January 31,
1997 which were funded by approximately 40 different government agencies, most
of which are within the DoD. In addition, for the year ended January 31, 1997
and the three months ended April 30, 1997, approximately 32% and 28%,
respectively of Jaycor's revenues were derived from approximately 40 contracts
with DSWA and approximately 14% and 16%, respectively of Jaycor's revenues were
derived from contracts with SM-ALC. In those instances where Jaycor teams with
other companies to bid for contracts, it may become either the prime contractor
or a subcontractor under the contract. Jaycor's relationship with the funding
government agency frequently does not differ substantially between a prime
contractor and a subcontractor.
COMPETITION
Jaycor's competitors generally fall into three broad classes, including (i)
smaller companies which have a high degree of specialization in one government
contract segment (e.g., Mission Research Corporation), (ii)
medium-to-large-sized companies that compete with Jaycor for a broad range of
government contracts (e.g., Science Applications International Corporation, EG&G
and Kaman Sciences), and (iii) extremely large aerospace and defense contractors
that rarely compete with Jaycor except for certain prototype development
contracts which involve large-scale sophisticated technology or large multi-year
contracts (e.g., Hughes, Lockheed-Martin, TRW and Raytheon). Many of Jaycor's
competitors have substantially greater technical, financial, marketing and other
resources than Jaycor. No assurance can be given that Jaycor's competitors will
not bid for or deliver their solutions in a more effective or efficient manner,
which would significantly adversely affect Jaycor's potential market share.
Jaycor believes that the critical success factors in its market are the ability
to (i) develop proprietary technology, (ii) maintain technological superiority,
(iii) maintain customer satisfaction, (iv) adapt to changing budget priorities,
(v) identify and provide cost-effective solutions for government applications,
and (vi) continue to recruit and retain highly-skilled personnel.
PROCUREMENT OF GOVERNMENT CONTRACTS
Jaycor competes for most of its contracts in an open bidding process. RFPs
are generally advertised in The Commerce Business Daily, a government
publication. Bids are generally due from 30 to 60 days after the release of the
RFP, and the ensuing proposal evaluation process generally requires three to six
months.
Jaycor typically bids on three types of government contracts: (i) CPFF,
(ii) T&M, and (iii) fixed-price. CPFF contracts provide for reimbursement for
all of Jaycor's allowable costs and a fixed profit. T&M
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<PAGE> 30
contracts require Jaycor to provide a certain number of labor hours at a rate
prescribed by the contract. Jaycor is reimbursed for the hours spent on T&M
contracts at the prescribed labor rate for each category and for all materials
utilized. The fee in a T&M contract is generally slightly higher than for CPFF
contracts. Fixed-price contracts require Jaycor to deliver the work product
described in the work statement at a fixed price, which has the largest risk to
Jaycor, but generally also has the largest potential profit margin. In the year
ended January 31, 1997, approximately 78%, 8%, and 14% and in the three months
ended April 30, 1997, approximately 82%, 5% and 13% of Jaycor's government
contract revenues were derived from CPFF, T&M, and fixed-price contracts,
respectively.
The nature of Jaycor's government contracts requires ongoing interaction
between Jaycor's key management and technical personnel and the various
government agencies. These interactions provide Jaycor with useful insight with
respect to its customers needs, and lead to opportunities to submit solicited or
unsolicited proposals to address these needs.
BACKLOG
Jaycor's total contract backlog was $68.5 million and $69.5 million as of
January 31, 1997 and 1996, respectively. The amount of backlog which had been
funded as of January 31, 1997 and 1996, was $23.6 million and $24.1 million,
respectively. Additionally, certain contracts contain provisions which allow the
government, under terms specified in the contract, to extend the period of
performance or to add additional work beyond the current contract scope. The
backlog value of these unexercised options as of January 31, 1997 and 1996 which
has been included in the total contract backlog was $32.3 million and $34.3
million, respectively.
Although there can be no assurance that full contractual funding will be
received, the Company expects, based on previous history, that substantially all
contracts which are not yet fully funded, including unexercised contract
options, will ultimately be funded.
PROPRIETARY INFORMATION AND INTELLECTUAL PROPERTY
Since 1991, Jaycor's strategy shifted to pursuing contracts with dual-use
technologies. Simultaneously, Jaycor began to patent technologies and products
with commercial potential. Jaycor has ten U.S. patents that have issued or been
allowed, and seven additional U.S. patent applications have been filed. In
addition, Jaycor has one corresponding foreign patent that has been issued, and
five additional corresponding foreign patent applications have been filed.
Under certain standard provisions in government contracts, the government
may retain certain rights, which are often limited, in technology developed
under or arising out of work performed under such contracts. For example, by
fulfilling contract disclosure requirements, a contractor can retain ownership
of a patent covering an invention developed under a contract funded by the DoD.
The government retains a nonexclusive, royalty-free license to use such patents.
If a contractor fails to disclose the invention to the government in a timely
manner, however, the contractor may lose all rights to the invention. The
regulations with respect to agencies other than the DoD may differ. In addition,
the regulations governing ownership of data rights developed under government
contract differ among various agencies and have been revised over the years. For
example, prior to 1995 a contractor who developed data or software under a
contract funded by the DoD would be able to claim copyright ownership of the
data or software, but the government would generally retain unlimited rights to
use the data or software for any purpose, including providing it to another
contractor for competitive purposes. With respect to data or software delivered
under DoD contract, but developed at private expense, the government generally
retains only limited or restricted rights to use such data or software for its
own purposes. The regulations with respect to agencies other than the DoD
differ, but generally allow the contractor to retain certain rights.
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<PAGE> 31
FIBRE CHANNEL NETWORK PRODUCTS
OVERVIEW
The Company, through its wholly owned subsidiary, Jaycor Networks, designs,
develops and markets high-speed digital communications adapters based on the
Fibre Channel standard approved by the ANSI in 1994. FibreStar products provide
essential hardware and software to reduce network congestion through (i) the
highest commercially available speed, (ii) scalability, (iii) simplicity, (iv)
multiprotocol transport, (v) increased connection distance, and (vi) high
reliability of data reception and absence of congestion with multiple users.
FibreStar products provide significant opportunities for business solutions in
such applications as (i) business and scientific computing, (ii) high volume
database access for the financial and retail industries, and (iii) multistream
digital video transmission and editing for the entertainment and broadcast
industries. The annual market for Fibre Channel adapters, such as the FibreStar
products, is projected to grow from $68 million in 1996 to over $200 million in
1997 and to exceed $1 billion by the year 2000, according to an industry study
by emf Associates and Andrew Prophet Research & Consulting, two networking
consulting groups.
Building on the Company's core competence in electronic and electro-optic
system design, FibreStar products were developed using the experience Jaycor
gained from 1991 through 1993 in designing specialized high-speed data
transmission systems for the DoD. After Jaycor's evaluation of the commercial
potential of the technology was confirmed by a market study conducted by the
Anderson Graduate School of Management at UCLA, Jaycor began designing its
initial prototype, an SBus-to-Fibre Channel adapter, in 1993. Subsequently, a
study by two independent high-technology consulting firms, Technology Strategies
and Alliances and Eminent Technologies, Inc., confirmed the commercial potential
for Fibre Channel products and outlined product development and marketing
options.
INDUSTRY BACKGROUND
The Fibre Channel standard is a computer and data storage interface
specification approved by the ANSI in 1994. When compared to existing standards,
Fibre Channel provides increased bandwidth for data communication, increased
distance over which data can be transmitted at high speeds, guaranteed data
delivery, and scalability to large numbers of network connections. The Fibre
Channel standard builds on industry experience to combine attractive features of
both network and storage protocols, and is the only standard that can transport
both network and storage protocols simultaneously over the same interface. Fibre
Channel provides 1063 Mbps transmission capabilities in half duplex and 2125
Mbps in full duplex. Additionally, the Fibre Channel standard permits connection
of a data warehouse to a network without a storage server, resulting in lower
costs of ownership and increased reliability. It is being used to improve
performance of computer networks and data storage systems in a wide variety of
applications.
The demand for and resulting application of Fibre Channel products is being
driven by three compelling market needs:
Increasing Requirements for Timely Retrieval and Archiving of Massive
Amounts of Data. In the past decade, organizations have become increasingly
aware that the ability to collect, analyze and distribute information in a
timely and efficient manner through computer networks is a key determinant of
their business success. However, business requirements to transmit increasing
volumes of information have grown beyond the capability of commonly employed
computer networks (e.g., Ethernet networks) to deliver data in a timely fashion.
During the past ten years, the amount of computing power commonly available in
personal computers has increased approximately 200 times. During that same
period, the amount of disk storage available in the desktop computer has
increased approximately 180 times, while enterprise system storage has increased
hundreds of times beyond that at the desktop. The connections to storage arrays
(e.g., SCSI and IDE) have not kept pace, and the various storage interfaces do
not meet current and future requirements for speed, distance and scalability.
With the introduction of high-speed Fibre Channel disc drives by Seagate
Technology in 1996, and the availability of SBus-to-Fibre Channel adapters and
PCI Bus-to-Fibre Channel adapters, such as the FibreStar products, Fibre Channel
is emerging as a preferred solution to network storage bottlenecks by
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<PAGE> 32
providing a substantial increase in data transfer rates (up to 2125 Mbps in
storage connections using full duplex).
Increasing Requirements for Bandwidth in Computer Networks. During the
past decade, new and more complex applications, such as desktop publishing,
distributed database management and the processing requirements of multimedia
information, have strained the ability of many networks to reliably handle the
vastly increased volume and density of traffic. These networks, particularly
those based on Ethernet, Fast Ethernet or Token Ring technologies are
increasingly subject to traffic bottlenecks at the servers and congestion
between clients, frequently resulting in long response times and reduced
productivity. Products based on ATM offer slightly higher bandwidth than Fast
Ethernet, but when an ATM network becomes congested, data packets are discarded.
A recent survey in Storage Management Solutions, an industry magazine, concluded
that network performance and response time were the most frequently cited
worries of information system managers. The data transfer rates, low latency,
scalability and distance capability of Fibre Channel provide cost-effective
solutions for these information management problems.
Fibre Channel is the only solution known to the Company that eliminates the
connection as the bandwidth-limiting element in both computing and storage
networks at a reasonable cost. Additional technologies and advanced networking
protocols, such as Gigabit Ethernet, are under development, but are not yet
standardized and have not yet been widely deployed commercially. In addition,
Ethernet networks, including the proposed Gigabit Ethernet, are based upon a
collision-domain access method that limits the usable bandwidth to an estimated
30% to 40% of the maximum rated bandwidth. In Ethernet networks, data
reliability also decreases as the number of users are increased. In contrast,
Fibre Channel is able to utilize nearly 100% of the maximum available bandwidth
while maintaining high data reliability as users are added to the network.
The Company estimates that in 1996, products designed to the Fibre Channel
standard comprised less than 2% of the worldwide network interface card market,
and the Company believes that Fibre Channel products accounted for an even
smaller percentage of the total storage protocol market. Based on the enhanced
performance offered by Fibre Channel and the projections of industry analysts,
the Company believes that the market share of Fibre Channel products will
increase over the next few years.
The figure below compares both common networking and storage interface
protocols with Fibre Channel, which alone can transport either or both network
and storage protocols simultaneously over the same interface.
FIBRE CHANNEL IS FASTER THAN OTHER
COMMON COMMERCIAL INTERFACE PROTOCOLS
[Bar graph comparing Fibre Channel to other network and storage protocols,
illustrating the following protocols and megabits per second:
Ethernet (10), Fast Ethernet (100), Token Ring (40), FDDI (100),
ATM OCI (155), ATM OC3 (622), SCSI (80), SCSI 2 (160),
Ultra SCSI (320) and Fibre Channel (1063).]
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Increased Use of Clustered PCs and Workstations. The increased computing
power of PCs and workstations and high-bandwidth links make it possible for
clustered PCs and workstations to fulfill functions formerly performed by
mainframe computers and at a lower cost of ownership. Clustering also allows
scalability, since computing power can be added incrementally as needs grow.
Fibre Channel, combining features of networking and computing channel standards,
provides a high bandwidth bidirectional link for communication among
workstations at internal bus speeds. As an open standard, Fibre Channel operates
with widely used workstations and PCs, and creates market opportunities for
high-speed digital communication adapters, such as the FibreStar products, that
are well suited for clustering applications.
The following diagrams illustrate a network implemented with two different
technologies. In the first diagram, multiple disk drives, represented as
cabinets of RAIDs, communicate with a file server over the commonly used SCSI
type connection. The file server communicates to workstations over an FDDI
protocol. Multiple SCSI connections and multiple FDDI connections to the bridge
are necessary to deliver 100 Mbps to individual users.
FILE STREAMING WITH A SCSI/FDDI NETWORK REQUIRES MULTIPLE STORAGE
CONNECTIONS WHILE DELIVERING ONLY 100 MBPS TO USERS
[Schematic diagram illustrating a file streaming SCSI/FDDI network. Cabinets of
RAIDs communicate with a file server over a SCSI type connection (2 x 160
Mbps), and the file server communicates to workstations over multiple FDDI
connections (4 x 100 Mbps) to a bridge.]
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In the following diagram, the RAIDs are connected with workstations in a
Fibre Channel loop configuration. Additionally, Fibre Channel permits direct,
common access to the disk drives over large distances, eliminating the need for
a file server. Communication to individual workstations is accomplished through
a Fibre Channel adapter, such as a FibreStar adapter, located in each
workstation, or two Fibre Channel adapters in each workstation for redundant
loops. Distribution of connectivity to individual workstations can be provided
by a Fibre Channel hub or switch. Workstations communicate with each other
through the hub or switch by using a network protocol and with the RAID cabinet
by using a storage protocol.
FILE STREAMING WITH A FIBRESTAR NETWORK
CAN DELIVER 1063 MBPS TO USERS OVER A SINGLE STORAGE CONNECTION
[SCHEMATIC DIAGRAM ILLUSTRATING A FILE STREAMING FIBRE CHANNEL NETWORK,
COMMUNICATION TO WORKSTATIONS IS ACCOMPLISHED THROUGH FIBRESTAR ADAPTERS
(1063 MBPS), AND COMMUNICATE WITH EACH OTHER THROUGH A HUB OR
SWITCH AND WITH A RAID CABINET]
FIBRE CHANNEL REPLACES A STANDARD
SCSI/FDDI NETWORK WITH HIGHER PERFORMANCE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
SCSI/FDDI
----------------------------------
STORAGE NETWORK
FEATURE
FIBRE CHANNEL
-------------------------
STORAGE & NETWORK
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bandwidth 400 Mbps 100 Mbps 1063 Mbps
- ---------------------------------------------------------------------------------------------
Simultaneous Storage/Network No No Yes
Protocol Support (server is not required)
- ---------------------------------------------------------------------------------------------
Connections 15 per bus 1,000 maximum 126 per loop
(16,000,000 maximum)
- ---------------------------------------------------------------------------------------------
Maximum Cable Length 98 feet 25 miles 6 miles
- ---------------------------------------------------------------------------------------------
</TABLE>
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Fibre Channel networking devices, such as the FibreStar products, provide high
performance through:
- HIGHEST COMMERCIALLY AVAILABLE SPEED: Communication bandwidth of 1063
Mbps in half duplex and 2125 Mbps in full duplex is available today.
- HIGHEST RELIABILITY AND EFFECTIVE BANDWIDTH: Fibre Channel's
credit-based access method assures high data reliability and maximum
utilization of the network (as compared with a 30% to 40% utilization of
Ethernet's collision-based access method).
- SCALABILITY: Up to 126 nodes can be connected on a single loop;
approximately 16 million can be connected through cascaded switches.
- RELATIVE SIMPLICITY OF INSTALLATION AND MAINTENANCE: Fibre Channel uses
thin cables and connectors as opposed to SCSI, that requires cumbersome,
thick cables that operate over relatively short distances.
- MULTIPROTOCOL TRANSPORT: Storage and network protocols can be
transported over Fibre Channel simultaneously; SCSI, Ethernet, and FDDI
data frames are readily carried by Fibre Channel.
- CONNECTION DISTANCE: Connections at full bandwidth can extend up to 98
feet over copper wire and up to six miles over fiber optics without
repeaters.
- NETWORK ATTACHED STORAGE: As a consequence of multiprotocol transport
capability, arrays of disk drives can be connected directly to the
network.
- GROWTH PATH TO THE FUTURE: The Fibre Channel standard is designed to
allow data transmission bandwidths up to 4251 Mbps in half duplex and
8502 Mbps in full duplex, which is four times the capability of existing
Fibre Channel products.
Fibre Channel products are now being used in a number of industries for:
- Digital image processing in advertising, print and entertainment
industries
- Processing and sharing of medical images
- Storage and retrieval of imaged documents
- Financial and retail transaction processing
- Computer-aided design and design automation
- Scientific and engineering computing
The Fibre Channel standard is well supported in the data communications and
computer networking industry. The Fibre Channel Association, an industry trade
group, has over 100 member companies, including: Sun Microsystems, Seagate
Technology, Digital Equipment Corporation, Hewlett-Packard, Unisys, Fujitsu,
Sony, EMC Corporation, Compaq Computer, NTT (Japan), Mitsubishi, Hitachi,
Matsushita, Amdahl Computer, Intel, LSI Logic, Motorola, Tektronix, Lucent
Technologies, Siemens Nixdorf, McDonnell Douglas, Panasonic and Electronic Data
Systems. Many companies have introduced Fibre Channel products for storage and
computing. At the Comdex computer trade show meeting in November 1996, Fibre
Channel products were exhibited by JNI and 35 other companies, including
Adaptec, Ancor Communications, Box Hill Systems, Digital Equipment Corporation,
Emulex, Gadzoox Microsystems, Hewlett-Packard, Intel, Interphase, LSI Logic,
QLogic, Quantum, Seagate Technology, Sun Microsystems, Texas Instruments,
Unisys, Vitesse Semiconductor, and XPoint Technology. JNI believes that the
introduction of additional Fibre Channel products in 1997 by OEMs, for which JNI
has been qualified as a supplier of adapters, should increase the market for
adapters in the near term.
THE JNI SOLUTION
FibreStar products address the need for high-bandwidth communication
between networked computers, workstations and data storage units. Based upon the
following analysis of the market which was performed in
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1993, JNI targeted its initial product offerings for the SBus environment,
before expanding to the PCI bus environment:
- Fibre Channel will initially be used in high performance workstations and
servers and with large storage units. There will be many more
workstations sold than large storage units. Each Fibre Channel
workstation and server connection will require one or more Fibre Channel
adapters, resulting in a larger volume market for adapters.
- Unix-based SBus-compatible computers, principally from Sun Microsystems,
account for more than half of the servers and workstations sold
worldwide, dominating the high-end market.
- Computers using the PCI bus will provide a second market for FibreStar
adapters, and are expected to exceed the SBus market near the end of the
decade. By taking a position as a leading supplier of Fibre Channel
products for the SBus market and the Sun Solaris operating system, JNI
intends to integrate with an OEM customer base and then sell PCI bus
FibreStar adapters as those customers move their product to the PCI bus.
JNI believes that the OEM customer base can serve as a reference to
expand FibreStar product market share for PCI bus adapters.
JNI commenced designing and developing the FibreStar SBus-to-Fibre Channel
adapters in June 1993, resulting in a beta release in May 1995 to key OEMs
developing products that required a Fibre Channel interface. JNI has developed
FibreStar SBus-to-Fibre Channel adapters for installation in computers
compatible with the Sun Microsystems SBus specification, including some
manufactured by companies such as Hewlett-Packard, Fujitsu and Digital Equipment
Corporation. JNI first shipped commercial versions of these SBus-to-Fibre
Channel adapters in May 1995, and commenced volume production in December 1996.
JNI is currently a leading independent supplier of Fibre Channel adapters for
SBus platforms, supporting the Solaris operating system with software drivers
for networking and storage connections. Suppliers of SBus-compatible computers
running the Solaris operating system are expected to incorporate the PCI bus
into these computers in increasing numbers. JNI is developing enhancements to
the drivers for its FibreStar PCI Bus-to-Fibre Channel adapters to support the
migration to this platform.
For DEC Alpha, Power PC and Intel processor-based computers with the PCI
bus, JNI began supplying beta versions of its FibreStar PCI Bus-to-Fibre Channel
adapters in July 1996. JNI currently supports the Windows NT and Solaris X86
operating systems with networking and storage software drivers.
STRATEGY
JNI's objective is to continue to strengthen its position as a leading
independent supplier of Fibre Channel networking products. JNI seeks to achieve
this objective by implementing the following strategic elements:
Develop Additional OEM and Reseller Arrangements. JNI primarily markets
and sells its products through reseller relationships and directly to OEMs which
incorporate FibreStar adapters into the OEM's product offerings. JNI intends to
capitalize on the increased demand for Fibre Channel products by negotiating
volume purchase agreements with other major storage suppliers and integrators,
as well as expanding relationships with resellers and OEMs.
Expand and Enhance Product Line. JNI's plan for product development and
introduction is based on expected trends in the marketplace. For example, JNI
intends to extend the range of its hardware and software offerings to 64-bit
server systems and for the higher bandwidth Fibre Channel connections. JNI also
intends to capitalize on its understanding of the Fibre Channel technology to
enhance the competitive price and performance characteristics and the
functionality of its products.
Leverage OEM and Reseller Relationships for SBus Products to Promote PCI
Bus Products. OEM customers often prefer to purchase similar types of products
from a supplier with whom they have an established relationship because issues
associated with integration of OEM products and product plans, technical
support, and reliability have already been successfully resolved. Similarly,
resellers tend to prefer selling products from companies with an established
product base backed by customer references. Since the architecture and software
for the FibreStar SBus and PCI bus products are similar, JNI seeks to use its
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leverage as a leading supplier of FibreStar SBus-to-Fibre Channel adapters to
capitalize on these purchasing patterns in marketing PCI Bus-to-Fibre Channel
products.
Develop Timely Responses to New Market Needs. JNI intends to address
anticipated market demand for its products in the areas of clustered computers
and workstations, data storage and warehousing (including database storage and
digital video/multimedia applications), and in upgrades of existing networks.
JNI participates in special-interest working groups within the Fibre Channel
Association to keep abreast of developments in emerging and future markets.
Continue Commitment to Product Quality and Customer Service. JNI is
dedicated to ongoing quality improvement and intends to continue to provide the
high level of service and technical support that has distinguished JNI in the
current marketplace.
PRODUCTS
JNI products provide essential hardware and software to address existing
market needs for high-bandwidth network connections between computers and
between networked computers, workstations and data storage units. JNI designs,
develops and markets FibreStar adapters for installation in SBus and PCI bus
compatible computers. The current 32-bit adapters can be used in the common
switched and loop network architectures with copper cable connections of up to
98 feet and with fiber optic connections of up to six miles. The adapters are
offered in several versions to respond to various application needs.
FIBRESTAR SBUS-TO-FIBRE CHANNEL ADAPTERS
- Adapters are provided at bandwidths of either 266 Mbps or 1063 Mbps.
- The 266 Mbps version is provided with optical fiber input/output ports.
- The 1063 Mbps version is provided with input/output ports for connection
to either copper cables or to fiber optics.
- Communications software drivers for SCSI and TCP/IP protocols for the
Solaris operating system versions 2.4 and higher.
- FibreStar adapters have operated successfully in Sun Microsystems,
SparcStations 5, 10 and 20, UltraSparcs 1 and 2, and the Sun 1000E
Enterprise Server.
FIBRESTAR PCI BUS-TO-FIBRE CHANNEL ADAPTERS
- Adapters are provided at bandwidths of either 266 Mbps or 1063 Mbps.
- The 266 Mbps version is provided with optical fiber input/output ports.
- The 1063 Mbps version is provided with input/output ports for connection
through removable I/O modules to either copper cables or to fiber optics.
The 1063 Mbps versions with integrated I/O copper or optical connections
are also sold.
- Communications software drivers for SCSI and TCP/IP protocols for the
Windows NT operating system versions 3.51 and 4.0, and Solaris X86.
- FibreStar adapters have operated successfully in several PCI platforms
including Intel Pentium-based computers made by Dell, Micron, Packard
Bell, Compaq, Gateway and Digital Equipment Corporation (DEC Alpha).
The list prices for JNI's adapters range from approximately $1,500 to
$3,600 depending on configuration and volume. JNI also sells 266 Mbps Fibre
Channel switch products under an OEM agreement with Hewlett-Packard and 1063
Mbps eight-port stackable Fibre Channel hubs produced in an OEM relationship
with Gadzoox Microelectronics.
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SALES AND MARKETING
JNI markets and sells its products primarily through resellers and OEMs.
JNI has developed and continues to develop its OEM relationships (frequently in
tandem with its resellers and sales representatives) by actively involving its
sales, marketing and engineering personnel, and senior management. In
particular, JNI has found that involving experienced engineers in the OEM sales
process enables close technical collaboration with the customer during the
evaluation and subsequent qualification of the product, often speeding the
process with timely problem solving, and establishing confidence in the
technical support that can be expected from JNI.
JNI has established strategic relationships with other Fibre Channel
product companies, including Hewlett-Packard and Gadzoox, pursuant to which such
companies provide switches and hubs under the FibreStar brand. These
relationships allow JNI to offer a suite of interoperable solutions.
In the United States, JNI sells FibreStar products primarily through direct
sales. To extend its geographic coverage, JNI has entered into reseller
agreements with Hucom to represent and sell FibreStar products in Japan, and
also with Computer Overseas Corporation for Western Europe. These agreements do
not provide the resellers with any rights of return or price protection. JNI
supports both its resellers and sales representatives through training seminars,
direct sales support and technical support.
CUSTOMERS
Through April 30, 1997, JNI has sold over 40% of its adapters to Hucom for
resale to end users in Japan. JNI expects that its future customers will be
comprised primarily of OEMs and resellers. Since February 1996 JNI has also sold
adapters in initial evaluation orders to over 40 additional purchasers. Of those
purchasers, seven have completed their evaluation phase and five have placed
orders in production quantities.
RESEARCH AND DEVELOPMENT
JNI plans to remain competitive through continued investment in product
enhancement and new product development. JNI intends to focus its product
development efforts on areas of perceived need as the Fibre Channel market
develops.
JNI believes that the near-term market demands will be driven by the need
for large storage arrays with maximum bandwidth, low latency and high
reliability, coupled with a desire to reduce the cost per connection.
Consequently, JNI is focusing on the requirement for increased bandwidth by
developing FibreStar Fibre Channel adapters and drivers for 64-bit PCI bus and
SBus platforms from Sun Microsystems, Inc., Digital Equipment Corporation,
Hewlett-Packard and others. To reduce cost, the proprietary designs will be
simplified with new ASICs.
JNI intends to evaluate future opportunities to develop products that will
address the needs of related markets for digital video transmission and video
conferencing. JNI also intends to develop additional products focused on
establishing its network products as a market leader in market segments where
the high bandwidth provided by Fibre Channel products offers compelling economic
advantages, such as high-volume data storage and transaction environments, video
on demand and multiple-user multimedia networking. These planned products are
intended to extend the range of applicability of JNI's hardware and software
offerings into high-end 64-bit server systems and into intranets. JNI also
intends to enhance the products for higher bandwidth (2125 and 4251 Mbps)
interconnects as standards and market needs develop.
COMPETITION
The computer networking industry is intensely competitive, subject to rapid
change, and significantly affected by new product introductions and other market
activities of industry participants. JNI competes with companies offering
products based on the Fibre Channel standard, as well as companies offering
products based on competing standards. JNI believes that the principal
competitive factors in the computer networking market include the completeness
of product offerings, product quality, price and performance, adherence to
industry standards, the degree of interoperability with other networking
equipment, and time to market for
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new products. Many of JNI's current and potential competitors have significantly
greater financial, technical, marketing and other resources and larger installed
bases than JNI. Increased competition could result in price reductions, reduced
margins and loss of market share, all of which would materially and adversely
affect JNI's business, operating results and financial condition. JNI's
FibreStar adapters compete with product offerings from other vendors. Ancor
Communications and Genroco currently provide SBus-to-Fibre Channel adapters and
Emulex, Interphase, Adaptec and QLogic provide, or have announced plans to
introduce, PCI Bus-to-Fibre Channel adapters. Additionally, the computer
networking industry has witnessed many acquisitions pursuant to which several
large companies have emerged with comprehensive networking solutions. These
acquisitions may permit JNI's competitors to devote significantly greater
resources to the development and marketing of new competitive products and the
marketing of existing products to their larger installed bases of customers. JNI
expects that competition will increase, in particular as companies that are well
established in the computer networking industry increase their focus on the
emerging market for Fibre Channel adapters. There can be no assurance that JNI
will be able to compete successfully in the future with existing or new
competitors or that competitive pressures faced by JNI will not adversely affect
its business, operating results and financial condition.
MANUFACTURING
JNI uses third-party manufacturers for assembly, test and quality control,
thereby avoiding the significant capital investment required to establish and
maintain manufacturing and assembly facilities and allowing JNI to concentrate
its resources on product design, development, and marketing. JNI qualifies
manufacturers using a selection program that assesses their capacity, quality
standards and manufacturing processes.
Certain key components used in JNI's products, such as ASICs and controller
chips, are currently available only from a single source or a limited number of
sources. In particular, JNI has designed into its adapters a Fibre Channel
controller chip available only from Hewlett-Packard and a PCI interface chip
available only from Applied Micro Circuits Corporation. Similar chips are
available from other vendors, but incorporation of such chips into JNI's
products would require alterations to hardware design and driver software to
accommodate the characteristics of the new chips and, accordingly, would
substantially delay product shipments. In addition, JNI incorporates integrated
circuits from Texas Instruments and Advanced Micro Devices and oscillators from
NEL Frequency Controls, Inc. into its products. Although the functions of these
components can be duplicated using other components available on the market, the
unavailability of any of these components could substantially delay product
shipments. JNI has not entered into purchase agreements with the suppliers of
these components, which subjects JNI to potential shortages of components and
reduced control over delivery schedules and costs. Any such shortage, delivery
problem or cost increase could cause JNI to seek other suppliers, and the
process of identifying and qualifying such other suppliers could be lengthy.
Future difficulty in obtaining any of these key components could result in
delays or reductions in product shipments which, in turn, could have an adverse
effect on JNI's business, operating results and financial condition and,
accordingly, on the Company's business and future prospects.
In the event that any significant manufacturers were to become unable or
unwilling to continue to manufacture or test JNI's products in required volumes,
JNI would have to identify and qualify acceptable replacements. This process of
qualifying manufacturers and other suppliers could be lengthy, and no assurances
can be given that any additional sources would become available to JNI on a
timely basis. A delay or reduction in component shipments or a delay or increase
in costs in the assembly and testing of products by manufacturers could
adversely affect JNI's business, operating results and financial condition.
PROPRIETARY RIGHTS AND LICENSES
JNI's ability to compete successfully depends to a considerable extent on
its proprietary firmware, software and circuit board design. The adapter cards
will not function without JNI proprietary firmware programmed into certain
parts. Each adapter card is furnished with a copy of compiled driver software
that functions only with the JNI hardware design. Thus, reverse engineering of
the hardware design does not result in a functioning product. While it is
possible that the software could be modified for use with products of other
companies, JNI believes that the amount of effort required to modify the source
code provides an economic
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barrier to such misuse. JNI also believes that because of the rapid pace of
technological change in this industry, patent protection is less important than
the knowledge, ability and experience of JNI's employees.
To date, JNI has relied principally upon copyrights and trade secrets to
protect its proprietary technology. JNI generally enters into confidentiality or
license agreements with its employees, distributors, customers, and potential
customers and limits access to and distribution of the source code to its
software and other proprietary information. There can be no assurance that the
steps taken by JNI in this regard will be adequate to prevent misappropriation
of its technology or to provide adequate remedy in the event of a breach by
others. There can be no assurance that any intellectual property rights held by
JNI in the future will not be challenged, invalidated or circumvented, or that
any rights granted thereunder will provide competitive advantages to JNI. The
laws of some foreign countries may not permit the protection of JNI's
proprietary rights to the same extent as do the laws of the United States.
There has been substantial litigation regarding patent and other
intellectual property rights involving technology companies. In the future,
litigation may be necessary to protect trade secrets and other intellectual
property rights owed by JNI, to defend JNI against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation could be costly and a diversion of
management's attention, which by themselves could have adverse effects on JNI's
results of operations and financial condition. Adverse determinations in such
litigation could result in the loss of JNI's proprietary rights, subject JNI to
significant liabilities, require JNI to seek licenses from third parties or
prevent JNI from manufacturing or selling its products, any of which could have
an adverse effect on JNI's business, financial condition and results of
operations.
OTHER CORPORATE INFORMATION
EMPLOYEES
As of April 30, 1997, Jaymark had approximately 480 employees, of which 13
were employed by JNI. None of the Company's employees are represented by a labor
union or are subject to a collective bargaining agreement. The Company has never
experienced a work stoppage and believes its current relationship with its
employees to be good.
The success of the Company depends in large part upon its ability to
recruit and retain exceptional employees, particularly highly-skilled product
developers and system consultants. The Company will likely experience
significant competition but has not yet experienced difficulties in recruiting
qualified personnel. The Company is able to offer competitive salaries and
benefits, and offers equity positions to key employees.
FACILITIES
The Company's principal business headquarters are located in San Diego,
California in 104,000 square feet of office and laboratory space which is owned
by the Company. As of April 30, 1997, the Company leased office space in 17
other locations, the largest of which include: McLean, Virginia (approximately
31,700 square feet); Albuquerque, New Mexico (approximately 97,200 square feet);
Colorado Springs, Colorado (approximately 19,000 square feet); Reston, Virginia
(approximately 11,800 square feet); and Huntsville, Alabama (approximately 7,200
square feet). JNI uses approximately 4,000 square feet of office and engineering
laboratory space at the Company's corporate headquarters. The Company believes
that these facilities are adequate to meet its requirements for the foreseeable
future.
GOVERNMENT REGULATIONS
Because of its participation in government contracts, the Company is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Office of Federal Control Compliance
Programs. These and other governmental agencies may also, from time to time,
conduct inquiries or investigations that may cover a broad range of Company
activity. Responding to any such audits, inquiries or investigations may involve
significant expense and divert management attention. In addition, an adverse
finding in any such audit,
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inquiry or investigation could involve penalties that may have an adverse effect
on the Company's business, financial condition or results of operations.
The Company is also subject to a variety of local, state and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations.
The Company believes that it operates its business in material compliance
with applicable government regulations.
COMPANY HISTORY
The Company was initially incorporated in California on January 27, 1975,
and reincorporated in Delaware in May 1997. The Company recently reorganized
into a holding company structure and conducts its business through several
wholly owned subsidiaries. Substantially all of the Company's business efforts
are conducted through its Jaycor, Inc. and Jaycor Networks, Inc. subsidiaries.
The Company's principal executive offices are located at 9775 Towne Centre
Drive, San Diego, California 92121, and its telephone number at that location is
(619) 535-3100.
LEGAL PROCEEDINGS
From time to time, the Company is or has been a party to disputes arising
in the ordinary course of business, including disputes relating to employment
matters, contractual relationships and intellectual property rights. Although
there can be no assurance given with respect to the results of any of these
matters, based on information currently available to management, the Company
does not believe that the ultimate outcome of any of these disputes will have a
material adverse effect on the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company as of May 31, 1997 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Eric P. Wenaas, Ph.D.(1)............... 55 Chairman of the Board, Chief Executive Officer,
President and Director
James H. Stuhmiller, Ph.D.(1)(2)....... 54 Senior Vice President of Jaycor and Director
P. Randy Johnson....................... 46 Vice President, Finance and Chief Financial Officer
Terry M. Flanagan, Ph.D.(1)............ 59 President and Chief Executive Officer of JNI and
Director
John C. Stiska(3)...................... 55 Director
John S. Foster, Jr., Ph.D.(2)(3)....... 74 Director
David R. Heebner(2)(3)................. 70 Director
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
Eric P. Wenaas, Ph.D. Dr. Wenaas has been with the Company since 1976 and
has been a director of the Company since 1983. Dr. Wenaas became Chairman of the
Board, Chief Executive Officer and President of the Company in March 1991, and
was largely responsible for solving pressing fiscal problems and refocusing the
Company's technology base to emphasize the development of dual-use technologies.
Prior to 1991, Dr. Wenaas was a Senior Vice President of the Company, managing a
group of approximately 125 employees with approximately $30 million in annual
revenues. Dr. Wenaas received B.S. and M.S. degrees in electrical engineering
from Purdue University in 1963 and 1964, respectively, and received a Ph.D.
degree in engineering sciences from the State University of New York at Buffalo
in 1969.
James H. Stuhmiller, Ph.D. Dr. Stuhmiller has been with the Company since
its inception in 1975 and has been a director of the Company since June 1991.
Dr. Stuhmiller became a Senior Vice President of Jaycor in 1993. Dr. Stuhmiller
received a Ph.D. degree in theoretical physics from the University of Cincinnati
in 1973.
P. Randy Johnson. Mr. Johnson became Vice President, Finance and Chief
Financial Officer of the Company in December 1990. From 1989 to 1990, Mr.
Johnson served as Controller and a Vice President of the Company. Mr. Johnson
received a B.A. degree in economics in 1974 and an M.B.A. degree in finance from
Brigham Young University in 1976.
Terry M. Flanagan, Ph.D. Dr. Flanagan became President and Chief Executive
Officer of JNI and a director of the Company in February 1997. From 1993 to
1997, Dr. Flanagan was a Senior Vice President of the Company, where he managed
a group of approximately 40 employees with approximately $14 million in annual
revenues. He recognized the commercial potential for the Company's Fibre Channel
technology and assembled the team to develop and market the technology. Dr.
Flanagan also served as a Vice President of the Company from 1980 to 1992. Prior
to joining Jaycor in 1977, Dr. Flanagan was an Engineering Manager and Special
Projects Manager at Frequency and Time Systems, Inc., where he was responsible
for developing Global Positioning System standards for both commercial and
government applications. Dr. Flanagan served as a group leader at Gulf General
Atomic and IRT Corporation from 1969 to 1975. He received a B.S. degree in
physics from the University of Santa Clara in 1960 and M.S. and Ph.D. degrees
from Purdue University in 1963 and 1966, respectively.
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John C. Stiska. Mr. Stiska became a director of the Company in June 1991.
Mr. Stiska has been a Corporate Senior Vice President of Qualcomm Incorporated
since February 1996, and was given the additional responsibility of General
Manager of Qualcomm's Technology Applications Division in January 1997. From
1990 to January 1996, Mr. Stiska was with Triton Group Ltd., an
operating-holding company based in San Diego that emerged in 1993 from the
Chapter 11 bankruptcy proceedings of Triton Group Ltd. and Intermark, Inc., most
recently as its Chairman and CEO. Before that time he practiced law for 20
years, specializing in corporate law, mergers and acquisitions and securities
law. Mr. Stiska also serves as a director of Laser Power Corporation and several
privately held companies. He received his B.B.A. and J.D. degrees from the
University of Wisconsin.
John S. Foster, Jr., Ph.D. Dr. Foster became a director of the Company in
June 1992. Dr. Foster is a consultant and former director of TRW Inc. He
previously served as Chairman of the Defense Science Board, a research and
engineering advisory board selected by the Secretary of Defense. Dr. Foster is
Chairman of the Board of Pilkington Aerospace and Technology Strategies and
Alliances and serves as a director of Arete Associates. Dr. Foster received a
B.S. degree from McGill University in Montreal, Quebec in 1948 and a Ph.D.
degree in physics from the University of California, Berkeley in 1952. In 1979,
he received an honorary Doctor of Science degree from the University of
Missouri.
David R. Heebner. Mr. Heebner became a director of the Company in
September 1994. Mr. Heebner is a member of the Defense Science Board and
Chairman of the National Academy of Sciences Naval Studies Board. During the
period from 1975 through 1993, Mr. Heebner was affiliated with Science
Applications International Corporation, serving as a director from July 1976
through June 1993, as Executive Vice President, as a General Manager, and as
Vice Chairman of the Board from 1980 until June 1993. Mr. Heebner received a
B.S. degree in electrical engineering from Newark College of Engineering in 1950
and a M.S. degree in electrical engineering from the University of Southern
California in 1955.
All directors hold office until the next annual meeting of the stockholders
of the Company and until their successors have been duly elected and qualified.
The Company's Bylaws provide that the Board of Directors will consist of between
five and nine members, and the number of directors is currently set at six.
Officers are elected by and serve at the discretion of the Board of Directors.
There are no family relationships among the directors or officers of the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee of the Board of Directors is responsible for reviewing
with management the financial controls, accounting, credit and reporting
activities of the Company. The Audit Committee reviews the qualifications of the
Company's independent accountants, makes recommendations to the Board of
Directors regarding the selection of independent accountants, reviews the scope,
fees and results of any audit and reviews non-audit services and related fees
provided by the independent accountants. During the year ended January 31, 1997,
the members of the Audit Committee were initially Robert P. Sullivan, a retired
Executive Vice President of the Company, Dr. Stuhmiller and Mr. Stiska. In June
1996, Mr. Heebner replaced Mr. Stiska as a member of the Audit Committee. On
February 25, 1997, the Board of Directors appointed a new Audit Committee,
consisting of Dr. Stuhmiller, Dr. Foster and Mr. Heebner.
The Compensation Committee of the Board of Directors is responsible for the
administration of all salary and incentive compensation plans for the officers
and key employees of the Company, including bonuses. The Compensation Committee
also administers the Company's stock option and stock purchase plans. During the
year ended January 31, 1997, the members of the Compensation Committee were Dr.
Wenaas, Dr. Foster, Mr. Stiska and Mr. Heebner. On February 25, 1997, the Board
of Directors appointed a new Compensation Committee, consisting of Mr. Stiska,
Mr. Heebner and Dr. Foster.
The Executive Committee of the Board of Directors consists of Dr. Wenaas,
Dr. Stuhmiller and Dr. Flanagan. The Board of Directors does not have a
nominating committee. The selection of nominees for the Board of Directors is
made by the entire Board of Directors.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended January 31, 1997, Eric P. Wenaas, the
Company's President and Chief Executive Officer, served on the Compensation
Committee of the Company's Board of Directors, but, as of February 25, 1997, Dr.
Wenaas no longer serves on such committee. No member of the Board of Directors
of the Company, its current Compensation Committee or the Compensation Committee
that served during the fiscal year ended January 31, 1997 serves as a member of
the board of directors or compensation committee of an entity that has one or
more executive officers serving as a member of the Company's Board of Directors
or Compensation Committee.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company receive a fee of $3,750 on a
quarterly basis for serving as a director and receive a fee of $1,000 for
attendance at meetings of the Board of Directors and any committees thereof, as
well as being reimbursed for out-of-pocket expenses incurred with respect to
attendance at such meetings. From time to time, the Company has granted stock
options to directors of the Company with exercise prices equal to the fair value
of the Common Stock on the date of grant. Following the effectiveness of the
Company's 1997 Outside Directors Stock Option Plan (the "Directors Plan"),
non-employee directors of the Company will receive annual grants of options to
purchase shares of Class A Common Stock under such plan. See "-- Benefit Plans."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not be personally liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of (i) a breach of the director's
duty of loyalty to the Company or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law, and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the full extent permitted by Delaware law. The Bylaws also
authorize the Company to indemnify its employees and agents to the full extent
permitted by Delaware law, at the discretion of the Company's Board of
Directors. The Company intends to enter into indemnification agreements with its
directors and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
43
<PAGE> 45
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company during
the fiscal year ended January 31, 1997 to the Company's Chief Executive Officer
and each of the Company's four other most highly compensated executive officers
(the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------
----------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY OTHER UNDERLYING OPTIONS COMPENSATION
- ------------------------------------- -------- ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Eric P. Wenaas....................... $376,300 $51,480(1) 17,400 $ 2,520(2)
President and Chief Executive
Officer
Robert P. Sullivan(3)................ 337,822 45,452(4) 10,800 212,067(5)
Executive Vice President
James H. Stuhmiller.................. 234,675 29,028(6) 3,600 2,112(2)
Senior Vice President
Terry M. Flanagan.................... 186,000 29,930(8) 10,200 672(2)
Senior Vice President(7)
P. Randy Johnson..................... 153,300 30,516(9) 22,200 552(2)
Vice President, Finance and Chief
Financial Officer
</TABLE>
- ---------------
(1) Consists of an $18,800 payment in lieu of raise, a $3,094 housing allowance
for a residence in the Washington, D.C. area, $6,375 for use of a Company
automobile, $10,047 in contributions to the Company's Money Purchase Pension
Plan (the "Pension Plan"), $8,584 in deferred compensation, $1,131 in
contributions to the ESOP, $2,864 in premiums with respect to the Company's
executive medical insurance and $585 for personal tax planning.
(2) Consists of life insurance premiums.
(3) Dr. Sullivan retired from the Company effective January 31, 1997 and entered
into a Retirement Agreement with the Company on such date. See "Certain
Transactions."
(4) Consists of a $16,900 payment in lieu of raise, $1,950 for use of a Company
automobile, $11,865 in contributions to the Pension Plan, $8,584 in deferred
compensation, $1,289 in contributions to the ESOP, $2,864 in premiums with
respect to the Company's executive medical insurance and $2,000 for personal
tax planning.
(5) Consists of $16,000 for the transfer of ownership of an automobile, $155,225
in deferred compensation accrued over prior years, $38,322 in accrued
vacation pay and $2,520 in life insurance premiums. See "Certain
Transactions."
(6) Consists of an $8,400 automobile allowance, $8,729 in contributions to the
Pension Plan, $8,016 in deferred compensation, $1,019 in contributions to
the ESOP and $2,864 in premiums with respect to the Company's executive
medical insurance.
(7) Dr. Flanagan currently serves as President and Chief Executive Officer of
JNI.
(8) Consists of a $4,700 payment in lieu of raise, a $5,400 automobile
allowance, $11,865 in contributions to the Pension Plan, $3,712 in deferred
compensation, $1,289 in contributions to the ESOP, $2,864 in premiums with
respect to the Company's executive medical insurance and $100 for personal
tax planning.
(9) Consists of a $7,700 payment in lieu of raise, a $6,000 automobile
allowance, $11,865 in contributions to the Pension Plan, $798 in deferred
compensation, $1,289 in contributions to the ESOP and $2,864 in premiums
with respect to the Company's executive medical insurance.
44
<PAGE> 46
The following table provides information concerning grants of options to
purchase Class B Common Stock during the fiscal year ended January 31, 1997 to
the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
NUMBER OF PERCENT OF APPRECIATION FOR
SECURITIES TOTAL EXERCISE OPTION TERM(1)
UNDERLYING OPTIONS GRANTED PRICE EXPIRATION ------------------
NAME OPTIONS GRANTED TO EMPLOYEES PER SHARE(2) DATE 5% 10%
- --------------------------- --------------- --------------- ------------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Eric P. Wenaas............. 17,400 6.1% $ 5.57 3/4/04 $46,274 $110,834
Robert P. Sullivan......... 10,800 3.8 5.57 3/4/04 28,722 68,794
James H. Stuhmiller........ 3,600 1.3 5.57 3/4/04 9,574 22,931
Terry M. Flanagan.......... 10,200 3.6 5.57 3/4/04 27,126 64,972
P. Randy Johnson........... 4,200 1.5 5.57 3/4/04 11,170 26,753
18,000 6.3 6.48 12/2/04 55,690 133,388
</TABLE>
- ---------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5% and
the 10% assumed annual compound rates of appreciation are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future Common Stock price.
(2) All such options were granted under the Company's 1996 Nonstatutory Stock
Option Plan and vest in full on the first anniversary of the date of grant.
All such options were granted at fair market value as determined on the date
of grant by the Board of Directors of the Company. The Company's Common
Stock was not traded publicly at the time of such option grants to the Named
Executive Officers. See "-- Benefit Plans."
The following table provides information concerning the number of shares
issued upon exercise of options by the Named Executive Officers during the
fiscal year ended January 31, 1997 and the value realized by the Named Executive
Officers. The table also provides information concerning unexercised options
held by the Named Executive Officers as of January 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 1/31/97 AT 1/31/97(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Eric P. Wenaas................................... 261,000 17,400 $ 543,600 $15,834
Robert P. Sullivan............................... 181,800 10,800 362,250 9,828
James H. Stuhmiller.............................. 5,850 5,550 2,399 4,076
Terry M. Flanagan................................ 72,000 10,200 58,320 9,282
P. Randy Johnson................................. 36,000 22,200 75,600 3,822
</TABLE>
- ---------------
(1) "Value Realized" represents the fair value of the underlying securities on
the exercise date minus the aggregate exercise price of such options. For
purposes of this calculation, a fair value of $6.48 per share was used, the
fair value of the securities as determined by the Board of Directors of the
Company as of January 31, 1997.
No options to purchase shares of the Company's Common Stock were exercised
by the Named Executive Officers during the fiscal year ended January 31, 1997.
No compensation intended to serve as incentive for
45
<PAGE> 47
performance to occur over a period longer than one fiscal year was paid pursuant
to a long-term incentive plan during the last fiscal year to any of the Named
Executive Officers.
BENEFIT PLANS
1996 STOCK OPTION PLAN
The Board of Directors has reserved 435,000 shares of Class B Common Stock
and 500,000 shares of Class A Common Stock for issuance under the Company's 1996
Stock Option Plan (the "1996 Option Plan"). Originally adopted in December 1995
as the Company's 1996 Nonstatutory Stock Option Plan, the 1996 Option Plan was
amended on February 25, 1997 to provide for the grant of "incentive stock
options" intended to qualify for certain tax treatment and to provide for the
grant of options to purchase shares of Class A Common Stock following the
effective date of this offering. At April 30, 1997, 176,700 shares of Class B
Common Stock were subject to outstanding options, and 258,300 shares of Class B
Common Stock and 500,000 shares of Class A Common Stock remained reserved for
issuance with respect to future grants under the 1996 Option Plan. The 1996
Option Plan, which is administered by the Compensation Committee of the Board of
Directors, provides for the grant of non-qualified stock options and incentive
stock options to employees and directors of the Company. Options granted under
the 1996 Option Plan generally terminate after eight years and are subject to
individual vesting schedules, but options previously granted under such plan
generally vest in full one year from the date of grant.
1997 OUTSIDE DIRECTORS STOCK OPTION PLAN
A total of 75,000 shares of Class A Common Stock has been reserved for
issuance under the Directors Plan. Prior to the effective date of this offering,
no options have been granted under the Directors Plan. The Directors Plan
provides for automatic grants of non-qualified stock options to certain
directors of the Company who are not employees of the Company ("Outside
Directors"). Under the Directors Plan, each Outside Director elected or
appointed as a director following the effective date of this offering will
automatically be granted an option to purchase 10,000 shares of Class A Common
Stock on the date of his or her initial election or appointment. In addition,
each Outside Director will thereafter automatically be granted an option to
purchase up to 3,000 shares of Class A Common Stock following each annual
meeting of the Company's stockholders at which such Outside Director is
re-elected. The exercise price of all such options will be equal to the fair
market value of the Class A Common Stock on the date of grant. Initial options
granted under the Directors Plan generally vest over a four-year period, and
annual options generally vest in full four years from the date of grant. All
such options must be exercised within ten years from the date of grant.
1997 EMPLOYEE STOCK PURCHASE PLAN
A total of 200,000 shares of the Company's Class A Common Stock has been
reserved for issuance under the Company's 1997 Employee Stock Purchase Plan (the
"Purchase Plan"), none of which have been issued. The Purchase Plan permits
eligible employees of the Company to purchase shares of Class A Common Stock at
a discount through payroll deductions during sequential 24-month offering
periods. Each such offering period is divided into four consecutive six-month
purchase periods. Unless otherwise provided by the Board of Directors prior to
the commencement of an offering period, the price at which shares are purchased
under the Purchase Plan for such offering period is equal to 85% of the lesser
of the fair market value of the Class A Common Stock on the first day of such
offering period or the last day of the purchase period of such offering period.
The initial offering period will commence on the effective date of this
offering.
JNI 1997 STOCK OPTION PLAN
JNI has adopted a subsidiary-level option plan known as the Jaycor
Networks, Inc. 1997 Stock Option Plan (the "JNI Plan"), which provides for the
grant to employees of JNI of incentive stock options and non-qualified stock
options to purchase shares of common stock of JNI. For a nine-year period
following the date of grant, such options are only exercisable in the event that
JNI undergoes a "change in control" (generally defined as a sale of assets,
merger or public offering of equity securities). Following such nine-year
period, but
46
<PAGE> 48
prior to the termination of such option (the options terminate ten years from
the date of grant), the option may be exercised, but, in such event, JNI has a
right to repurchase such shares at the greater of the exercise price or the fair
market value of such shares. The exercise price of all such options will be
equal to the fair market value of the common stock of JNI on the date of grant.
In the event that an optionee under the JNI Plan exercises an option to purchase
shares of the Company's Common Stock granted subsequent to the adoption of the
JNI Plan to such optionee under one of the Company's stock option plans, all
options granted under the JNI Plan terminate immediately. Similarly, in the
event that an optionee under the JNI Plan exercises an option granted under the
JNI Plan, all options granted subsequent to the adoption of the JNI Plan under
the Company's stock option plans terminate immediately. Options granted under
the JNI Plan generally vest over a four-year period, although such vesting is
accelerated in the event of certain transactions resulting in a transfer of
control of JNI.
PRIOR STOCK OPTION PLANS
The Board of Directors has reserved a total of 3,015,000 shares of Class B
Common Stock for issuance under the Company's 1980 Stock Option Plan (the "1980
Option Plan"), 1990 Incentive Stock Option Plan (the "1990 Option Plan") and
1991 Stock Option Plan (the "1991 Option Plan" and, collectively with the 1980
Option Plan and the 1990 Option Plan, the "Prior Option Plans"). At April 30,
1997, 429,712 shares of Class B Common Stock had been issued upon exercise of
options granted under the Prior Option Plans, an aggregate of 1,038,525 shares
remained reserved for issuance upon the exercise of outstanding options and
195,240 shares were available for future grant. The Prior Option Plans are
administered by the Compensation Committee of the Board of Directors and provide
in certain cases for the grant of incentive stock options as well as
non-qualified stock options. Options granted under the 1980 Option Plan and the
1990 Option Plan generally vest over a four-year period and generally terminate
after ten years. The options granted under the 1991 Option Plan are immediately
exercisable and terminate after ten years.
In accordance with the terms of the Class B Common Stock, 20% of the
aggregate number of shares of Class B Common Stock issuable upon exercise of
options granted under the Prior Option Plans and the 1996 Option Plan convert
into shares of Class A Common Stock upon the closing of this offering, and an
additional 20% of such shares of Class B Common Stock underlying the options
will convert into shares of Class A Common Stock upon each anniversary of such
closing, whether or not the options have been exercised. All shares underlying
outstanding options, as well as outstanding shares issued upon exercise of
options, will have fully converted into shares of Class A Common Stock upon the
fourth anniversary of the closing of this offering. Upon each exercise of such
options, the shares of Class A Common Stock and Class B Common Stock issuable
will be in proportion to the Class A Common Stock and each series of Class B
Common Stock that has not yet converted. See "Description of Capital Stock."
401(K) PLAN
The Company adopted its 401(k) Plan effective January 1, 1987 and
subsequently amended the 401(k) Plan on several occasions. Participation in the
401(k) Plan is restricted to employees of Jaycor and JNI who meet certain
service requirements. Under the 401(k) Plan, employees may contribute, as
pre-tax contributions, up to 15% of their compensation, subject to certain
discrimination rules and the Internal Revenue Service annual limit on employee
deductible contributions, which limit is currently $9,500 for 1997. No
contributions to the 401(k) Plan are made by the Company. Participants are
entitled to direct the investment of their accounts among various investment
funds. The 401(k) Plan is intended to qualify under Sections 401(a) and 401(k)
of the Internal Revenue Code so that salary deferral contributions to the 401(k)
Plan and income earned on such salary deferral contributions are not currently
taxable to participants until distributed and contributions made by participants
pursuant to the 401(k) Plan are non-taxable to participants. The Company's plan
committee, which consists of P. Randy Johnson, the Company's Vice President,
Finance and Chief Financial Officer, Dorothy K. Bidwell, the Company's
Secretary, and Carol McHenry, Jaycor's Vice President, Corporate Resources (the
"Plan Committee"), administers the 401(k) Plan and Fidelity Management Trust
Company serves as trustee of the 401(k) Plan.
47
<PAGE> 49
EMPLOYEE STOCK OWNERSHIP PLAN
The Company originally adopted the ESOP effective May 5, 1983 and
subsequently amended the ESOP on several occasions. Effective upon the closing
of this offering, the ESOP will convert into a stock bonus plan which, although
it retains substantially all of the features of an employee stock ownership
plan, does not require the ESOP to own publicly traded stock of the Company.
Participation in the ESOP is limited to employees of Jaycor who meet certain
service requirements. All contributions to the ESOP are made by the Company at
the discretion of the Board of Directors, and annual contributions are not
required. Employer contributions are allocated to the accounts of eligible
participants in accordance with relative compensation. The interests of
participants in the ESOP generally vest upon the completion of five years of
service. Substantially all contributions to the ESOP are invested in Class B
Common Stock of the Company. Shares of Common Stock held by the ESOP are
generally distributed to participants either (i) the end of the plan year
following the year of retirement, or (ii) the end of the fifth plan year
following the year of termination. Prior to the closing of this offering, the
Company may be required under certain circumstances to repurchase shares of
Common Stock distributed by the ESOP to retired and terminated participants.
Upon the closing of this offering, the Company may, at its option, satisfy
obligations for distributions of shares with Class A Common Stock. To the extent
that the ESOP does not hold sufficient shares of Class A Common Stock to meet
its obligations to distribute shares to participants following retirement or
termination, the Company has agreed to exchange shares of Class A Common Stock
for shares of Class B Common Stock held by the ESOP to distribute to such
participants. The ESOP is intended to qualify under Section 401(a) of the
Internal Revenue Code so that contributions to the ESOP and income earned on the
contributions are not currently taxable to participants until distributed and
contributions to the plan are currently deductible by the Company. The ESOP is
administered by the Plan Committee.
MONEY PURCHASE PENSION PLAN
The Company adopted the Pension Plan effective July 1, 1981 and
subsequently amended the Pension Plan on several occasions. Participation in the
Pension Plan is limited to employees of Jaycor who meet certain service
requirements. All contributions to the Pension Plan are made by the Company. In
order to receive an allocation of the Company's contribution to the Pension
Plan, an eligible employee must be employed on the last day of the calendar year
and have completed at least 1,000 hours of service during such year, except
during the first year of participation when participants automatically receive a
contribution. Employer contributions are allocated to eligible participants in
accordance with a formula that takes into account relative compensation of all
eligible participants and social security contributions by the Company. The
amounts allocated to the accounts of participants under the Pension Plan vest
upon completion of five years of service with the Company. The Pension Plan is
intended to qualify under Section 401(a) of the Internal Revenue Code so that
contributions to the Pension Plan and income earned on such contributions are
not currently taxable to participants until distributed and contributions to the
Pension Plan are currently deductible by the Company. The Plan Committee
administers the Pension Plan and Fidelity Management Trust Company serves as
trustee of the Pension Plan.
48
<PAGE> 50
CERTAIN TRANSACTIONS
In consideration for relinquishing stock options previously granted to Dr.
Wenaas, Jaymark has entered into an agreement, as amended, with Dr. Wenaas
whereby the Company will credit a total of $160,000 in deferred compensation for
the benefit of Dr. Wenaas in four equal annual installments commencing January
15, 1998. Each installment is subject to Dr. Wenaas' employment by the Company
on such date. Interest accrues on the amount credited at the prime rate
published by Wells Fargo Bank. In the event of Dr. Wenaas' death, disability or
termination other than for cause, Dr. Wenaas or his heirs will receive the full
amount.
Effective January 31, 1997, the Company entered into a Retirement Agreement
(the "Retirement Agreement") with Robert P. Sullivan, who served as a director
of the Company and as Executive Vice President of the Company until such date.
The Retirement Agreement provides that Dr. Sullivan will provide services to the
Company at a rate of $100 per hour, as directed from time to time by the
President or Board of Directors of the Company. Dr. Sullivan agreed to provide
such services until the earlier to occur of (i) one year after the closing of
this offering, or (ii) June 30, 1998. Pursuant to the Retirement Agreement, on
January 31, 1997, the Company repurchased 23,392 shares of Class B Common Stock
from Dr. Sullivan at a price of $6.48 per share. In addition, the Company agreed
to repurchase 120,000 shares of Class B Common Stock from Dr. Sullivan at a
price per share of $8.33 per share, which price is subject to adjustment if the
closing of this offering does not occur during 1997. The Company is obligated to
repurchase such shares within 30 days of the closing of this offering, but such
obligation is postponed as specified in the Retirement Agreement in the event
that such repurchase would impair the Company's ability to qualify for listing
of its Class A Common Stock on the Nasdaq National Market. Concurrent with Dr.
Sullivan's resignation as an officer and director of the Company, the Company
paid $38,322 owed to Dr. Sullivan for accrued vacation pay, paid $155,255 to Dr.
Sullivan pursuant to the terms of a Deferred Compensation Agreement between the
Company and Dr. Sullivan, dated June 14, 1991, and agreed to transfer an
automobile valued at $16,000 to Dr. Sullivan.
The spouses of Dr. Wenaas and Dr. Stuhmiller are employed by Jaycor on
terms that the Company believes are customary for individuals with similar
backgrounds and responsibilities.
The Company offers deferred compensation arrangements to certain of its
employees, including its officers. The agreements allow the employees to defer
up to 100% of their salaries, net of certain payroll withholdings, with interest
accruing thereon at specified rates, currently ranging from 8% to 9%.
Distributions commence upon retirement or termination and continue for a period
as prescribed in the respective agreements.
The Company's Delaware Certificate of Incorporation provides for
indemnification of the Company's officers and directors in certain
circumstances. The Company intends to enter into Indemnification Agreements with
each of its directors and executive officers. See "Management -- Limitation of
Liability and Indemnification Matters."
49
<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 31, 1997, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by: (i) each of
the Named Executive Officers, (ii) each of the Company's directors, (iii) all
directors and executive officers of the Company as a group, and (iv) each other
person known by the Company to own beneficially more than 5% of the Company's
Common Stock. Except as otherwise noted, the person or entities in this table
have sole voting and investment power with respect to all shares of Common Stock
beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED (1)
NUMBER OF SHARES OF ------------------------
COMMON STOCK BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING(2)
- ----------------------------------------------------- --------------------- ---------- -----------
<S> <C> <C> <C>
5% STOCKHOLDERS AND FORMER OFFICER:
PAUL I. NAKAYAMA..................................... 96,278 5.2% 3.0%
1425 Luneta Drive
Del Mar, California 92014
POLL FAMILY TRUST, DATED SEPTEMBER 14, 1990,
ROBERT POLL AND GAIL POLL, TRUSTEES.................. 135,096 7.3 4.3
1309 Georgina Avenue
Santa Monica, California 90402
LOUISE STUHMILLER(3)(4).............................. 126,104 6.7 4.0
WELLS FARGO BANK(5).................................. 487,241 26.2 15.4
707 Wilshire Boulevard
MAC 2818-101
Los Angeles, California 90017
ROBERT P. SULLIVAN(6)................................ 318,621 15.5 9.5
4202 Maple Tree Court
Alexandria, Virginia 22304
EXECUTIVE OFFICERS AND DIRECTORS:
ERIC P. WENAAS(4)(7)................................. 412,532 19.3 12.0
JAMES H. STUHMILLER(4)(8)............................ 126,104 6.7 4.0
P. RANDY JOHNSON(9).................................. 45,862 2.4 1.4
TERRY M. FLANAGAN(4)(10)............................. 116,203 6.0 3.6
JOHN C. STISKA(11)................................... 20,400 1.1 *
JOHN S. FOSTER, JR.(12).............................. 20,400 1.1 *
DAVID R. HEEBNER(13)................................. 20,400 1.1 *
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (7
PERSONS)(14)....................................... 761,901 32.6 21.0
</TABLE>
- ---------------
* Represents less than 1% of outstanding Common Stock or voting power.
(1) Shares beneficially owned and percentage of ownership are based on
1,861,640 shares of Class B Common Stock outstanding before this offering
and 3,161,640 shares of Common Stock to be outstanding after the closing of
this offering, as of May 31, 1997 and assuming no exercise of the
Underwriters' over-allotment option. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or disposition power with respect to such shares.
(2) The percentages indicated in the "Shares Beneficially Owned After the
Offering" column do not take into account the Company's agreement, subject
to certain conditions, to repurchase 120,000 shares of Common Stock from
Robert P. Sullivan within 30 days of the closing of this offering. See
"Certain Transactions" and footnote 6.
50
<PAGE> 52
(3) Ms. Stuhmiller is the wife of James H. Stuhmiller, Senior Vice President of
Jaycor and a director of the Company. Includes 11,400 shares issuable upon
exercise of options held by Dr. Stuhmiller that are exercisable within the
60-day period following May 31, 1997, approximately 6,158 shares held by
the ESOP on behalf of Dr. Stuhmiller, and approximately 546 shares held by
the ESOP on behalf of Ms. Stuhmiller. See footnote 8.
(4) The address of such stockholder is: c/o the Company, 9775 Towne Centre
Drive, San Diego, California 92121.
(5) Consists of 487,241 shares held as trustee of the ESOP. Wells Fargo Bank
disclaims beneficial ownership of all such shares. See
"Management -- Benefit Plans."
(6) Includes 192,600 shares issuable upon exercise of options held by Dr.
Sullivan that are exercisable within the 60-day period following May 31,
1997 and approximately 6,021 shares held by the ESOP on behalf of Dr.
Sullivan. Also includes 120,000 shares which the Company has agreed to
repurchase, subject to certain conditions, within 30 days of the closing of
this offering. See "Certain Transactions."
(7) Includes 278,400 shares issuable upon exercise of options held by Dr.
Wenaas that are exercisable within the 60-day period following May 31,
1997, approximately 6,973 shares held by the ESOP on behalf of Dr. Wenaas,
approximately 1,091 shares held by the ESOP on behalf of Karen M. Wenaas,
the wife of Dr. Wenaas, and 126,068 shares held as co-trustee of the
Revocable Trust of Eric P. and Karen M. Wenaas.
(8) Includes 108,000 shares held by Louise Stuhmiller, the wife of Dr.
Stuhmiller, 11,400 shares issuable upon exercise of options held by Dr.
Stuhmiller that are exercisable within the 60-day period following May 31,
1997, approximately 6,158 shares held by the ESOP on behalf of Dr.
Stuhmiller, and approximately 546 shares held by the ESOP on behalf of Ms.
Stuhmiller. See footnote 3.
(9) Includes 40,200 shares issuable upon exercise of options held by Mr.
Johnson that are exercisable within the 60-day period following May 31,
1997 and approximately 3,862 shares held by the ESOP on behalf of Mr.
Johnson. Excludes 18,000 shares issuable upon exercise of options held by
Mr. Johnson that are exercisable subsequent to July 30, 1997.
(10) Includes 82,200 shares issuable upon exercise of options held by Dr.
Flanagan that are exercisable within the 60-day period following May 31,
1997 and approximately 5,203 shares held by the ESOP on behalf of Dr.
Flanagan.
(11) Consists of 20,400 shares issuable upon exercise of options held by Mr.
Stiska that are exercisable within the 60-day period following May 31,
1997. Excludes 4,500 shares issuable upon exercise of options held by Mr.
Stiska that are exercisable subsequent to July 30, 1997.
(12) Consists of 20,400 shares issuable upon exercise of options held by Dr.
Foster that are exercisable within the 60-day period following May 31,
1997. Excludes 4,500 shares issuable upon exercise of options held by Dr.
Foster that are exercisable subsequent to July 30, 1997.
(13) Consists of 20,400 shares issuable upon exercise of options held by Mr.
Heebner that are exercisable within the 60-day period following May 31,
1997. Excludes 4,500 shares issuable upon exercise of options held by Mr.
Heebner that are exercisable subsequent to July 30, 1997.
(14) Includes 473,400 shares issuable upon exercise of options that are
exercisable within the 60-day period following May 31, 1997 and
approximately 23,833 shares owned by the ESOP on behalf of such
stockholders.
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<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 12,000,000 shares
of Class A Common Stock, par value $0.001 per share, and 4,000,000 shares of
Class B Common Stock, par value $0.001 per share. The Class B Common Stock
consists of five series, and each such series consists of 800,000 shares. Other
than the conversion of all shares of Class B Common Stock into shares of Class A
Common Stock over a four-year period commencing upon the closing of this
offering, the rights, preferences and privileges of each class of Common Stock
are identical in all respects. The following summary of certain provisions of
the Common Stock of the Company does not purport to be complete and is subject
to, and qualified in its entirety by, the Certificate of Incorporation of the
Company and the Bylaws of the Company that are included as exhibits to the
Registration Statement of which this Prospectus forms a part, as well as the
provisions of applicable law.
COMMON STOCK
As of April 30, 1997, there were no shares of Class A Common Stock
outstanding and 1,741,640 shares of Class B Common Stock outstanding, which
shares were held of record by approximately 62 stockholders, excluding 120,000
shares of Class B Common Stock that the Company has agreed to repurchase,
subject to certain conditions. Upon the closing of this offering, 20% of the
outstanding shares of Class B Common Stock will automatically convert into
shares of Class A Common Stock. The holders of Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of the
holders of Common Stock and are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities. Holders of Common Stock have no
preemptive or subscription rights, and there are no redemption or conversion
rights with respect to such shares. All outstanding shares of Common Stock are
fully paid and non-assessable.
The Class B Common Stock consists of five series, which are designated and
known as Series B-1 Common Stock, Series B-2 Common Stock, Series B-3 Common
Stock, Series B-4 Common Stock and Series B-5 Common Stock. The outstanding
shares of Class B Common Stock are comprised of approximately 20% of each such
series. To the extent that the shares of Class B Common Stock held by a
stockholder do not divide evenly among the series of Class B Common Stock, such
stockholder may hold from one to four additional shares of Series B-5 Common
Stock. Accordingly, 348,416 shares of Series B-5 Common Stock were outstanding
as of April 30, 1997, as opposed to 348,306 shares of each of the other series
of Class B Common Stock. Upon the closing of this offering, all outstanding
shares of Series B-1 Common Stock will automatically convert into shares of
Class A Common Stock. Upon the first anniversary of the closing of this
offering, all outstanding shares of Series B-2 Common Stock will automatically
convert into shares of Class A Common Stock. Upon the second anniversary of the
closing of this offering, all outstanding shares of Series B-3 Common Stock will
automatically convert into shares of Class A Common Stock. Upon the third
anniversary of the closing of this offering, all outstanding shares of Series
B-4 Common Stock will automatically convert into shares of Class A Common Stock.
Upon the fourth anniversary of the closing of this offering, all outstanding
shares of Series B-5 Common Stock will automatically convert into shares of
Class A Common Stock. Accordingly, on the fourth anniversary of the closing of
this offering, all outstanding shares of Class B Common Stock will have
converted into shares of Class A Common Stock.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Following its proposed reincorporation in Delaware, the Company will be a
Delaware corporation and will be subject to Section 203 of the Delaware General
Corporation Law (the "Delaware Law"), an anti-takeover law. In general, Section
203 of the Delaware Law prevents an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination" (as defined therein) with a Delaware
corporation for three years following the date such person became an interested
stockholder, subject to certain exceptions, such as the approval of the Board of
Directors and of the holders of at least two-thirds of the outstanding shares of
voting stock not owned by such interested stockholder. The existence of such
provision would be expected to have an anti-takeover effect, including with
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<PAGE> 54
respect to attempts that might result in a premium over the market price for the
shares of Common Stock held by the stockholders.
The Company's Certificate of Incorporation does not provide for cumulative
voting in the election of directors and eliminates the ability of the Company's
stockholders to take action by written consent. These provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of the Company. The amendment of any of these provisions would
require approval by holders of at least two-thirds or more of the outstanding
shares of Common Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock
Transfer Corporation. Its telephone number in Glendale, California is (818)
502-1404.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the Class
A Common Stock and there can be no assurance that a significant public market
for the Class A Common Stock will be developed or sustained after this offering.
Sales of substantial amounts of Class A Common Stock in the public market after
this offering, or the possibility of such sales occurring, could adversely
affect prevailing market prices of the Class A Common Stock or the future
ability of the Company to raise capital through an offering of equity
securities.
After this offering, the Company will have outstanding 1,648,306 shares of
Class A Common Stock and 1,393,334 shares of Class B Common Stock, after giving
effect to the Company's repurchase, subject to certain conditions, of 120,000
shares of Common Stock. Of such shares, the 1,300,000 shares of Class A Common
Stock offered hereby will be freely tradeable in the public market without
restriction under the Securities Act, unless such shares are held by
"affiliates" of the Company, as defined in Rule 144 under the Securities Act.
The remaining 348,306 shares of Class A Common Stock and the 1,393,334
shares of Class B Common Stock outstanding upon completion of this offering will
be "restricted securities," as defined in Rule 144 (the "Restricted Shares").
The Restricted Shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act. Restricted Shares may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rules 144
or 701 under the Securities Act, which are summarized below.
All shares of the Company's Class B Common Stock will convert into shares
of the Company's Class A Common Stock over a four-year period commencing upon
the closing of this offering at the rate of approximately 348,306 shares on the
closing of this offering and on each of the first three anniversaries of such
closing, and 348,416 shares on the fourth anniversary of such closing. Subject
to the lock-up agreements discussed below, substantially all of the shares of
Class A Common Stock issued upon conversion of the Class B Common Stock will
generally be freely tradeable, subject in certain instances to the volume
limitations imposed by Rule 144.
Pursuant to certain "lock-up" agreements, all of the executive officers and
directors of the Company, as well as certain officers of the Company's
subsidiaries and certain spouses of the executive officers of the Company, who,
following the closing of this offering, will collectively hold an aggregate of
61,332 shares of Class A Common Stock and 245,333 shares of Class B Common
Stock, have agreed, subject to certain limited exceptions, not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of any such
shares for a period of one year from the date of this Prospectus. Certain
additional stockholders of the Company, including the ESOP, who, following the
closing of this offering, will collectively hold an aggregate of 237,338 shares
of Class A Common Stock and 949,440 shares of Class B Common Stock, have entered
into similar lock-up agreements covering a period of 180 days following the date
of this Prospectus. Such agreements provide that Brean Murray & Co., Inc. may,
in its sole discretion and at any time without notice, release all or a portion
of the shares subject to these lock-up agreements. The Company has also entered
into
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<PAGE> 55
an agreement with Brean Murray & Co., Inc. that it will not offer, sell or
otherwise dispose of shares of Common Stock for a period of 180 days from the
date of this Prospectus, other than pursuant to its existing stock option and
stock purchase plans.
Following the expiration of such lock-up periods, certain shares issued
upon exercise of options granted by the Company prior to the date of this
Prospectus will also be available for sale in the public market pursuant to Rule
701 under the Securities Act as such shares convert into shares of Class A
Common Stock. Rule 701 permits resales of such shares in reliance upon Rule 144
but without compliance with certain restrictions, including the holding period
requirement, imposed under Rule 144. In general, under Rule 144, as amended,
beginning 90 days after the date of this Prospectus, a person (or persons whose
shares of the Company are aggregated) who has beneficially owned Restricted
Shares for at least one year (including the holding period of any prior owner
who is not an affiliate of the Company) would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of Class A Common Stock
(approximately 16,483 shares following this offering), or (ii) the average
weekly trading volume of the Class A Common Stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale and notice requirements and to
the availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years (including the holding period
of any prior owner who is not an affiliate of the Company) is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
The ESOP holds 487,241 of the Restricted Shares, which shares will only be
eligible for resale in the public market following distribution to ESOP
participants. In certain circumstances, the Company is obligated to exchange
shares of Class A Common Stock for shares of Class B Common Stock held by the
ESOP. See "Management -- Benefit Plans."
As of April 30, 1997, options to purchase 1,215,225 shares of Class B
Common Stock were outstanding under the Company's stock option plans, 1,050,450
of which were exercisable as of such date and approximately 1,059,900 of which
are subject to lock-up agreements. The shares of Class B Common Stock issuable
upon exercise of such options convert into shares of Class A Common Stock over a
four-year period commencing on the closing of this offering. The Company intends
to file after the effective date of this offering Registration Statements on
Form S-8 to register an aggregate of 2,443,765 shares of Class A Common Stock
reserved for issuance under its stock option and stock purchase plans or upon
conversion of shares of Class B Common Stock issued under such plans. Such
Registration Statements will become effective automatically upon filing. Shares
of Class A Common Stock issued under such plans or issued upon conversion of
shares of Class B Common Stock issued under such plans, after the filing of such
Registration Statements on Form S-8, may be sold in the open market, subject, in
the case of certain holders, to the Rule 144 limitations applicable to
affiliates, the above-referenced lock-up agreements and vesting restrictions
imposed by the Company. See "Management -- Benefit Plans."
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<PAGE> 56
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), for which Brean Murray & Co.,
Inc. is acting as representative (the "Representative"), and each of the
Underwriters severally has agreed to purchase from the Company the aggregate
number of shares of Class A Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Brean Murray & Co., Inc. ............................................
---------
Total........................................................... 1,300,000
=========
</TABLE>
Upon the terms and subject to the conditions of the Underwriting Agreement,
the Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Class A Common Stock set forth in the above table
if any of the shares of Class A Common Stock are purchased.
The Underwriters propose to offer the shares of Class A Common Stock to the
public at the initial public offering price set forth on the cover page of this
Prospectus, and to selected dealers at such public offering price less a
concession not to exceed $ per share. The Underwriters or such dealers
may reallow a commission to certain other dealers not to exceed $ per
share. After the offering to the public, the offering price, the concessions to
selected dealers and the reallowance to other dealers may be changed by the
Representative.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 195,000 additional
shares of Class A Common Stock to cover over-allotments, if any, at the initial
public offering price, less underwriting discounts and commissions, as set forth
on the cover page of this Prospectus. If the Underwriters exercise this option,
then each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriters' initial commitment as indicated in the table above. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the shares of Class A Common Stock offered hereby.
Prior to this offering, there has been no previous public market for the
Class A Common Stock of the Company. The public offering price for the Class A
Common Stock has been determined by negotiations between the Company and the
Underwriters. The factors considered in determining the initial public offering
price included an assessment of the history and the prospects for the industry
in which the Company operates, the ability of the Company's management, the past
and present operations of the Company, the historical results of operations of
the Company, the prospects for future earnings of the Company, the general
conditions of the securities markets at the time of the offering, and the prices
of similar securities of comparable companies.
In connection with the offering made hereby, the Company has agreed to sell
to the Representative, for nominal consideration, the Representative's Warrants
to purchase 130,000 shares of Class A Common Stock from the Company (10% of the
number of shares issued in this offering). The Representative's Warrants are
exercisable, in whole or in part, at an exercise price equal to 130% of the
public offering price set forth on the cover page of this Prospectus at any time
during the four-year period commencing one year after the effective date of the
Registration Statement of which this Prospectus is a part. The warrant agreement
pursuant to which the Warrants will be issued will contain provisions providing
for adjustment of the exercise price and the number and type of securities
issuable upon exercise of the Representative's Warrants should any one or more
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<PAGE> 57
of certain specified events occur. The Representative's Warrants grant to the
holders thereof certain rights of registration for the securities issuable upon
exercise of the Representative's Warrants.
The executive officers and directors of the Company, as well as certain
officers of the Company's subsidiaries and certain spouses of the executive
officers of the Company, have agreed not to sell, offer to sell, issue,
distribute or otherwise dispose of any shares of Common Stock of the Company for
a period of one year from the date of this Prospectus, without the prior written
consent of the Representative. In addition, certain additional stockholders and
optionholders of the Company have entered into similar agreements covering a
period of 180 days following the date of this Prospectus. These lock-up
agreements permit a stockholder to transfer shares of Common Stock (i) to
members of his or her immediate family or to a trust for their benefit, provided
that such persons or trust agree to be similarly bound, or (ii) that are
purchased in the public market in or subsequent to this offering.
The Company has agreed to reimburse the Underwriters for up to $175,000 of
the Underwriters' out-of-pocket expenses (including fees of their counsel) in
connection with the sale of the Class A Common Stock offered hereby. The Company
has also agreed to indemnify the Underwriters or contribute to losses arising
out of certain liabilities that may be incurred in connection with this
offering, including liabilities under the Securities Act.
The Representative, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the Class A Common Stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Representative to reclaim a selling
concession from a syndicate member when the securities originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Class A Common Stock to
be higher than it would otherwise be in the absence of such transactions. These
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by Gray Cary Ware & Freidenrich, A Professional Corporation, San
Diego, California. Certain legal matters relating to the offering will be passed
upon for the Underwriters by Stroock & Stroock & Lavan LLP, Los Angeles,
California.
EXPERTS
The financial statements as of January 31, 1997 and 1996 and for each of
the three years in the period ended January 31, 1997 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act with respect to the Class A Common
Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Class A
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<PAGE> 58
Common Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, and the financial statements and notes filed as
a part thereof. Statements made in this Prospectus concerning the contents of
any document referred to herein are not necessarily complete. With respect to
each such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement, including the exhibits thereto
and the financial statements and notes filed as a part thereof, as well as such
reports and other information filed with the Commission, may be inspected
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
Such reports and other information may also be inspected without charge at a Web
site maintained by the Commission. The address of such site is
http://www.sec.gov.
The Company will furnish its stockholders with annual reports containing
financial statements audited by independent accountants and make available
quarterly reports for the first three quarters of each year containing unaudited
financial statements.
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GLOSSARY
As used in this Prospectus, the following terms have the meanings set forth
below.
ANSI (AMERICAN NATIONAL STANDARDS INSTITUTE): The administrator and
coordinator of the U.S. private sector voluntary standardization system. ANSI
promotes the use of U.S. standards internationally, advocates U.S. policy and
technical positions in international and regional standards organizations, and
encourages the adoption of international standards as national standards where
these meet the needs of the user community.
ARBITRATED LOOP: A ring topology for connection of up to 126 Fibre Channel
nodes (e.g., computers and disk drives with Fibre Channel interfaces) without a
switch. A request for control of the loop can come from any node, and the Fibre
Channel protocol assures fair access to each node.
ASIC (APPLICATION SPECIFIC INTEGRATED CIRCUIT): An integrated circuit
designed for a specific, usually proprietary, purpose.
ATM (ASYNCHRONOUS TRANSFER MODE): A high-bandwidth, controlled-delay
fixed-size packet switching and transmission system that uses fixed-size packets
also known as "cells."
BRIDGE: A device or setup that connects and passes data, voice or video
between two network segments, based on the destination field in the packet
header.
COLLISION-DOMAIN ACCESS METHOD: A link-level access method sometimes
referred to as Carrier Sense Multiple Access with Collision Detection (CSMA/CD)
allowing multiple simultaneous data transmissions to collide with each other
requiring retransmissions after a variable quite-time period. Such methods
rarely exceed 30% to 40% of the available link-level bandwidth due to increasing
collisions as data traffic increases.
CPFF (COST PLUS FIXED FEE): A contract that provides for reimbursement of
allowable costs and a fixed profit.
CREDIT-BASED ACCESS METHOD: A link-level access method whereby the sender
and receiver have prearranged the available space for the incoming data
receptions. Credit-based methods can utilize nearly 100% of the available
link-level bandwidth.
ELECTRONIC AND ELECTROMAGNETIC WARFARE: Actions involving the use of
electromagnetic energy to determine, exploit, reduce or prevent hostile use of
the electromagnetic spectrum, and actions which retain the friendly use of the
electromagnetic spectrum.
ELECTRO-OPTIC SYSTEMS: A generic term for systems that involve both
optical and electronic components (e.g., video cameras, systems for enhanced
night vision and sensors using optical detectors).
ETHERNET: A local area network that connects devices such as computers,
printers and terminals based on IEEE standard 802.3. Standard Ethernet transmits
data in up to 1514 byte packets at bandwidths 10 Mbps (standard Ethernet or
10BaseT) and 100 Mbps (fast Ethernet or 100BaseT). Gigabit per second Ethernet
devices are in development.
FDDI (FIBER DISTRIBUTED DATA INTERFACE): An ANSI standard, fiber optic,
token-passing local area network with transport speeds up to 100 Mbps. A node
gains control of the network by removing a circulating packet called a "token"
from the network and releases control by putting the token back into
circulation.
FIBRE CHANNEL ADAPTER: A circuit card that plugs into a computer bus slot
and provides the hardware and software to allow the computer to send and receive
data over a Fibre Channel connection or network.
FIBRE CHANNEL STANDARD: An ANSI standard that defines a high-speed data
transfer interface that can be used to connect together workstations,
mainframes, supercomputers, storage devices and displays in frames up to 2148
bytes in length. The Fibre Channel standard defines the connections for
implementation of Fibre Channel connections, the data transmission protocol
including error control, data frame structure and sequences, a set of services
that are common across multiple ports of a node, and the mapping between Fibre
Channel and other protocols such as IP and SCSI command sets.
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FIXED-PRICE CONTRACT: A contract that requires the contractor to deliver
the work product described in the work statement at a fixed price.
FULL DUPLEX: In full duplex communication, data streams can be transmitted
and received simultaneously (i.e., sent in both directions) without loss of
data.
HALF DUPLEX: In half duplex communication, data transmitted must be
alternated with data received.
HUB: A multi-port networking device that rebroadcasts data frames received
at any port to all other ports. A hub is often used to connect disk arrays and
computers in a Fibre Channel arbitrated loop topology.
IDE (INTEGRATED DRIVE ELECTRONICS): An inexpensive desktop storage
interface.
IEEE (INSTITUTE OF ELECTRICAL AND ELECTRONICS ENGINEERS): An international
professional engineering society that maintains certain communications
standards.
INFORMATION WARFARE: Actions involving methods to intercept, exploit or
prevent hostile use of information systems (e.g., communications and sensors),
and actions which protect the friendly use of information systems.
IP (INTERNET PROTOCOL): The network layer of the internet communications
protocol that specifies the rules by which blocks of information, called IP
packets, may be exchanged across the local or wide area networks.
LAN (LOCAL AREA NETWORK): A network that interconnects devices over a
geographically small area, typically within one building or part of a building.
LATENCY: The time delay between issuance of a request and the initiation
of the requested action.
NODE: Any device connected to a network.
PCI BUS (PERIPHERAL CONNECT INTERFACE BUS): The PCI local bus is a
high-performance 32-bit or 64-bit bus intended for use as an interconnect
mechanism between highly integrated peripheral controller components, boards and
processor/memory systems.
PCI BUS-TO-FIBRE CHANNEL ADAPTER: A Fibre Channel adapter that plugs into
a slot in a computer with a PCI bus to effect communication between the computer
bus and other devices, such as workstations and storage arrays that are equipped
with Fibre Channel interfaces.
RAID (REDUNDANT ARRAY OF INEXPENSIVE DISKS): A technology developed in
1987 to reduce the cost of mass storage by combining small inexpensive disks to
replace larger expensive disks. Bits of a data word are written on different
disks (data striping), so that data can be reconstructed in the event of a
single disk failure. RAID technology provides greater performance, data
integrity and data availability than standard disk storage.
SBUS: The common name for a computer bus specification (IEEE Standard
1496-1993) used in computers manufactured by Sun Microsystems and other
companies running a UNIX operating system.
SBUS-TO-FIBRE CHANNEL ADAPTER: A Fibre Channel adapter that plugs into a
slot in an SBus computer to effect communication between the computer bus and
other devices, such as workstations and storage arrays that are equipped with
Fibre Channel interfaces.
SCALABILITY: The capability to add larger numbers of devices connected to
a network.
SCSI (SMALL COMPUTER SYSTEMS INTERFACE): An ANSI standard input and output
interface primarily used for attachment of data storage devices to processors,
via a standard hardware interface, which uses standard SCSI commands.
SWITCH: A networking and telecommunication component that establishes an
exclusive connection between two network devices. Switches usually have many
ports and connect any two ports to establish communication, managing multiple
communications simultaneously.
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TCP (TRANSMISSION CONTROL PROTOCOL): The transport layer of the internet
communications protocol that it defines the rules by which two data ports
establish a connection and how messages are exchanged between the two ports. It
provides reliable, full duplex connection service and allows arbitrarily long
streams of data to be transmitted, it typically using the IP protocol to
transmit data.
TCP/IP: A designation for a common networking protocol consisting of TCP
for connection-oriented transport and IP for messaging.
T&M (TIME AND MATERIALS): A contract that requires the contractor to
provide a certain number of labor hours at a prescribed rate and provides for
reimbursement for hours spent at such rate and for all materials utilized.
TOKEN RING: A 16 Mbps protocol for a ring topology LAN invented by IBM. A
data frame called a "token" circulates around the ring. Each device on the LAN
gains control of the network by removing and holding the token, releasing it
when transmission is completed.
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JAYMARK, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS..................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of April 30, 1997 (unaudited) and January 31, 1997
and 1996........................................................................ F-3
Consolidated Statement of Income for the Three Months Ended April 30, 1997 and
1996 (unaudited) and the Years Ended January 31, 1997, 1996, and 1995........... F-4
Consolidated Statement of Stockholders' Equity for the Years Ended January 31,
1997, 1996, and 1995 and the Three Months Ended April 30, 1997 (unaudited)...... F-5
Consolidated Statement of Cash Flows for the Three Months Ended April 30, 1997
and 1996 (unaudited) and the Years Ended January 31, 1997, 1996, and 1995....... F-6
Notes to Consolidated Financial Statements....................................... F-7
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Jaymark, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Jaymark,
Inc. and its subsidiaries at January 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
San Diego, California
May 13, 1997, except as
to the reincorporation
described in Note 1, which
is as of May 29, 1997
F-2
<PAGE> 64
JAYMARK, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
APRIL 30, 1997
-------------------------- JANUARY 31,
PRO FORMA -----------------
HISTORICAL (NOTE 1) 1997 1996
---------- ------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 63 $ 63 $ 85 $ 53
Accounts receivable...................................... 10,361 10,361 10,347 13,008
Inventories.............................................. 538 538 370 131
Prepaid expenses and other current assets................ 829 829 473 684
------- ------- ------- -------
Total current assets............................. 11,791 11,791 11,275 13,876
Property and equipment, net................................ 19,524 19,524 19,631 19,874
Other assets............................................... 1,129 1,129 964 1,029
------- ------- ------- -------
$ 32,444 $32,444 $31,870 $34,779
======= ======= ======= =======
LIABILITIES, MANDATORILY REDEEMABLE SHARES,
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities................. $ 6,620 $ 6,620 $ 6,326 $ 6,002
Bank line of credit...................................... 4,764 4,764 4,286 4,953
Current portion of long-term debt and capital lease
obligations........................................... 1,110 1,110 1,090 1,380
Deferred income taxes.................................... 205 205 379 1,300
------- ------- ------- -------
Total current liabilities........................ 12,699 12,699 12,081 13,635
------- ------- ------- -------
Long-term debt and capital lease obligations, less current
portion.................................................. 13,491 13,491 13,587 14,457
Deferred compensation...................................... 898 898 875 917
Other liabilities.......................................... 40 40 36 378
------- ------- ------- -------
Total long-term liabilities...................... 14,429 14,429 14,498 15,752
------- ------- ------- -------
Commitments and contingencies (Note 8)
Mandatorily redeemable shares:
Held by ESOP, at fair value, 487,241, no shares (pro
forma), 487,241, and 463,380 shares issued and
outstanding, respectively (Note 6).................... 5,067 3,159 2,579
Stock repurchase obligation, 120,000, 120,000 (pro
forma), 120,000, and no shares issued and outstanding,
respectively (Note 9)................................. 1,000 1,000 1,000
------- ------- ------- -------
Total mandatorily redeemable shares.............. 6,067 1,000 4,159 2,579
------- ------- ------- -------
Stockholders' equity:
Class A Common Stock, par value $0.001, 12,000,000 shares
authorized; no shares issued or outstanding...........
Class B Common Stock, par value $0.001, 4,000,000 shares
authorized; 1,254,399, 1,741,640 (pro forma)
1,252,251, and 1,425,721 shares issued and
outstanding, respectively............................. 1 2 1 1
Additional paid-in capital............................... 471 977 457 378
Stock subscription receivable............................ (150) (150) (150)
Retained earnings........................................ 3,487 3,487 3,476 4,516
Cumulative adjustment for mandatorily redeemable shares
held by ESOP.......................................... (4,560) (2,652) (2,082)
------- ------- ------- -------
Total stockholders' equity (deficit)............. (751) 4,316 1,132 2,813
------- ------- ------- -------
$ 32,444 $32,444 $31,870 $34,779
======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 65
JAYMARK, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30, YEAR ENDED JANUARY 31,
---------------------- -----------------------------------
1997 1996 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 13,430 $ 13,224 $ 54,403 $ 52,928 $ 57,656
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues........................ 10,579 10,644 44,192 43,523 47,846
Selling, general and administrative..... 2,104 1,941 7,187 6,257 7,363
Research and development................ 269 80 532 560 228
---------- ---------- ---------- ---------- ----------
12,952 12,665 51,911 50,340 55,437
---------- ---------- ---------- ---------- ----------
Operating income.......................... 478 559 2,492 2,588 2,219
Interest expense.......................... 460 488 1,888 2,018 1,721
---------- ---------- ---------- ---------- ----------
Income before income taxes................ 18 71 604 570 498
Provision for income taxes................ 7 36 247 234 176
---------- ---------- ---------- ---------- ----------
Net income................................ $ 11 $ 35 $ 357 $ 336 $ 322
========== ========== ========== ========== ==========
Net earnings per share.................... $ 0.01 $ 0.02 $ 0.17 $ 0.16 $ 0.15
========== ========== ========== ========== ==========
Shares used in per share calculation...... 2,010,995 2,040,492 2,043,243 2,075,852 2,131,439
========== ========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 66
JAYMARK, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
ADJUSTMENT
COMMON STOCK FOR
------------------ MANDATORILY
REDEEMABLE
CLASS B ADDITIONAL STOCK SHARES HELD
------------------ PAID-IN SUBSCRIPTION RETAINED BY ESOP (NOTE
SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS 6)
--------- ------ ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1994....... 1,586,338 $ 2 $ 439 $ $4,204 $(1,640)
Exercise of stock options....... 4,410 18
Repurchases of Common Stock..... (43,905) (1) (108)
Mandatorily redeemable ESOP
shares adjustment............ (19,219) (8) (33)
Net income...................... 322
--------- --- ---- ------ ------- -----
Balance at January 31, 1995....... 1,527,624 2 448 4,418 (1,673)
Repurchases of Common Stock..... (51,803) (1) (49) (238)
Mandatorily redeemable ESOP
shares adjustment............ (50,100) (21) (409)
Net income...................... 336
--------- --- ---- ------ ------- -----
Balance at January 31, 1996....... 1,425,721 1 378 4,516 (2,082)
Issuances of Common Stock....... 50,443 211 (150)
Repurchases of Common Stock..... (80,052) (119) (400)
Mandatorily redeemable ESOP
shares adjustment............ (23,861) (10) (570)
Stock repurchase obligation..... (120,000) (3) (997)
Net income...................... 357
--------- --- ---- ------ ------- -----
Balance at January 31, 1997....... 1,252,251 1 457 (150) 3,476 (2,652)
Issuances of Common Stock
(unaudited).................. 2,148 14
Mandatorily redeemable ESOP
shares adjustment
(unaudited).................. (1,908)
Net income (unaudited).......... 11
--------- --- ---- ------ ------- -----
Balance at April 30, 1997
(unaudited)..................... 1,254,399 $ 1 $ 471 $ (150) $3,487 $(4,560)
========= === ==== ====== ======= =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 67
JAYMARK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
APRIL 30, YEAR ENDED JANUARY 31,
--------------- -------------------------------
1997 1996 1997 1996 1995
----- ----- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 11 $ 35 $ 357 $ 336 $ 322
----- ----- ------- ------- -------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization................... 431 446 1,681 1,837 2,054
(Gain) loss on disposal of assets............... (5) 2 (5) (14) 11
(Decrease) increase in cash, net of the effects
of acquisitions, due to changes in:
Accounts receivable........................... (14) 912 2,725 (481) (501)
Inventories................................... (168) (131) (203) (105) 57
Prepaid expenses and other current assets..... (356) (179) 218 (145) (51)
Other assets.................................. (165) 122 65 (195) (125)
Accounts payable and accrued liabilities...... 294 (184) 307 (670) (191)
Deferred income taxes......................... (174) (854) (921) (152) 149
Deferred compensation......................... 23 42 (42) 108 114
Other liabilities............................. 18 (2) (312) (8) 33
----- ----- ------- ------- -------
Total adjustments.......................... (116) 174 3,513 175 1,550
----- ----- ------- ------- -------
Net cash (used in) provided by operating
activities............................. (105) 209 3,870 511 1,872
----- ----- ------- ------- -------
Cash flows from investing activities:
Proceeds from sale of assets...................... 5 24 31 7
Expenditures for property and equipment........... (324) (188) (1,005) (623) (676)
Acquisitions of certain assets.................... (246) (273) (606)
Payments received on notes receivable............. 22 782
----- ----- ------- ------- -------
Net cash (used in) provided by investing
activities............................. (319) (434) (1,254) (1,176) 113
----- ----- ------- ------- -------
Cash flows from financing activities:
Changes in net borrowings under bank line of
credit.......................................... 478 667 (667) 2,401 (895)
Principal payments under capital lease
obligations..................................... (117) (112) (354) (376) (341)
Repayments of long-term debt...................... (243) (323) (1,080) (1,795) (1,207)
Proceeds from issuances of long-term debt......... 284 642 642
Repurchases of Class B Common Stock............... (519) (288) (109)
Proceeds from issuances of Class B Common Stock... 36 18
----- ----- ------- ------- -------
Net cash provided by (used in) financing
activities............................. 402 232 (2,584) 584 (1,892)
----- ----- ------- ------- -------
Net (decrease) increase in cash..................... (22) 7 32 (81) 93
Cash at beginning of period......................... 85 53 53 134 41
----- ----- ------- ------- -------
Cash at end of period............................... $ 63 $ 60 $ 85 $ 53 $ 134
===== ===== ======= ======= =======
Supplemental disclosure of cash paid during the year
for:
Interest.......................................... $ 655 $ 546 $ 1,751 $ 2,016 $ 1,825
Income taxes...................................... 23 1 443 1,075 225
Supplemental non-cash investing and financing
activities:
Capital lease obligations originated.............. $ 213 $ 274 $ 403 $ 87
Issuances of Class B Common Stock................. $ 14 175
Acquisition of certain assets in exchange for
liability....................................... 91
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 68
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 -- DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company
Jaymark, Inc., its predecessors, and its subsidiaries (the "Company"),
provide advanced technology products and services to government and commercial
customers with core competencies in the areas of electronic and electro-optic
system design, communications engineering, electromagnetic effects, nuclear and
high-explosive weapon effects, and high-speed computer networking products.
Reincorporation
On May 29, 1997 the Company merged with and into a newly incorporated
Delaware corporation, Jaymark, Inc., a wholly-owned subsidiary, which is the
surviving corporation. In conjunction with the merger, each outstanding share of
the Company's Common Stock was exchanged for three-fifths of one share of the
Class B Common Stock of Jaymark, Inc. In addition, each outstanding option to
purchase a share of the Company's Common Stock was exchanged for an option to
purchase three-fifths of one share of the Class B Common Stock of Jaymark, Inc.,
at five-thirds of its original exercise price. All other terms of the Company's
outstanding options will remain the same.
All references to share and per share amounts and other data in these
financial statements have been retroactively restated to reflect the
reincorporation.
Consolidation
The consolidated financial statements present the accounts of Jaymark,
Inc., its predecessors, and its wholly-owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
Pro forma financial data (unaudited)
The unaudited pro forma information presented in the accompanying balance
sheet as of April 30, 1997 reflects the reclassification to stockholders' equity
(deficit) of the mandatory redeemable ESOP shares based on the ability of the
Company, following its proposed initial public offering (the "Offering") to
satisfy ESOP distribution obligations with readily tradeable shares of Class A
Common Stock (Note 6).
Acquisitions
The Company recorded at fair value certain immaterial assets purchased with
cash and issuances of Class B Common Stock during fiscal years 1997 and 1996.
Fiscal Year
The Company operates and reports its results of operations on the basis of
52 or 53 week periods ending on the Friday closest to January 31. Fiscal years
1997, 1996, and 1995 ended on January 31, 1997, February 2, 1996, and February
3, 1995, and consisted of 52, 52, and 53 weeks, respectively. For presentation
purposes, the Company has indicated its fiscal year as ending on January 31.
Interim Periods
The consolidated balance sheet as of May 2, 1997, the consolidated
statements of income and of cash flows for the three months ended May 2, 1997
and May 3, 1996, and the consolidated statement of stockholders' equity for the
three months ended May 2, 1997 are unaudited, but, in the opinion of management
of the Company, include all adjustments necessary to present fairly, in all
material respects, the financial position as of May 2, 1997 and the results of
operations and cash flows for the Company for the three months ended May 2, 1997
and May 3, 1996. All data as of such date and for such periods included herein
is unaudited. Operating results for the three months ended May 2, 1997 are not
necessarily indicative of the
F-7
<PAGE> 69
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
results that may be expected for the year ending January 31, 1998. For
presentation purposes, the Company has indicated its fiscal first quarter as
ending on April 30.
Revenue Recognition
The Company's revenues are derived primarily from the performance of
services for various agencies of the U.S. government, through prime government
contracts or through subcontracts issued by U.S. government prime contractors.
Contracts generally are in the form of (i) reimbursement of costs under
cost-plus fixed fee, (ii) time and materials, or (iii) fixed price. Revenues are
generally recognized as costs are incurred and include a portion of the total
estimated earnings to be realized based upon the relationship between contract
costs incurred to date and total estimated contract costs at completion.
Provision is made for any expected losses on contracts by a charge to income
during the period in which the losses are first identified.
Inventories
Inventories, consisting primarily of raw materials and spare parts, are
stated at the lower of average cost (determined on a first-in, first-out basis)
or market.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives, primarily using the straight-line method. Useful lives
range from three to five years for equipment, thirty-one to forty years for
buildings and the shorter of the useful lives or the terms of the leases (three
to nine years) for leased assets and leasehold improvements. Upon sale or
disposal, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in cost of revenues.
Maintenance and repair costs are charged to expense as incurred.
Research and Development Costs
Company-sponsored research and development costs to develop new concepts
and proprietary systems and products are charged to operations as incurred.
Income Taxes
Current income tax expense or benefit represents the amount of income taxes
expected to be payable or refundable for the current year. A deferred income tax
liability or asset is established for the expected future tax consequences of
temporary differences between the financial reporting and income tax bases of
assets and liabilities. Deferred income tax expense or benefit represents the
net change during the year in the deferred income tax liabilities or assets.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be "more likely than not" realized in future
tax returns.
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.
Fair Value of Financial Instruments
The fair value of the Company's long-term debt, capital lease, and deferred
compensation obligations approximate fair value as the nominal rates of interest
for these instruments approximate market rates of interest currently available
to the Company for similar instruments. The carrying amounts of the Company's
F-8
<PAGE> 70
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
accrued and other liabilities and its bank line of credit approximate their fair
values due to their short-term maturities.
Concentrations of Credit Risk
Concentrations of credit risk with respect to receivables are limited
because the Company's primary customers are various agencies of the U.S.
government as well as commercial customers engaged in work for the U.S.
government. As of January 31, 1997 and 1996, there were no significant
concentrations of receivables with these commercial customers, and there were
outstanding receivables from the U.S. government in the amounts of $4,641 and
$5,164, respectively. During 1997, 1996, and 1995, Department of Defense prime
contracts and subcontracts accounted for approximately 88%, 89%, and 91%,
respectively, of the Company's revenues. Total revenues attributed to U.S.
government prime contracts and subcontracts approximated 93%, 97%, and 98%
during 1997, 1996, and 1995, respectively.
Long-Lived Assets
The Company investigates potential impairments of long-lived assets,
identifiable intangibles, and any associated goodwill when events or changes in
circumstances indicate that an asset's carrying value may not be recoverable. An
impairment loss is recognized when the sum of the expected future undiscounted
net cash flows is less than the carrying amount of the asset. No such losses
have been identified by the Company.
Stock-Based Compensation
The Company measures compensation costs related to stock option plans using
the intrinsic value method and provides pro forma disclosures of net income and
net earnings per share as if the fair value based method had been applied in
measuring compensation costs (Note 6).
Net Earnings Per Share
Net earnings per share is computed based on the weighted average number of
common shares and common stock equivalents, using the treasury stock method,
modified if necessary, outstanding during the respective periods. All stock
issued and stock options granted since March 7, 1996 have been included as
outstanding for all periods using the treasury stock method and an assumed
public offering price of $13.00 per share. Common stock equivalents include the
dilutive effect of stock options. Supplemental net earnings per share,
retroactively reflecting the impact of the repayment of the bank line of credit
contemplated in the Offering, is not presented as the impact is antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
No. 128 will be adopted by the Company as required in the fourth quarter of
fiscal 1998. Upon adoption of SFAS No. 128, the Company will present basic
earnings per share and diluted earnings per share. Basic earnings per share will
be computed based on the weighted average number of shares outstanding during
the period. Diluted earnings per share will be computed based on the weighted
average number of shares outstanding during the period increased by the dilutive
effect of potential common stock. Management is currently evaluating the impact
that the adoption of SFAS No. 128 will have on the Company's financial
statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current period presentation.
F-9
<PAGE> 71
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 -- COMPOSITION OF CERTAIN CONSOLIDATED FINANCIAL STATEMENT CAPTIONS
Accounts receivable:
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
----------- ------------------
1997 1997 1996
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Contract receivables:
Billed..................................... $ 5,796 $ 6,838 $ 7,391
Unbilled, net of progress payments of $807,
$1,316, and $2,057....................... 4,302 3,278 4,743
------- ------- -------
10,098 10,116 12,134
Income taxes receivable......................... 166 69 688
Other receivables............................... 97 162 186
------- ------- -------
$10,361 $10,347 $13,008
======= ======= =======
</TABLE>
Contract receivables are primarily derived from contracts and subcontracts
with various agencies of the U.S. government. Reimbursable costs incurred under
U.S. government contracts and subcontracts, including allocated indirect
expenses, are subject to audit and adjustment by negotiations between the
Company and U.S. government representatives. Contract revenues have been
recorded in amounts which are expected to be realized upon final audit. Unbilled
receivables are stated at their estimated realizable value and consist primarily
of amounts billed subsequent to the balance sheet date or which are billable
upon the occurrence of specified events, as well as contract retentions and
unreimbursed costs subject to contract modification. Contract retentions of
$1,020 at January 31, 1997 are collectible upon contract completion, final
customer approval and final indirect rate settlement, and the majority thereof
is expected to be collected within one year. Unbilled contract receivables at
January 31, 1997 included $490 related to costs incurred on projects in advance
of receiving formal funding authorization from customers. The Company
anticipates receiving modifications to fully fund this balance.
Property and equipment, net:
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
----------- --------------------
1997 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Land.......................................... $ 3,300 $ 3,300 $ 3,300
Buildings..................................... 14,816 14,816 14,816
Computer and test equipment................... 10,284 10,381 10,533
Leasehold improvements........................ 1,724 1,704 2,673
Office furniture and equipment, vehicles and
other equipment............................. 2,252 2,280 2,078
-------- -------- --------
32,376 32,481 33,400
Less accumulated depreciation and
amortization................................ (12,852) (12,850) (13,526)
-------- -------- --------
$ 19,524 $ 19,631 $ 19,874
======== ======== ========
</TABLE>
Included in property and equipment above is $1,111 and $1,117 of assets
under capital leases with $623 and $493 of accumulated amortization on January
31, 1997 and 1996, respectively. Depreciation expense recorded during fiscal
years 1997, 1996, and 1995 was $1,170, $1,417, and $1,623, respectively.
F-10
<PAGE> 72
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
----------- --------------------
1997 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable.............................. $ 3,777 $ 3,430 $ 3,220
Accrued salaries, benefits and payroll
taxes....................................... 797 1,432 1,041
Accrued vacation.............................. 984 983 1,024
Accrued retirement plan contributions......... 190 189 207
Other......................................... 872 292 510
--------- -------- --------
$ 6,620 $ 6,326 $ 6,002
========= ======== ========
</TABLE>
NOTE 3 -- SEGMENT INFORMATION
The Company's principal business involves providing advanced technology
products and services to the Department of Defense and other government agencies
and to commercial companies. Core competencies of the professional staff include
(i) electronic and electro-optic system design, (ii) communications engineering,
(iii) electromagnetic effects, (iv) nuclear and high-explosive weapon effects
(e.g., blast and shock effects on structures), and (v) high-speed computer
networking products. The Company's management structure is based upon broad
technological groupings, not necessarily related to any particular industry,
line of business, geographical area or market.
For purposes of analyzing and understanding the Company's financial
statements, its operations have been classified into three broad segments:
advanced technology products and services, network products, and other.
Industry segment information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
APRIL 30, YEAR ENDED JANUARY 31,
----------------- -------------------------------
1997 1996 1997 1996 1995
------- ------- ----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Advanced technology products
and services............... $12,635 $12,904 $52,840 $52,620 $57,646
Network products............. 572 49 520 75 10
Other........................ 223 271 1,043 233
------- ------- ------- ------- -------
$13,430 $13,224 $54,403 $52,928 $57,656
======= ======= ======= ======= =======
Operating income:
Advanced technology products
and services............... $ 874 $ 939 $ 3,631 $ 2,984 $ 2,403
Network products............. (367) (251) (818) (267) (184)
Other........................ (29) (129) (321) (129)
------- ------- ------- ------- -------
$ 478 $ 559 $ 2,492 $ 2,588 $ 2,219
======= ======= ======= ======= =======
</TABLE>
F-11
<PAGE> 73
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
APRIL 30, YEAR ENDED JANUARY 31,
----------------- -------------------------------
1997 1996 1997 1996 1995
------- ------- ----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Capital expenditures:
Advanced technology products
and services............... $ 205 $ 45 $ 740 $ 433 $ 525
Network products............. 100 10 83 8 31
Other........................ 2 127 147 101
------- ------- ----------- ------- -------
307 182 970 542 556
Capital expenditures on other
assets.......................... 17 6 35 81 120
------- ------- ----------- ------- -------
$ 324 $ 188 $ 1,005 $ 623 $ 676
======= ======= ========= ======= =======
Depreciation and amortization of
property and equipment:
Advanced technology products
and services............... $ 243 $ 236 $ 948 $ 1,193 $ 1,479
Network products............. 20 10 18 21 18
Other........................ 34 65 181 67
------- ------- ----------- ------- -------
297 311 1,147 1,281 1,497
Depreciation and amortization of
other assets.................... 134 135 534 556 557
------- ------- ----------- ------- -------
$ 431 $ 446 $ 1,681 $ 1,837 $ 2,054
======= ======= ========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
----------- -----------------
1997 1997 1996
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Identifiable assets:
Advanced technology products and services...... $13,791 $13,220 $15,610
Network products............................... 1,068 620 150
Other.......................................... 773 922 715
------- ------- -------
15,632 14,762 16,475
Other assets........................................ 16,812 17,108 18,304
------- ------- -------
$32,444 $31,870 $34,779
======= ======= =======
</TABLE>
Segment operating results reflect general corporate expense allocations as
all such expenses are allocated to individual segments by the Company, as
required by Government Cost Accounting Standards. Sales between segments are not
material. Identifiable assets of the respective industry segments consist
principally of contract receivables, inventories, prepaid expenses, other
current assets, and property and equipment. Other assets are principally land,
building, and deferred income taxes.
NOTE 4 -- BANK LINE OF CREDIT
The Company has a bank line of credit which is renegotiated on an annual
basis and expires on October 1, 1997. Under terms of the credit agreement, the
Company may borrow up to $6,000, limited to specified percentages of eligible
accounts receivable, at 7/8% over the bank's prime rate. The interest rate at
January 31, 1997 was 9.125%, and as of such date the Company had $1,328 of
additional funds available under the bank line of credit. In addition, the
Company pays a quarterly commitment fee of 5/8% per annum on the
F-12
<PAGE> 74
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
average daily unused amount of the line of credit. Borrowings under the line of
credit agreement are secured by the Company's accounts receivable, inventories,
and unencumbered property and equipment. The credit arrangement surrounding the
line of credit require the Company to maintain certain financial ratios and
among other things, limits the amount of dividends that the Company may pay and
prohibits the Company from further pledging any of its assets unless such pledge
is in conjunction with obtaining term financing for property and equipment
acquired during the previous 12 months. At January 31, 1997, the Company was in
compliance with all covenants.
NOTE 5 -- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
----------- ------------------
1997 1997 1996
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Building mortgage............................... $13,506 $13,652 $14,015
Term loans...................................... 706 520 1,236
Capital lease obligations....................... 389 505 586
------- ------- -------
14,601 14,677 15,837
Less current portion............................ (1,110) (1,090) (1,380)
------- ------- -------
$13,491 $13,587 $14,457
======= ======= =======
</TABLE>
The building mortgage is secured by a first deed of trust on the land and
building, and is amortized over a 17 year period. Interest under the mortgage,
which was fixed at 8.96%, 8.96%, and 7.31% during fiscal years 1997, 1996, and
1995, respectively, varies according to options available to the Company.
The term loans are secured by the Company's property and equipment and are
payable in monthly principal and interest installments over a three year term
with fixed interest rates ranging from 6.89% to 9.45%.
At January 31, 1997, scheduled maturities are as follows:
<TABLE>
<CAPTION>
CAPITAL
BUILDING TERM LEASE
FISCAL YEAR MORTGAGE LOANS OBLIGATIONS TOTAL
-------------------------------------- -------- ------ ----------- -------
<S> <C> <C> <C> <C>
1998.................................. $ 435 $354 $ 301 $ 1,090
1999.................................. 476 166 203 845
2000.................................. 521 45 566
2001.................................. 570 570
2002.................................. 624 624
Thereafter............................ 11,026 11,026
------- ------ ---- -------
$13,652 $520 549 14,721
======= ======
Less imputed interest................. (44) (44)
---- -------
$ 505 $14,677
==== =======
</TABLE>
NOTE 6 -- BENEFIT PLANS
The Company has a Money Purchase Pension Plan (the "Pension Plan"), which
covers substantially all employees of Jaycor, Inc. ("Jaycor"). Employees vest
100% on the fifth anniversary of their hire date. Annual contributions, as
defined in the Pension Plan, are determined by specified percentages of each
employee's annual earnings. During fiscal years 1997, 1996, and 1995, the
charges to operations under this plan were $1,064, $1,231, and $1,115,
respectively.
F-13
<PAGE> 75
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company has an Employee Stock Ownership Plan (the "ESOP"), which covers
substantially all employees of Jaycor. At January 31, 1997 and 1996, all shares
held by the ESOP were Class B Common Stock and such shares were allocated to
participants. Plan contributions are discretionary. During fiscal years 1997,
1996, and 1995, related compensation charges to operations were $203, $200, and
$350, respectively. The Company has fully funded the contributions with $203,
$370, and $270 being contributed during fiscal years 1997, 1996, and 1995,
respectively. Distribution of ESOP shares to a retiring or terminated
participant occurs within five years from separation. Within 15 months from
distribution, the participant may exercise a put option, or the ESOP may
exercise a call option, at fair value, for any portion of the shares
distributed. Accordingly, the shares of Class B Common Stock held by the ESOP
are reflected at their aggregate fair values, as determined by an annual
independent appraisal. At January 31, 1997 and 1996, ESOP shares outstanding
with aggregate fair values of $3,159 and $2,579, respectively, are separately
classified in the consolidated balance sheet. The cumulative adjustment for
mandatorily redeemable shares held by the ESOP at each fiscal year end
represents the difference between the aggregate historical issuance price of
such shares and their aggregate fair value at year end. Following the closing of
the Offering, the Company may, at its option, satisfy obligations for
distributions of shares with Class A Common Stock, which will be readily
tradeable. To the extent that the ESOP does not hold a sufficient number of
shares of Class A Common Stock to meet its obligations to distribute shares to
participants following retirement or termination (Note 9), the Company has
agreed to exchange shares of Class A Common Stock for shares of Class B Common
Stock held by the ESOP to distribute to such participants. Consequently, these
shares will be reported at their aggregate historical issuance price as a
component of stockholders' equity subsequent to the Offering.
The Company offers deferred compensation arrangements to certain of its
employees. The agreements allow the employees to defer up to 100% of their
salaries, net of certain payroll withholdings, with interest accruing thereon at
specified rates, currently ranging from 8% to 9%. Distributions commence upon
retirement or termination and continue for a period as prescribed in the
respective agreements.
The Company has an Incentive Stock Option Plan (the "1990 Option Plan"),
which provides for the issuance of up to 900,000 shares of the Company's Class B
Common Stock to employees of the Company. Options are granted at prices not less
than 100% of its fair value, as determined by the Company's Board of Directors,
or 110% for persons controlling more than 10% of the voting rights, at the date
of grant. Stock options are generally exercisable in four equal installments
commencing one year after the date of grant and expire in ten years. At January
31, 1997, options for 142,440 shares were available for future grant.
The Company has a Non-qualified Stock Option Plan (the "1991 Option Plan"),
which provides for the issuance of up to 315,000 shares of the Company's Class B
Common Stock to employees of the Company and certain directors of the Company
who are not employees of the Company ("Outside Directors"). Options are granted
at prices not less than 100% of its fair value, as determined by the Company's
Board of Directors, at the date of grant. Options are vested at the date of
grant and expire in ten years. At January 31, 1997, there were no options
available for future grant.
During fiscal year 1996, the Company adopted a Non-qualified Stock Option
Plan (the "1996 Option Plan"), which provides for the issuance of up to 435,000
shares of the Company's Class B Common Stock. During February 1997, the Company
amended the 1996 Option Plan to provide for the grant of incentive stock options
and the issuance of up to 500,000 shares of Class A Common Stock following the
effective date of the Offering. Employees and Outside Directors of the Company
are eligible to receive options. Options are granted at prices determined by the
Board of Directors. The expiration date and the vesting schedule are also
determined by the Board of Directors. At January 31, 1997, options for 248,700
Class B shares were available for future grant.
F-14
<PAGE> 76
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During February 1997, the Company adopted the 1997 Outside Directors Stock
Option Plan (the "Directors Plan"), which provides for the issuance of up to
75,000 shares of Class A Common Stock following the effective date of the
Offering. No options have been granted under the Directors Plan. The Directors
Plan provides for automatic grants of non-qualified stock options to Outside
Directors. Under the Directors Plan, each Outside Director elected or appointed
as a director following the effective date of this Offering will automatically
be granted an option to purchase 10,000 shares of Class A Common Stock on the
date of his or her initial election or appointment. In addition, each Outside
Director will thereafter automatically be granted an option to purchase up to
3,000 shares of Class A Common Stock following each annual meeting of the
Company's stockholders at which such Outside Director is re-elected. The
exercise price of all such options will be equal to the fair market value of the
Class A Common Stock on the date of grant. Initial options granted under the
Directors Plan will generally vest over a four-year period, and annual options
will generally vest in full four years from the date of grant. All such options
must be exercised within ten years from their date of grant.
During February 1997, the Company adopted the 1997 Employee Stock Purchase
Plan (the "Purchase Plan") which provides for the issuance of up to 200,000
shares of the Company's Class A Common Stock following the effective date of the
Offering. The Purchase Plan permits eligible employees of the Company to
purchase shares of Class A Common Stock at a fifteen percent (15%) discount
through payroll deductions at specified purchase dates during sequential
24-month offering periods. Each such offering period is divided into four
consecutive six-month purchase periods. The price at which shares are purchased
under the Purchase Plan for such offering period is equal to 85% of the lesser
of the fair market value of the Class A Common Stock on the first day of such
offering period or the last day of the applicable purchase period within such
offering period. The initial offering period will commence on the effective date
of the Offering.
During February 1997, the Company adopted the JNI 1997 Stock Option Plan
(the "JNI Plan") which provides for the issuance of up to 900,000 shares of JNI
common stock. No options have been granted under the JNI Plan. The JNI Plan
provides for the issuance to employees of JNI of incentive stock options and
non-qualified stock options to purchase shares of JNI's common stock. For a
nine-year period following the date of grant, such options are only exercisable
in the event that JNI undergoes a change in control, as defined (generally, a
sale of assets, merger, or public offering of equity securities). Following such
nine-year period, but prior to the termination of such options, ten years from
the date of grant, the options may be exercised, but, in such event, JNI has a
right to repurchase such shares at the greater of the exercise price or the fair
market value of such shares. The exercise price of all such options will be
equal to the fair market value of the JNI common stock on the date of grant. In
the event that an optionee under the JNI Plan exercises an option to purchase
shares of the Company's Common Stock granted subsequent to the adoption of the
JNI Plan to such optionee under the Company's 1990 Option Plan or 1996 Option
Plan, all options granted under the JNI Plan terminate immediately. Similarly,
in the event that an optionee under the JNI Plan exercises an option granted
under the JNI Plan, all options granted subsequent to the adoption of the JNI
Plan under the Company's stock option plans terminate immediately. Options
granted under the JNI Plan generally vest over a four-year period, although such
vesting is accelerated in the event of certain transactions resulting in a
transfer of control of JNI.
F-15
<PAGE> 77
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the status of the Company's stock option plans as of January
31, 1997 and 1996 and changes during the fiscal years ended January 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of
period.......................... 1,073,625 $ 4.66 1,090,200 $ 4.67
Granted........................... 284,100 $ 5.76 29,700 $ 5.27
Exercised......................... (45,000) $ 4.03
Cancelled......................... (35,100) $ 5.22 (46,275) $ 5.17
--------- ---------
Outstanding at end of period...... 1,277,625 $ 4.91 1,073,625 $ 4.66
========= =========
Options exercisable at period
end............................. 972,908 921,467
Weighted average fair value of
options granted during the
period.......................... $1.82 $1.77
</TABLE>
The following table summarizes information about employee stock options
outstanding at January 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
PRICES JANUARY 31, 1997 CONTRACTUAL LIFE PRICE JANUARY 31, 1997 PRICE
-------------- ---------------- ---------------- -------- ---------------- --------
<S> <C> <C> <C> <C> <C>
$1.945 18,000 4.8 years $1.945
$4.028 419,400 3.8 years $4.028 398,408 $4.028
$4.738 348,975 4.5 years $4.738 348,975 $4.738
$5.200 - $5.667 258,600 7.1 years $5.538 137,325 $5.558
$6.067 - $6.483 232,650 8.1 years $6.300 88,200 $6.067
--------- -------
1,277,625 972,908
========= =======
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its plans. Compensation expense is recognized
over the period of benefit, generally four years, for the Company's employee
stock option grants, which are fixed in nature, when the options are granted
with exercise prices less than fair market value of the underlying stock, as
determined by the Company's Board of Directors. During fiscal year 1997, charges
to operations under these plans totaled $5.
Had compensation cost for the Company's stock based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Financial Accounting Standards Board
Statement No. 123, the Company's net income and net earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 31,
---------------
1997 1996
----- -----
<S> <C> <C>
Net income:
As reported............................................. $ 357 $ 336
Pro forma............................................... 239 324
Net earnings per share:
As reported............................................. $0.17 $0.16
Pro forma............................................... 0.12 0.16
</TABLE>
F-16
<PAGE> 78
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during fiscal years 1997 and 1996, respectively:
dividend yield of 0.0% and 0.0%; expected volatility of 0.0% and 0.0%; risk-free
interest rate of 6.30% and 6.66%; and expected term of 5.1 years and 6.4 years.
NOTE 7 -- INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
APRIL 30, YEAR ENDED JANUARY 31,
-------------- -----------------------------
1997 1996 1997 1996 1995
---- ----- ----------- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal..................... $(70) $ 667 $ 851 $ 411 $ 147
State....................... (8) 138 206 95 27
---- ---- ------ ---- -----
(78) 805 1,057 506 174
---- ---- ------ ---- -----
Deferred:
Federal..................... 75 (638) (670) (223) 3
State....................... 10 (131) (140) (49) (1)
---- ---- ------ ---- -----
85 (769) (810) (272) 2
---- ---- ------ ---- -----
$ 7 $ 36 $ 247 $ 234 $ 176
==== ==== ====== ==== =====
</TABLE>
The balance sheet classification of the net deferred tax asset (liability)
is as follows:
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
----------- ---------------
1997 1997 1996
----------- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Non-current deferred asset........................ $ 268 $ 527 $ 638
Current deferred liability........................ (205) (379) (1,300)
$ 63 $ 148 $ (662)
</TABLE>
The deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
----------- ---------------
1997 1997 1996
----------- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Unbilled receivables.............................. $ (298) $(690) $(1,645)
Accrued compensation and benefits................. 119 301 301
Deferred compensation............................. 135 343 402
Depreciation...................................... 168 271 359
Retirement plan contributions..................... (46) (116) (138)
State income taxes................................ 27 60
Other............................................. (15) 12 (1)
$ 63 $ 148 $ (662)
</TABLE>
F-17
<PAGE> 79
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED JANUARY
APRIL 30, 31,
-------------- --------------------
1997 1996 1997 1996 1995
---- ------ ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory rate............................. $ 6 $ 24 $205 $194 $169
State income taxes, net of federal tax
benefit.................................. 2 5 32 30 28
Non-deductible meals and entertainment..... 7 8 32 28 39
Research and development tax credit........ (19) (35) (25) (27)
Revision to state apportionment factor..... 1 5 (1) (14)
Other...................................... 10 (1) 8 8 (19)
---- ---- ---- ---- ----
$ 7 $ 36 $247 $234 $176
==== ==== ==== ==== ====
</TABLE>
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
The Company has committed to pay minimum rentals under leases for office
facilities and equipment at January 31, 1997, as follows:
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
--------------------------------------------------------------------- ---------
<S> <C>
1998................................................................. $ 1,117
1999................................................................. 791
2000................................................................. 720
2001................................................................. 777
2002................................................................. 755
Thereafter........................................................... 705
------
Total minimum payments............................................... $ 4,865
======
</TABLE>
Rental expense for fiscal years 1997, 1996, and 1995 was $2,019, $2,875,
and $2,968, respectively.
Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims, cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse affect on the Company's consolidated financial position, results of
operations, or cash flows.
NOTE 9 -- COMMON STOCK
The Company has two classes of Common Stock, Class A and Class B
(collectively, "Common Stock"). The holders of Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of the
holders of Common Stock. Holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds legally
available therefor.
As of January 31, 1997, there were no shares of Class A Common Stock
outstanding. The Class B Common Stock consists of five series, divided evenly
among each such series. Upon the closing of the Offering, all shares of the
first series will automatically convert into shares of Class A Common Stock.
Upon the annual anniversary of the closing of the Offering, the next series will
automatically convert into shares of Class A Common Stock. Accordingly, on the
fourth anniversary of the closing of the Offering, all shares of Class B Common
Stock will have converted into shares of Class A Common Stock.
F-18
<PAGE> 80
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
During October, 1996, options to purchase 36,000 shares of Common Stock
were exercised in return for a fully-secured recourse note receivable in the
amount of $150. This amount has been reflected as a stock subscription
receivable in the consolidated balance sheet at January 31, 1997.
Effective January 31, 1997, the Company entered into a retirement agreement
with one of its officers and directors. Pursuant to the retirement agreement,
the Company agreed to repurchase 120,000 shares of Common Stock from the former
employee at a price of $8.33 per share, subject to adjustment if the closing of
the Offering does not occur during calendar year 1997. The Company is obligated
to repurchase such shares within 30 days of the closing of the Offering, subject
to certain conditions.
F-19
<PAGE> 81
JAYCOR DEVELOPS DUAL-USE TECHNOLOGIES WITH COMMERCIAL OPPORTUNITIES
[Picture of two individuals wearing hardhats standing and kneeling,
respectively, in front of two luggage containers. A box labelled "explosives"
sits between the two luggage containers, and an airplane flies overhead. The
luggage container in the left displays damage from an internal explosion, while
the luggage container on the right, labelled "Jaycor," appears undamaged.]
BOMB-RESISTANT LUGGAGE CONTAINER
<TABLE>
<S> <C>
[Picture of an automobile passing over the [Picture illustrating an artist's rendition of an
Company's Auto-Arrestor, which is spread across ultrasound image of a handgun.]
a highway. A spark appears underneath the
automobile.] ACOUSTIC IMAGING DEVICE
AUTO-ARRESTOR
[Picture of a Hummer equipped with horn antennas [Picture of firearms and non-lethal projectiles.]
for the detection of buried land mines.]
GROUND PENETRATING MINE RADAR NON-LETHAL PROJECTILES
</TABLE>
<PAGE> 82
[Jaymark Logo]
[Jaycor Networks, Inc. Logo]
[Jaycor Logo]
<PAGE> 83
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses payable by the
Registrant in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All amounts shown
are estimates except the Securities and Exchange Commission registration fee and
the NASD filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee...... $ 6,343
NASD filing fee.......................................... 2,593
Nasdaq National Market fee............................... 20,800
Accounting fees and expenses............................. 275,000
Legal fees and expenses.................................. 350,000
Printing and engraving expenses.......................... 90,000
Transfer agent and registrar fees........................ 6,000
Blue Sky fees and expenses............................... 15,000
Underwriter's expense allowance.......................... 175,000
Directors' and Officers' Insurance....................... 50,000
Miscellaneous expenses................................... 34,264
--------
Total............................................... $1,025,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Restated Certificate of
Incorporation and Bylaws provide that the Registrant shall indemnify its
directors and officers to the full extent permitted by Delaware General
Corporation Law, including the circumstances in which indemnification is
otherwise discretionary under Delaware law, and authorize the Registrant to
indemnify its employees and agents to such extent. In addition, the Registrant
intends to enter into separate indemnity agreements with its directors and
executive officers that require the Registrant, among other things, to indemnify
them against certain liabilities which may arise by reason of their status or
service (other than liabilities arising from willful misconduct of a culpable
nature) and to maintain directors' and officers' liability insurance, if
available on reasonable terms.
These indemnification provisions and the indemnity agreements to be entered
into between the Registrant and its directors and executive officers may be
sufficiently broad to permit indemnification of the Registrant's directors and
executive officers for liabilities (including reimbursement of expenses
incurred) arising under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 31, 1994, the Registrant has issued and sold the following
unregistered securities:
(a) Issuances of Shares of Common Stock.
On October 24, 1996, pursuant to the terms of an Agreement for Purchase and
Sale of Assets by and among the Company, Long John Productions, Inc. ("LJPI")
and John Biffar ("Biffar"), Jaycor, Inc., a California corporation ("Jaycor"),
issued and sold a total of 5,464 shares of its common stock (as adjusted for
II-1
<PAGE> 84
the three-for-five reverse split effective May 29, 1997 (the "Stock Split")) to
LJPI in Biffar's name, as partial consideration for the acquisition of certain
assets in October 1995.
Effective January 31, 1997, Jaycor reorganized into a holding company
structure pursuant to an Agreement and Plan of Reorganization (the
"Reorganization Agreement") by and among Jaycor, Jaycor Acquisition Company, a
California corporation, and Jaycor Emerging Technologies, Inc., a California
corporation ("JETI"). Pursuant to the Reorganization Agreement, JETI issued
1,859,492 shares of its common stock to the shareholders of Jaycor and,
accordingly, became the parent corporation of Jaycor and each of its wholly
owned subsidiaries.
On February 28, 1997, pursuant to the terms of an Employment Agreement by
and between Jaycor and Robert M. Howell ("Howell"), JETI issued and sold a total
of 2,148 shares of its common stock (as adjusted for the Stock Split) to Howell
as partial consideration for services rendered thereunder.
On March 5, 1997, Jaymark, Inc., a Delaware corporation ("Jaymark"), issued
and sold 100 shares of its common stock to JETI. Effective May 29, 1997, Jaymark
and JETI entered into an Agreement and Plan of Merger (the "Merger Agreement"),
pursuant to which (i) JETI merged with and into Jaymark, with Jaymark as the
surviving corporation, (ii) the 100 issued and outstanding shares of common
stock of Jaymark were canceled and retired, and (iii) Jaymark issued 1,861,640
shares of its Class B Common Stock to the shareholders of JETI.
(b) Option Issuances to, and Exercises by, Employees and Directors.
From January 31, 1994 to the present, Jaycor issued options to purchase a
total of 352,800 shares of its common stock (as adjusted for the Stock Split) at
exercise prices ranging from $1.95 to $6.48 per share to 34 employees and three
non-employee directors. No consideration was paid to Jaycor by any recipient of
any of the foregoing options for the grant of any such options. From January 31,
1994 to the present, Jaycor issued a total of 45,000 shares of its common stock
(as adjusted for the Stock Split) to two employees upon exercise of stock
options at an exercise price of $4.03 per share. On January 31, 1997, pursuant
to the Reorganization Agreement, all of such outstanding options were converted
into options to purchase shares of common stock of JETI. On May 29, 1997,
pursuant to the Merger Agreement, each such outstanding option was converted
into an option to purchase three-fifths of a share of Class B Common Stock of
Jaymark.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
The issuances described in Items 15(a) were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering or,
where appropriate, in reliance on Rule 145(a)(2) under the Securities Act. In
addition, the issuances described in Item 15(b) were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and contracts
relating to compensation or, where appropriate, in reliance on Rule 145(a)(2)
under the Securities Act. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other instruments
issued in such transactions. All recipients either received adequate information
about the Registrant or had access, through employment or other relationships,
to such information.
II-2
<PAGE> 85
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1+** Agreement for Purchase and Sale of Assets dated March 4, 1996 by and between the
Company and Robert M. Howell.
2.2+** Agreement for Purchase and Sale of Assets dated October 24, 1995 by and among
the Company, Long John Productions, Inc. and John Biffar.
2.3+** Agreement for Purchase and Sale of Assets dated March 22, 1996 by and between
the Company and Robert L. Ritter.
2.4** Agreement and Plan of Reorganization dated January 30, 1997 by and among Jaycor,
a California corporation, Jaycor Acquisition Company, a California corporation,
and Jaycor Emerging Technologies, Inc., a California corporation.
2.5** Form of Agreement and Plan of Merger by and between Jaycor Emerging
Technologies, Inc., a California corporation, and Jaymark, Inc., a Delaware
corporation.
3.1** Certificate of Incorporation of the Company.
3.2** Bylaws of the Company.
4.1** Specimen Class A Common Stock Certificate.
4.2** Specimen Class B Common Stock Certificate.
5.1 Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation.
10.1** Form of Indemnity Agreement.
10.2** 1980 Stock Option Plan and forms of agreements thereunder.
10.3** 1990 Incentive Stock Option Plan and form of agreement thereunder.
10.4** 1991 Non-Qualified Stock Option Plan and form of agreement thereunder.
10.5** 1996 Stock Option Plan, as amended, and forms of agreement thereunder.
10.6** 1997 Outside Directors Stock Option Plan and forms of agreement thereunder.
10.7 Jaycor Networks, Inc. 1997 Stock Option Plan and forms of agreement thereunder.
10.8** Employee Stock Ownership Plan, as amended.
10.9** 1997 Employee Stock Purchase Plan and form of agreement thereunder.
10.10** 401(k) Plan dated October 22, 1993, as amended.
10.11** Money Purchase Pension Plan, dated October 22, 1993, as amended.
10.12** Credit Agreement dated October 1, 1996 by and between the Company and Wells
Fargo Bank.
10.13** Assignment, Modification and Assumption Agreement and Consent dated February 3,
1993 by and among the Company, Union Bank and Westerra Pacific Associates, and
the underlying Building Loan Agreement, Note, Deed of Trust, Security Agreement
and related modification agreements.
10.14** Lease Agreement dated December 31, 1994 by and between the Company and Loup
Management Company (Colorado Springs, Colorado).
10.15** Lease Agreement dated April 17, 1996 by and between the Company and APA
Properties No. 6, L.P. (Reston, Virginia).
10.16** Deed of Lease dated December 6, 1995 by and between the Company and Advent
Realty Limited Partnership II (McLean, Virginia).
10.17** Retirement Agreement dated January 31, 1997 by and between the Company and
Robert P. Sullivan, as amended.
10.18 Form of Warrant Agreement by and between the Company and Brean Murray & Co.,
Inc.
10.19** Deferred Compensation Agreement dated February 25, 1997 by and between the
Company and Eric P. Wenaas.
10.20** Forms of Deferred Compensation Plan Agreement.
11.1 Computation of earnings per share.
21.1** Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP (See page II-6).
</TABLE>
II-3
<PAGE> 86
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
- -------- --------------------------------------------------------------------------------
<C> <S>
23.2 Consent of Gray Cary Ware & Freidenrich, a Professional Corporation (included in
Exhibit 5.1).
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed as an exhibit to this Registration Statement.
+ Exhibits and schedules to this exhibit not filed herewith are identified in
the table of contents therein. Upon request, the Registrant will furnish
supplementally to the Commission any such omitted exhibit or schedule.
(b) Financial Statement Schedules
All required information is set forth in the Consolidated Financial
Statements included in the Prospectus constituting part of this Registration
Statement.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this Registration
Statement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered hereunder, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Registrant pursuant to Rule 424 (b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each posteffective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on the 6th day of June, 1997.
JAYMARK, INC.
By: /s/ ERIC P. WENAAS
------------------------------------
Eric P. Wenaas
President and Chief Executive
Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ERIC P. WENAAS President, Chief Executive June 6, 1997
- ------------------------------------------ Officer, Chairman of the Board
Eric P. Wenaas and Director (Principal
Executive Officer)
P. RANDY JOHNSON* Vice President, Finance and June 6, 1997
- ------------------------------------------ Chief Financial Officer
P. Randy Johnson (Principal Financial and
Accounting Officer)
JAMES H. STUHMILLER* Director June 6, 1997
- ------------------------------------------
James H. Stuhmiller
TERRY M. FLANAGAN* Director June 6, 1997
- ------------------------------------------
Terry M. Flanagan
JOHN C. STISKA* Director June 6, 1997
- ------------------------------------------
John C. Stiska
JOHN S. FOSTER, JR.* Director June 6, 1997
- ------------------------------------------
John S. Foster, Jr.
DAVID R. HEEBNER* Director June 6, 1997
- ------------------------------------------
David R. Heebner
*By: /s/ ERIC P. WENAAS
- ------------------------------------------
Eric P. Wenaas
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 88
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 13, 1997, except as
to the reincorporation described in Note 1, which is as of May 29, 1997,
relating to the financial statements of Jaymark, Inc., which appears in such
Prospectus. We also consent to the references to us under the headings "Experts"
and "Selected Consolidated Financial Data" in such Prospectus. However, it
should be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Consolidated Financial Data."
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
San Diego, California
June 6, 1997
II-6
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
2.1+** Agreement for Purchase and Sale of Assets dated March 4, 1996 by and between the
Company and Robert M. Howell.
2.2+** Agreement for Purchase and Sale of Assets dated October 24, 1995 by and among the
Company, Long John Productions, Inc. and John Biffar.
2.3+** Agreement for Purchase and Sale of Assets dated March 22, 1996 by and between the
Company and Robert L. Ritter.
2.4** Agreement and Plan of Reorganization dated January 30, 1997 by and among Jaycor, a
California corporation, Jaycor Acquisition Company, a California corporation, and
Jaycor Emerging Technologies, Inc., a California corporation.
2.5** Form of Agreement and Plan of Merger by and between Jaycor Emerging Technologies,
Inc., a California corporation, and Jaymark, Inc., a Delaware corporation.
3.1** Certificate of Incorporation of the Company.
3.2** Bylaws of the Company.
4.1** Specimen Class A Common Stock Certificate.
4.2** Specimen Class B Common Stock Certificate.
5.1 Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation.
10.1** Form of Indemnity Agreement.
10.2** 1980 Stock Option Plan and forms of agreements thereunder.
10.3** 1990 Incentive Stock Option Plan and form of agreement thereunder.
10.4** 1991 Non-Qualified Stock Option Plan and form of agreement thereunder.
10.5** 1996 Stock Option Plan, as amended, and forms of agreement thereunder.
10.6** 1997 Outside Directors Stock Option Plan and forms of agreement thereunder.
10.7 Jaycor Networks, Inc. 1997 Stock Option Plan and forms of agreement thereunder.
10.8** Employee Stock Ownership Plan, as amended.
10.9** 1997 Employee Stock Purchase Plan and form of agreement thereunder.
10.10** 401(k) Plan dated October 22, 1993, as amended.
10.11** Money Purchase Pension Plan, dated October 22, 1993, as amended.
10.12** Credit Agreement dated October 1, 1996 by and between the Company and Wells Fargo
Bank.
10.13** Assignment, Modification and Assumption Agreement and Consent dated February 3,
1993 by and among the Company, Union Bank and Westerra Pacific Associates, and the
underlying Building Loan Agreement, Note, Deed of Trust, Security Agreement and
related modification agreements.
10.14** Lease Agreement dated December 31, 1994 by and between the Company and Loup
Management Company (Colorado Springs, Colorado).
10.15** Lease Agreement dated April 17, 1996 by and between the Company and APA Properties
No. 6,
10.16** Deed of Lease dated December 6, 1995 by and between the Company and Advent Realty
Limited Partnership II (McLean, Virginia).
10.17** Retirement Agreement dated January 31, 1997 by and between the Company and Robert
P. Sullivan, as amended.
10.18 Form of Warrant Agreement by and between the Company and Brean Murray & Co., Inc.
10.19** Deferred Compensation Agreement dated February 25, 1997 by and between the Company
and Eric P. Wenaas.
10.20** Forms of Deferred Compensation Plan Agreement.
11.1 Computation of earnings per share.
21.1** Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP (See page II-6).
23.2 Consent of Gray Cary Ware & Freidenrich, a Professional Corporation (included in
Exhibit 5.1).
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------------------
<S> <C>
24.1** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed as an exhibit to this Registration Statement.
+ Exhibits and schedules to this exhibit not filed herewith are identified in
the table of contents therein. Upon request, the Registrant will furnish
supplementally to the Commission any such omitted exhibit or schedule.
<PAGE> 1
EXHIBIT 1.1
DRAFT
6/06/97
1,300,000 Shares
Jaymark, Inc.
Class A Common Stock
(Par Value $0.001 Per Share)
UNDERWRITING AGREEMENT
----------------------
_____________, 1997
BREAN MURRAY & CO., INC.
As Representative of the
several Underwriters
570 Lexington Avenue
New York, New York 10022-6822
Ladies and Gentlemen:
Jaymark, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell an aggregate of 1,300,000 shares (the
"Firm Shares") of the Company's Class A Common Stock, par value $0.001 per share
(the "Class A Common Stock"), to you and the other underwriters named in
Schedule I hereto (collectively, the "Underwriters"), for whom you are acting as
representative (the "Representative"). The Company also has agreed to grant to
you and the other Underwriters an option ("the Option") to purchase up to an
additional 195,000 shares of Class A Common Stock (the "Option Shares"), on the
terms and for the purposes set forth in Section 1(b) hereto. The Firm Shares and
the Option Shares are collectively referred to herein as the "Shares." The
Company has also agreed to issue and sell to you Warrants (as defined below) to
purchase up to 130,000 shares of Class A Common Stock. The words "you" and
"your" refer to the Representative of the Underwriters.
The Company hereby confirms as follows its agreements with the
Representative and the several other Underwriters.
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained and subject to all the
<PAGE> 2
terms and conditions of this Underwriting Agreement (the "Agreement"), the
Company agrees to sell to each Underwriter and each Underwriter, severally and
not jointly, agrees to purchase from the Company at a purchase price of $[ ] per
Share, the number of Firm Shares set forth opposite the name of such Underwriter
on Schedule I hereto, plus such additional number of Firm Shares which such
Underwriter may become obligated to purchase pursuant to Section 11 hereof.
(b) Subject to all the terms and conditions of this Agreement,
the Company grants the Option to the several Underwriters to purchase, severally
and not jointly, the Option Shares at the same price per share as the
Underwriters shall pay for the Firm Shares. The Option may be exercised only to
cover over-allotments in the sale of the Firm Shares by the Underwriters and may
be exercised in whole or in part at any time and from time to time on or before
the 30th day after the date of this Agreement (or on the next business day if
the 30th day is not a business day), upon notice (the "Option Shares Notice") in
writing or by telephone (confirmed in writing) by the Representative to the
Company no later than 5:00 p.m., New York City time, at least two and no more
than five business days before the date specified for closing in the Option
Shares Notice (the "Option Closing Date") setting forth the aggregate number of
Option Shares to be purchased and the time and date for such purchase. On the
Option Closing Date, the Company will issue and sell to the Underwriters the
number of Option Shares set forth in the Option Shares Notice and each
Underwriter will purchase such percentage of the Option Shares as is equal to
the percentage of Firm Shares that such Underwriter is purchasing, as adjusted
by the Representative in such manner as it deems advisable to avoid fractional
shares.
(c) Subject to the terms and conditions of this Agreement, the
Company will, at the Closing Date (as defined below), further issue and sell to
you or, at your direction, to your bona fide officers, for a total purchase
price of $100, warrants entitling the holders thereof to purchase up to an
aggregate of 130,000 shares of Class A Common Stock (the "Warrant Shares") at a
price of $____ per share (130% of the initial per share public offering price on
the Effective Date of the Registration Statement, as defined below) (the
"Warrants") for a period of four years, such period to commence one year after
the effective date of the Registration Statement. Such Warrants shall contain
such other terms and provisions as may be set forth in an agreement with respect
thereto (the "Warrant Agreement") executed and delivered by the Company and you
simultaneously with the execution and delivery of this Agreement. As provided in
the Warrant Agreement, you may designate that the Warrants be issued in varying
amounts directly to your bona fide officers and not to you. Such designation
will be made by you only if you determine
- 2 -
<PAGE> 3
that such issuances would not violate the interpretations of the National
Association of Securities Dealers, Inc. (the "NASD") relating to the review of
corporate financing arrangements. As further provided in the Warrant Agreement,
no sale, transfer, assignment or hypothecation of the Warrants shall be made for
a period of five (5) years from the effective date of the Registration Statement
except to bona fide officers of the Representative and officers or partners of
selected dealers. The holders of the Warrants will be entitled to the
registration rights set forth in the Warrant Agreement.
2. Delivery and Payment.
(a) Delivery of the Firm Shares shall be made to the Representative for
the accounts of the Underwriters against payment of the purchase price by
certified or official bank checks payable in New York Clearing House funds drawn
to the order of the Company (the "Closing") at the office of Brean Murray & Co.,
Inc. at 570 Lexington Avenue, New York, New York 10022, or such other location
as shall be agreed upon by the Company and the Representative. Such payment
shall be made at 10:00 a.m., New York City time, on the third full business day
following the date of this Agreement, or at such other time and date not more
than seven business days after the date of this Agreement, as may be agreed upon
by the Representative and the Company (such date is hereinafter referred to as
the "Closing Date"). Time shall be of the essence and delivery at the time and
place specified in this Agreement is a further condition of the obligation of
each Underwriter hereunder.
(b) To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
(c) Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the
Representative shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
(d) The cost of original issue tax stamps, if any, in connection with
the issuance, sale and delivery of the Firm Shares, the Option Shares and the
Warrant Shares by the Company to the respective Underwriters shall be borne by
the Company. The Company will pay and save each Underwriter and any subsequent
- 3 -
<PAGE> 4
holder of the Shares harmless from any and all liabilities with respect to or
resulting from any failure or delay in paying Federal or state stamp and other
transfer taxes, if any, which may be payable or determined to be payable in
connection with the original issuance, sale or delivery to such Underwriter of
the Firm Shares, the Option Shares and the Warrant Shares.
3. Representations and Warranties of the Company. The Company
represents, warrants and covenants to each Underwriter that:
(a) A registration statement on Form S-1 (No. 333-[ ]) relating to the
Shares and the Warrants (collectively, the "Securities"), including a
preliminary prospectus relating to the Securities and such amendments to such
registration statement as may have been required to the date of this Agreement,
has been prepared by the Company under the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations (collectively referred to as the
"Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission. The Commission
has not issued any order preventing or suspending the use of the Prospectus (as
defined below) or any Preliminary Prospectus (as defined below) or instituted
or, to the knowledge of the Company, threatened any proceeding for that purpose.
The term "Preliminary Prospectus" as used herein means a preliminary prospectus
relating to the Securities included at any time as part of the foregoing
registration statement or any amendment thereto before it became effective under
the Act and any prospectus filed with the Commission by the Company pursuant to
Rule 424(a) of the Rules and Regulations. Copies of such registration statement
and amendments and of each related Preliminary Prospectus have been delivered to
the Representative. If such registration statement has not become effective, a
further amendment to such registration statement, including a form of final
prospectus, necessary to permit such registration statement to become effective
will be filed promptly by the Company with the Commission. If such registration
statement has become effective, a final prospectus relating to the Securities
containing information permitted to be omitted at the time of effectiveness by
Rule 430A will be filed by the Company with the Commission in accordance with
Rule 424(b) of the Rules and Regulations promptly after execution and delivery
of this Agreement. The term "Registration Statement" means the registration
statement as amended at the time it becomes or became effective (the "Effective
Date"), including all financial statements and schedules and all exhibits,
documents incorporated therein by reference and all information contained in any
final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations or in a term sheet described in Rule 434 of the Rules and
Regulations in accordance with Section 5 hereof and deemed to be included
therein as of the Effective Date by Rule
- 4 -
<PAGE> 5
430A of the Rules and Regulations. The term "Prospectus" means the prospectus
relating to the Shares as first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or, if no such filing is required, the form
of final prospectus relating to the Shares included in the Registration
Statement at the Effective Date.
(b) On the date that any Preliminary Prospectus was filed with the
Commission, the date the Prospectus is first filed with the Commission pursuant
to Rule 424(b) (if required), at all times subsequent to and including the
Closing Date and, if later, the Option Closing Date and when any post-effective
amendment to the Registration Statement becomes effective or any amendment or
supplement to the Prospectus is filed with the Commission, the Registration
Statement, each Preliminary Prospectus and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
or supplement thereto), including the financial statements included in the
Prospectus, did or will comply with all applicable provisions of the Act and the
Rules and Regulations and did or will contain all statements required to be
stated therein in accordance with the Act and the Rules and Regulations. On the
Effective Date and when any post-effective amendment to the Registration
Statement becomes effective, no part of the Registration Statement or any such
amendment did or will contain any untrue statement of material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading. At the Effective Date, the date the
Prospectus or any amendment or supplement to the Prospectus is filed with the
Commission and at the Closing Date and, if later, the Option Closing Date, the
Prospectus did not or will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading. The
foregoing representations and warranties in this Section 3(b) do not apply to
any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representative specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto.
(c) At or prior to the Closing Date, the Company will complete a series
of transactions as referred to under the caption "Business - Company History" in
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), including the following:
The transactions contemplated under the caption "Business Company
History" in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) are collectively referred to as the
"Reorganization Transactions."
- 5 -
<PAGE> 6
All agreements entered into or to be entered into by the Company or the
Subsidiaries (as defined below) in connection with the Reorganization
Transactions are collectively referred to as the "Reorganization Agreements."
(d) The only subsidiaries of the Company are listed on Exhibit A hereto
(each, a "Subsidiary," and, collectively, the "Subsidiaries"). The Company and
each of its Subsidiaries are, and at the Closing Date and the Option Closing
Date will be, duly organized, validly existing corporation and in good standing
under the laws of their respective jurisdictions of incorporation or
organization. The Company and each Subsidiary have, and at the Closing Date and
the Option Closing Date will have, full power and authority to conduct all the
activities conducted by them, to own or lease all the assets owned or leased by
them and to conduct their respective businesses as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus). The Company and each of the Subsidiaries
are, and at the Closing Date and the Option Closing Date will be, duly licensed
or qualified to do business as a foreign corporation and are in good standing in
all jurisdictions in which the nature of the activities conducted by them or the
character of the assets owned or leased by them makes such licensing or
qualification necessary, except where the failure to be so qualified does not
and, upon consummation of the Reorganization Transactions will not, have a
material adverse effect, singly or in the aggregate, on the business,
properties, prospects, assets, condition (financial or otherwise), net worth or
results of operations of the Company and its Subsidiaries taken as a whole (a
"Material Adverse Effect"). Except as described in the Prospectus (or, if the
Prospectus is not in existence, in the most recent Preliminary Prospectus), the
Company does not own, and at the Closing Date will not own, directly or
indirectly, any shares of stock or any other equity or long-term debt securities
of any corporation or have any equity interest in any firm, partnership, joint
venture, association or other entity. Complete and correct copies of the
articles (or certificates) of incorporation and the bylaws, operating agreements
or partnership agreements or other governing documents of the Company and each
Subsidiary, and all amendments thereto, have been delivered to the
Representative or its counsel, and no changes therein will be made subsequent to
the date hereof and prior to the Closing Date or, if later, the Option Closing
Date, except as contemplated by the Reorganization Transactions or the
Registration Statement.
(e) The outstanding shares of capital stock of each of the
Company and its Subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable and are not subject to any preemptive or similar
rights. The issued shares of the Subsidiaries are owned by the Company free and
clear of
- 6 -
<PAGE> 7
any perfected security interest or any liens, encumbrances, claims or other
security interests, other than as described in the Registration Statement. The
Shares and the Warrant Shares to be issued and sold by the Company will be, upon
such issuance and payment therefor, duly authorized, validly issued, fully paid
and nonassessable and will not be subject to any preemptive or similar rights.
The Company has, and, upon completion of the sale of the Shares and the
Reorganization Transactions, will have, a duly authorized, issued and
outstanding capitalization as set forth under the caption "Capitalization" in
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) as of the date of the table thereunder and on the
Closing Date and the Option Closing Date will have the adjusted capitalization
set forth therein as of the date of the table thereunder, based on the
assumptions set forth therein. The securities of the Company conform in all
material respects to the descriptions thereof contained in the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus).
Except as set forth or contemplated in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), the Company does not have outstanding, and at the
Closing Date and, if later, the Option Closing Date will not have outstanding,
any options to purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, any shares of its capital stock or any such warrants, convertible
securities or obligations.
(f) The consolidated financial statements and the related notes
and schedules thereto included in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present the consolidated financial condition, results of
operations, shareholders' equity and cash flows of the Company and its
Subsidiaries at the dates and for the periods specified therein. Such financial
statements and the related notes and schedules thereto have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise noted therein) and such
financial statements as are audited have been examined by Price Waterhouse LLP
who are independent public accountants within the meaning of the Act and the
Rules and Regulations, as indicated in their reports filed therewith. The
selected financial information and statistical data set forth under the captions
"Prospectus Summary - Summary Consolidated Financial Information" and "Selected
Consolidated Financial Data" in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) have been prepared on a basis
consistent with the financial statements of the Company and its Subsidiaries.
- 7 -
<PAGE> 8
(g) Each of the Company and the Subsidiaries maintains a system
of internal accounting control sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorization, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(h) The Company is not required to be registered under the
Investment Company Act of 1940, as amended (the "Investment Company Act").
(i) Except as set forth in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), there are no actions, suits, arbitrations, claims,
governmental or other proceedings pending or threatened against or affecting the
Company, any Subsidiary or any respective directors, officers, or, to the
Company's knowledge, stockholders of any of the foregoing in their capacity as
such before or by any court, regulatory body or administrative agency or any
other governmental agency or body, domestic or foreign (collectively,
"Governmental Body"), wherein an unfavorable ruling, decision or finding might
have a Material Adverse Effect. Neither the Company nor its Subsidiaries is in
violation of, or in default with respect to, any law, rule, or regulation, or
any order, judgment, or decree, except as described in the Prospectus (or if the
Prospectus is not in existence, in the most recent Preliminary Prospectus) or
such as in the aggregate do not now have and can reasonably be expected in the
future not to have a Material Adverse Effect; nor is the Company or its
Subsidiaries presently required under any order, judgment or decree to take any
action in order to avoid any such violation or default.
(j) Each of the Company and the Subsidiaries has, and at the
Closing Date, the Option Closing Date (if any) and upon consummation of the
Reorganization Transactions will have, all governmental licenses, permits,
consents, orders, approvals, franchises, certificates and other authorizations
(collectively, "Licenses") necessary to carry on its business and lease or own
its properties as contemplated in the Prospectus (or, if the Prospectus is not
in existence, in the most recent Preliminary Prospectus), except in such case
where the failure to have such Licenses will not have a Material Adverse Effect.
Each of the Company and the Subsidiaries has, and at the Closing Date and the
Option Closing Date (if any) and upon consummation of the
- 8 -
<PAGE> 9
Reorganization Transactions will have, complied in all material respects with
all laws, regulations and orders applicable to it or its business and
properties, except where the failure to so comply will not have a Material
Adverse Effect. None of the Company or the Subsidiaries is, and, at the Closing
Date and the Option Closing Date (if any), none of them will be, in default (nor
has any event occurred which, with notice or lapse of time or both, would
constitute a default) in the due performance and observation of any term,
covenant or condition of any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument (collectively, a
"contract or other agreement") to which any of them is, or will be, a party or
by which any of their respective properties is, or will be, bound or affected,
which default would have a Material Adverse Effect. To the best knowledge of the
Company, no other party under any such contract or other agreement is, or will
be, in default in any material respect thereunder. There are no governmental
proceedings or actions pending or overtly threatened in writing for the purpose
of suspending, modifying or revoking any License held, or to be held, by the
Company or any Subsidiary. None of the Company or the Subsidiaries is in
violation of any provision of its articles of incorporation or bylaws, operating
agreement or other governing instrument, except where such violation will not
have a Material Adverse Effect.
(k) No consent, approval, authorization or order of, or any
filing or declaration with, any Governmental Body is required for the
performance of this Agreement, the Warrant Agreement or the Reorganization
Agreements or the consummation of the transactions contemplated hereby or
thereby, except such as have been obtained under the Act or the Rules and
Regulations (or with respect to the Warrant Shares, as may be required under the
Act) and such as may be required under state securities or Blue Sky laws or the
bylaws and rules of the NASD in connection with the purchase and distribution by
the Underwriters of the Shares or the Warrant Shares. All approvals of the
stockholders of the Company and any Subsidiaries required for the consummation
of the Reorganization Transactions were duly and validly obtained at meetings
held for that purpose or pursuant to written consents prior to ____________,
1997, have not been revoked and remain in full force and effect; such approvals
were solicited on the basis of information supplied by such entities, and such
information did not include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the
circumstances under which they were made, not misleading.
(l) Neither the Company nor any Subsidiary has received from a
Governmental Body any of the following written
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<PAGE> 10
instruments with regard to matters that have not been finally resolved: (i) any
cure or show cause notice or notice of default; (ii) any notice of contract
termination of any kind (exclusive of expiration and non-renewal); (iii) any
final decision subject to any applicable disputes clause or unilateral contract
modification assessing a material penalty or material damages; (iv) any
assertion of a claim of violations of the Cost Accounting Standards ("CAS") at
48 Code of Federal Regulations ("CFR") 9900 et seq. or defective pricing; (v)
any notice of a proposed disallowance of indirect cost claims in excess of
reserves therefor; (vi) any subpoena or notice signifying the initiation of an
investigation by a governmental investigative or enforcement agency or body
other than normal audits in the ordinary course of business; or (vii) with
respect to contracts with any Governmental Body, whether direct or indirect, any
other notice from a government contracting officer alleging the failure by the
Company or any Subsidiary to provide goods or services fully in conformity to,
or otherwise to comply in any material way with, any applicable contract
provision, specification or regulation. The Company is not aware that any
Governmental Body has initiated a debarment or suspension proceeding against the
Company or any Subsidiary and has not received any written notice of such a
proceeding or proposed proceeding. Neither the Company nor any Subsidiary has
made disclosures to a Governmental Body pursuant to any voluntary disclosure
agreement. The Company and its Subsidiaries have, and will have, made all
material payments which are required to have been made through the Closing Date
to any lower-tier subcontractors.
In connection with each proposal relating to goods and/or services
proposed to be provided to any Governmental Body by the Company or any
Subsidiary: (i) as to any such proposal which would result in a contract which
would contain a clause relating to CAS and for which the Company or a Subsidiary
has secured price quotations from lower-tier subcontractors, the Company will,
to the extent required by the Governmental Body, cause such clause to flow down
to all lower-tier non-exempt subcontractors; (ii) to the best of the Company's
knowledge all cost or pricing data submitted by the Company or any of its
Subsidiaries will be accurate, complete and current as of the date of the final
agreement on price with the contracting agency if such final agreement is or has
been reached prior to the Closing Date; and (iii) in all cases where the Company
or any of its Subsidiaries secured cost or pricing data for such proposals from
lower-tier subcontractors, to the extent required by the Governmental Body, the
Company or any of its Subsidiaries secured a certificate of current cost and
pricing data from such lower-tier subcontractors.
(m) The Company and its Subsidiaries are in compliance in all material
respects with applicable government regulations
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<PAGE> 11
regarding the disclosure of their cost accounting practices and procedures,
including without limitation the submission of disclosure statements pursuant to
Federal Acquisition Regulation, Subpart 30.2 et seq. (48 CFR Exhibit 30.201 et
seq.) or comparable regulations; the accounting practices and procedures of the
Company and its Subsidiaries were at the time of submission, are as of the date
hereof and will be on the Effective Date in accordance with its disclosure
statements in all material respects; and neither the Company nor any Subsidiary
believes that any governmental agency or body has a justifiable basis to (i)
challenge or seek material modifications of such accounting practices and
procedures or (ii) seek recovery of amounts paid or payable to the Company or
any Subsidiary materially in excess of reserves therefor by reason of changes to
such accounting practices and procedures or otherwise.
(n) The Company has full power (corporate and other) and
authority to enter into and consummate the transactions provided for in this
Agreement, the Reorganization Agreements and the Warrant Agreement. Each of this
Agreement and the Warrant Agreement has been duly authorized, executed and
delivered by the Company and, assuming that each of this Agreement and the
Warrant Agreement is a binding agreement of yours, constitutes a legal, valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting the enforcement of creditors'
rights and the application of equitable principles relating to the availability
of remedies and except as rights to indemnity or contribution may be limited by
federal or state securities laws and the public policy underlying such laws).
None of the Company's execution, delivery or performance of this
Agreement or the Warrant Agreement, its consummation of the Reorganization
Transactions and the transactions contemplated herein, its application of the
net proceeds of the offering in the manner set forth under the caption "Use of
Proceeds" or the conduct of its business as described in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus),
does now or will in the future conflict with, result in any breach or violation
of any of the terms or provisions of, or constitute a default under, cause (or
permit) the maturation or acceleration of any liability or obligation or the
termination of any right under, or result in the creation or imposition of any
lien, charge, or encumbrance upon, any property or assets of the Company or its
Subsidiaries pursuant to the terms of (A) the charter or by-laws of the Company
or its Subsidiaries (B) any indenture, mortgage, deed of trust, voting trust
agreement, shareholders' agreement, note agreement or other agreement or
instrument to which the Company or its Subsidiaries is a party or
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<PAGE> 12
by which any of them may be bound or to which any of their property is or may be
subject or (C) any statute, judgment, decree, order, rule or regulation
applicable to the Company or its Subsidiaries of any government, arbitrator,
court, regulatory body or administrative agency or other governmental agency or
body, domestic or foreign, having jurisdiction over the Company or its
Subsidiaries, or any of their activities or properties.
(o) All executed agreements or copies of executed agreements,
including but not limited to the Reorganization Agreements, filed as exhibits to
the Registration Statement to which the Company or any of its Subsidiaries is a
party or by which any of them is or may be bound or to which any of their
assets, properties or businesses are or may be subject have been duly and
validly authorized, executed and delivered by the Company or any such
Subsidiary, as the case may be, and constitute the legal, valid and binding
agreements of the Company or such Subsidiaries, as the case may be, enforceable
against each in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws relating to enforcement of creditors'
rights generally, and general equitable principles relating to the availability
of remedies, and except as rights to indemnity or contribution may be limited by
federal or state securities laws and the public policy underlying such laws).
The descriptions in the Registration Statement of the Reorganization
Transactions, contracts and other documents are accurate in all material
respects and fairly present the information required to be shown with respect
thereto by the Act and the Rules and Regulations, and there are no transactions,
contracts or other documents which are required by the Act or the Rules and
Regulations to be described in the Registration Statement or filed as exhibits
to the Registration Statement which are not described or filed as required, and
the exhibits which have been filed are complete and correct copies of the
documents of which they purport to be copies.
(p) Except as set forth in or contemplated by the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
including the section therein describing the Reorganization Transactions,
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and prior to the Closing Date
and, if later, the Option Closing Date: (i) there has not been, and will not
have been, any change in the capitalization of the Company or any material
adverse change in the business, properties, prospects, condition (financial or
otherwise), net worth or results of operations of the Company arising for any
reason whatsoever; (ii) the Company has not incurred, and will not have incurred
any material liabilities or
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<PAGE> 13
obligations, direct or contingent; (iii) the Company has not and will not have
entered into any material transactions other than pursuant to this Agreement;
(iv) the Company has not and will not have paid or declared any dividends or
other distributions of any kind on any class of its capital stock; (v) there has
not and will not have been any change in the capitalization of any Subsidiary or
any material adverse change in the business, properties, prospects, condition
(financial or otherwise), net worth or results of operations of any of them, in
any case arising for any reason whatsoever; (vi) none of the Subsidiaries has or
will have incurred any material liabilities or obligations, direct or
contingent, (vii) none of the Subsidiaries has or will have entered into any
material transactions other than as contemplated by this Agreement; and (viii)
none of the Subsidiaries has or will have paid or declared any dividends or
other distributions of any kind on any class of its capital stock, partnership
interests or other equity securities.
(q) No labor disturbance by the employees of the Company or any
of its Subsidiaries exists or, to the Company's knowledge, is imminent which may
have a Material Adverse Effect.
(r) Since its inception, neither the Company nor any of its
Subsidiaries has incurred any material liability arising under or as a result of
the application of the provisions of the Act or any state securities or Blue Sky
laws.
(s) Each of the Company and its Subsidiaries owns, or is licensed
or otherwise has sufficient right to use, the proprietary knowledge, inventions,
patents, trademarks, service marks, trade names, logo marks and copyrights used
in or necessary for the conduct of its business (collectively "Rights") as
described in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus). No claims have been asserted against the Company
or its Subsidiaries by any person with respect to the use of any such Rights or
challenging or questioning the validity or effectiveness of any such Rights. The
use, in connection with the business and operations of the Company of such
Rights does not, to the Company's best knowledge, infringe on the rights of any
person.
(t) There are no contracts, agreements or understandings between
the Company or any of its Subsidiaries and any person granting such person the
right to require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such person or
to require the Company to include such securities under the Registration
Statement (other than those that have been disclosed in the Prospectus or, if
the Prospectus is not in existence, the
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<PAGE> 14
most recent Preliminary Prospectus), that have not been waived with respect to
the Registration Statement.
(u) Neither the Company nor any of its officers, directors or
affiliates (within the meaning of the Rules and Regulations) has taken, directly
or indirectly, any action designed to stabilize or manipulate the price of any
security of the Company, or which has constituted or which might in the future
reasonably be expected to cause or result in stabilization or manipulation of
the price of any security of the Company, to facilitate the sale or resale of
the Shares or otherwise.
(v) Each of the Company and its Subsidiaries has good and
marketable title to, or valid and enforceable leasehold interests in, all
properties and assets owned or leased by it, free and clear of all liens,
encumbrances, security interests, claims, restrictions, equities, claims and
defects, except (A) such as are described in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), or such as do not materially adversely affect the value
of any of such properties or assets taken as a whole and do not materially
interfere with the use made and proposed to be made of any of such properties or
assets, and (B) liens for taxes not yet due and payable as to which appropriate
reserves have been established and reflected in the financial statements
included in the Registration Statement. The Company and its Subsidiaries own or
lease all such properties as are necessary to its operations as now conducted,
and as proposed to be conducted as set forth in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus); and the properties and business of the Company and its
Subsidiaries conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus). All the
material leases and subleases of the Company and its Subsidiaries and under
which the Company or its Subsidiaries holds properties or assets as lessee or
sublessee, constitute valid leasehold interests of the Company or such
Subsidiaries free and clear of any lien, encumbrance, security interest,
restriction, equity, claim or defect, are in full force and effect, and neither
the Company nor any of its Subsidiaries is in default in respect of any of the
terms or provisions of any such material leases or subleases, and neither the
Company nor any of its Subsidiaries has notice of any claim which has been
asserted by anyone adverse to the Company's or any of its Subsidiaries' rights
as lessee or sublessee under either the material lease or sublease, or affecting
or questioning the Company's or any of its Subsidiaries' right to the continued
possession of the leased or subleased premises under any such material lease or
sublease, which may have a Material Adverse Effect.
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<PAGE> 15
(w) The Class A Common Stock and the Shares have been accepted
for listing, subject only to notice of issuance, on The Nasdaq Stock Market
National Market ("NMS").
(x) None of the Subsidiaries are currently, and after giving
effect to the Reorganization Transactions will not be, prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on any such Subsidiary's capital stock from repaying to the Company
any loans or advances to such Subsidiaries from the Company or from transferring
any of such Subsidiaries's property or assets to the Company, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(y) Neither the Company nor any of its Subsidiaries nor any of
their respective employees or agents has made any payment of funds of the
Company or any of its Subsidiaries or received, or retained any funds in
violation of any law, rule or regulation of a character required to be disclosed
in the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(z) The business, operations and facilities of the Company and
the Subsidiaries have been, are being and, upon consummation of the
Reorganization Transactions, will be conducted in compliance with all applicable
laws, ordinances, rules, regulations, licenses, permits, approvals, plans,
authorizations or requirements relating to occupational safety and health, or
pollution, or protection of health or the environment (including, without
limitation, those relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants or hazardous or toxic substances, materials
or wastes into ambient air, surface water, groundwater or land, or relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of chemical substances, pollutants, contaminants or
hazardous or toxic substances, materials or wastes, whether solid, gaseous or
liquid in nature) of any governmental department, commission, board, bureau,
agency or instrumentality of the United States, any state or political
subdivision thereof, or any foreign jurisdiction, and all applicable judicial or
administrative agency or regulatory decrees, awards, judgments and orders
relating thereto; and none of the Company or the Subsidiaries has received any
notice from any governmental instrumentality or any third party alleging any
violation thereof or liability thereunder (including, without limitation,
liability for costs of investigating or remediating sites containing hazardous
substances and/or damages to natural resources).
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<PAGE> 16
(aa) Each of the Company and its Subsidiaries has filed all
necessary federal, state and local and other material tax returns that are
required to be filed or has requested extensions thereof and has paid all taxes
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable.
(ab) Each of the Company and the Subsidiaries is insured by
insurers of recognized financial responsibility against such losses and risks as
are prudent and customary in the business in which the Company or such
Subsidiary is engaged; none of the Company or the Subsidiaries has been refused
any insurance coverage sought or applied for; and the Company has no reason to
believe that it will not be able to renew its existing insurance coverage (or
such coverage as will be in effect upon consummation of the Reorganization
Transactions) as and when such coverage expires.
(ac) Each certificate signed by any officer of the Company and
delivered to the Representative or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
(ad) The Company has prepared and filed with the Commission
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") an appropriate registration statement form to register the
Class A Common Stock under the Exchange Act effective upon the effectiveness of
the Registration Statement.
4. Public Offering of the Shares. It is understood that
the Underwriters will make a public offering of the Shares and at
the price and upon the other terms set forth in the Prospectus
and subject to the terms and conditions hereunder.
5. Agreements of the Company. The Company covenants and
agrees with each of the Underwriters as follows:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of
this Agreement, and any amendments thereto, to become effective as
promptly as practicable. If required, the Company will file the
Prospectus and any amendment or supplement thereto with the Commission
in the manner and within the time period required by Rule 424(b) under
the Act. During any time when a prospectus relating to the Shares is
required to be delivered under the Act, the Company (A) will comply with
all requirements imposed upon it by the Act and the Rules and
Regulations to the extent necessary to permit the continuance of sales
of or dealings
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<PAGE> 17
in the Shares in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (B) will not file with
the Commission the prospectus, any amendment or supplement to such
prospectus or any amendment to the Registration Statement of which the
Representative shall not previously have been advised and furnished with
a copy a reasonable period of time prior to the proposed filing and as
to which filing the Representative shall not have given its consent,
such consent to not be unreasonably withheld.
(ii) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Representative (A) when the
Registration Statement, as amended, has become effective; if the
provisions of Rule 430A promulgated under the Act will be relied upon,
when the Prospectus has been filed in accordance with said Rule 430A and
when any post-effective amendment to the Registration Statement becomes
effective; (B) of any request made by the Commission for amending the
Registration Statement, for supplementing any Preliminary Prospectus or
the Prospectus or for additional information, or (C) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or any
order preventing or suspending the use of any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto or the institution
or threat of any investigation or proceeding for that purpose, and will
use its best efforts to prevent the issuance of any such order and, if
issued, to obtain the lifting thereof as soon as possible.
(iii) The Company will (A) take or cause to be taken all
such actions and furnish all such information as the Representative may
reasonably require in order to qualify the Shares for offer and sale
under the state securities or Blue Sky laws of such jurisdictions as the
Representative may designate, (B) continue such qualifications in effect
for as long as may be necessary to complete the distribution of the
Shares but not to exceed one year from the date of this Agreement, and
(C) make such applications, file such documents and furnish such
information as may be required for the purposes set forth in clauses (A)
and (B); provided, however, that the Company shall not be required to
qualify as a foreign corporation or file a general or unlimited consent
to service of process in any such jurisdiction.
(iv) The Company consents to the use of the Prospectus
(and any amendment or supplement thereto) by the Underwriters and all
dealers to whom the Shares may be sold,
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<PAGE> 18
in connection with the offering or sale of the Shares and for such
period of time thereafter as the Prospectus is required by law or the
Rules and Regulations to be delivered in connection therewith. If, at
any time when a prospectus relating to the Shares is required to be
delivered under the Act or the Rules and Regulations, any event occurs
as a result of which the Prospectus, as then amended or supplemented,
would include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein not misleading,
or if it becomes necessary at any time to amend or supplement the
Prospectus to comply with the Act or the Rules and Regulations, the
Company promptly will so notify the Representative and, subject to
Section 5(i) hereof, will prepare and file with the Commission an
amendment to the Registration Statement or an amendment or supplement to
the Prospectus which will correct such statement or omission or effect
such compliance.
(v) As soon as practicable, but in any event not later
than 45 days after the end of the 12-month period beginning on the day
after the end of the fiscal quarter of the Company during which the
effective date of the Registration Statement occurs (90 days in the
event that the end of such fiscal quarter is the end of the Company's
fiscal year), the Company will make generally available to its security
holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Representative, an earnings statement which will
be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations, which statement need not be audited unless required by the
Act or the Rules and Regulations, covering a period of at least 12
consecutive months after the effective date of the Registration
Statement.
(vi) The Company will timely file all such reports, forms
or other documents as may be required from time to time under the Act
(including a report on Form SR, if required), the Rules and Regulations,
the Exchange Act, and the rules and regulations thereunder, and all such
reports, forms and documents filed will comply in all material respects
as to form and substance with the applicable requirements under the Act,
the Rules and Regulations, the Exchange Act and the rules and
regulations thereunder.
(vii) During a period of five years after the date hereof,
the Company will furnish to its shareholders, as soon as practicable,
annual reports (including financial statements audited by independent
public accountants) and
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<PAGE> 19
unaudited quarterly reports of earnings, and will deliver to the
Representative:
(A) concurrently with furnishing such quarterly
reports to its shareholders, statements of income of the Company
for each quarter in the form furnished to the Company's
shareholders and certified by the Company's principal financial
or accounting officer;
(B) concurrently with furnishing such annual
reports to its shareholders, a balance sheet of the Company as at
the end of the preceding fiscal year, together with statements of
operations, shareholders' equity, and cash flows of the Company
for such fiscal year, accompanied by a copy of the report thereon
of independent public accountants;
(C) as soon as they are available, copies of
all information (financial or other) mailed to
shareholders;
(D) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the
Commission, the NASD or any securities exchange;
(E) every press release and every material news
item or article of interest to the financial community in respect
of the Company or its affairs which was released or prepared by
the Company; and
(F) any additional information of a public nature
concerning the Company or its business which the Representative
may reasonably request.
During such five-year period, if the Company
has active subsidiaries, the foregoing financial statements will be on a
consolidated basis to the extent that the accounts of the Company and
its subsidiaries are consolidated, and will be accompanied by similar
financial statements for any significant subsidiary which is not so
consolidated.
(viii) The Company will maintain a Transfer Agent and, if
necessary under the jurisdiction of incorporation of the Company, a
Registrar (which may be the same entity as the Transfer Agent) for its
Class A Common Stock.
(ix) The Company will furnish, without charge, to the
Representative or on the Representative's order, at such
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<PAGE> 20
place as the Representative may designate, copies of each Preliminary
Prospectus, the Registration Statement and any pre-effective or
post-effective amendments thereto (two of which copies will be signed
and will include all financial statements and exhibits) and the
Prospectus, and all amendments and supplements thereto, in each case as
soon as available and in such quantities as the Representative may
reasonably request.
(x) The Company will not, directly or indirectly, without
the prior written consent of the Representative, offer, sell, grant any
option to purchase or otherwise dispose (or announce any offer, sale,
grant of any option to purchase or other disposition) of any shares of
Class A Common Stock or any securities convertible into, or exchangeable
or exercisable for, shares of Class A Common Stock for a period of 180
days after the date hereof, except pursuant to this Agreement and except
pursuant to employee benefit plans discussed in the Prospectus.
(xi) Neither the Company nor any of its officers or
directors, nor affiliates of any of them (within the meaning of the
Rules and Regulations) will take, directly or indirectly, any action
designed to, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any
securities of the Company.
(xii) The Company will apply the net proceeds of the
offering received by it in the manner set forth under the caption "Use
of Proceeds" in the Prospectus.
6. Expenses.
(a) Whether or not the transactions contemplated in this
Agreement are consummated, or for any reason this Agreement is terminated, the
Company will pay, or reimburse if paid by the Representative, all fees and
expenses incident to the performance of the obligations of the Company under
this Agreement, including, but not limited to, (i) the preparation, printing and
filing of the Registration Statement and exhibits thereto, each Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Registration
Statement or the Prospectus, (ii) the preparation and delivery of certificates
representing the Shares, (iii) the reproduction and distribution of this
Agreement, the Warrant Agreement, the Agreement among Underwriters, any Dealer
Agreements and any Underwriters' Questionnaire, (iv) furnishing (including costs
of shipping and mailing) such copies of the Registration Statement, the
Prospectus and any Preliminary Prospectus, and all amendments and supplements
thereto, as may be requested for use in connection
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<PAGE> 21
with the offering and sale of the Shares by the Underwriters or by dealers to
whom Shares may be sold, (v) the quotation of the Shares on the NMS, (vi) any
filings required to be made by the Underwriters with the NASD, (vii) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions designated pursuant to Section
5(g), including the reasonable fees, disbursements and other charges of counsel
to the Underwriters in connection therewith, and the preparation and printing of
preliminary, supplemental and final Blue Sky memoranda, (viii) counsel and
accountants to the Company and (ix) the transfer agent for the Shares.
(b) Whether or not the transactions contemplated by this
Agreement are consummated or if this Agreement shall be terminated by the
Company pursuant to any of the provisions hereof, the Company will reimburse the
Representative for all of its accountable out-of-pocket fees and expenses
(including the fees, disbursements and other charges of its counsel) incurred by
it in connection herewith, up to an aggregate amount of $175,000,
which amount excludes the expenses to be paid by the Company relating to
sub-sections (vi) and (vii) of paragraph (a) above.
7. Conditions of the Underwriters' Obligations. The obligation of each
Underwriter to purchase and pay for the Shares set forth opposite the name of
such Underwriter in Schedule I is subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date as if they had been made on and as of the Closing Date;
the accuracy on and as of the Closing Date of the statements of officers of the
Company made pursuant to the provisions hereof; the performance by the Company
on and as of the Closing Date of its covenants and agreements hereunder; and the
following additional conditions:
(a) If the Company has elected to rely on Rule 430A under the
Act, the Registration Statement shall have been declared effective, and the
Prospectus (containing the information omitted pursuant to Rule 430A) shall have
been filed with the Commission not later than the Commission's close of business
on the second business day following the date hereof or such later time and date
to which the Representative shall have consented; if the Company does not elect
to rely on Rule 430A, the Registration Statement shall have been declared
effective not later than 9:00 A.M., New York time, on the date hereof or such
later time and date to which the Representative shall have consented; if
required, in the case of any changes in or amendments or supplements to the
Prospectus in addition to those contemplated above, the Company shall have filed
such Prospectus as amended or supplemented with the Commission in the manner and
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<PAGE> 22
within the time period required by Rule 424(b) under the Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the knowledge of the Company or the
Representative, shall be contemplated by the Commission; and the Company shall
have complied with any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise).
(b) The Company shall not have advised the Representative that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representative's opinion, is material, or omits
to state a fact which, in the Representative's opinion, is material and is
required to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Representative's opinion, is material, or
omits to state a fact which, in the Representative's opinion, is material and is
required to be stated therein or is necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representative shall
have received from counsel to the Underwriters, such opinion or opinions with
respect to the issuance and sale of the Firm Shares, the Registration Statement
and the Prospectus and such other related matters as the Representative
reasonably may request and such counsel shall have received such documents and
other information as they reasonably request to enable them to pass upon such
matters.
(d) On the Closing Date the Underwriters shall have received the
opinion, dated the Closing Date, of Gray Cary Ware & Freidenrich, counsel to the
Company ("Company Counsel"), to the effect set forth below:
(i) Each of the Company and its Subsidiaries is a duly
incorporated and validly existing corporation in good standing under the
laws of its jurisdiction of incorporation with the corporate power and
authority to own or lease its properties and to conduct its business as
described in the Prospectus. Each of the Company and its Subsidiaries is
duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the ownership or leasing of
property or conduct of its business requires such qualification (except
for those jurisdictions in which the failure so to qualify can be cured
without having a Material Adverse Effect);
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<PAGE> 23
(ii) The Company has authorized capital stock as set forth
in the Prospectus; the securities of the Company conform in all material
respects to the description thereof contained in the Prospectus; the
outstanding shares of Class A and Class B Common Stock have been duly
authorized and validly issued by the Company, are fully paid and
non-assessable, and are free of any preemptive or, to the knowledge of
such counsel, other rights to subscribe for any of the Shares; the
Company has duly authorized the issuance and sale of the Shares to be
sold by it hereunder; the Shares, when issued by the Company and paid
for in accordance with the terms hereof, will be validly issued, fully
paid and non-assessable and will conform in all material respects to the
description thereof contained in the Prospectus and will not be subject
to any preemptive or, to the knowledge of such counsel, subscription or
other similar rights; and the Shares have been duly authorized for
quotation, subject only to notice of issuance, on the NMS;
(iii) The Registration Statement is effective under the
Act; any required filing of the Prospectus pursuant to Rule 424(b) has
been made in the manner and within the time period required by Rule
424(b); and, to the knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement or any amendment thereto
has been issued, and no proceedings for that purpose have been
instituted or are pending or, to the knowledge of such counsel, are
threatened or contemplated under the Act; the Registration Statement, as
of the effective date, and the Prospectus, as of the date thereof, and,
if any, each amendment and supplement thereto (except for the financial
and statements, schedules and other financial and statistical data
included therein, as to which such counsel need not express any
opinion), complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations; to the knowledge
of such counsel, there are no contracts or documents which are required
by the Act to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
which are not described or filed as required by the Act and the Rules
and Regulations; to the knowledge of such counsel, there is not pending
or threatened against the Company any action, suit, proceeding or
investigation before or by any court, regulatory body, or administrative
agency or any other governmental agency or body, domestic or foreign, of
a character required to be disclosed in the Registration Statement or
the Prospectus which is not so disclosed therein; and the statements set
forth under the headings "Business - Company History," "- Proprietary
Rights and Licenses," "- Government Regulations," "- Litigation,"
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<PAGE> 24
"Management - Limitation of Liability and Indemnification," "- Benefit
Plans," "Certain Transactions," "Shares Eligible for Future Sale," and
"Description of Capital Stock," in the Prospectus, insofar as such
statements constitute a summary of legal matters, documents or
proceedings referred to therein, provide an accurate summary in all
material respects of such legal matters, documents and proceedings;
(iv) The Company has full corporate right, power, and
authority to enter into this Agreement and the Warrant Agreement and to
consummate the transactions provided for herein and therein; each of
this Agreement and the Warrant Agreement has been duly authorized,
executed and delivered by the Company; and each of this Agreement and
the Warrant Agreement, assuming due authorization, execution and
delivery by each other party hereto, is a valid and binding agreement of
the Company, enforceable in accordance with its terms, except as limited
by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws now or hereafter in effect relating to or affecting
creditors' rights generally or by general principles of equity relating
to the availability of remedies and except as rights to indemnity and
contribution may be limited by federal or state securities laws or the
public policy underlying such laws. None of the Company's execution,
delivery or performance of each of this Agreement and the Warrant
Agreement, its consummation of the transactions contemplated herein and
therein, conflicts or will conflict with or results or will result in
any breach or violation of any of the terms or provisions of, or
constitute a default under, or result in the creation or imposition of
any lien, charge or encumbrance upon, any property or assets of the
Company or any of its Subsidiaries pursuant to the terms of the charter
or by-laws of the Company or any of its Subsidiaries; the terms of any
indenture, mortgage, deed of trust, voting trust agreement,
stockholder's agreement, note agreement or other agreement or instrument
filed as an exhibit to the Registration Statement to which the Company
or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is or may be bound or to which any of its properties
may be subject; any statute, rule or regulation of any regulatory body
or administrative agency or other governmental agency or body, domestic
or foreign, having jurisdiction over the Company or any of its
Subsidiaries any of their respective activities or properties; or any
judgment, decree or order, known to such counsel after reasonable
investigation, of any Governmental Body; and no consent, approval,
authorization or order of any Governmental Body, has been or is required
for the Company's performance of this Agreement or the consummation of
the transactions contemplated hereby, except under the
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<PAGE> 25
Act or as may be required under state securities or Blue Sky laws;
(v) To such counsel's knowledge, except as described in
the Prospectus, no claims have been asserted against the Company or any
of its Subsidiaries by any person to the use of any rights or
challenging or questioning the validity or effectiveness of any such
rights. The use, in connection with the business and operations of the
Company and its Subsidiaries of such rights does not, to the best of
such counsel's knowledge, infringe on the rights of any person;
(vi) Each of the Company and the Subsidiaries has full legal
right, power, and authority to enter into the agreements that it has
entered, or will enter, into in connection with the Reorganization
Transactions (collectively, the "Reorganization Agreements") to which it
is a party and to consummate the transactions provided for in each
thereof. Each Reorganization Agreement has been duly authorized,
executed and delivered by the Company and each other party thereto; each
Reorganization Agreement is a valid and binding agreement of the Company
and each other party thereto, enforceable in accordance with its terms,
except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws now or hereafter in effect relating to or
affecting creditors' rights generally or by general principles of equity
relating to the availability of remedies. None of the execution or
delivery of any Reorganization Agreement by any party thereto, the
performance by any thereof of its obligations thereunder, the
consummation by any thereof of the transactions contemplated therein or
of any other Reorganization Transaction, conflicts or will conflict with
or results or will result in any breach or violation of any of the terms
or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon, any
property or assets of any of them pursuant to (A) the terms of the
articles of incorporation or bylaws or partnership or operating
agreement or other governing instruments or documents of any of them;
(B) the terms of any contract or other agreement known to such counsel
after reasonable investigation to which any of them is (or, upon
consummation of the Reorganization Transactions, will be) a party or by
which any of them is or may be bound or to which any of their respective
properties is or may be subject; (C) any statute, rule or regulation of
any Governmental Body having jurisdiction over any of them or any of
their respective activities or properties; or (D) the terms of any
judgment, decree or order, known to such counsel after reasonable
investigation, of any arbitrator or
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<PAGE> 26
Governmental Body having such jurisdiction. No consent, approval,
authorization or order of any Governmental Body has been or is required
for the performance of any Reorganization Agreement or the consummation
of the transactions contemplated thereby or the consummation of any
other Reorganization Transaction in each case by any of the Company or
the Subsidiaries, except such as have been obtained. All of the
Reorganization Transactions have been consummated to the full extent
contemplated by the Reorganization Agreements as of the date of this
Agreement;
(vii) The Company is not required to be registered under
the Investment Company Act;
(viii) The outstanding shares of capital stock of the
Subsidiaries are duly authorized, validly issued and fully paid; such
shares are owned by the Company free and clear of any perfected security
interest. No Subsidiary of the Company is currently prohibited, directly
or indirectly, by its charter documents or, to such counsel's knowledge,
any contract or agreement to which such subsidiary is a party from
paying any dividends to the Company, from making any other distribution
on such Subsidiary's capital stock, from repaying to the Company or from
transferring any of such Subsidiary's property or assets to the Company
or any other Subsidiary of the Company, except as described or
contemplated by the Prospectus.
In addition, such counsel shall state that in the
course of the preparation of the Registration Statement and the Prospectus, such
counsel has participated in conferences with officers and representatives of the
Company, with the Representative and its counsel and with the Company's
independent public accountants, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were discussed and
(without taking any further action to verify independently the statements made
in the Registration Statement and the Prospectus and, except as stated in the
foregoing opinion, without assuming responsibility for the accuracy,
completeness or fairness of such statements) nothing has come to such counsel's
attention that causes such counsel to believe that either the Registration
Statement as of the date it is declared effective or the Prospectus as of the
date thereof and as of the Closing Date and any Option Closing Date contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading
(it being understood that such counsel need not express any opinion with respect
to the financial statements, schedules and other financial or
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<PAGE> 27
statistical data included in the Registration Statement or the Prospectus).
In rendering any such opinion, such counsel may
rely, as to matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of the Company and public officials.
References to the Registration Statement and the
Prospectus in this paragraph (d) shall include any amendment or supplement
thereto at the date of such opinion.
(e) On or prior to the Closing Date, counsel to the Underwriters
shall have been furnished such documents, certificates and opinions as they may
reasonably require in order to evidence the accuracy, completeness or
satisfaction of any of the representations or warranties of the Company, or
conditions herein contained.
(f) At the time that this Agreement is executed by the Company,
the Underwriters shall have received from Price Waterhouse LLP a letter as of
the date of this Agreement in form and substance satisfactory to you (the
"Original Letter"), and on the Closing Date the Underwriters shall have received
from such firm a letter dated the Closing Date stating that, as of a specified
date not earlier than three (3) days prior to the Closing Date, nothing has come
to the attention of such firm to suggest that the statements made in the
Original Letter are not true and correct.
(g) On the Closing Date, the Underwriters shall have received a
certificate, dated the Closing Date, on behalf of the Company the principal
executive officer and the principal financial or accounting officer of the
Company to the effect that each of such persons has carefully examined the
Registration Statement and the Prospectus and any amendments or supplements
thereto and this Agreement, and that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing
Date, and the Company has complied with all agreements and covenants and
satisfied all conditions contained in this Agreement on its part to be
performed or satisfied at or prior to the Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of each
of such persons are contemplated or threatened under the Act and any and
all
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<PAGE> 28
filings required by Rule 424 and Rule 430A have been timely made;
(iii) The Registration Statement and Prospectus and, if
any, each amendment and each supplement thereto, contain all statements
and information required to be included therein, and neither the
Registration Statement nor any amendment thereto includes any 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 and neither the Prospectus (or any supplement
thereto) nor any Preliminary Prospectus includes or included any untrue
statement of a material fact or omits or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus up
to and including the Closing Date, neither the Company nor any
Subsidiaries has incurred, other than in the ordinary course of its
business, any material liabilities or obligations, direct or contingent;
neither the Company nor any Subsidiaries has purchased any of its
outstanding capital stock or paid or declared any dividends or other
distributions on its capital stock; the Company nor any Subsidiaries has
entered into any transactions not in the ordinary course of business;
and there has not been any change in the capital stock or, consolidated
long-term debt or, any increase in the short-term borrowings (other than
any increase in short-term borrowings in the ordinary course of
business) of the Company or any material adverse change to the business,
properties, assets, net worth, condition (financial or other), results
of operations or prospects of the Company and its Subsidiaries taken as
a whole; neither the Company nor any Subsidiary has sustained any
material loss or damage to its property or assets, whether or not
insured; there is no litigation which is pending or threatened against
the Company or any Subsidiary which is required under the Act or the
Rules and Regulations to be set forth in an amended or supplemented
Prospectus which has not been set forth; and there has not occurred any
event required to be set forth in an amended or supplemented Prospectus
which has not been set forth.
References to the Registration Statement and the
Prospectus in this paragraph (g) are to such documents as amended and
supplemented at the date of the certificate.
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<PAGE> 29
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus up to and including the
Closing Date there has not been (i) any adverse change or decrease specified in
the letter or letters referred to in paragraph (f) of this Section 7 or (ii) any
adverse change, or any development involving a prospective adverse change, in
the business or properties of the Company or its Subsidiaries which change or
decrease in the case of clause (i) or change or development in the case of
clause (ii) makes it impractical or inadvisable in the Representative's judgment
to proceed with the public offering or the delivery of the Shares as
contemplated by the Prospectus.
(i) No order suspending the sale of the Shares in any
jurisdiction designated by you pursuant to Section 5(iii)(A) hereof has been
issued on or prior to the Closing Date and no proceedings for that purpose have
been instituted or, to your knowledge or that of the Company, have been or are
contemplated.
(j) The Company shall have delivered to the Representative
written agreements in the form set forth in Exhibit ___ hereto with each officer
and director of the Company, and the beneficial owners of at least 1,200,000
shares of the outstanding shares of Class A Common Stock or Class B Common Stock
and beneficial owner of options to purchase shares of Class A Common Stock or
Class B Common Stock aggregating at least 1,100,000 shares to the effect that
they will not, for a period of (i) one year after the commencement of the public
offering of the Shares, if such person is an officer or director of the Company
or (ii) 180 days after the commencement of the public offering of the Shares,
without the prior written consent of the Representative, directly or indirectly,
offer to sell, sell, contract to sell, grant or transfer any option to purchase
or otherwise dispose (or announce any offer, sale, grant of any option to
purchase or other disposition) of any shares of Class A Common Stock or Class B
Common Stock, or any securities convertible into or exchangeable for shares of
Class A Common Stock or Class B Common Stock (other than pursuant to employee
stock or nonemployee director option plans). It is acknowledged that the
restriction contained in this Section 7(j) shall not be applicable to the Firm
Shares, the Option Shares or the Underwriter's Warrant Shares being sold by the
Company to the Underwriters pursuant to this Agreement.
(k) The Company shall have furnished the Underwriters with such
further opinions, letters, certificates or documents as you or counsel for the
Underwriters may reasonably request. All opinions, certificates, letters and
documents to be furnished by the Company will comply with the provisions hereof
only if they are reasonably satisfactory in all material respects to the
Underwriters and to counsel for the Underwriters. The Company
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<PAGE> 30
shall furnish the Underwriters with conformed copies of such opinions,
certificates, letters and documents in such quantities as you reasonably
request. The certificates delivered under this Section 7 shall constitute
representations, warranties and agreements of the Company as to all matters set
forth therein as fully and effectively as if such matters had been set forth in
Section 2 of this Agreement.
(l) The Shares shall be quoted on the NMS.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any
and all losses, claims, damages or liabilities, joint or several (and actions in
respect thereof), to which such Underwriter or such controlling person may
become subject, under the Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or the Prospectus or any Preliminary Prospectus, or any amendment or
supplement thereto, or any blue sky application or other document executed by
the Company specifically for the purpose of qualifying, or based upon written
information furnished by the Company filed in any state or other jurisdiction in
order to qualify, any or all of the Shares under the securities or Blue Sky laws
thereof (any such application, document or information being hereinafter called
a "Blue Sky Application"), or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements not misleading and will reimburse, as
incurred, such Underwriter or such controlling persons for any legal or other
expenses incurred by such Underwriter or such controlling persons in connection
with investigating, defending or appearing as a third party witness in
connection with any such loss, claim, damage, liability
- 30 -
<PAGE> 31
or action; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in any of such documents in reliance upon and
in conformity with information relating to any Underwriter furnished in writing
to the Company by the Representative on behalf of any Underwriter expressly for
inclusion therein, and provided, further, that such indemnity with respect to
any Preliminary Prospectus shall not inure to the benefit of any Underwriter (or
to the benefit of any person controlling such Underwriter) from whom the person
asserting any such loss, claim, damage, liability or action purchased Shares
which are the subject thereof to the extent that any such loss, claim, damage,
liability or action (i) results from the fact that such Underwriter failed to
send or give a copy of the Prospectus (as amended or supplemented) to such
person at or prior to the confirmation of the sale of such Shares to such person
in any case where such delivery is required by the Act and (ii) arises out of or
is based upon an untrue statement or omission of a material fact contained in
such Preliminary Prospectus that was corrected in the Prospectus (as amended and
supplemented), unless such failure resulted from non-compliance by the Company
with Section 5(viii) hereof.
The indemnity agreement in this paragraph (a) shall be in
addition to any liability which the Company may have at common law or otherwise.
(b) Each of the Underwriters agrees severally, but not jointly,
to indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any and all losses, claims, damages or liabilities
(and actions in respect thereof) to which the Company or any such director,
officer, or controlling person may become subject, under the Act or other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or actions arise out of or
are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or the Prospectus or any
Preliminary Prospectus, or any amendment or supplement thereto or in any Blue
Sky Application, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
information furnished in writing by that Underwriter through the Representative
to the Company expressly for use therein; and will reimburse, as incurred, all
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person in connection with investigating or defending any
such loss, claim, damage, liability or action. The Company acknowledges that the
statements with respect to the public offering of the Shares set forth under the
heading "Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriters to the Company expressly for use therein and
constitute the only information furnished in writing by or on behalf of the
Underwriters for inclusion in the Prospectus. The indemnity agreement contained
in this paragraph (b) shall be in addition to
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<PAGE> 32
any liability which the Underwriters may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 8, notify such indemnifying party or
parties of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under paragraph (a) or (b) of this Section
8 or to the extent that the indemnifying party was not adversely affected by
such omission. In case any such action is brought against an indemnified party
and it notifies an indemnifying party or parties of the commencement thereof,
the indemnifying party or parties against which a claim is to be made will be
entitled to participate therein and, to the extent that it or they may wish, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party has reasonably concluded that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and otherwise to participate in the defense of such action on behalf of
such indemnified party or parties, in which case the indemnifying party shall
only be responsible for the fees and expenses of one counsel (in addition
to local counsel) for all similarly situated indemnified parties. Upon receipt
of notice from the indemnifying party to such indemnified party of its election
so to assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses (other than the reasonable
costs of investigation) subsequently incurred by such indemnified party in
connection with the defense thereof unless (i) the indemnified party has
employed such counsel in connection with the assumption of such different or
additional legal defenses in accordance with the proviso to the immediately
preceding sentence, (ii) the indemnifying party has not employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action, or
(iii) the indemnifying party has authorized in writing the employment of counsel
for the indemnified party at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 8 is
unavailable to hold harmless an indemnified party under paragraph (a) or (b)
above in respect of any losses,
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<PAGE> 33
claims, damages, expenses or liabilities (or actions in respect thereof)
referred to therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) (i) in such proportion as
is appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, from the offering of the Shares or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified, on the other hand, in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. In any case
where the Company is a contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company, on the one
hand, and the Underwriters, on the other, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares (before
deducting expenses) bear to the total underwriting discounts received by the
Underwriters hereunder, in each case as set forth in the table on the cover page
of the Prospectus. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this paragraph (d) 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 provisions of this paragraph (d), the Underwriters
shall not be required to contribute any amount in excess of the underwriting
discount applicable to the Shares purchased by the Underwriters hereunder. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this paragraph (d),
(i) each person, if any, who controls an Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act shall have the same
rights to contribution
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<PAGE> 34
as such Underwriter and (ii) each director of the Company, each officer of the
Company who has signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act, shall have the same rights to contribution as the Company,
subject in each case to this paragraph (d). Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect to which a claim for contribution may
be made against another party or parties under this paragraph (d), notify such
party or parties from whom contribution may be sought, but the omission so to
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any other obligation (x) it or they may have
hereunder or otherwise than under this paragraph (d) or (y) to the extent that
such party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any liabilities
which any indemnifying party may have at common law or otherwise.
9. Right to Increase Offering. At anytime during a period of 30 days from the
date of the Prospectus, the Underwriters, by no less than two business days'
prior notice to the Company, may designate a closing (which may be concurrent
with, and part of, the closing on the Closing Date with respect to the Firm
Shares or may be a second closing held on a date subsequent to the Closing Date,
in either case such date shall be referred to herein as the "Option Closing
Date") at which the Underwriters may purchase all or less than all of the Option
Shares in accordance with the provisions of this Section 9 at the purchase price
per share to be paid for the Firm Shares. In no event shall the Option Closing
Date be later than 10 business days after written notice of election to purchase
Option Shares is given.
The Company agrees to sell to the several Underwriters on the
Option Closing Date the number of Option Shares specified in such notice and the
Underwriters agree, severally and not jointly, to purchase such Option Shares on
the Option Closing Date. Such Option Shares shall be purchased for the account
of each Underwriter in the same proportion as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I bears to the total
number of Firm Shares (subject to adjustment by you to eliminate fractions) and
may be purchased by the Underwriters only for the purpose of covering
over-allotments made in connection with the sale of the Firm Shares.
No Option Shares shall be sold or delivered unless the Firm
Shares previously have been, or simultaneously are, sold and delivered. The
right to purchase the Option Shares or any portion thereof may be surrendered
and terminated at any time upon notice by you to the Company.
Except to the extent modified by this Section 9, all provisions
of this Agreement relating to the transactions contemplated to occur on the
Closing Date for the sale of the
- 34 -
<PAGE> 35
Firm Shares shall apply, mutatis mutandis, to the Option Closing Date for the
sale of the Option Shares.
10. Effective Date and Termination.
(a) This Agreement shall become effective at 9:00 A.M., New York
time, on the date hereof, or at such later time after the Registration Statement
becomes effective as the Representative, in its sole discretion, shall release
the Shares for the sale to the public unless prior to such time the
Representative shall have received written notice from the Company that it
elects that this Agreement shall not become effective, or the Representative
shall have given written notice to the Company that the Representative on behalf
of the Underwriters elects that this Agreement shall not become effective;
provided, however, that the provisions of this Section and of Section 6 and
Section 8 hereof shall at all times be effective; provided, further, that this
Agreement shall terminate if the Registration Statement is not declared
effective. For purposes of this Section 11(a), the Shares to be purchased
hereunder shall be deemed to have been so released upon the earlier of
notification by the Representative to securities dealers releasing such Shares
for offering or the release by the Representative for publication of the first
newspaper advertisement which is subsequently published relating to the Shares.
(b) This Agreement (except for the provisions of Sections 6 and 8
hereof) may be terminated by the Representative by notice to the Company in the
event that the Company has failed to comply in any respect with any of the
provisions of this Agreement required on its part to be performed at or prior to
the Closing Date or the Option Closing Date, or if any of the
representations or warranties of the Company are not accurate in any respect or
if the covenants, agreements or conditions of, or applicable to the Company
herein contained have not been complied with in any respect or satisfied within
the time specified on the Closing Date or the Option Closing Date, respectively,
or if prior to the Closing Date or the Option Closing Date:
(i) the Company shall have sustained a loss by strike,
fire, flood, accident or other calamity of such a character as to
interfere materially with the conduct of the business and operations of
the Company regardless of whether or not such loss was insured;
(ii) trading in the Class A Common Stock shall have been
suspended by the Commission or the NMS or trading in securities
generally on the New York Stock Exchange or the NMS shall have been
suspended or a material limitation on such trading shall have been
imposed or minimum or
- 35 -
<PAGE> 36
maximum prices shall have been established on either any such exchange
or market system;
(iii) a banking moratorium shall have been
declared by New York, California or United States
authorities;
(iv) there shall have been an outbreak or escalation of
hostilities between the United States and any foreign power or an
outbreak or escalation of any other insurrection or armed conflict
involving the United States; or
(v) there shall have been a material adverse change in (A)
general economic, political or financial conditions or (B) the present
or prospective business or condition (financial or other) of the Company
and its Subsidiaries taken as a whole that, in each case, in the
Representative's judgment makes it impracticable or inadvisable to make
or consummate the public offering, sale or delivery of the Company's
Shares on the terms and in the manner contemplated in the Prospectus and
the Registration Statement.
(c) Termination of this Agreement under this Section 11 or
Section 12 after the Firm Shares have been purchased by the Underwriters
hereunder shall be applicable only to the Option Shares. Termination of this
Agreement shall be without liability of any party to any other party other than
as provided in Sections 6 and 8 hereof.
11. Default of Underwriters. If one or more Underwriters default in their
obligations to purchase Firm Shares or Option Shares hereunder and the aggregate
number of such Shares that such defaulting Underwriter or Underwriters agreed
but failed to purchase is ten percent or less of the aggregate number of Firm
Shares or Option Shares to be purchased by all of the Underwriters at such time
hereunder, the other Underwriters may make arrangements satisfactory to the
Representatives for the purchase of such Shares by other persons (who may
include one or more of the non-defaulting Underwriters, including the
Representatives), but if no such arrangements are made by the Firm Closing Date
or the related Option Closing Date, as the case may be, the other Underwriters
shall be obligated severally in proportion to their respective commitments
hereunder to purchase the Firm Shares or Option Shares that such defaulting
Underwriter or Underwriters agreed but failed to purchase. If one or more
Underwriters so default with respect to an aggregate number of Shares that is
more than ten percent of the aggregate number of Firm Shares or Option Shares,
as the case may be, to be purchased by all of the Underwriters at such time
hereunder, and if
- 36 -
<PAGE> 37
arrangements satisfactory to the Representatives are not made within 36 hours
after such default for the purchase by other persons (who may include one or
more of the non-defaulting Underwriters, including the Representatives) of the
Shares with respect to which such default occurs, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter or the Company
other than as provided in Section 11 hereof. In the event of any default by one
or more Underwriters as described in this Section 11, the Representatives shall
have the right to postpone the Firm Closing Date or the Option Closing Date, as
the case may be, established as provided in Section 1 hereof for not more than
seven business days in order that any necessary changes may be made in the
arrangements or documents for the purchase and delivery of the Firm Shares or
Option Shares, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 11. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
12. Survival. The respective representations, warranties, agreements, covenants,
indemnities and other statements of the Company, its officers and the several
Underwriters set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company, any of
its officers or directors, any Underwriter or any controlling person referred to
in Section 8 hereof and (ii) delivery of and payment for the Shares. The
respective agreements, covenants, indemnities and other statements set forth in
Sections 6 and 8 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
13. Notices. Notice shall be given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered or telegraphed and confirmed by letter or telecopied and confirmed
by letter (a) if to the Underwriters, to the Representative at the office of
Brean Murray & Co., Inc., 570 Lexington Avenue, New York, New York 10022-6822,
Attention: A. Brean Murray or, if sent to the Company, shall be mailed or
delivered or telegraphed and confirmed to the Company at 9775 Towne Centre
Drive, San Diego, California 92121, Attention: President, with a copy to Gray
Cary Ware & Freidenrich, 401 B Street, Suite 1700, San Diego, California
92101-4297, Attention: Cameron Jay Rains, Esq.
14. Successors. This Agreement shall inure to the benefit of and be binding upon
the Company and each Underwriter and the Company's and each Underwriter's
respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in
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<PAGE> 38
respect of this Agreement, or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person, except that the representations, warranties, indemnities and
contribution agreements of the Company contained in this Agreement shall also be
for the benefit of any person or persons, if any, who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and except that the Underwriters' indemnity and contribution agreements shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement, and any person or persons,
if any, who control the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act. No purchaser of Shares from the Underwriters
will be deemed a successor because of such purchase. This Agreement shall not be
assignable by either party hereto without the prior written consent of the other
party.
- 38 -
<PAGE> 39
15. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE
TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY
PROVISIONS RELATING TO CONFLICTS OF LAWS.
16. Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
JAYMARK, INC.
By:
--------------------------
Name:
Title:
Confirmed as of the date first above mentioned:
BREAN MURRAY & CO., INC.
By: Brean Murray & Co., Inc.
Acting on its own behalf and as
the Representative of the several
Underwriters referred to in the
foregoing Agreement
By:
----------------------------------------
Name:
Title:
- 39 -
<PAGE> 40
SCHEDULE I
UNDERWRITERS
Underwriting Agreement dated ________, 1997
<TABLE>
<CAPTION>
Number of Firm
Shares to be
Purchased from
Name the Company
<S> <C>
Brean Murray & Co., Inc..............................
---------
Total........................................... 1,300,000
=========
</TABLE>
- 40 -
<PAGE> 1
EXHIBIT 5.1
[GRAY CARY WARE & FREIDENRICH LETTERHEAD]
OUR FILE NO:
100222-151320
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Jaymark, Inc.
Registration Statement on Form S-1 (No. 333-22959)
Ladies and Gentlemen:
As counsel to Jaymark, Inc., a Delaware corporation (the "Company"), we
are rendering this opinion in connection with a proposed sale of those certain
shares of the Company's newly issued Class A Common Stock, $0.001 par value per
share, as set forth in the Registration Statement on Form S-1 (No. 333-22959)
to which this opinion is being filed as Exhibit 5.1 (the "Shares"). We have
examined all instruments, documents and records which we deemed relevant and
necessary for the basis of our opinion hereinafter expressed. In such
examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity
to the originals of all documents submitted to us as copies.
We express no opinion with respect to (i) the availability of equitable
remedies, including specific performance, or (ii) the effect of bankruptcy,
insolvency, reorganization, moratorium or equitable principles relating to or
limiting creditors' rights generally.
Based on such examination, we are of the opinion that the Shares
identified in the above-referenced Registration Statement will be, upon
effectiveness of the Registration Statement and receipt by the Company of
payment therefor, duly authorized, validly issued, fully paid and nonassessable.
<PAGE> 2
GRAY CARY WARE & FREIDENRICH
Securities and Exchange Commission
Page Two
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever it
appears in said Registration Statement, including the Prospectus constituting a
part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
/S/ GRAY CARY WARE & FREIDENRICH
GRAY CARY WARE & FREIDENRICH
A Professional Corporation
<PAGE> 1
Exhibit 10.7
JAYCOR NETWORKS, INC.
1997 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Jaycor Networks, Inc. 1997 Stock
Option Plan (the "PLAN") is hereby established effective as of February 3,
1997 (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the
interests of the Company and its shareholders by providing an incentive to
attract, retain and reward persons performing services for the Company and by
motivating such persons to contribute to the growth and profitability of the
Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect
until the earlier of its termination by the Board or the date on which all of
the shares of Stock available for issuance under the Plan have been issued and
all restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Options
shall be granted, if at all, before the earlier to occur of (a) the date ten
(10) years from the earlier of the date the Plan is adopted by the Board or the
date the Plan is duly approved by the shareholders of the Company, (b) the
effective date of the registration statement filed by the Company under the
Securities Act in connection with the initial public offering of stock by the
Company, or (c) the date on which Jaycor, pursuant to a sale or exchange of
shares, merger, consolidation, or spin-off transaction, no longer owns,
directly or indirectly, more than fifty percent (50%) of the total combined
voting power of the Company.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following
terms shall have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the
Company. If one or more Committees have been appointed by the Board to
administer the Plan, "Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of
1986, as amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee
or other committee of the Board duly appointed to administer the Plan and
having such powers as shall be specified by the Board. Unless the powers of
the Committee have
1
<PAGE> 2
been specifically limited, the Committee shall have all of the powers of the
Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means Jaycor Networks, Inc., a
Delaware corporation, or any successor corporation thereto.
(e) "EMPLOYEE" means any person treated as an
employee (including an officer or a director who is also treated as an
employee) in the records of the Company; provided, however, that neither
service as a director nor payment of a director's fee shall be sufficient to
constitute employment for purposes of the Plan.
(f) "EXCHANGE ACT" means the Securities Exchange
Act of 1934, as amended.
(g) "FAIR MARKET VALUE" means, as of any date,
the value of a share of Stock or other property as determined by the Board, in
its sole discretion, or by the Company, in its sole discretion, if such
determination is expressly allocated to the Company herein.
(h) "INCENTIVE STOCK OPTION" means an Option
intended to be (as set forth in the Option Agreement) and which qualifies as an
incentive stock option within the meaning of Section 422(b) of the Code.
(i) "INSIDER" means an officer or a director of
the Company or any other person whose transactions in Stock are subject to
Section 16 of the Exchange Act.
(j) "JAYCOR" means Jaycor Emerging Technologies,
Inc., a California corporation, or any successor corporation thereto.
(k) "NONSTATUTORY STOCK OPTION" means an Option
not intended to be (as set forth in the Option Agreement) or which does not
qualify as an Incentive Stock Option.
(l) "OPTION" means a right to purchase shares of
Stock (subject to adjustment as provided in Section 4.2) pursuant to the terms
and conditions of the Plan. An Option may be either an Incentive Stock Option
or a Nonstatutory Stock Option.
(m) "OPTION AGREEMENT" means a written agreement
between the Company and an Optionee setting forth the terms, conditions and
restrictions of the Option granted to the Optionee and any shares acquired upon
the exercise thereof.
2
<PAGE> 3
(n) "OPTIONEE" means a person who has been
granted one or more Options.
(o) "PARENT CORPORATION" means any present or
future "parent corporation" of the Company, as defined in Section 424(e) of the
Code.
(p) "PARTICIPATING COMPANY" means the Company or
any Parent Corporation or Subsidiary Corporation.
(q) "PARTICIPATING COMPANY GROUP" means, at any
point in time, all corporations collectively which are then Participating
Companies.
(r) "RULE 16B-3" means Rule 16b-3 under the
Exchange Act, as amended from time to time, or any successor rule or
regulation.
(s) "SECTION 162(M)" means Section 162(m) of the
Code, as amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66).
(t) "STOCK" means the common stock of the
Company, as adjusted from time to time in accordance with Section 4.2.
(u) "SUBSIDIARY CORPORATION" means any present or
future "subsidiary corporation" of the Company, as defined in Section 424(f) of
the Code.
(v) "TEN PERCENT OWNER OPTIONEE" means an
Optionee who, at the time an Option is granted to the Optionee, owns stock
possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of a Participating Company within the meaning of Section
422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein
are for convenience only and shall not affect the meaning or interpretation of
any provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be
administered by the Board, including any duly appointed Committee of the Board.
All questions of interpretation of the Plan or of any Option shall be
determined by the Board, and such determinations shall be final and binding
upon all persons having an interest in the Plan or such Option. Any officer of
a Participating Company shall have the authority to act on behalf of the
Company with respect to any matter, right, obligation, determination or
election which is the responsibility of or which is allocated to the Company
herein, provided the officer has apparent authority with respect to such
matter, right, obligation, determination or election.
3
<PAGE> 4
3.2 ADMINISTRATION WITH RESPECT TO INSIDERS. With
respect to participation by Insiders in the Plan, at any time that any class of
equity security of the Company is registered pursuant to Section 12 of the
Exchange Act, the Plan shall be administered in compliance with the
requirements, if any, of Rule 16b-3.
3.3 POWERS OF THE BOARD. In addition to any other powers
set forth in the Plan and subject to the provisions of the Plan, the Board
shall have the full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the
time or times at which, Options shall be granted and the number of shares of
Stock to be subject to each Option;
(b) to designate Options as Incentive Stock
Options or Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares
of Stock;
(d) to determine the terms, conditions and
restrictions applicable to each Option (which need not be identical) and any
shares acquired upon the exercise thereof, including, without limitation, (i)
the exercise price of the Option, (ii) the method of payment for shares
purchased upon the exercise of the Option, (iii) the method for satisfaction of
any tax withholding obligation arising in connection with the Option or such
shares, including by the withholding or delivery of shares of stock, (iv) the
timing, terms and conditions of the exercisability of the Option or the vesting
of any shares acquired upon the exercise thereof, (v) the time of the
expiration of the Option, (vi) the effect of the Optionee's termination of
employment on any of the foregoing, and (vii) all other terms, conditions and
restrictions applicable to the Option or such shares not inconsistent with the
terms of the Plan;
(e) to approve one or more forms of Option
Agreement;
(f) to amend, modify, extend, or renew, or grant
a new Option in substitution for, any Option or to waive any restrictions or
conditions applicable to any Option or any shares acquired upon the exercise
thereof;
(g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionee's
termination of employment with the Company;
(h) to prescribe, amend or rescind rules,
guidelines and policies relating to the Plan, or to adopt supplements to, or
alternative versions of, the Plan, including, without limitation, as the Board
deems necessary or desirable to
4
<PAGE> 5
comply with the laws of, or to accommodate the tax policy or custom of, foreign
jurisdictions whose citizens may be granted Options; and
(i) to correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Option Agreement and to make all
other determinations and take such other actions with respect to the Plan or
any Option as the Board may deem advisable to the extent consistent with the
Plan and applicable law.
3.4 COMMITTEE COMPLYING WITH SECTION 162(M). If a
Participating Company is a "publicly held corporation" within the meaning of
Section 162(m), the Board may establish a Committee of "outside directors"
within the meaning of Section 162(m) to approve the grant of any Option which
might reasonably be anticipated to result in the payment of employee
remuneration that would otherwise exceed the limit on employee remuneration
deductible for income tax purposes pursuant to Section 162(m).
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to
adjustment as provided in Section 4.2, the maximum aggregate number of shares
of Stock that may be issued under the Plan shall be Nine Hundred Thousand
(900,000). Such shares shall consist of authorized but unissued or reacquired
shares of Stock or any combination thereof. If any outstanding Option for any
reason expires or is terminated or canceled or shares, subject to repurchase,
upon the exercise of an Option are repurchased by the Company, the shares
allocable to the unexercised portion of such Option, or such repurchased
shares, shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the
event of any stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification or similar change in the
capital structure of the Company, appropriate adjustments shall be made in the
number and class of shares subject to the Plan and to any outstanding Options
and in the exercise price per share of any outstanding Options.
Notwithstanding the foregoing, any fractional share resulting from an
adjustment pursuant to this Section 4.2 shall be rounded up or down to the
nearest whole number, as determined by the Board, and in no event may the
exercise price of any Option be decreased to an amount less than the par value,
if any, of the stock subject to the Option. The adjustments determined by the
Board pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted
only to Employees. Eligible persons may be granted more than one (1) Option.
5
<PAGE> 6
5.2 FAIR MARKET VALUE LIMITATION. To the extent that the
aggregate Fair Market Value of stock with respect to which options designated
as Incentive Stock Options are exercisable by an Optionee for the first time
during any calendar year (under all stock option plans of the Participating
Company Group, including the Plan) exceeds One Hundred Thousand Dollars
($100,000), the portion of such options which exceeds such amount shall be
treated as Nonstatutory Stock Options. For purposes of this Section 5.2,
options designated as Incentive Stock Options shall be taken into account in
the order in which they were granted, and the Fair Market Value of stock shall
be determined as of the time the option with respect to such stock is granted.
If the Code is amended to provide for a different limitation from that set
forth in this Section 5.2, such different limitation shall be deemed
incorporated herein effective as of the date and with respect to such Options
as required or permitted by such amendment to the Code. If an Option is
treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option
in part by reason of the limitation set forth in this Section 5.2, the Optionee
may designate which portion of such Option the Optionee is exercising. In the
absence of such designation, the Optionee shall be deemed to have exercised the
Incentive Stock Option portion of the Option first. Separate certificates
representing each such portion shall be issued upon the exercise of the Option.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced
by Option Agreements specifying the number of shares of Stock covered thereby,
in such form as the Board shall from time to time establish. Option Agreements
may incorporate all or any of the terms of the Plan by reference and shall
comply with and be subject to the following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option
shall be established in the sole discretion of the Board; provided, however,
that (a) the exercise price per share of Stock for an Option shall be not less
than the Fair Market Value of a share of Stock on the effective date of grant
of the Option, and (b) no Option granted to a Ten Percent Owner Optionee shall
have an exercise price per share of Stock less than one hundred ten percent
(110%) of the Fair Market Value of a share of Stock on the effective date of
grant of the Option. Notwithstanding the foregoing, an Option (whether an
Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an
exercise price lower than the minimum exercise price set forth above if such
Option is granted pursuant to an assumption or substitution for another option
in a manner qualifying under the provisions of Section 424(a) of the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at
such time or times, or upon such event or events, and subject to such terms,
conditions, performance criteria, and restrictions as shall be determined by
the Board and set forth in the Option Agreement evidencing such Option;
provided, however, that (a) no Option shall be exercisable after the expiration
of ten (10) years after the effective date of grant of such Option, and (b) no
Incentive Stock Option granted to a Ten Percent
6
<PAGE> 7
Owner Optionee shall be exercisable after the expiration of five (5) years
after the effective date of grant of such Option.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as
otherwise provided below, payment of the exercise price for the number of
shares of Stock being purchased pursuant to any Option shall be made (i) in
cash, by check, or cash equivalent, (ii) by tender to the Company of shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to
such stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the exercise price, (iii) by the
assignment of the proceeds of a sale or loan with respect to some or all of the
shares being acquired upon the exercise of the Option (including, without
limitation, through an exercise complying with the provisions of Regulation T
as promulgated from time to time by the Board of Governors of the Federal
Reserve System) (a "CASHLESS EXERCISE"), (iv) by the Optionee's promissory note
in a form approved by the Company, (v) by such other consideration as may be
approved by the Board from time to time to the extent permitted by applicable
law, or (vi) by any combination thereof. The Board may at any time or from
time to time, by adoption of or by amendment to the standard forms of Option
Agreement described in Section 7, or by other means, grant Options which do not
permit all of the foregoing forms of consideration to be used in payment of the
exercise price or which otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the
foregoing, an Option may not be exercised by tender of shares of Stock to the
extent such tender would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board at the time the Option is granted, an
Option may not be exercised by the tender of shares of Stock unless such shares
either have been owned by the Optionee for more than six (6) months or were not
acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at
any and all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
(d) PAYMENT BY PROMISSORY NOTE. No promissory
note shall be permitted if the exercise of an Option using a promissory note
would be a violation of any law. Any permitted promissory note shall be on
such terms as the Board shall determine at the time the Option is granted. The
Optionee may be required to secure any promissory note used to exercise an
Option with the shares acquired upon the exercise of the Option or with other
collateral acceptable to the Company. Unless otherwise provided by the Board,
if the Company at any time is
7
<PAGE> 8
subject to the regulations promulgated by the Board of Governors of the Federal
Reserve System or any other governmental entity affecting the extension of
credit in connection with the securities acquired upon exercise of the Option,
any promissory note shall comply with such applicable regulations, and the
Optionee shall pay the unpaid principal and accrued interest, if any, to the
extent necessary to comply with such applicable regulations.
6.4 TAX WITHHOLDING. The Company shall have the right to
require the Optionee, through payroll withholding, cash payment or otherwise,
including by means of a Cashless Exercise, to make adequate provision for any
tax withholding obligations of the Participating Company Group arising in
connection with the Option or the shares acquired upon the exercise thereof.
The Company shall have no obligation to deliver shares or to release shares
from an escrow established pursuant to the Option Agreement until such tax
withholding obligations have been satisfied by the Optionee.
7. STANDARD FORMS OF OPTION AGREEMENT.
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided
by the Board at the time the Option is granted, an Option designated as an
"Incentive Stock Option" shall comply with and be subject to the terms and
conditions set forth in the form of Incentive Stock Option Agreement adopted by
the Board concurrently with its adoption of the Plan and as amended from time
to time.
7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise
provided by the Board at the time the Option is granted, an Option designated
as a "Nonstatutory Stock Option" shall comply with and be subject to the terms
and conditions set forth in the form of Nonstatutory Stock Option Agreement
adopted by the Board concurrently with its adoption of the Plan and as amended
from time to time.
7.3 STANDARD TERM OF OPTIONS. Except as otherwise
provided in Section 6.2 or by the Board in the grant of an Option, any Option
granted hereunder shall have a term of ten (10) years from the effective date
of grant of the Option.
7.4 AUTHORITY TO VARY TERMS. The Board shall have the
authority from time to time to vary the terms of any of the standard forms of
Option Agreement described in this Section 7 either in connection with the
grant or amendment of an individual Option or in connection with the
authorization of a new standard form or forms; provided, however, that the
terms and conditions of any such new, revised or amended standard form or forms
of Option Agreement are not inconsistent with the terms of the Plan.
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8. TRANSFER OF CONTROL.
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed
to have occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or
exchange in a single or series of related transactions by the shareholders of
the Company of more than fifty percent (50%) of the voting stock of the
Company;
(ii) a merger or consolidation in which
the Company is a party;
(iii) the sale, exchange, or transfer of
all or substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the
Company.
(b) A "TRANSFER OF CONTROL" shall mean an
Ownership Change Event or a series of related Ownership Change Events
(collectively, the "TRANSACTION") wherein the shareholders of the Company
immediately before the Transaction do not retain immediately after the
Transaction, in substantially the same proportions as their ownership of shares
of the Company's voting stock immediately before the Transaction, direct or
indirect beneficial ownership of more than fifty percent (50%) of the total
combined voting power of the outstanding voting stock of the Company or the
corporation or corporations to which the assets of the Company were transferred
(the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the
preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting stock of one or
more corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through one
or more subsidiary corporations. The Board shall have the right to determine
whether multiple sales or exchanges of the voting stock of the Company or
multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the
event of a Transfer of Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may either assume the Company's rights and
obligations under outstanding Options or substitute for outstanding Options
substantially equivalent options for the Acquiring Corporation's stock. For
purposes of this Section 8.2, an Option shall be deemed assumed if, following
the Transfer of Control, the Option confers the right to purchase, for each
share of Stock subject to the Option immediately prior to the Transfer of
Control, the consideration (whether stock, cash or other securities or
property) to which a holder of a share of Stock on the effective date of the
Transfer
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<PAGE> 10
of Control was entitled. Any Options which are neither assumed or substituted
for by the Acquiring Corporation in connection with the Transfer of Control nor
exercised as of the date of the Transfer of Control shall terminate and cease
to be outstanding effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, shares acquired upon exercise of an Option prior
to the Transfer of Control and any consideration received pursuant to the
Transfer of Control with respect to such shares shall continue to be subject to
all applicable provisions of the Option Agreement evidencing such Option except
as otherwise provided in such Option Agreement. Furthermore, notwithstanding
the foregoing, if the corporation the stock of which is subject to the
outstanding Options immediately prior to an Ownership Change Event described in
Section 8.1(a)(i) constituting a Transfer of Control is the surviving or
continuing corporation and immediately after such Ownership Change Event less
than fifty percent (50%) of the total combined voting power of its voting stock
is held by another corporation or by other corporations that are members of an
affiliated group within the meaning of Section 1504(a) of the Code without
regard to the provisions of Section 1504(b) of the Code, the outstanding
Options shall not terminate unless the Board otherwise provides in its sole
discretion.
9. PROVISION OF INFORMATION. Each Optionee shall be given access
to information concerning the Company equivalent to that information generally
made available to the Company's common shareholders.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, an Option shall be exercisable only by the Optionee or the Optionee's
guardian or legal representative. No Option shall be assignable or
transferable by the Optionee, except by will or by the laws of descent and
distribution.
11. INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board or the Company is delegated shall be indemnified by the
Company against all reasonable expenses, including attorneys' fees, actually
and necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is
approved by independent legal counsel selected by the Company) or paid by them
in satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60)
days after the institution of such action, suit or proceeding, such person
shall offer to the Company, in writing, the opportunity at its own expense to
handle and defend the same.
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12. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or
amend the Plan at any time. However, subject to changes in applicable law,
regulations or rules that would permit otherwise, without the approval of the
Company's shareholders, there shall be (a) no increase in the maximum aggregate
number of shares of Stock that may be issued under the Plan (except by
operation of the provisions of Section 4.2), (b) no change in the class of
persons eligible to receive Incentive Stock Options, and (c) no other amendment
of the Plan that would require approval of the Company's shareholders under any
applicable law, regulation or rule. In any event, no termination or amendment
of the Plan may adversely affect any then outstanding Option or any unexercised
portion thereof, without the consent of the Optionee, unless such termination
or amendment is required to enable an Option designated as an Incentive Stock
Option to qualify as an Incentive Stock Option or is necessary to comply with
any applicable law, regulation or rule.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the Jaycor Networks, Inc. 1997 Stock Option Plan was duly adopted by the
Board on February 3, 1997.
/s/ Dorothy K. Bidwell
-----------------------------
Secretary
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JAYCOR NETWORKS, INC.
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made
and entered into as of ___________, 199_, by and between Jaycor Networks, Inc.
and ___________________________ (the "OPTIONEE").
The Company has granted to the Optionee pursuant to the Jaycor
Networks, Inc. 1997 Stock Option Plan an option to purchase certain shares of
stock, upon the terms and conditions set forth in this Option Agreement (the
"OPTION").
1. DEFINITIONS AND CONSTRUCTION.
1.1. DEFINITIONS. Whenever used herein, the following
terms shall have their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means
________________________ , 199_.
(b) "NUMBER OF OPTION SHARES" means
___________________ shares of Stock, as adjusted from time to time pursuant to
Section 9.
(c) "EXERCISE PRICE" means $ ____________ per
share of Stock, as adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the earliest to
occur of the following: (i) the effective date of the registration statement
filed by the Company under the Securities Act in connection with the initial
public offering of stock by the Company, (ii) the date on which Jaycor,
pursuant to a sale or exchange of shares, merger or consolidation, or spin-off
transaction, no longer owns, directly or indirectly, more than fifty percent
(50%) of the total combined voting power of the Company, or (iii) the date
occurring nine (9) years after the Date of Option Grant.
(e) "INITIAL VESTING DATE" means the date
occurring one (1) year after the Date of Option Grant.
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(f) "ACCELERATED VESTED RATIO" means, on any
relevant date, the ratio determined as follows:
(i) Prior to the Initial Vesting Date,
the Accelerated Vested Ratio shall be 1/4.
(ii) On the Initial Vesting Date, the
Accelerated Vested Ratio shall be 1/3, provided that the Optionee's Service is
continuous from the Date of Option Grant until the Initial Vesting Date.
(iii) On the date occurring one year after
the Initial Vesting Date, the Accelerated Vested Ratio shall be 3/4, provided
that the Optionee's Service is continuous from the Initial Vesting Date until
such date.
(iv) On the date occurring two years
after the Initial Vesting Date, the Accelerated Vested Ratio shall be 1/1,
provided that the Optionee's Service is continuous from the Initial Vesting
Date until such date.
(g) "NONACCELERATED VESTED RATIO" means, on any
relevant date, the ratio determined as follows:
(i) Prior to the Initial Vesting Date,
the Nonaccelerated Vested Ratio shall be zero.
(ii) On the Initial Vesting Date, the
Nonaccelerated Vested Ratio shall be 1/10, provided that the Optionee's Service
is continuous from the Date of Option Grant until the Initial Vesting Date.
(iii) On the date occurring one year after
the Initial Vesting Date, the Nonaccelerated Vested Ratio shall be 3/10,
provided that the Optionee's Service is continuous from the Initial Vesting
Date until such date.
(iv) On the date occurring two years
after the Initial Vesting Date, the Nonaccelerated Vested Ratio shall be 3/5,
provided that the Optionee's Service is continuous from the Initial Vesting
Date until such date.
(v) On the date occurring three years
after the Initial Vesting Date, the Nonaccelerated Vested Ratio shall be 1/1,
provided that the Optionee's Service is continuous from the Initial Vesting
Date until such date.
(h) "NUMBER OF VESTED SHARES" means, on any
relevant date, the number of shares determined as follows:
(i) Prior to the date described in
Section 1.1(d)(ii), the Number of Vested Shares shall be equal to the Number of
Option Shares multiplied by the Nonaccelerated Vested Ratio.
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(ii) On and after the date described in
Section 1.1(d)(ii), the Number of Vested Shares shall be equal to the Number of
Option Shares multiplied by the Accelerated Vested Ratio.
(i) "OPTION EXPIRATION DATE" means the date ten
(10) years after the Date of Option Grant.
(j) "BOARD" means the Board of Directors of the
Company. If one or more Committees have been appointed by the Board to
administer the Plan, "Board" shall also mean such Committee(s).
(k) "CODE" means the Internal Revenue Code of
1986, as amended, and any applicable regulations promulgated thereunder.
(l) "COMMITTEE" means the Compensation Committee
or other committee of the Board duly appointed to administer the Plan and
having such powers as shall be specified by the Board. Unless the powers of
the Committee have been specifically limited, the Committee shall have all of
the powers of the Board granted in the Plan, including, without limitation, the
power to amend or terminate the Plan at any time, subject to the terms of the
Plan and any applicable limitations imposed by law.
(m) "COMPANY" means Jaycor Networks, Inc., a
Delaware corporation, or any successor corporation thereto.
(n) "DISABILITY" means the permanent and total
disability of the optionee within the meaning of Section 22(e)(3) of the Code.
(o) "EMPLOYEE" means any person treated as an
employee (including an officer or a director who is also treated as an
employee) in the records of the Company; provided, however, that neither
service as a director nor payment of a director's fee shall be sufficient to
constitute employment for this purpose.
(p) "EXCHANGE ACT" means the Securities Exchange
Act of 1934, as amended.
(q) "FAIR MARKET VALUE" means, as of any date,
the value of a share of Stock or other property as determined by the Board, in
its sole discretion, or by the Company, in its sole discretion, if such
determination is expressly allocated to the Company herein.
(r) "JAYCOR" means Jaycor Emerging Technologies,
Inc., a California corporation, or any successor corporation thereto.
(s) "JAYCOR OPTION" means an option to purchase
shares of the common stock of Jaycor which was granted to the Optionee after
the Date of Option
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<PAGE> 15
Grant pursuant to a stock option plan maintained by Jaycor; provided, however,
that a purchase right granted to the Optionee pursuant to an employee stock
purchase plan maintained by Jaycor shall not be treated as a Jaycor Option for
purposes of this Option Agreement.
(t) "PARENT CORPORATION" means any present or
future "parent corporation" of the Company, as defined in Section 424(e) of the
Code.
(u) "PARTICIPATING COMPANY" means the Company or
any Parent Corporation or Subsidiary Corporation.
(v) "PARTICIPATING COMPANY GROUP" means, at any
point in time, all corporations collectively which are then Participating
Companies.
(w) "PLAN" means the Jaycor Networks, Inc. 1997
Stock Option Plan.
(x) "SECURITIES ACT" means the Securities Act of
1933, as amended.
(y) "SERVICE" means the Optionee's employment
with the Company.
(z) "STOCK" means the common stock of the
Company, as adjusted from time to time in accordance with Section 9.
(aa) "SUBSIDIARY CORPORATION" means any present or
future "subsidiary corporation" of the Company, as defined in Section 424(f) of
the Code.
1.2. CONSTRUCTION. Captions and titles contained herein
are for convenience only and shall not affect the meaning or interpretation of
any provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX STATUS OF OPTION. This Option is intended to be an
incentive stock option within the meaning of Section 422(b) of the Code (an
"INCENTIVE STOCK OPTION"), but the Company does not represent or warrant that
this Option qualifies as such. The Optionee should consult with the Optionee's
own tax advisor regarding the tax effects of this Option and the requirements
necessary to obtain favorable income tax treatment under Section 422 of the
Code, including, but not limited to, holding period requirements.
3. ADMINISTRATION. All questions of interpretation concerning
this Option Agreement shall be determined by the Board, including any duly
appointed Committee of the Board. All determinations by the Board shall be
final and binding
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<PAGE> 16
upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
4.1. RIGHT TO EXERCISE. Except as otherwise provided
herein, the Option shall be exercisable on and after the Initial Exercise Date
and prior to the termination of the Option (as provided in Section 6) in an
amount not to exceed the Number of Vested Shares less the number of shares of
Stock previously acquired upon exercise of the Option. In no event shall the
Option be exercisable for more shares than the Number of Option Shares.
4.2. METHOD OF EXERCISE. Exercise of the Option shall be
by written notice to the Company which must state the election to exercise the
Option, the number of whole shares for which the Option is being exercised and
such other representations and agreements as to the Optionee's investment
intent with respect to such shares as may be required pursuant to the
provisions of this Option Agreement. The written notice must be signed by the
Optionee and must be delivered in person, by certified or registered mail,
return receipt requested, by confirmed facsimile transmission, or by such other
means as the Company may permit, to the Chief Financial Officer of the Company,
or other authorized representative of the Company, prior to the termination of
the Option as set forth in Section 6, accompanied by (i) full payment of the
aggregate Exercise Price for the number of shares being purchased and (ii) an
executed copy, if required herein, of the then current form of escrow agreement
referenced below. The Option shall be deemed to be exercised upon receipt of
such written notice, the aggregate Exercise Price, and, if required by the
Company, such executed agreement.
4.3. PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as
otherwise provided below, payment of the aggregate Exercise Price for the
number of shares of Stock for which the Option is being exercised shall be made
(i) in cash, by check, or cash equivalent, (ii) by tender to the Company of
whole shares of Stock owned by the Optionee having a Fair Market Value (as
determined by the Company without regard to any restrictions on transferability
applicable to such stock by reason of federal or state securities laws or
agreements with an underwriter for the Company) not less than the aggregate
Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section
4.3(c), or (iv) by any combination of the foregoing.
(b) TENDER OF STOCK. Notwithstanding the
foregoing, the Option may not be exercised by tender to the Company of shares
of Stock to the extent such tender would constitute a violation of the
provisions of any law,
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<PAGE> 17
regulation or agreement restricting the redemption of the stock. The Option
may not be exercised by the tender shares of Stock unless such shares either
have been owned by the Optionee for more than six (6) months or were not
acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE"
means the assignment in a form acceptable to the Company of the proceeds of a
sale or loan with respect to some or all of the shares acquired upon the
exercise of the Option pursuant to a program or procedure approved by the
Company (including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
the Option to purchase shares of Stock by means of a Cashless Exercise.
4.4. TAX WITHHOLDING. At the time the Option is
exercised, in whole or in part, or at any time thereafter as requested by the
Company, the Optionee hereby authorizes withholding from payroll and any other
amounts payable to the Optionee, and otherwise agrees to make adequate
provision for (including by means of a Cashless Exercise to the extent
permitted by the Company), any sums required to satisfy the federal, state,
local and foreign tax withholding obligations of the Participating Company
Group, if any, which arise in connection with the Option, including, without
limitation, obligations arising upon (i) the exercise, in whole or in part, of
the Option, (ii) the transfer, in whole or in part, of any shares acquired upon
exercise of the Option, (iii) the operation of any law or regulation providing
for the imputation of interest, or (iv) the lapsing of any restriction with
respect to any shares acquired upon exercise of the Option. The Optionee is
cautioned that the Option is not exercisable unless such tax withholding
obligations are satisfied. Accordingly, the Optionee may not be able to
exercise the Option when desired even though the Option is vested, and the
Company shall have no obligation to issue a certificate for such shares or
release such shares from any escrow provided for herein.
4.5. CERTIFICATE REGISTRATION. Except in the event the
Exercise Price is paid by means of a Cashless Exercise, the certificate for the
shares as to which the Option is exercised shall be registered in the name of
the Optionee, or, if applicable, in the names of the heirs of the Optionee.
4.6. RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF
SHARES. The grant of the Option and the issuance of shares upon exercise of
the Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares upon exercise would constitute a
violation of any applicable federal, state or foreign securities laws or other
law or regulations or the requirements of any stock exchange or market system
upon which the stock may then be listed. In addition, the Option may not be
exercised unless (i) a registration statement under the Securities Act shall
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<PAGE> 18
at the time of exercise of the Option be in effect with respect to the shares
issuable upon exercise of the Option or (ii) in the opinion of legal counsel to
the Company, the shares issuable upon exercise of the Option may be issued in
accordance with the terms of an applicable exemption from the registration
requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION
MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from
any regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto
as may be requested by the Company.
4.7. FRACTIONAL SHARES. The Company shall not be required
to issue fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised
during the lifetime of the Optionee only by the Optionee or the Optionee's
guardian or legal representative and may not be assigned or transferred in any
manner except by will or by the laws of descent and distribution. Following
the death of the Optionee, the Option, to the extent provided in Section 7, may
be exercised by the Optionee's legal representative or by any person empowered
to do so under the deceased Optionee's will or under the then applicable laws
of descent and distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may
no longer be exercised on the first to occur of (a) the Option Expiration Date,
(b) the last date for exercising the Option following termination of the
Optionee's Service as described in Section 7, (c) a Transfer of Control to the
extent provided in Section 8, or (d) the date on which the Optionee exercises a
Jaycor Option.
7. EFFECT OF TERMINATION OF SERVICE.
7.1. OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service is
terminated because of the Disability of the Optionee, the Option, to the extent
unexercised and exercisable on the date on which the Optionee's Service
terminated, may be exercised by the Optionee (or the Optionee's guardian or
legal representative) at any time prior to the expiration of twelve (12) months
after the date on which the Optionee's Service terminated, but in any event no
later than the Option Expiration Date.
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(b) DEATH. If the Optionee's Service is
terminated because of the death of the Optionee, the Option, to the extent
unexercised and exercisable on the date on which the Optionee's Service
terminated, may be exercised by the Optionee's legal representative or other
person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months
after the date on which the Optionee's Service terminated, but in any event no
later than the Option Expiration Date. The Optionee's Service shall be deemed
to have terminated on account of death if the Optionee dies within three (3)
months after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the
Optionee's Service terminates for any reason except Disability or death, the
Option, to the extent unexercised and exercisable by the Optionee on the date
on which the Optionee's Service terminated, may be exercised by the Optionee
within three (3) months (or such other longer period of time as determined by
the Board, in its sole discretion) after the date on which the Optionee's
Service terminated, but in any event no later than the Option Expiration Date.
7.2. EXTENSION IF EXERCISE PREVENTED BY LAW.
Notwithstanding the foregoing, if the exercise of the Option within the
applicable time periods set forth in Section 7.1 is prevented by the provisions
of Section 4.6, the Option shall remain exercisable until three (3) months
after the date the Optionee is notified that the Option is exercisable, but in
any event no later than the Option Expiration Date. The Company makes no
representation as to the tax consequences of any such delayed exercise. The
Optionee should consult with the Optionee's own tax advisor as to the tax
consequences to the Optionee of any such delayed exercise.
7.3. EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 7.1 of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the
Option shall remain exercisable until the earliest to occur of (i) the tenth
(10th) day following the date on which a sale of such shares by the Optionee
would no longer be subject to such suit, (ii) the one hundred and ninetieth
(190th) day after the Optionee's termination of Service, or (iii) the Option
Expiration Date. The Company makes no representation as to the tax
consequences of any such delayed exercise. The Optionee should consult with
the Optionee's own tax advisors as to the tax consequences to the Optionee of
any such delayed exercise.
7.4. LEAVE OF ABSENCE. For purposes of Section 7.1, the
Optionee's Service shall not be deemed to terminate if the Optionee takes any
military leave, sick leave, or other bona fide leave of absence approved by the
Company of ninety (90) days or less. In the event of a leave of absence in
excess of ninety (90) days, the Optionee's Service shall be deemed to terminate
on the ninety-first (91st) day of such leave unless the Optionee's right to
return to Service remains guaranteed by statute or contract. Notwithstanding
the foregoing, unless otherwise designated by the
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Company (or required by law), a leave of absence shall not be treated as
Service for purposes of determining the Optionee's Accelerated Vested Ratio or
Nonaccelerated Vested Ratio.
8. TRANSFER OF CONTROL.
8.1. DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed
to have occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or
exchange in a single or series of related transactions by the stockholders of
the Company of more than fifty percent (50%) of the voting stock of the
Company;
(ii) a merger or consolidation in which
the Company is a party;
(iii) the sale, exchange, or transfer of
all or substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the
Company.
(b) A "TRANSFER OF CONTROL" shall mean an
Ownership Change Event or a series of related Ownership Change Events
(collectively, the "TRANSACTION") wherein the stockholders of the Company
immediately before the Transaction do not retain immediately after the
Transaction, in substantially the same proportions as their ownership of shares
of the Company's voting stock immediately before the Transaction, direct or
indirect beneficial ownership of more than fifty percent (50%) of the total
combined voting power of the outstanding voting stock of the Company or the
corporation or corporations to which the assets of the Company were transferred
(the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the
preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting stock of one or
more corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through one
or more subsidiary corporations. The Board shall have the right to determine
whether multiple sales or exchanges of the voting stock of the Company or
multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
8.2. EFFECT OF TRANSFER OF CONTROL ON OPTION. In the
event of a Transfer of Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may either assume the Company's rights and
obligations under the Option or substitute for the Option a substantially
equivalent option for the Acquiring Corporation's stock. For purposes of this
Section 8.2, the Option shall be deemed assumed if, following the
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Transfer of Control, the Option confers the right to purchase, for each share
of Stock subject to the Option immediately prior to the Transfer of Control,
the consideration (whether stock, cash or other securities or property) to
which a holder of a share of Stock on the effective date of the Transfer of
Control was entitled. The Option shall terminate and cease to be outstanding
effective as of the date of the Transfer of Control to the extent that the
Option is neither assumed or substituted for by the Acquiring Corporation in
connection with the Transfer of Control nor exercised as of the date of the
Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of the Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of this Option Agreement
except as otherwise provided herein. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate
unless the Board otherwise provides in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification, or similar change in the capital structure of
the Company, appropriate adjustments shall be made in the number, Exercise
Price and class of shares of stock subject to the Option. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 9 shall be rounded up or down to the nearest whole number, as
determined by the Board, and in no event may the Exercise Price be decreased to
an amount less than the par value, if any, of the stock subject to the Option.
The adjustments determined by the Board pursuant to this Section 9 shall be
final, binding and conclusive.
10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee
shall have no rights as a stockholder with respect to any shares covered by the
Option until the date of the issuance of a certificate for the shares for which
the Option has been exercised (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company).
No adjustment shall be made for dividends, distributions or other rights for
which the record date is prior to the date such certificate is issued, except
as provided in Section 9. Nothing in this Option Agreement shall confer upon
the Optionee any right to continue in the Service of the Company or interfere
in any way with any right of the Company to terminate the Optionee's Service.
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11. VESTED SHARE REPURCHASE OPTION.
11.1. GRANT OF VESTED SHARE REPURCHASE OPTION. If the
Conversion Date occurs as a result of the lapse of nine (9) years from the Date
of Option Grant, upon the occurrence of a Repurchase Event, as defined below,
the Company shall have the right to repurchase the shares of Stock acquired by
the Optionee pursuant to the Option (the "REPURCHASE SHARES") under the terms
and subject to the conditions set forth in this Section 11 (the "VESTED SHARE
REPURCHASE OPTION"). Each of the following events shall constitute a
"REPURCHASE EVENT":
(a) Termination of the Optionee's Service for any
reason or no reason, with or without cause, including death or Disability. The
Repurchase Period, as defined below, shall commence on the date of termination
of the Optionee's Service.
(b) The Optionee, the Optionee's legal
representative, or other holder of shares acquired upon exercise of the Option
attempts to sell, exchange, transfer, pledge, or otherwise dispose of any
Repurchase Shares. The Repurchase Period, as defined below, shall commence on
the date the Company receives actual notice of such attempted sale, exchange,
transfer, pledge or other disposition.
(c) The receivership, bankruptcy or other
creditor's proceeding regarding the Optionee or the taking of any of the
Optionee's shares of Stock by legal process, such as a levy of execution. The
Repurchase Period, as defined below, shall commence on the date the Company
receives actual notice of the commencement of pendency of the receivership,
bankruptcy or other creditor's proceeding or the date of such taking, as the
case may be. The Fair Market Value of the Repurchase Shares shall be
determined as of the last day of the month preceding the month in which the
proceeding involved commenced or the taking occurred.
11.2. EXERCISE OF VESTED SHARE REPURCHASE OPTION. The
Company may exercise the Vested Share Repurchase Option by written notice
delivered personally or forwarded by first class mail to the Optionee, the
Optionee's legal representative, or other holder of the Repurchase Shares, as
the case may be, during the Repurchase Period. The "REPURCHASE PERIOD" shall
be the period commencing at the time set forth in Section 11.1 above and ending
on the later of (a) the date ninety (90) days after the commencement of the
Repurchase Period or (b) the date ninety (90) days after the Option is last
exercised. If the Company fails to give notice during the Repurchase Period,
the Vested Share Repurchase Option shall terminate (unless the Company and the
Optionee have extended the time for the exercise of the Vested Share Repurchase
Option) unless and until there is a subsequent Repurchase Event.
Notwithstanding a termination of the Vested Share Repurchase Option, the
remaining provisions of this Option Agreement shall remain in full force and
effect. If there is a subsequent Repurchase Event, the Vested Share Repurchase
Option shall again become exercisable as provided in this Section 11. The
Vested Share Repurchase
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Option must be exercised, if at all, for all of the Repurchase Shares, except
as the Company and the Optionee otherwise agree.
11.3. PAYMENT FOR REPURCHASE SHARES. The repurchase price
per share being repurchased by the Company pursuant to the Vested Share
Repurchase Option shall be an amount equal to the greater of (a) the Optionee's
original cost per share, as adjusted pursuant to Section 9, or (b) the Fair
Market Value of the shares determined as of the date of the Repurchase Event
(except as otherwise provided in Section 11.1(c) above) by the Board in good
faith. Payment by the Company to the Optionee shall be made in cash on or
before the last day of the Repurchase Period. For purposes of the foregoing,
cancellation of any indebtedness of the Optionee to the Company shall be
treated as payment to the Optionee in cash to the extent of the unpaid
principal and any accrued interest canceled.
11.4. ASSIGNMENT OF VESTED SHARE REPURCHASE OPTION. The
Company shall have the right to assign the Vested Share Repurchase Option at
any time, whether or not such option is then exercisable, to one or more
persons as may be selected by the Company.
11.5. TERMINATION OF VESTED SHARE REPURCHASE OPTION. The
other provisions of this Option Agreement notwithstanding, the Vested Share
Repurchase Option shall terminate and be of no further force and effect upon
the existence of a "public market", as defined in Exchange Act, for the class
of shares subject to the Vested Share Repurchase Option.
12. ESCROW.
12.1. ESTABLISHMENT OF ESCROW. To ensure that shares
subject to the Vested Share Repurchase Option will be available for repurchase,
the Company may require the Optionee to deposit the certificate evidencing the
shares which the Optionee purchases upon exercise of the Option with an escrow
agent designated by the Company under the terms and conditions of an escrow
agreement approved by the Company. If the Company does not require such
deposit as a condition of exercise of the Option, the Company reserves the
right at any time to require the Optionee to so deposit the certificate in
escrow. Upon a change, as described in Section 9, in the character or amount
of any of the outstanding stock of the corporation the stock of which is
subject to the provisions of this Option Agreement, any and all new,
substituted or additional securities or other property to which the Optionee is
entitled by reason of the Optionee's ownership of shares of Stock acquired upon
exercise of the Option that remain, following such change described in Section
9, subject to the Vested Share Repurchase Option shall be immediately subject
to the escrow to the same extent as such shares of Stock immediately before
such event. The Company shall bear the expenses of the escrow.
12.2. DELIVERY OF SHARES TO OPTIONEE. As soon as
practicable after the expiration of the Vested Share Repurchase Option, but not
more frequently than once
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each calendar year, the escrow agent shall deliver to the Optionee the shares
and any other property no longer subject to such restriction.
12.3. NOTICES AND PAYMENTS. In the event the shares and
any other property held in escrow are subject to the Company's exercise of the
Vested Share Repurchase Option, the notices required to be given to the
Optionee shall be given to the escrow agent, and any payment required to be
given to the Optionee shall be given to the escrow agent. Within thirty (30)
days after payment by the Company, the escrow agent shall deliver the shares
and any other property which the Company has purchased to the Company and shall
deliver the payment received from the Company to the Optionee.
13. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from
time to time, there is any stock dividend, stock split or other change, as
described in Section 9, in the character or amount of any of the outstanding
stock of the corporation the stock of which is subject to the provisions of
this Option Agreement, then in such event any and all new, substituted or
additional securities to which the Optionee is entitled by reason of the
Optionee's ownership of the shares acquired upon exercise of the Option shall
be immediately subject to the Vested Share Repurchase Option and with the same
force and effect as the shares subject to the Vested Share Repurchase Option
immediately before such event.
14. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee
shall dispose of the shares acquired pursuant to the Option only in accordance
with the provisions of this Option Agreement. In addition, the Optionee shall
promptly notify the Chief Financial Officer of the Company if the Optionee
disposes of any of the shares acquired pursuant to the Option within one (1)
year after the date the Optionee exercises all or part of the Option or within
two (2) years after the Date of Option Grant. Until such time as the Optionee
disposes of such shares in a manner consistent with the provisions of this
Option Agreement, unless otherwise expressly authorized by the Company, the
Optionee shall hold all shares acquired pursuant to the Option in the
Optionee's name (and not in the name of any nominee) for the one-year period
immediately after the exercise of the Option and the two-year period
immediately after Date of Option Grant. At any time during the one-year or
two-year periods set forth above, the Company may place a legend on any
certificate representing shares acquired pursuant to the Option requesting the
transfer agent for the Company's stock to notify the Company of any such
transfers. The obligation of the Optionee to notify the Company of any such
transfer shall continue notwithstanding that a legend has been placed on the
certificate pursuant to the preceding sentence.
15. REPRESENTATIONS AND WARRANTIES. In connection with the
receipt of the Option and any acquisition of shares upon the exercise thereof,
the Optionee hereby agrees, represents and warrants as follows:
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15.1. The Optionee is acquiring the Option and will acquire
any shares of Stock upon exercise of the Option for the Optionee's own account,
and not on behalf of any other person or as a nominee, for investment and not
with a view to, or sale in connection with, any distribution of the Option or
such shares.
15.2. The Optionee was not presented with or solicited by
any form of general solicitation or general advertising, including, but not
limited to, any advertisement, article, notice, or other communication
published in any newspaper, magazine, or similar media, or broadcast over
television, radio or similar communications media, or presented at any seminar
or meeting whose attendees have been invited by any general solicitation or
general advertising.
15.3. The Optionee has either (a) a preexisting personal or
business relationship with the Company or any of its officers, directors, or
controlling persons, consisting of personal or business contacts of a nature
and duration to enable the Optionee to be aware of the character, business
acumen and general business and financial circumstances of the person with whom
such relationship exists, or (b) such knowledge and experience in financial and
business matters (or has relied on the financial and business knowledge and
experience of the Optionee's professional advisor who is unaffiliated with and
who is not, directly or indirectly, compensated by the Company or any affiliate
or selling agent of the Company) as to make the Optionee capable of evaluating
the merits and risks of the Option and any investment in shares acquired
pursuant to the Option and to protect the Optionee's own interests in the
transaction, or (c) both such relationship and such knowledge and experience.
15.4. The Optionee understands that the Option and any
shares acquired upon exercise of the Option have not been qualified under the
Corporate Securities Law of 1968, as amended, of the State of California by
reason of a specific exemption therefrom, which exemption depends upon, among
other things, the bona fide nature of the Optionee's representations as
expressed herein. The Optionee understands that the Company is relying on the
Optionee's representations and warrants that the Company is entitled to rely on
such representations and that such reliance is reasonable.
16. LEGENDS. The Company may at any time place legends
referencing the Vested Share Repurchase Option and any applicable federal,
state or foreign securities law restrictions on all certificates representing
shares of stock subject to the provisions of this Option Agreement. The
Optionee shall, at the request of the Company, promptly present to the Company
any and all certificates representing shares acquired pursuant to the Option in
the possession of the Optionee in order to carry out the provisions of this
Section.
17. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon
exercise of the Option may be sold, exchanged, transferred (including, without
limitation, any transfer to a nominee or agent of the Optionee), assigned,
pledged, hypothecated or
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otherwise disposed of, including by operation of law, in any manner which
violates any of the provisions of this Option Agreement and, and any such
attempted disposition shall be void. The Company shall not be required (a) to
transfer on its books any shares which will have been transferred in violation
of any of the provisions set forth in this Option Agreement or (b) to treat as
owner of such shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such shares will have been so transferred.
18. BINDING EFFECT. Subject to the restrictions on transfer set
forth herein, this Option Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
19. TERMINATION OR AMENDMENT. The Board may terminate or amend
the Plan or the Option at any time; provided, however, that except as provided
in Section 8.2 in connection with a Transfer of Control, no such termination or
amendment may adversely affect the Option or any unexercised portion hereof
without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law or government regulation or is
required to enable the Option to qualify as an Incentive Stock Option. No
amendment or addition to this Option Agreement shall be effective unless in
writing.
20. INTEGRATED AGREEMENT. This Option Agreement constitutes the
entire understanding and agreement of the Optionee and the Participating
Company Group with respect to the subject matter contained herein, and there
are no agreements, understandings, restrictions, representations, or warranties
among the Optionee and the Participating Company Group with respect to such
subject matter other than those as set forth or provided for herein. To the
extent contemplated herein, the provisions of this Option Agreement shall
survive any exercise of the Option and shall remain in full force and effect.
21. APPLICABLE LAW. This Option Agreement shall be governed by
the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
the State of California.
JAYCOR NETWORKS, INC.
By:
------------------------------------
Title:
---------------------------------
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The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement, including the Vested Share Repurchase
Option set forth in Section 11, and hereby accepts the Option subject to all of
the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board
upon any questions arising under this Option Agreement. The undersigned
acknowledges receipt of a copy of the Plan.
OPTIONEE
Date:
------------------------- ------------------------------
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JAYCOR NETWORKS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is
made and entered into as of ___________, 199_, by and between Jaycor Networks,
Inc. and ___________________________ (the "OPTIONEE").
The Company has granted to the Optionee pursuant to the Jaycor
Networks, Inc. 1997 Stock Option Plan an option to purchase certain shares of
stock, upon the terms and conditions set forth in this Option Agreement (the
"OPTION").
1. DEFINITIONS AND CONSTRUCTION.
1.1. DEFINITIONS. Whenever used herein, the following
terms shall have their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means
________________________ , 199_.
(b) "NUMBER OF OPTION SHARES" means
___________________ shares of Stock, as adjusted from time to time pursuant to
Section 9.
(c) "EXERCISE PRICE" means $ ____________ per
share of Stock, as adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the earliest to
occur of the following: (i) the effective date of the registration statement
filed by the Company under the Securities Act in connection with the initial
public offering of stock by the Company, (ii) the date on which Jaycor,
pursuant to a sale or exchange of shares, merger or consolidation, or spin-off
transaction, no longer owns, directly or indirectly, more than fifty percent
(50%) of the total combined voting power of the Company, or (iii) the date
occurring nine (9) years after the Date of Option Grant.
(e) "INITIAL VESTING DATE" means the date
occurring one (1) year after the Date of Option Grant.
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(f) "ACCELERATED VESTED RATIO" means, on any
relevant date, the ratio determined as follows:
(i) Prior to the Initial Vesting Date,
the Accelerated Vested Ratio shall be 1/4.
(ii) On the Initial Vesting Date, the
Accelerated Vested Ratio shall be 1/3, provided that the Optionee's Service is
continuous from the Date of Option Grant until the Initial Vesting Date.
(iii) On the date occurring one year after
the Initial Vesting Date, the Accelerated Vested Ratio shall be 3/4, provided
that the Optionee's Service is continuous from the Initial Vesting Date until
such date.
(iv) On the date occurring two years
after the Initial Vesting Date, the Accelerated Vested Ratio shall be 1/1,
provided that the Optionee's Service is continuous from the Initial Vesting
Date until such date.
(g) "NONACCELERATED VESTED RATIO" means, on any
relevant date, the ratio determined as follows:
(i) Prior to the Initial Vesting Date,
the Nonaccelerated Vested Ratio shall be zero.
(ii) On the Initial Vesting Date, the
Nonaccelerated Vested Ratio shall be 1/10, provided that the Optionee's Service
is continuous from the Date of Option Grant until the Initial Vesting Date.
(iii) On the date occurring one year after
the Initial Vesting Date, the Nonaccelerated Vested Ratio shall be 3/10,
provided that the Optionee's Service is continuous from the Initial Vesting
Date until such date.
(iv) On the date occurring two years
after the Initial Vesting Date, the Nonaccelerated Vested Ratio shall be 3/5,
provided that the Optionee's Service is continuous from the Initial Vesting
Date until such date.
(v) On the date occurring three years
after the Initial Vesting Date, the Nonaccelerated Vested Ratio shall be 1/1,
provided that the Optionee's Service is continuous from the Initial Vesting
Date until such date.
(h) "NUMBER OF VESTED SHARES" means, on any
relevant date, the number of shares determined as follows:
(i) Prior to the date described in
Section 1.1(d)(ii), the Number of Vested Shares shall be equal to the Number of
Option Shares multiplied by the Nonaccelerated Vested Ratio.
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(ii) On and after the date described in
Section 1.1(d)(ii), the Number of Vested Shares shall be equal to the Number of
Option Shares multiplied by the Accelerated Vested Ratio.
(i) "OPTION EXPIRATION DATE" means the date ten
(10) years after the Date of Option Grant.
(j) "BOARD" means the Board of Directors of the
Company. If one or more Committees have been appointed by the Board to
administer the Plan, "Board" shall also mean such Committee(s).
(k) "CODE" means the Internal Revenue Code of
1986, as amended, and any applicable regulations promulgated thereunder.
(l) "COMMITTEE" means the Compensation Committee
or other committee of the Board duly appointed to administer the Plan and
having such powers as shall be specified by the Board. Unless the powers of
the Committee have been specifically limited, the Committee shall have all of
the powers of the Board granted in the Plan, including, without limitation, the
power to amend or terminate the Plan at any time, subject to the terms of the
Plan and any applicable limitations imposed by law.
(m) "COMPANY" means Jaycor Networks, Inc., a
Delaware corporation, or any successor corporation thereto.
(n) "DISABILITY" means the permanent and total
disability of the optionee within the meaning of Section 22(e)(3) of the Code.
(o) "EMPLOYEE" means any person treated as an
employee (including an officer or a director who is also treated as an
employee) in the records of the Company; provided, however, that neither
service as a director nor payment of a director's fee shall be sufficient to
constitute employment for this purpose.
(p) "EXCHANGE ACT" means the Securities Exchange
Act of 1934, as amended.
(q) "FAIR MARKET VALUE" means, as of any date,
the value of a share of Stock or other property as determined by the Board, in
its sole discretion, or by the Company, in its sole discretion, if such
determination is expressly allocated to the Company herein.
(r) "JAYCOR" means Jaycor Emerging Technologies,
Inc., a California corporation, or any successor corporation thereto.
(s) "JAYCOR OPTION" means an option to purchase
shares of the common stock of Jaycor which was granted to the Optionee after
the Date of Option
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Grant pursuant to a stock option plan maintained by Jaycor; provided, however,
that a purchase right granted to the Optionee pursuant to an employee stock
purchase plan maintained by Jaycor shall not be treated as a Jaycor Option for
purposes of this Option Agreement.
(t) "PARENT CORPORATION" means any present or
future "parent corporation" of the Company, as defined in Section 424(e) of the
Code.
(u) "PARTICIPATING COMPANY" means the Company or
any Parent Corporation or Subsidiary Corporation.
(v) "PARTICIPATING COMPANY GROUP" means, at any
point in time, all corporations collectively which are then Participating
Companies.
(w) "PLAN" means the Jaycor Networks, Inc. 1997
Stock Option Plan.
(x) "SECURITIES ACT" means the Securities Act of
1933, as amended.
(y) "SERVICE" means the Optionee's employment
with the Company.
(z) "STOCK" means the common stock of the
Company, as adjusted from time to time in accordance with Section 9.
(aa) "SUBSIDIARY CORPORATION" means any present or
future "subsidiary corporation" of the Company, as defined in Section 424(f) of
the Code.
1.2. CONSTRUCTION. Captions and titles contained herein
are for convenience only and shall not affect the meaning or interpretation of
any provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX STATUS OF OPTION. This Option is intended to be a
nonstatutory stock option and shall not be treated as an incentive stock option
within the meaning of Section 422(b) of the Code.
3. ADMINISTRATION. All questions of interpretation concerning
this Option Agreement shall be determined by the Board, including any duly
appointed Committee of the Board. All determinations by the Board shall be
final and binding upon all persons having an interest in the Option. Any
officer of a Participating Company shall have the authority to act on behalf of
the Company with respect to any matter, right, obligation, or election which is
the responsibility of or which is
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allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, or election.
4. EXERCISE OF THE OPTION.
4.1. RIGHT TO EXERCISE. Except as otherwise provided
herein, the Option shall be exercisable on and after the Initial Exercise Date
and prior to the termination of the Option (as provided in Section 6) in an
amount not to exceed the Number of Vested Shares less the number of shares of
Stock previously acquired upon exercise of the Option. In no event shall the
Option be exercisable for more shares than the Number of Option Shares.
4.2. METHOD OF EXERCISE. Exercise of the Option shall be
by written notice to the Company which must state the election to exercise the
Option, the number of whole shares for which the Option is being exercised and
such other representations and agreements as to the Optionee's investment
intent with respect to such shares as may be required pursuant to the
provisions of this Option Agreement. The written notice must be signed by the
Optionee and must be delivered in person, by certified or registered mail,
return receipt requested, by confirmed facsimile transmission, or by such other
means as the Company may permit, to the Chief Financial Officer of the Company,
or other authorized representative of the Company, prior to the termination of
the Option as set forth in Section 6, accompanied by (i) full payment of the
aggregate Exercise Price for the number of shares being purchased and (ii) an
executed copy, if required herein, of the then current form of escrow agreement
referenced below. The Option shall be deemed to be exercised upon receipt of
such written notice, the aggregate Exercise Price, and, if required by the
Company, such executed agreement.
4.3. PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as
otherwise provided below, payment of the aggregate Exercise Price for the
number of shares of Stock for which the Option is being exercised shall be made
(i) in cash, by check, or cash equivalent, (ii) by tender to the Company of
whole shares of Stock owned by the Optionee having a Fair Market Value (as
determined by the Company without regard to any restrictions on transferability
applicable to such stock by reason of federal or state securities laws or
agreements with an underwriter for the Company) not less than the aggregate
Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section
4.3(c), or (iv) by any combination of the foregoing.
(b) TENDER OF STOCK. Notwithstanding the
foregoing, the Option may not be exercised by tender to the Company of shares
of Stock to the extent such tender would constitute a violation of the
provisions of any law, regulation or agreement restricting the redemption of
the stock. The Option may not be exercised by the tender shares of Stock
unless such shares either have been owned
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<PAGE> 33
by the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE"
means the assignment in a form acceptable to the Company of the proceeds of a
sale or loan with respect to some or all of the shares acquired upon the
exercise of the Option pursuant to a program or procedure approved by the
Company (including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
the Option to purchase shares of Stock by means of a Cashless Exercise.
4.4. TAX WITHHOLDING. At the time the Option is
exercised, in whole or in part, or at any time thereafter as requested by the
Company, the Optionee hereby authorizes withholding from payroll and any other
amounts payable to the Optionee, and otherwise agrees to make adequate
provision for (including by means of a Cashless Exercise to the extent
permitted by the Company), any sums required to satisfy the federal, state,
local and foreign tax withholding obligations of the Participating Company
Group, if any, which arise in connection with the Option, including, without
limitation, obligations arising upon (i) the exercise, in whole or in part, of
the Option, (ii) the transfer, in whole or in part, of any shares acquired upon
exercise of the Option, (iii) the operation of any law or regulation providing
for the imputation of interest, or (iv) the lapsing of any restriction with
respect to any shares acquired upon exercise of the Option. The Optionee is
cautioned that the Option is not exercisable unless such tax withholding
obligations are satisfied. Accordingly, the Optionee may not be able to
exercise the Option when desired even though the Option is vested, and the
Company shall have no obligation to issue a certificate for such shares or
release such shares from any escrow provided for herein.
4.5. CERTIFICATE REGISTRATION. Except in the event the
Exercise Price is paid by means of a Cashless Exercise, the certificate for the
shares as to which the Option is exercised shall be registered in the name of
the Optionee, or, if applicable, in the names of the heirs of the Optionee.
4.6. RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF
SHARES. The grant of the Option and the issuance of shares upon exercise of
the Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares upon exercise would constitute a
violation of any applicable federal, state or foreign securities laws or other
law or regulations or the requirements of any stock exchange or market system
upon which the stock may then be listed. In addition, the Option may not be
exercised unless (i) a registration statement under the Securities Act shall at
the time of exercise of the Option be in effect with respect to the shares
issuable upon exercise of the Option or (ii) in the opinion of legal counsel to
the Company,
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<PAGE> 34
the shares issuable upon exercise of the Option may be issued in accordance
with the terms of an applicable exemption from the registration requirements of
the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE
EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE
OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE
OPTION IS VESTED. The inability of the Company to obtain from any regulatory
body having jurisdiction the authority, if any, deemed by the Company's legal
counsel to be necessary to the lawful issuance and sale of any shares subject
to the Option shall relieve the Company of any liability in respect of the
failure to issue or sell such shares as to which such requisite authority shall
not have been obtained. As a condition to the exercise of the Option, the
Company may require the Optionee to satisfy any qualifications that may be
necessary or appropriate, to evidence compliance with any applicable law or
regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
4.7. FRACTIONAL SHARES. The Company shall not be required
to issue fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised
during the lifetime of the Optionee only by the Optionee or the Optionee's
guardian or legal representative and may not be assigned or transferred in any
manner except by will or by the laws of descent and distribution. Following
the death of the Optionee, the Option, to the extent provided in Section 7, may
be exercised by the Optionee's legal representative or by any person empowered
to do so under the deceased Optionee's will or under the then applicable laws
of descent and distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may
no longer be exercised on the first to occur of (a) the Option Expiration Date,
(b) the last date for exercising the Option following termination of the
Optionee's Service as described in Section 7, (c) a Transfer of Control to the
extent provided in Section 8, or (d) the date on which the Optionee exercises a
Jaycor Option.
7. EFFECT OF TERMINATION OF SERVICE.
7.1. OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service is
terminated because of the Disability of the Optionee, the Option, to the extent
unexercised and exercisable on the date on which the Optionee's Service
terminated, may be exercised by the Optionee (or the Optionee's guardian or
legal representative) at any time prior to the expiration of twelve (12) months
after the date on which the Optionee's Service terminated, but in any event no
later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service is
terminated because of the death of the Optionee, the Option, to the extent
unexercised and exercisable on
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<PAGE> 35
the date on which the Optionee's Service terminated, may be exercised by the
Optionee's legal representative or other person who acquired the right to
exercise the Option by reason of the Optionee's death at any time prior to the
expiration of twelve (12) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date. The
Optionee's Service shall be deemed to have terminated on account of death if
the Optionee dies within three (3) months after the Optionee's termination of
Service.
(c) OTHER TERMINATION OF SERVICE. If the
Optionee's Service terminates for any reason except Disability or death, the
Option, to the extent unexercised and exercisable by the Optionee on the date
on which the Optionee's Service terminated, may be exercised by the Optionee
within three (3) months (or such other longer period of time as determined by
the Board, in its sole discretion) after the date on which the Optionee's
Service terminated, but in any event no later than the Option Expiration Date.
7.2. EXTENSION IF EXERCISE PREVENTED BY LAW.
Notwithstanding the foregoing, if the exercise of the Option within the
applicable time periods set forth in Section 7.1 is prevented by the provisions
of Section 4.6, the Option shall remain exercisable until three (3) months
after the date the Optionee is notified that the Option is exercisable, but in
any event no later than the Option Expiration Date.
7.3. EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 7.1 of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the
Option shall remain exercisable until the earliest to occur of (i) the tenth
(10th) day following the date on which a sale of such shares by the Optionee
would no longer be subject to such suit, (ii) the one hundred and ninetieth
(190th) day after the Optionee's termination of Service, or (iii) the Option
Expiration Date.
7.4. LEAVE OF ABSENCE. For purposes of Section 7.1, the
Optionee's Service shall not be deemed to terminate if the Optionee takes any
military leave, sick leave, or other bona fide leave of absence approved by the
Company of ninety (90) days or less. In the event of a leave of absence in
excess of ninety (90) days, the Optionee's Service shall be deemed to terminate
on the ninety-first (91st) day of such leave unless the Optionee's right to
return to Service remains guaranteed by statute or contract. Notwithstanding
the foregoing, unless otherwise designated by the Company (or required by law),
a leave of absence shall not be treated as Service for purposes of determining
the Optionee's Accelerated Vested Ratio or Nonaccelerated Vested Ratio.
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<PAGE> 36
8. TRANSFER OF CONTROL.
8.1. DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed
to have occurred if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or
exchange in a single or series of related transactions by the stockholders of
the Company of more than fifty percent (50%) of the voting stock of the
Company;
(ii) a merger or consolidation in which
the Company is a party;
(iii) the sale, exchange, or transfer of
all or substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the
Company.
(b) A "TRANSFER OF CONTROL" shall mean an
Ownership Change Event or a series of related Ownership Change Events
(collectively, the "TRANSACTION") wherein the stockholders of the Company
immediately before the Transaction do not retain immediately after the
Transaction, in substantially the same proportions as their ownership of shares
of the Company's voting stock immediately before the Transaction, direct or
indirect beneficial ownership of more than fifty percent (50%) of the total
combined voting power of the outstanding voting stock of the Company or the
corporation or corporations to which the assets of the Company were transferred
(the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the
preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting stock of one or
more corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through one
or more subsidiary corporations. The Board shall have the right to determine
whether multiple sales or exchanges of the voting stock of the Company or
multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
8.2. EFFECT OF TRANSFER OF CONTROL ON OPTION. In the
event of a Transfer of Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may either assume the Company's rights and
obligations under the Option or substitute for the Option a substantially
equivalent option for the Acquiring Corporation's stock. For purposes of this
Section 8.2, the Option shall be deemed assumed if, following the Transfer of
Control, the Option confers the right to purchase, for each share of Stock
subject to the Option immediately prior to the Transfer of Control, the
consideration (whether stock, cash or other securities or property) to which a
holder of a share of Stock on the effective date of the Transfer of Control was
entitled. The Option shall
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<PAGE> 37
terminate and cease to be outstanding effective as of the date of the Transfer
of Control to the extent that the Option is neither assumed or substituted for
by the Acquiring Corporation in connection with the Transfer of Control nor
exercised as of the date of the Transfer of Control. Notwithstanding the
foregoing, shares acquired upon exercise of the Option prior to the Transfer of
Control and any consideration received pursuant to the Transfer of Control with
respect to such shares shall continue to be subject to all applicable
provisions of this Option Agreement except as otherwise provided herein.
Furthermore, notwithstanding the foregoing, if the corporation the stock of
which is subject to the Option immediately prior to an Ownership Change Event
described in Section 8.1(a)(i) constituting a Transfer of Control is the
surviving or continuing corporation and immediately after such Ownership Change
Event less than fifty percent (50%) of the total combined voting power of its
voting stock is held by another corporation or by other corporations that are
members of an affiliated group within the meaning of Section 1504(a) of the
Code without regard to the provisions of Section 1504(b) of the Code, the
Option shall not terminate unless the Board otherwise provides in its sole
discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification, or similar change in the capital structure of
the Company, appropriate adjustments shall be made in the number, Exercise
Price and class of shares of stock subject to the Option. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 9 shall be rounded up or down to the nearest whole number, as
determined by the Board, and in no event may the Exercise Price be decreased to
an amount less than the par value, if any, of the stock subject to the Option.
The adjustments determined by the Board pursuant to this Section 9 shall be
final, binding and conclusive.
10. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT. The Optionee
shall have no rights as a stockholder with respect to any shares covered by the
Option until the date of the issuance of a certificate for the shares for which
the Option has been exercised (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company).
No adjustment shall be made for dividends, distributions or other rights for
which the record date is prior to the date such certificate is issued, except
as provided in Section 9. Nothing in this Option Agreement shall confer upon
the Optionee any right to continue in the Service of the Company or interfere
in any way with any right of the Company to terminate the Optionee's Service.
11. VESTED SHARE REPURCHASE OPTION.
11.1. GRANT OF VESTED SHARE REPURCHASE OPTION. If the
Conversion Date occurs as a result of the lapse of nine (9) years from the Date
of Option Grant, upon the occurrence of a Repurchase Event, as defined below,
the Company shall have the right to repurchase the shares of Stock acquired by
the Optionee pursuant to the Option (the "REPURCHASE SHARES") under the terms
and subject to the conditions set
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<PAGE> 38
forth in this Section 11 (the "VESTED SHARE REPURCHASE OPTION"). Each of the
following events shall constitute a "REPURCHASE EVENT":
(a) Termination of the Optionee's Service for any
reason or no reason, with or without cause, including death or Disability. The
Repurchase Period, as defined below, shall commence on the date of termination
of the Optionee's Service.
(b) The Optionee, the Optionee's legal
representative, or other holder of shares acquired upon exercise of the Option
attempts to sell, exchange, transfer, pledge, or otherwise dispose of any
Repurchase Shares. The Repurchase Period, as defined below, shall commence on
the date the Company receives actual notice of such attempted sale, exchange,
transfer, pledge or other disposition.
(c) The receivership, bankruptcy or other
creditor's proceeding regarding the Optionee or the taking of any of the
Optionee's shares of Stock by legal process, such as a levy of execution. The
Repurchase Period, as defined below, shall commence on the date the Company
receives actual notice of the commencement of pendency of the receivership,
bankruptcy or other creditor's proceeding or the date of such taking, as the
case may be. The Fair Market Value of the Repurchase Shares shall be
determined as of the last day of the month preceding the month in which the
proceeding involved commenced or the taking occurred.
11.2. EXERCISE OF VESTED SHARE REPURCHASE OPTION. The
Company may exercise the Vested Share Repurchase Option by written notice
delivered personally or forwarded by first class mail to the Optionee, the
Optionee's legal representative, or other holder of the Repurchase Shares, as
the case may be, during the Repurchase Period. The "REPURCHASE PERIOD" shall
be the period commencing at the time set forth in Section 11.1 above and ending
on the later of (a) the date ninety (90) days after the commencement of the
Repurchase Period or (b) the date ninety (90) days after the Option is last
exercised. If the Company fails to give notice during the Repurchase Period,
the Vested Share Repurchase Option shall terminate (unless the Company and the
Optionee have extended the time for the exercise of the Vested Share Repurchase
Option) unless and until there is a subsequent Repurchase Event.
Notwithstanding a termination of the Vested Share Repurchase Option, the
remaining provisions of this Option Agreement shall remain in full force and
effect. If there is a subsequent Repurchase Event, the Vested Share Repurchase
Option shall again become exercisable as provided in this Section 11. The
Vested Share Repurchase Option must be exercised, if at all, for all of the
Repurchase Shares, except as the Company and the Optionee otherwise agree.
11.3. PAYMENT FOR REPURCHASE SHARES. The repurchase price
per share being repurchased by the Company pursuant to the Vested Share
Repurchase Option shall be an amount equal to the greater of (a) the Optionee's
original cost per share, as adjusted pursuant to Section 9, or (b) the Fair
Market Value of the shares determined as of the date of the Repurchase Event
(except as otherwise provided in
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<PAGE> 39
Section 11.1(c) above) by the Board in good faith. Payment by the Company to
the Optionee shall be made in cash on or before the last day of the Repurchase
Period. For purposes of the foregoing, cancellation of any indebtedness of the
Optionee to the Company shall be treated as payment to the Optionee in cash to
the extent of the unpaid principal and any accrued interest canceled.
11.4. ASSIGNMENT OF VESTED SHARE REPURCHASE OPTION. The
Company shall have the right to assign the Vested Share Repurchase Option at
any time, whether or not such option is then exercisable, to one or more
persons as may be selected by the Company.
11.5. TERMINATION OF VESTED SHARE REPURCHASE OPTION. The
other provisions of this Option Agreement notwithstanding, the Vested Share
Repurchase Option shall terminate and be of no further force and effect upon
the existence of a "public market", as defined in Exchange Act, for the class
of shares subject to the Vested Share Repurchase Option.
12. ESCROW.
12.1. ESTABLISHMENT OF ESCROW. To ensure that shares
subject to the Vested Share Repurchase Option will be available for repurchase,
the Company may require the Optionee to deposit the certificate evidencing the
shares which the Optionee purchases upon exercise of the Option with an escrow
agent designated by the Company under the terms and conditions of an escrow
agreement approved by the Company. If the Company does not require such
deposit as a condition of exercise of the Option, the Company reserves the
right at any time to require the Optionee to so deposit the certificate in
escrow. Upon a change, as described in Section 9, in the character or amount
of any of the outstanding stock of the corporation the stock of which is
subject to the provisions of this Option Agreement, any and all new,
substituted or additional securities or other property to which the Optionee is
entitled by reason of the Optionee's ownership of shares of Stock acquired upon
exercise of the Option that remain, following such change described in Section
9, subject to the Vested Share Repurchase Option shall be immediately subject
to the escrow to the same extent as such shares of Stock immediately before
such event. The Company shall bear the expenses of the escrow.
12.2. DELIVERY OF SHARES TO OPTIONEE. As soon as
practicable after the expiration of the Vested Share Repurchase Option, but not
more frequently than once each calendar year, the escrow agent shall deliver to
the Optionee the shares and any other property no longer subject to such
restriction.
12.3. NOTICES AND PAYMENTS. In the event the shares and
any other property held in escrow are subject to the Company's exercise of the
Vested Share Repurchase Option, the notices required to be given to the
Optionee shall be given to the escrow agent, and any payment required to be
given to the Optionee shall be given to the escrow agent. Within thirty (30)
days after payment by the Company,
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<PAGE> 40
the escrow agent shall deliver the shares and any other property which the
Company has purchased to the Company and shall deliver the payment received
from the Company to the Optionee.
13. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from
time to time, there is any stock dividend, stock split or other change, as
described in Section 9, in the character or amount of any of the outstanding
stock of the corporation the stock of which is subject to the provisions of
this Option Agreement, then in such event any and all new, substituted or
additional securities to which the Optionee is entitled by reason of the
Optionee's ownership of the shares acquired upon exercise of the Option shall
be immediately subject to the Vested Share Repurchase Option and with the same
force and effect as the shares subject to the Vested Share Repurchase Option
immediately before such event.
14. REPRESENTATIONS AND WARRANTIES. In connection with the
receipt of the Option and any acquisition of shares upon the exercise thereof,
the Optionee hereby agrees, represents and warrants as follows:
14.1. The Optionee is acquiring the Option and will acquire
any shares of Stock upon exercise of the Option for the Optionee's own account,
and not on behalf of any other person or as a nominee, for investment and not
with a view to, or sale in connection with, any distribution of the Option or
such shares.
14.2. The Optionee was not presented with or solicited by
any form of general solicitation or general advertising, including, but not
limited to, any advertisement, article, notice, or other communication
published in any newspaper, magazine, or similar media, or broadcast over
television, radio or similar communications media, or presented at any seminar
or meeting whose attendees have been invited by any general solicitation or
general advertising.
14.3. The Optionee has either (a) a preexisting personal or
business relationship with the Company or any of its officers, directors, or
controlling persons, consisting of personal or business contacts of a nature
and duration to enable the Optionee to be aware of the character, business
acumen and general business and financial circumstances of the person with whom
such relationship exists, or (b) such knowledge and experience in financial and
business matters (or has relied on the financial and business knowledge and
experience of the Optionee's professional advisor who is unaffiliated with and
who is not, directly or indirectly, compensated by the Company or any affiliate
or selling agent of the Company) as to make the Optionee capable of evaluating
the merits and risks of the Option and any investment in shares acquired
pursuant to the Option and to protect the Optionee's own interests in the
transaction, or (c) both such relationship and such knowledge and experience.
14.4. The Optionee understands that the Option and any
shares acquired upon exercise of the Option have not been qualified under the
Corporate
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<PAGE> 41
Securities Law of 1968, as amended, of the State of California by reason of a
specific exemption therefrom, which exemption depends upon, among other things,
the bona fide nature of the Optionee's representations as expressed herein.
The Optionee understands that the Company is relying on the Optionee's
representations and warrants that the Company is entitled to rely on such
representations and that such reliance is reasonable.
15. LEGENDS. The Company may at any time place legends
referencing the Vested Share Repurchase Option and any applicable federal,
state or foreign securities law restrictions on all certificates representing
shares of stock subject to the provisions of this Option Agreement. The
Optionee shall, at the request of the Company, promptly present to the Company
any and all certificates representing shares acquired pursuant to the Option in
the possession of the Optionee in order to carry out the provisions of this
Section.
16. RESTRICTIONS ON TRANSFER OF SHARES. No shares acquired upon
exercise of the Option may be sold, exchanged, transferred (including, without
limitation, any transfer to a nominee or agent of the Optionee), assigned,
pledged, hypothecated or otherwise disposed of, including by operation of law,
in any manner which violates any of the provisions of this Option Agreement
and, and any such attempted disposition shall be void. The Company shall not
be required (a) to transfer on its books any shares which will have been
transferred in violation of any of the provisions set forth in this Option
Agreement or (b) to treat as owner of such shares or to accord the right to
vote as such owner or to pay dividends to any transferee to whom such shares
will have been so transferred.
17. BINDING EFFECT. Subject to the restrictions on transfer set
forth herein, this Option Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
18. TERMINATION OR AMENDMENT. The Board may terminate or amend
the Plan or the Option at any time; provided, however, that except as provided
in Section 8.2 in connection with a Transfer of Control, no such termination or
amendment may adversely affect the Option or any unexercised portion hereof
without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law or government regulation. No
amendment or addition to this Option Agreement shall be effective unless in
writing.
19. INTEGRATED AGREEMENT. This Option Agreement constitutes the
entire understanding and agreement of the Optionee and the Participating
Company Group with respect to the subject matter contained herein, and there
are no agreements, understandings, restrictions, representations, or warranties
among the Optionee and the Participating Company Group with respect to such
subject matter other than those as set forth or provided for herein. To the
extent contemplated herein, the provisions of this Option Agreement shall
survive any exercise of the Option and shall remain in full force and effect.
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<PAGE> 42
20. APPLICABLE LAW. This Option Agreement shall be governed by
the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
the State of California.
JAYCOR NETWORKS, INC.
By:
------------------------------
Title:
---------------------------
The Optionee represents that the Optionee is familiar with the terms
and provisions of this Option Agreement, including the Vested Share Repurchase
Option set forth in Section 11, and hereby accepts the Option subject to all of
the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board
upon any questions arising under this Option Agreement. The undersigned
acknowledges receipt of a copy of the Plan.
OPTIONEE
Date:
------------------------------ --------------------------------
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<PAGE> 1
EXHIBIT 10.18
DRAFT
6/5/97
WARRANT AGREEMENT
By and Between
JAYMARK, INC.
and
BREAN MURRAY & CO., INC.
Dated as of __________ __, 1997
<PAGE> 2
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of ________ __, 1997 by and between JAYMARK,
INC., a Delaware corporation (the "Company"), and BREAN MURRAY & CO., INC. (the
"Representative") (the Company and the Representative are referred to
collectively herein as the "Parties").
The Company proposes to issue to the Representative warrants as
hereinafter described (the "Warrants") to purchase up to an aggregate of 130,000
shares of the Company's Class A Common Stock, $0.001 par value per share (the
"Class A Common Stock"), subject to adjustment as provided in Section 8 hereof
(such 130,000 shares, as adjusted, being hereinafter referred to as the
"Shares"), each Warrant entitling the holder ("Holder") thereof to purchase one
share of Class A Common Stock. All capitalized terms used herein and not
otherwise defined herein shall have the same meanings as in that certain
underwriting agreement, of even date herewith, by and between the Company and
the several underwriters named therein (the "Underwriting Agreement").
NOW, THEREFORE, in consideration of the following promises and mutual
agreements and for other good and valuable consideration, the Parties agree as
follows:
1. Issuance of Warrants; Form of Warrant. On the Closing Date the
Company will issue, sell and deliver the Warrants to the Representative or its
bona fide officers for an aggregate price of $100. The Warrants shall be issued
to the Representative or such designees in the amounts set forth on Schedule I
attached hereto. The form of the Warrant and of the form of election to purchase
Shares to be attached thereto shall be substantially as set forth on Exhibit A
attached hereto. The Warrants shall be executed on behalf of the Company by the
manual or facsimile signature of the present or any future President or any Vice
President of the Company, under its corporate seal, affixed or in facsimile, and
attested by the manual or facsimile signature of the present or any future
Secretary or Assistant Secretary of the Company.
2. Registration. The Warrants shall be numbered and shall be registered
in a Warrant register (the "Warrant Register"). The Company shall be entitled to
treat the registered holder of any Warrant on the Warrant Register as the owner
in fact thereof for all purposes and shall not be bound to recognize any
equitable or other claim to or interest in such Warrant on the part of any other
person, and shall not be liable for any registration or transfer of Warrants
which are registered or are to be registered in the name of a fiduciary or the
nominee
1
<PAGE> 3
of a fiduciary unless made with the actual knowledge that a fiduciary or
nominee is committing a breach of trust in requesting such registration or
transfer, or with such knowledge of such facts that its participation therein
amounts to bad faith. The Warrants shall be registered initially in the name
of the Representative in such denominations as the Representative may request
in writing from the Company; provided, however, that the Representative may
designate that all or a portion of the Warrants be issued in varying amounts
directly to its bona fide officers and not to the Representative. Such
designation will only be made by the Representative if it determines that such
issuances would not violate the interpretation of the Board of Governors of the
National Association of Securities Dealers, Inc. (the "NASD"), relating to the
review of corporate financing arrangements.
3. Transfer of Warrants. The Warrants will not be sold, transferred,
assigned or hypothecated, in part or in whole, prior to the first anniversary of
the effective date of the Registration Statement, and thereafter only to bona
fide officers, directors, shareholders, employees or registered representatives
of the Representative upon written request to the Company delivered in
accordance with Section 12 and upon delivery of the Warrant Certificate duly
endorsed by the Holder or by its duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer. In all cases of transfer by an attorney, the original power of
attorney, duly approved, or an official copy thereof, duly certified, shall be
deposited with the Company. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority shall be produced, and may be required to be deposited with the
Company in its discretion. Upon any registration of transfer, the Company shall
deliver a new Warrant or Warrants to the persons entitled thereto. Any of the
Warrants may be exchanged at the option of its Holder for other Warrants of
different denominations, of like tenor and representing in the aggregate the
right to purchase a like number of shares of Class A Common Stock upon surrender
to the Company or its duly authorized agent. The Company may require payment of
a sum sufficient to cover all taxes and other governmental charges that may be
imposed in connection with any voluntary transfer, exchange or other disposition
of the Warrants. However, the Company shall have no obligation to cause Warrants
to be transferred on its books to any person, if such transfer would violate the
Securities Act of 1933, as amended (the "Act"), or applicable state securities
laws.
4. Term of Warrants; Exercise of Warrants.
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<PAGE> 4
(a) Term of Warrants. Each Warrant entitles the registered
owner thereof to purchase one Share at a purchase price of $____ per
Share (as adjusted from time to time pursuant to the provisions hereof,
the "Exercise Price") at any time from the first anniversary of the
effective date of the Registration Statement until 5:00 p.m., New York
City time, on ________ __, 2002 (the "Warrant Expiration Date").
(b) Exercise of Warrants. The Exercise Price and the Shares
issuable upon exercise of Warrants are subject to adjustment upon the
occurrence of certain events, pursuant to the provisions of Section 8
of this Agreement. Subject to the provisions of this Agreement, and in
addition to the right to surrender warrants without any cash payment as
set forth in subsection (c) below, each Holder shall have the right,
which may be exercised as set forth in such Warrants, to purchase from
the Company (and the Company shall issue and sell to such Holder) the
number of fully paid and nonassessable Shares specified in such
Warrants, upon surrender to the Company, or its duly authorized agent,
of such Warrants, with the form of election to purchase attached
thereto duly completed and signed, with signatures guaranteed by an
eligible guarantor institution participating in an approved signature
guarantee medallion program and upon payment to the Company of the
Exercise Price, as adjusted in accordance with the provisions of
Section 8 of this Agreement, for the number of Shares in respect of
which such Warrants are then exercised. No adjustment shall be made for
any dividends on any Shares issuable upon exercise of a Warrant. Upon
each surrender of Warrants and payment of the Exercise Price, the
Company shall issue and cause to be delivered with all reasonable
dispatch, but in no event later than three trading days following such
surrender, to or upon the written order of the Holder of such Warrants
and in such name or names as such Holder may designate, a certificate
or certificates for the number of full Shares so purchased upon the
exercise of such Warrants, together with cash, as provided in Section 9
of this Agreement, in respect of any fractional Shares otherwise
issuable upon such surrender. Such certificate or certificates shall be
deemed to have been issued and any person so designated to be named
therein shall be deemed to have become a holder of record of such
Shares as of the date of the surrender of Warrants and payment of the
Exercise Price as aforesaid; provided, however, that if, at the date of
surrender of such Warrants, the transfer books for the Common Stock or
other class of securities issuable upon the exercise of such Warrants
shall be closed, the certificates for the Shares shall be issuable as
of the date on which such books shall next be opened (whether before,
on or after the Warrant Expiration Date) and until such date the
Company
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<PAGE> 5
shall be under no duty to deliver any certificate for such Shares;
provided, further, however, that the transfer books of record, unless
otherwise required by law, shall not be closed at any one time for a
period longer than twenty (20) days. The rights of purchase represented
by the Warrants shall be exercisable, at the election of the Holder(s)
thereof, either in full or from time to time in part and, in the event
that any Warrant is exercised in respect of less than all of the Shares
issuable upon such exercise at any time prior to the Warrant Expiration
Date, a new Warrant or Warrants will be issued for the remaining number
of Shares specified in the Warrant so surrendered.
(c) Payment of Exercise Price. Payment of the Exercise Price
may be made in cash or by certified check or official bank check
payable to the order of the Company. In addition and in lieu of any
cash payment, the Holder of the Warrants shall have the right at any
time and from time to time to exercise the Warrants in full or in part
by surrendering the Warrant in exchange for the number of Shares equal
to the product of (x) the number of shares as to which the Warrants are
being exercised multiplied by (y) a fraction, the numerator of which is
the Market Price (as defined below) of the Shares less the Exercise
Price and the denominator of which is such Market Price. Solely for the
purposes of this paragraph, "Market Price" shall be the average last
reported sale price of the Common Stock as calculated over the five (5)
trading day period preceding the date on which the Election to Purchase
is surrendered to the Company.
5. Payment of Taxes. The Company will pay all documentary stamp taxes,
if any, attributable to the issuance of Shares upon the exercise of Warrants;
provided, however, that the Company shall not be required to pay any taxes
payable in respect of any transfer involved in the issue or delivery of any
certificates for Shares in a name other than that of the Holder of Warrants in
respect of which such Shares are issued.
6. Mutilated or Missing Warrants. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest, but only
upon receipt of evidence reasonably satisfactory to the Company of such
mutilation, loss, theft or destruction of such Warrant and indemnity, if
requested, reasonably satisfactory to the Company. An applicant for such
substitute Warrants shall also comply with such other reasonable
4
<PAGE> 6
regulations and pay such other reasonable charges and expenses as the Company
may prescribe.
7. Reservation of Shares, etc. The Company has reserved, and shall at
all times keep reserved, out of the authorized and unissued Class A Common
Stock, a number of shares of Class A Common Stock sufficient to provide for the
exercise of the rights of purchase represented by the outstanding Warrants. U.S.
Stock Transfer Corporation, transfer agent for the Class A Common Stock (the
"Transfer Agent"), and any subsequent transfer agent for the Company's
securities issuable upon the exercise of the Warrants will be irrevocably
authorized and directed at all times until the Warrant Expiration Date to
reserve such number of authorized and unissued shares as shall be required for
such purpose. The Company will keep a copy of this Agreement on file with the
Transfer Agent and with every subsequent transfer agent for any shares of the
Company's securities issuable upon the exercise of the Warrants. The Company
will supply the Transfer Agent or any subsequent transfer agent with duly
executed certificates for such purpose and will itself provide or make available
any cash distributable as provided in Section 9 of this Agreement. All Warrants
surrendered in the exercise of the rights thereby evidenced shall be cancelled,
and such cancelled Warrants shall constitute sufficient evidence of the number
of Shares that have been issued upon the exercise of such Warrants. No shares of
Class A Common Stock shall be subject to reservation in respect of unexercised
Warrants after the Warrant Expiration Date.
8. Adjustments of Exercise Price and Number of Shares. The Exercise
Price and the number and kind of securities issuable upon exercise of each
Warrant shall be subject to adjustment from time to time upon the happening of
certain events, as follows:
(a) If the Company (i) declares a dividend on its Class A
Common Stock in shares of Class A Common Stock or makes a distribution
in shares of Class A Common Stock, (ii) subdivides its outstanding
shares of Class A Common Stock, (iii) combines its outstanding shares
of Class A Common Stock into a smaller number of shares of Class A
Common Stock or (iv) issues by reclassification of its shares of Class
A Common Stock other securities of the Company (including any such
reclassification in connection with a consolidation or merger in which
the Company is the surviving entity), the number of Shares purchasable
upon exercise of each Warrant immediately prior thereto shall be
adjusted so that the Holder of each Warrant shall be entitled to
receive the kind and number of Shares or other securities of the
Company which he would have owned or have been entitled to receive
after the happening of any of the events described above, had such
Warrant been exercised
5
<PAGE> 7
immediately prior to the happening of such event or any record date
with respect thereto. An adjustment made pursuant to this paragraph (a)
shall become effective immediately after the effective date of such
event retroactive to immediately after the record date, if any, for
such event.
(b) If the Company issues rights, options or warrants to all
holders of its shares of Class A Common Stock, without any charge to
such holders, entitling them (for a period expiring within 45 days
after the record date mentioned below in this paragraph (b)) to
subscribe for or to purchase shares of Class A Common Stock at a price
per share lower than the then current market price per share of Class A
Common Stock at the record date mentioned below (as defined in
paragraph (d) below), the number of Shares thereafter purchasable upon
exercise of each Warrant shall be determined by multiplying the number
of Shares theretofore purchasable upon exercise of each Warrant by a
fraction, of which the numerator shall be the number of shares of Class
A Common Stock outstanding on such record date plus the number of
additional shares of Class A Common Stock offered for subscription or
purchase, and of which the denominator shall be the number of shares of
Class A Common Stock outstanding on such record date plus the number of
shares which the aggregate offering price of the total number of shares
of Class A Common Stock so offered would purchase at the then current
market price per share of Class A Common Stock. Such adjustment shall
be made whenever such rights, options or warrants are issued, and shall
become effective retroactively to immediately after the record date for
the determination of shareholders entitled to receive such rights,
options or warrants.
(c) If the Company distributes to all holders of its shares of
Class A Common Stock shares of stock other than Class A Common Stock or
evidences of its indebtedness or assets (excluding cash dividends
payable out of consolidated earnings or retained earnings and dividends
or distributions referred to in paragraph (a) above) or rights, options
or warrants or convertible or exchangeable securities containing the
right to subscribe for or purchase shares of Class A Common Stock
(excluding those referred to in paragraph (b) above), then in each case
the number of Shares thereafter issuable upon the exercise of each
Warrant shall be determined by multiplying the number of Shares
theretofore issuable upon the exercise of each Warrant, by a fraction,
of which the numerator shall be the current market price per share of
Class A Common Stock (as defined in paragraph (d) below) on the record
date mentioned below in this paragraph (c), and of which the
denominator shall be
6
<PAGE> 8
the current market price per share of Class A Common Stock on such
record date, less the then fair value (as determined in good faith by
the Board of Directors of the Company, whose determination shall be
conclusive) of the portion of the shares of stock other than Class A
Common Stock or assets or evidences of indebtedness so distributed or
of such subscription rights, options or warrants, or of such
convertible or exchangeable securities applicable to one share of Class
A Common Stock. Such adjustment shall be made whenever any such
distribution is made, and shall become effective on the date of
distribution retroactive to immediately after the record date for the
determination of shareholders entitled to receive such distribution.
(d) For the purpose of any computation under paragraphs (b)
and (c) of this Section 8, the current market price per share of Class
A Common Stock at any date shall be the average of the daily closing
prices for fifteen (15) consecutive trading days commencing twenty (20)
trading days before the date of such computation. The closing price for
each day shall be the last reported sale price regular way or, in case
no such reported sale takes place on such day, the average of the
closing bid and asked prices regular way for such day, in either case
on the principal national securities exchange on which the shares are
listed or admitted to trading, or if they are not listed or admitted to
trading on any national securities exchange, but are traded in the
over- the-counter market, the closing sale price of the Class A Common
Stock or, in case no sale is publicly reported, the average of the
representative closing bid and asked quotations for the Class A Common
Stock, on the NASDAQ system or any comparable system, or if the Class A
Common Stock is not listed on the NASDAQ system or a comparable system,
the closing sale price of the Class A Common Stock or, in case no sale
is publicly reported, the average of the closing bid and asked prices
as furnished by two members of the NASD selected from time to time by
the Company for that purpose.
(e) No adjustment in the number of Shares purchasable
hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the number of
Shares purchasable upon the exercise of each Warrant; provided,
however, that any adjustments which by reason of this paragraph (e) are
not required to be made shall be carried forward and taken into account
in any subsequent adjustment but not later than three years after the
happening of the specified event or events. All calculations shall be
made to the nearest one thousandth of a share.
7
<PAGE> 9
(f) Whenever the number of Shares purchasable upon exercise of
each Warrant is adjusted, as herein provided, the Exercise Price shall
be adjusted by multiplying the Exercise Price in effect immediately
prior to such adjustment by a fraction, of which the numerator shall be
the number of Shares purchasable upon the exercise of each Warrant
immediately prior to such adjustment, and of which the denominator
shall be the number of Shares so purchasable immediately thereafter.
(g) For the purpose of this Section 8, the term "shares of
Class A Common Stock" shall mean (i) the class of stock designated as
the Class A Common Stock of the Company at the date of this Agreement
or (ii) any other class of stock resulting from successive changes or
reclassifications of such shares consisting solely of changes in par
value, or from no par value to par value, or from par value to no par
value. If at any time, as a result of an adjustment made pursuant to
paragraph (a) above, the Holders become entitled to purchase any shares
of capital stock of the Company other than shares of Class A Common
Stock, thereafter the number of such other shares so purchasable upon
exercise of each Warrant and the Exercise Price of such shares shall be
subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the
Shares contained in paragraphs (a) through (f), inclusive, and
paragraphs (h) through (m), inclusive, of this Section 8, and the
provisions of Sections 4, 5, 7 and 10, with respect to the Shares,
shall apply on like terms to any such other shares.
(h) Upon the expiration of any rights, options, warrants or
conversion rights or exchange privileges, if any thereof have not been
exercised, the Exercise Price and the number of shares of Class A
Common Stock purchasable upon the exercise of each Warrant shall, upon
such expiration, be readjusted and shall thereafter be such as it would
have been had it originally been adjusted (or had the original
adjustment not been required, as the case may be) as if (i) the only
shares of Class A Common Stock so issued were the shares of Class A
Common Stock, if any, actually issued or sold upon the exercise of such
rights, options, warrants or conversion rights or exchange privileges
and (ii) such shares of Class A Common Stock, if any, were issued or
sold for the consideration actually received by the Company upon such
exercise plus the aggregate consideration, if any, actually received by
the Company for the issuance, sale or grant of all of such rights,
options, warrants or conversion rights or exchange privileges whether
or not exercised; provided, however, that no such readjustment shall
have the effect of decreasing the number of shares issuable upon the
8
<PAGE> 10
exercise of each Warrant or increasing the Exercise Price by an amount
in excess of the amount of the adjustment initially made in respect of
the issuance, sale or grant of such rights, options, warrants or
conversion rights or exchange privileges.
(i) The Company may, at its option at any time during the term
of the Warrants, reduce the then current Exercise Price for all
Warrants to any amount deemed appropriate by the Board of Directors of
the Company. Such reduction may be for all or any portion of the
remaining term of the Warrants; provided, that the expiration of the
reduction may not be less than 30 days following the mailing of the
notice required by paragraph (j) below.
(j) Whenever the number of Shares issuable upon the exercise
of each Warrant or the Exercise Price of such Shares is adjusted, as
herein provided, the Company shall promptly mail by first class mail,
postage prepaid, to each Holder notice certified by its Chief Financial
Officer of such adjustment or adjustments. Such notice shall set forth
the number of Shares issuable upon the exercise of each Warrant and the
Exercise Price of such Shares after such adjustment, setting forth a
brief statement of the facts requiring such adjustment and setting
forth the computation by which such adjustment was made. Such
certificate shall be conclusive as to the correctness of such
adjustment and each Holder shall have the right to inspect such
certificate during reasonable business hours.
(k) Except as provided in this Section 8, no adjustment in
respect of any dividends shall be made during the term of a Warrant or
upon the exercise of a Warrant.
(l) If the Company consolidates with or merges into another
corporation or if the Company sells or conveys all or substantially all
its property to another corporation, the Company or such successor or
purchasing corporation (or an affiliate of such successor or purchasing
corporation), as the case may be, agrees that each Holder shall have
the right thereafter upon payment of the Exercise Price in effect
immediately prior to such action to purchase upon exercise of each
Warrant the kind and amount of shares and other securities and property
(including cash) which such Holder would have owned or been entitled to
receive after the happening of the consolidation, merger, sale or
conveyance had such Warrant been exercised immediately prior to such
action. The provisions of this paragraph (l) shall apply to successive
consolidations, mergers, sales or conveyances.
9
<PAGE> 11
(m) Notwithstanding any adjustment in the Exercise Price or
the number or kind of shares purchasable upon the exercise of the
Warrants pursuant to this Agreement, certificates for Warrants issued
prior or subsequent to such adjustment may continue to express the same
price and number and kind of Shares as are initially issuable pursuant
to this Agreement.
9. Fractional Interests. The Company shall not be required to issue
fractions of Shares on the exercise of Warrants. If more than one Warrant is
presented for exercise in full at the same time by the same Holder, the number
of Shares issuable upon the exercise thereof shall be computed on the basis of
the aggregate number of Shares issuable on exercise of the Warrants so
presented. If any fraction of a Share would, except for the provisions of this
Section 9, be issuable on the exercise of any Warrant (or specified portions
thereof), the Company shall purchase such fraction for an amount in cash equal
to the same fraction of the current market price per share of Class A Common
Stock (determined as provided in Section 8(d) of this Agreement) on the date of
exercise.
10. Registration Rights.
(a) Demand Registration Rights. The Company covenants and agrees with
the Representative and any other or subsequent Holders of the Registrable
Securities (as defined in paragraph (f) of this Section 10) that, subject to the
availability of audited financial statements complying with Regulation S-X under
the Act, upon written request of the then Holder(s) of at least a majority of
the Warrants or the Registrable Securities, or both, which were originally
issued to the Representative or its designees, made at any time within the
period commencing one year and ending five years after the Effective Date, the
Company will file as promptly as practicable and, in any event, within 60 days
after receipt of such written request, at its expense (other than the fees of
counsel and sales commissions for such Holders), no more than once, a new
registration statement under the Act, registering or qualifying the Registrable
Securities for sale. Within fifteen (15) days after receiving any such notice,
the Company shall give notice to the other Holders of the Registrable Securities
advising that the Company is proceeding with such registration statement and
offering to include the Registrable Securities of such Holders. The Company
shall not be obligated to any other such Holder unless that other Holder accepts
such offer by notice in writing to the Company within ten (10) days thereafter.
The Company will use its best efforts, through its officers, directors, auditors
and counsel in all matters necessary or advisable, to file and cause such
registration statement to become effective as promptly as practicable (but in no
event within 90 days of the initial
10
<PAGE> 12
filing of such registration statement) and for a period of 24 months thereafter
to reflect in the registration statement financial statements which are
prepared in accordance with Section 10(a)(3) of the Act and any facts or events
arising that, individually, or in the aggregate, represent a fundamental or
material change in the information set forth in the registration statement to
enable any Holders of the Warrants to exercise such Warrants and sell Shares,
or to enable any holders of Shares to sell such Shares, during that nine-month
period. If any registration pursuant to this paragraph (a) is an underwritten
offering, the Holders of a majority of the Registrable Securities to be
included in such registration shall be entitled to select the underwriter or
managing underwriter (in the case of a syndicated offering) of such offering,
subject to the Company's approval which shall not be unreasonably withheld.
(b) Piggyback Registration Rights. The Company covenants and agrees
with the Representative and any other Holders or subsequent Holders of the
Registrable Securities that if, at any time within the period commencing one
year and ending five years after the Effective Date, it proposes to file a
registration statement with respect to any class of equity or equity-related
security (other than in connection with an offering to the Company's employees
or in connection with an acquisition, merger or similar transaction) under the
Act in a primary registration on behalf of the Company and/or in a secondary
registration on behalf of holders of such securities and the registration form
to be used may be used for registration of the Registrable Securities, the
Company will give prompt written notice (which, in the case of a registration
statement or notification pursuant to the exercise of demand registration rights
other than those provided in Section 10(a) of this Agreement, shall be within
ten (10) business days after the Company's receipt of notice of such exercise
and, in any event, at least 30 days prior to such filing) to the Holders of
Registrable Securities (regardless of whether some of the Holders have
theretofore availed themselves of the right provided in Section 10(a) of this
Agreement) at the addresses appearing on the records of the Company of its
intention to file a registration statement and will offer to include in such
registration statement any of the Registrable Securities subject to paragraphs
(i) and (ii) of this paragraph (b), such number of Registrable Securities with
respect to which the Company has received written requests for inclusion therein
within ten (10) days after the giving of notice by the Company. All
registrations requested pursuant to this paragraph (b) are referred to herein as
"Piggyback Registrations". All Piggyback Registrations pursuant to this
paragraph (b) will be made solely at the Company's expense (other than as
provided in Section 10(d) hereof). This paragraph is not applicable to a
registration
11
<PAGE> 13
statement filed by the Company with the Commission on Forms S-4 or S-8 or any
successor forms.
(i) Priority on Primary Registrations. If a Piggyback
Registration includes an underwritten primary registration for the
Company, and the underwriter(s) for such offering determine in good
faith and advise the Company in writing that in their opinion the
number of Registrable Securities requested to be included in such
registration exceeds the number that can be sold in such offering
without materially adversely affecting the distribution of such
securities by the Company, the Company will include in such
registration (A) first, the securities that the Company proposes to
sell and (B) second, the Registrable Securities requested to be
included in such registration, apportioned pro rata among the Holders
of Registrable Securities, provided, however, the Company will use its
best efforts to include not less than 20% of the Registrable
Securities, and (C) third, securities of the holders of other
securities requesting registration.
(ii) Priority on Secondary Registrations. If a Piggyback
Registration consists only of an underwritten secondary registration
for holders of securities of the Company (other than pursuant to
Section 10(a)), and the underwriter(s) for such offering advise the
Company in writing that in their opinion the number of Registrable
Securities requested to be included in such registration exceeds the
number which can be sold in such offering without materially adversely
affecting the distribution of such securities by the Company, the
Company will include in such registration (A) first, the securities
requested to be included therein by the holders requesting such
registration and the Registrable Securities requested to be included in
such registration, pro rata among all such holders on the basis of the
number of shares requested to be included by each such holder,
provided, however, the Company will use its best efforts to include not
less than 20% of the Registrable Securities, and (B) second, other
securities requested to be included in such registration.
Notwithstanding the foregoing, if any such underwriter determines in
good faith and advises the Company in writing that the distribution of the
Registrable Securities requested to be included in the registration concurrently
with the securities being registered by the Company would materially adversely
affect the distribution of such securities by the Company, then the Holders of
such Registrable Securities shall delay their offering and sale for such period
ending on the earliest of (1) 90 days following the effective date of the
Company's registration statement, (2) the day upon which the underwriting
syndicate, if
12
<PAGE> 14
any, for such offering has been disbanded or, (3) such date as the Company,
managing underwriter and Holders of Registrable Securities otherwise agree. If
such a delay occurs, the Company shall file such supplements, post-effective
amendments and take any other steps necessary to permit such Holders to make
their proposed offering and sale for a period of 180 days immediately following
the end of such delay. If any party disapproves of the terms of any such
underwriting, it may elect to withdraw therefrom by written notice to the
Company, the underwriter, and the Underwriters. However, the Company shall not
be required to file a registration statement to include Shares pursuant to this
Section 10(b) if counsel, reasonably satisfactory to the Company, renders an
opinion to the Company that the Shares proposed to be disposed of may be
transferred pursuant to the provisions of Rule 144 under the Act or otherwise
without registration under the Act.
(c) Other Registration Rights. In addition to the rights above
provided, the Company will cooperate with the then Holders of the Registrable
Securities in preparing and signing any registration statement, in addition to
the registration statements discussed above, required in order to sell or
transfer the Registrable Securities and will supply all information required
therefor, but such additional registration statement, shall be at the then
Holders' cost and expense; provided, however, that if the Company elects to
register or qualify additional shares of Class A Common Stock, the cost and
expense of such registration statement will be pro rated between the Company and
the Holders of the Registrable Securities according to the aggregate sales price
of the securities being issued. However, the Company will not be required to
file a registration statement pursuant to this paragraph (c), (i) at a time when
the audited financial statements required to be included therein are not
available, which time shall be limited to the period commencing 45 days after
the end of the Company's last fiscal year and ending 90 days after the end of
such fiscal year, or (ii) within 90 days after completion of a public offering
by the Company of any of its Class A Common Stock or equity-related securities
or (iii) if it would adversely impact the Company in its capital raising plans
or otherwise (in which latter case filing may be delayed no longer than 120
days).
(d) Action to be Taken by the Company. In connection with the
registration of Registrable Securities in accordance with paragraphs (a), (b) or
(c) of this Section 10, the Company agrees to:
(i) Bear the expenses of any registration or qualification
under paragraphs (a) or (b) of this Section 10, including, but not
limited to, legal, accounting and printing fees; provided, however,
that in no event shall
13
<PAGE> 15
the Company be obligated to pay (A) any fees and disbursements of
special counsel for Holders of Registrable Securities, or (B) any
underwriters' discount or commission in respect of such Registrable
Securities, (C) any stock transfer taxes attributable to the sale of
the Registrable Securities, or (D) upon the exercise of any demand
registration right provided for in paragraph (a) of this Section 10,
the cost of any liability or similar insurance required by an
underwriter, to the extent that such costs are attributable solely to
the offering of such Registrable Securities, payment of which shall, in
each case, be the sole responsibility of the Holders of the Registrable
Securities; and
(ii) Use its best efforts to register or qualify the
Registrable Securities for offer or sale under state securities or Blue
Sky laws of such jurisdictions in which the Underwriters or such
Holders shall reasonably request, provided, however, that no
qualification shall be required in any jurisdiction where, as a result
thereof, the Company would be subject to service of general process or
to taxation as a foreign corporation doing business in such
jurisdiction to which it is not then subject, and to do all other acts
necessary or advisable to enable the holders to consummate the proposed
sale, transfer or other disposition of such securities in any
jurisdiction.
(e) Action to be Taken by the Holders. In connection with the
registration of Registrable Securities in accordance with paragraphs (a), (b) or
(c) of this Section 10, the Company's obligation shall be conditioned as to each
such public offering upon a timely receipt by the Company in writing of:
(i) Information as to the terms of such public offering
furnished by or on behalf of each Holder intending to make a public
offering of his or its Registrable Securities; and
(ii) Such other information as the Company may reasonably
require from such Holders, or any underwriter for any of them, for
inclusion in such Registration Statement.
(f) For purposes of this Section 10, (i) the term "Holder" shall
include holders of Shares, and (ii) the term "Registrable Securities" shall mean
the Shares, if issued.
14
<PAGE> 16
11. Notices to Holders.
(a) Nothing in this Agreement or in any Warrants shall be construed as
conferring upon the Holders the right to vote or to receive dividends or to
consent or to receive notice as shareholders in respect of the meetings of
shareholders or the election of directors of the Company or any other matter, or
any rights whatsoever as shareholders of the Company; provided, however, that in
the event that a meeting of shareholders shall be called to consider and take
action on a proposal for the voluntary dissolution of the Company, other than in
connection with a consolidation, merger or sale of all, or substantially all, of
its property, assets, business and good will as an entirety, the Company shall
cause a notice thereof to be sent by first-class mail, postage prepaid, at least
twenty (20) days prior to the date fixed as a record date or the date of closing
the transfer books in relation to such meeting, to each registered Holder of
Warrants at such Holder's address appearing on the Warrant Register; but failure
to mail or to receive such notice or any defect therein or in the mailing
thereof shall not affect the validity of any action taken in connection with
such voluntary dissolution.
(b) If the Company intends to make any distribution on its Class A
Common Stock (or other securities which may be issuable in lieu thereof upon the
exercise of Warrants), including, without limitation, any such distribution to
be made in connection with a consolidation or merger in which the Company is the
surviving entity, or to issue subscription rights or warrants to holders of its
Class A Common Stock, the Company shall cause a notice of its intention to make
such distribution to be sent by first-class mail, postage prepaid, at least
twenty (20) days prior to the date fixed as a record date or the date of closing
the transfer books in relation to such distribution, to each registered Holder
of Warrants at such Holder's address appearing on the Warrant Register, but
failure to mail or to receive such notice or any defect therein or in the
mailing thereof shall not affect the validity of any action taken in connection
with such distribution.
12. Notices. Any notice pursuant to this Agreement to be given by the
Holder of any Warrant or the holder of any Share to the Company shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed as follows or to such other address as the Company may designate by
notice given in accordance with this Section 12, to the Holders of Warrants or
the holders of Shares:
Jaymark, Inc.
9775 Towne Centre Drive
San Diego, California 92121
15
<PAGE> 17
Attention: President
Notices or demands authorized by this Agreement to be given or made by
the Company to or on the Holder of any Warrant or the holder of any Share shall
be sufficiently given or made (except as otherwise provided in this Agreement)
if sent by first-class mail, postage prepaid, addressed to such Holder or such
holder of Shares at the address of such Holder or such holder of Shares as shown
on the Warrant Register or the books of the Company, as the case may be.
13. Governing Law. This Agreement and each Warrant issued hereunder
shall be governed by and construed in accordance with the substantive laws of
the State of New York. The Company hereby agrees to accept service of process by
notice given to it pursuant to the provisions of Section 12.
14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute one and the same instrument.
16
<PAGE> 18
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed as of the day, month and year first above written.
JAYMARK, INC.
By:_____________________________
Its: ________________________
BREAN MURRAY & CO., INC.
By:_____________________________
Its:_________________________
17
<PAGE> 19
SCHEDULE I
<TABLE>
<CAPTION>
Name of Number of
Underwriter Warrants
- ----------- ---------
Brean Murray & Co., Inc.
<S> <C>
Total 130,000
</TABLE>
<PAGE> 20
No. ____ _____ Warrants
VOID AFTER 5:00 P.M. NEW YORK CITY TIME
ON ________ __, 2002
JAYMARK, INC.
Warrant Certificate
THIS CERTIFIES THAT for value received ________________, or registered
assigns, is the owner of the number of Warrants set forth above, each of which
entitles the owner thereof to purchase at any time from ________ __, 1998, until
5:00 p.m., New York City time on ________ __, 2002 (the "Warrant Expiration
Date"), one fully paid and nonassessable share of common stock, $0.001 par value
per share (the "Class A Common Stock"), of JAYMARK, INC., a Delaware corporation
(the "Company"), at the purchase price of $____ per share (as adjusted from time
to pursuant to the Warrant Agreement referenced below, the "Exercise Price")
upon presentation and surrender of this Warrant Certificate with the Form of
Election to Purchase duly executed, as provided in the Warrant Agreement
together with payment of the aggregate Exercise Price for the shares of Class A
Common Stock being purchased (defined below). The number of Warrants evidenced
by this Warrant Certificate (and the number of shares which may be purchased
upon exercise thereof) set forth above, and the Exercise Price per share set
forth above, are the number and Exercise Price as of the date of original
issuance of the Warrants, based on the shares of Class A Common Stock of the
Company as constituted at such date. As provided in the Warrant Agreement
referred to below, the Exercise Price and the number or kind of shares which may
be purchased upon the exercise of the Warrants evidenced by this Warrant
Certificate are, upon the happening of certain events, subject to modification
and adjustment.
This Warrant Certificate is subject to, and entitled to the benefits
of, all of the terms, provisions and conditions of an agreement dated as of
________ __, 1997 (the "Warrant Agreement") between the Company and Brean Murray
& Co., Inc., which Warrant Agreement is hereby incorporated herein by reference
and made a part hereof and to which Warrant Agreement reference is hereby made
for a full description of the rights, limitations of rights, duties and
immunities hereunder of the Company and the holders of the Warrant Certificates.
Copies of
1
<PAGE> 21
the Warrant Agreement are on file at the principal office of the Company.
This Warrant Certificate, with or without other Warrant Certificates,
upon surrender at the principal office of the Company, may be exchanged for
another Warrant Certificate or Warrant Certificates of like tenor and date
evidencing Warrants entitling the holder to purchase a like aggregate number of
shares of Class A Common Stock as the Warrants evidenced by the Warrant
Certificate or Warrant Certificates surrendered entitled such holder to
purchase. If this Warrant Certificate shall be exercised in part, the holder
hereof shall be entitled to receive upon surrender hereof another Warrant
Certificate or Warrant Certificates for the number of whole Warrants not
exercised.
No fractional shares of Class A Common Stock will be issued upon the
exercise of any Warrant or Warrants evidenced hereby, but in lieu thereof a cash
payment will be made, as provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote,
receive dividends, subscription rights or be deemed the holder of Class A Common
Stock or any other securities of the Company which may at any time be issuable
on the exercise hereof for any purpose, nor shall anything contained in the
Warrant Agreement or herein be construed to confer upon the holder hereof, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action (whether
upon any recapitalization, issue of stock, reclassification of stock, change of
par value or change of stock to no par value, consolidation, merger, conveyance,
or otherwise) or, except as provided in the Warrant Agreement, to receive notice
of meetings, until the Warrant or Warrants evidenced by this Warrant Certificate
shall have been exercised and the Shares shall have become deliverable as
provided in the Warrant Agreement.
If this Warrant shall be surrendered for exercise within any period
during which the transfer books for the Company's Class A Common Stock or other
class of stock purchasable upon the exercise of this Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates for
shares purchasable upon such exercise until the date of the reopening of said
transfer books, provided, however, that such books shall not be closed for
longer than a 20-day period.
2
<PAGE> 22
IN WITNESS WHEREOF, JAYMARK, INC. has caused the signature (or
facsimile signature) of its President and its Secretary to be printed hereon and
its corporate seal (or facsimile) to be printed hereon.
Dated ________ __, 1997
JAYMARK, INC.
By:____________________________
Its: _______________________
Attest:
_________________________
3
<PAGE> 23
FORM OF
ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificates.)
FOR VALUE RECEIVED __________________ hereby sells, assigns and
transfers unto this Warrant Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute and appoint
____________________, to transfer the within Warrant Certificate on the books of
the within-named Company, with full power of substitution.
Dated: ______________________, ____
__________________________________
Signature
Signature Guaranteed:
NOTICE
The signature of the foregoing Assignment must correspond to the name
as written upon the face of this Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE> 24
FORM OF
ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Warrant Certificate).
TO: JAYMARK, INC.
The undersigned hereby irrevocably elects to exercise Warrants
represented by this Warrant Certificate to purchase ______ shares of Class A
Common Stock issuable upon the exercise of such Warrants and requests that
certificates for such shares be issued in the name of:
Please insert social security, tax identification or other identifying number
_________________________________
_________________________________
_________________________________
(Please print name and address)
If such number of Warrants is not all the Warrants evidenced by this Warrant
Certificate, a new Warrant Certificate for the balance remaining of such
Warrants shall be registered in the name of and delivered to:
Please insert social security, tax identification or other identifying number
_________________________________
_________________________________
_________________________________
(Please print name and address)
Dated: _______________, ____
______________________________
Signature
(Signature must conform in all
respects to name of holder as
specified on the face of this
Warrant Certificate)
Signature Guaranteed:
<PAGE> 1
EXHIBIT 11.1
JAYMARK, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except for share and per share amounts)
<TABLE>
<CAPTION>
Three months ended
April 30, Year ended January 31,
-------------------------- ------------------------------------------
1997 1996 1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income $ 11 $ 35 $ 357 $ 336 $ 322
========== ========== ========== ========== ==========
Weighted average number of common shares outstanding 1,861,662 1,889,101 1,891,852 1,924,461 1,980,048
Common stock equivalent shares(1) 149,333 151,391 151,391 151,391 151,391
---------- ---------- ---------- ---------- ----------
Total number of shares for computing primary and
fully diluted earnings per share 2,010,995 2,040,492 2,043,243 2,075,852 2,131,439
========== ========== ========== ========== ==========
Primary net earnings per share $0.01 $0.02 $0.17 $0.16 $0.15
========== ========== ========== ========== ==========
Fully diluted net earnings per share(2) $0.01 $0.02 $0.17 $0.16 $0.15
========== ========== ========== ========== ==========
</TABLE>
- -----------
(1) Represents common stock equivalent shares for stock granted since
March 7, 1996 using the treasury stock method and the $13.00 estimated
initial public offering price per share pursuant to Staff Accounting
Bulletin No. 83.
(2) This computation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by Accounting Principles Board Opinion
No. 15 because it results in dilution of less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1997
<PERIOD-START> FEB-01-1997 FEB-01-1996
<PERIOD-END> APR-30-1997 APR-30-1997
<CASH> 63 85
<SECURITIES> 0 0
<RECEIVABLES> 10,361 10,347
<ALLOWANCES> 0 0
<INVENTORY> 538 370
<CURRENT-ASSETS> 11,791 11,275
<PP&E> 32,376 32,481
<DEPRECIATION> 12,852 12,850
<TOTAL-ASSETS> 32,444 31,870
<CURRENT-LIABILITIES> 12,699 12,081
<BONDS> 13,491 13,587
6,067 4,159
0 0
<COMMON> 1 1
<OTHER-SE> (752) 1,131
<TOTAL-LIABILITY-AND-EQUITY> 32,444 31,870
<SALES> 0 0
<TOTAL-REVENUES> 13,430 54,403
<CGS> 0 0
<TOTAL-COSTS> 12,952 51,911
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 460 1,888
<INCOME-PRETAX> 18 604
<INCOME-TAX> 7 247
<INCOME-CONTINUING> 11 357
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 11 357
<EPS-PRIMARY> 0.01 0.17
<EPS-DILUTED> 0.01 0.17
</TABLE>
