<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1997.
REGISTRATION NO. 333-22959
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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
PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 14, 1997
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
Copper or Fiber-Optic Cables Depending Upon Distance
[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
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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...................................................................... 23
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 to be consummated prior to the
effectiveness of this offering, (ii) gives effect to the Company's
reincorporation in Delaware to be completed prior to the effectiveness of this
offering, and (iii) 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
4
<PAGE> 6
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 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.
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
is in the process of reincorporating in Delaware and will complete such
reincorporation prior to the effectiveness of this offering.
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
1,277,625 shares of Class B Common Stock issuable upon the exercise of
outstanding options at January 31, 1997 at a weighted average exercise price
of $4.91 per share, 972,908 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>
YEAR ENDED JANUARY 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
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CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues........................................... $ 54,403 $ 52,928 $ 57,656 $ 55,901 $ 57,695
Costs and expenses:
Cost of revenues................................. 44,930 43,803 47,846 46,656 48,684
Selling, general and administrative.............. 6,449 5,977 7,363 6,592 6,733
Research and development(1)...................... 532 560 228 206 365
--------- --------- --------- --------- ---------
51,911 50,340 55,437 53,454 55,782
--------- --------- --------- --------- ---------
Operating income................................... 2,492 2,588 2,219 2,447 1,913
Interest expense................................... 1,888 2,018 1,721 1,632 568
--------- --------- --------- --------- ---------
Income before income taxes......................... 604 570 498 815 1,345
Provision for income taxes(2)...................... 247 234 176 95 562
--------- --------- --------- --------- ---------
Net income......................................... $ 357 $ 336 $ 322 $ 720 $ 783
========= ========= ========= ========= =========
Net earnings per share............................. $ 0.17 $ 0.16 $ 0.15 $ 0.30 $ 0.30
========= ========= ========= ========= =========
Shares used in per share calculation............... 2,043,200 2,075,900 2,131,400 2,678,400 3,093,600
========= ========= ========= ========= =========
</TABLE>
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JANUARY 31, 1997
------------------------------
ACTUAL AS ADJUSTED(3)
----------- --------------
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CONSOLIDATED BALANCE SHEET DATA:
Cash...................................................................... $ 85 $ 9,322
Working capital (deficit)................................................. (806) 12,717
Total assets.............................................................. 31,870 41,107
Bank line of credit....................................................... 4,286 --
Mortgage debt, less current portion....................................... 13,217 13,217
Long-term liabilities, excluding mortgage debt............................ 1,281 1,281
Mandatorily redeemable ESOP shares(4)..................................... 3,159 --
Stock repurchase obligation............................................... 1,000 --
Total stockholders' equity................................................ 1,132 18,814
</TABLE>
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(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, as described in Note
1 of Notes to Consolidated Financial Statements.
(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% and 88% of the Company's revenues during the years ended
January 31, 1995, 1996, and 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,
7
<PAGE> 9
operating results and financial condition and, accordingly, the Company's
business and future prospects would be adversely affected.
- 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. 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.
- 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
8
<PAGE> 10
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 audits,
inquiries or investigations may involve significant expense and divert
management attention. In
9
<PAGE> 11
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, 17%, 11%, and 14%, 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, approximately 32% 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% 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 January 31, 1997, the outstanding balance under the Company's
bank line of credit was approximately $4.3 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 other stockholders, 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 218,117 shares of Class A
Common Stock and 872,538 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 January 31, 1997, options
to purchase 1,277,625 shares of Class B Common Stock were outstanding under the
Company's stock option plans, 972,908 of which were exercisable as of such date
and approximately 1,077,000 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."
13
<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 January 31, 1997, was approximately $4,286,000 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.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth, as of January 31, 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>
JANUARY 31, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Bank line of credit.................................................... $ 4,286 $ --
======= =======
Long-term debt and capital lease obligations, less current portion..... $13,587 $13,587
------- -------
Mandatorily redeemable shares:
Shares held by ESOP, at fair value, 487,241 shares (actual) and no
shares (as adjusted) issued and outstanding(1).................... 3,159 --
Stock repurchase obligation, 120,000 shares (actual) and no shares
(as adjusted) issued and outstanding.............................. 1,000 --
------- -------
Total mandatorily redeemable shares.......................... 4,159 --
------- -------
Stockholders' equity:
Class A Common Stock, par value $0.001; 12,000,000 shares authorized,
no shares (actual) and 1,647,878 shares (as adjusted) issued and
outstanding(2).................................................... -- 2
Class B Common Stock, par value $0.001; 4,000,000 shares authorized,
1,252,251 shares (actual) and 1,391,614 shares (as adjusted)
issued and outstanding(2)......................................... 1 1
Additional paid-in capital........................................... 457 15,485
Stock subscription receivable........................................ (150) (150)
Retained earnings.................................................... 3,476 3,476
Adjustment for mandatorily redeemable ESOP shares(1)................. (2,652) --
------- -------
Total stockholders' equity................................... 1,132 18,814
------- -------
Total capitalization.................................... $18,878 $32,401
======= =======
</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) 1,277,625 shares of Class B
Common Stock issuable upon the exercise of stock options outstanding as of
January 31, 1997 at a weighted average exercise price of $4.91 per share,
(iii) 575,000 shares of Class A Common Stock and 391,140 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, (vii)
8,596 shares of Common Stock potentially issuable pursuant to the terms of
an Employment Agreement, and (viii) 2,148 shares of Common Stock issued
subsequent to January 31, 1997. 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 Note 10 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 January 31, 1997
was $4,291,000 or $2.47 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. 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 $4,286,000 at
January 31, 1997, the pro forma net tangible book value of the Company as of
January 31, 1997 would have been $18,814,000, or $6.19 per share. This
represents an immediate increase in such net tangible book value of $3.72 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 January 31,
1997................................................... $2.47
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 3.72
-----
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 January 31, 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)... 1,739,492 57% $ 965,000 5% $ 0.55
New investors.............. 1,300,000 43 16,900,000 95 $ 13.00
--------- ---- ----------- ----
Total............ 3,039,492 100% $17,865,000 100%
========= ==== =========== ====
</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 January 31, 1997. As of
January 31, 1997, there were outstanding options to purchase 1,277,625 shares of
Class B Common Stock at a weighted average exercise price of $4.91 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 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>
YEAR ENDED JANUARY 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues........................................... $ 54,403 $ 52,928 $ 57,656 $ 55,901 $ 57,695
Costs and expenses:
Cost of revenues................................. 44,930 43,803 47,846 46,656 48,684
Selling, general and administrative.............. 6,449 5,977 7,363 6,592 6,733
Research and development......................... 532 560 228 206 365
--------- --------- --------- --------- ---------
51,911 50,340 55,437 53,454 55,782
--------- --------- --------- --------- ---------
Operating income................................... 2,492 2,588 2,219 2,447 1,913
Interest expense................................... 1,888 2,018 1,721 1,632 568
--------- --------- --------- --------- ---------
Income before income taxes......................... 604 570 498 815 1,345
Provision for income taxes(1)...................... 247 234 176 95 562
--------- --------- --------- --------- ---------
Net income......................................... $ 357 $ 336 $ 322 $ 720 $ 783
========= ========= ========= ========= =========
Net earnings per share............................. $ 0.17 $ 0.16 $ 0.15 $ 0.30 $ 0.30
========= ========= ========= ========= =========
Shares used in per share calculation............... 2,043,200 2,075,900 2,131,400 2,678,400 3,093,600
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AT JANUARY 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash................................................... $ 85 $ 53 $ 134 $ 41 $ 8
Working capital (deficit).............................. (806) 241 525 (56) (176)
Total assets........................................... 31,870 34,779 33,942 35,285 21,875
Bank line of credit.................................... 4,286 4,953 2,552 3,411 2,928
Mortgage debt, less current portion.................... 13,217 13,615 13,964 14,843 --
Long-term liabilities, excluding mortgage debt......... 1,281 2,137 2,027 2,462 3,765
Mandatorily redeemable ESOP shares(2).................. 3,159 2,579 2,149 2,108 2,310
Stock repurchase obligation............................ 1,000 -- -- -- --
Total stockholders' equity............................. 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. See Note 1 of Notes
to Consolidated Financial Statements.
(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% 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% and 88% of the Company's revenues during
the years ended January 31, 1995, 1996 and 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>
YEAR ENDED JANUARY 31,
-----------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues............................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues..................................... 82.6 82.8 83.0 83.4 84.4
Selling, general and administrative.................. 11.8 11.3 12.8 11.8 11.7
Research and development............................. 1.0 1.1 0.4 0.4 0.6
----- ----- ----- ----- -----
95.4 95.2 96.2 95.6 96.7
----- ----- ----- ----- -----
Operating income....................................... 4.6 4.8 3.8 4.4 3.3
Interest expense....................................... 3.5 3.8 2.9 2.9 1.0
----- ----- ----- ----- -----
Income before income taxes............................. 1.1 1.0 0.9 1.5 2.3
Provision for income taxes, net(1)..................... 0.4 0.4 0.3 0.2 0.9
----- ----- ----- ----- -----
Net income............................................. 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. See Note 1 of Notes to
Consolidated Financial Statements.
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
19
<PAGE> 21
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 $43.8 million, or 82.8%
of revenues, in the fiscal year ended January 31, 1996 to $44.9 million, or
82.6% of revenues, in the fiscal year ended January 31, 1997. This increase in
cost of revenues of $1.1 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 $6.0
million, or 11.3% of revenues, in the fiscal year ended January 31, 1996 to $6.4
million, or 11.9% of revenues, in the fiscal year ended January 31, 1997. The
increase is due to additional administrative and selling costs associated 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.
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 $43.8 million, or
82.8% 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
$6.0 million, or 11.3% 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
20
<PAGE> 22
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 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 January 31, 1997, the Company had $4.3 million outstanding
under such line of credit, which accrued interest at an annual rate of 9.125%,
and an additional $1.3 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
21
<PAGE> 23
payable at an annual rate of 8.96% as of January 31, 1997. See Note 5 of Notes
to Consolidated Financial Statements.
The Company had a working capital deficit of $806,000 at January 31, 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.
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.
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 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.
22
<PAGE> 24
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.
23
<PAGE> 25
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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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> 27
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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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 $8 million in additional 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,
approximately 32% of Jaycor's revenues were derived from approximately 40
contracts with DSWA and approximately 14% 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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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% 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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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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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.
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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).]
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.
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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 FIBRE CHANNEL
------------------------------- ------------------------
FEATURE STORAGE NETWORK 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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<PAGE> 37
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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<PAGE> 38
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 January 31, 1997, JNI has sold most 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, six have completed their evaluation phase and three 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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<PAGE> 39
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. While JNI believes it would
be able to obtain alternative sources of supply for these components at its
election and has not experienced delays in the receipt of these items, any
future difficulty in obtaining any of these key components or ASICs could result
in delays or reductions in product shipments which, in turn, could have an
adverse effect on JNI's results of operations.
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 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
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<PAGE> 40
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 January 31, 1997, Jaymark had approximately 490 employees, of which
11 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 January 31, 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 68,400 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, 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.
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<PAGE> 41
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 will reincorporate in Delaware prior to the completion of this offering. 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.
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<PAGE> 42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company as of February 28, 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)....... 53 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)................. 69 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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<PAGE> 43
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 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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<PAGE> 44
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.
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<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.
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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 January 31, 1997, 186,300 shares of Class B
Common Stock were subject to outstanding options, and 248,700 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, consultants 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 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 January 31,
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 1,091,325 shares
remained reserved for issuance upon the exercise of outstanding options and
142,440 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 February 1, 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 32.7 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
1,859,492 shares of Class B Common Stock outstanding before this offering
and 3,159,492 shares of Common Stock to be outstanding after the closing of
this offering, as of February 1, 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 January 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 January
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. Excludes 23,392 shares which were repurchased by the Company
on January 31, 1997. 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 January 31,
1997, approximately 6,973 shares held by the ESOP on behalf of Dr. Wenaas,
and approximately 1,091 shares held by the ESOP on behalf of Karen M.
Wenaas, the wife of Dr. Wenaas. Also includes 126,068 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. Also includes 11,400 shares issuable upon exercise of options
held by Dr. Stuhmiller that are exercisable within the 60-day period
following January 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 January 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 April 1, 1997.
(10) Includes 82,200 shares issuable upon exercise of options held by Dr.
Flanagan that are exercisable within the 60-day period following January
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 January 31,
1997. Excludes 4,500 shares issuable upon exercise of options held by Mr.
Stiska that are exercisable subsequent to April 1, 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 January 31,
1997. Excludes 4,500 shares issuable upon exercise of options held by Dr.
Foster that are exercisable subsequent to April 1, 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 January 31,
1997. Excludes 4,500 shares issuable upon exercise of options held by Mr.
Heebner that are exercisable subsequent to April 1, 1997.
(14) Includes 473,400 shares issuable upon exercise of options that are
exercisable within the 60-day period following January 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 to be in effect following the Company's reincorporation in Delaware 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 January 31, 1997, there were no shares of Class A Common Stock
outstanding and 1,739,492 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, 347,980 shares of Series B-5 Common Stock were outstanding
as of January 31, 1997, as opposed to 347,878 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
52
<PAGE> 54
stockholder. The existence of such provision would be expected to have an
anti-takeover effect, including with 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 other stockholders, 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 218,117 shares of Class A
Common Stock and 872,538 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
53
<PAGE> 55
Company has also entered into 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 or 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 January 31, 1997, options to purchase 1,277,625 shares of Class B
Common Stock were outstanding under the Company's stock option plans, 972,908 of
which were exercisable as of such date and approximately 1,077,000 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."
54
<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
55
<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
other stockholders, 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, subject to certain limited
exceptions, 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.
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
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
56
<PAGE> 58
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.
57
<PAGE> 59
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.
58
<PAGE> 60
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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<PAGE> 61
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.
60
<PAGE> 62
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 January 31, 1997 and 1996....................... F-3
Consolidated Statement of Income for 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............................................................ F-5
Consolidated Statement of Cash Flows for 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.
The reincorporation described in Note 1 to the consolidated financial statements
has not been consummated at May 13, 1997. When it has been consummated, we will
be in a position to furnish the following report:
"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
F-2
<PAGE> 64
JAYMARK, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................. $ 85 $ 53
Accounts receivable.................................................. 10,347 13,008
Inventories.......................................................... 370 131....
Prepaid expenses and other current assets............................ 473 684
------- -------
Total current assets......................................... 11,275 13,876
Property and equipment, net............................................ 19,631 19,874
Other assets........................................................... 964 1,029
------- -------
$31,870 $34,779
======= =======
LIABILITIES, MANDATORILY REDEEMABLE SHARES,
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................. $ 6,326 $ 6,002
Bank line of credit.................................................. 4,286 4,953
Current portion of long-term debt and capital lease obligations...... 1,090 1,380
Deferred income taxes................................................ 379 1,300
------- -------
Total current liabilities.................................... 12,081 13,635
------- -------
Long-term debt and capital lease obligations, less current portion..... 13,587 14,457
Deferred compensation.................................................. 875 917
Other liabilities...................................................... 36 378
------- -------
Total long-term liabilities.................................. 14,498 15,752
------- -------
Commitments and contingencies (Note 8)
Mandatorily redeemable shares:
Shares held by ESOP, at fair value, 487,241 and 463,380 shares issued
and outstanding (Note 6).......................................... 3,159 2,579
Stock repurchase obligation, 120,000 and no shares issued
and outstanding (Note 9).......................................... 1,000
------- -------
Total mandatorily redeemable shares.......................... 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; 1,252,251 and 1,425,721 shares issued and
outstanding....................................................... 1 1
Additional paid-in capital........................................... 457 378
Stock subscription receivable........................................ (150)
Retained earnings.................................................... 3,476 4,516
Cumulative adjustment for mandatorily redeemable shares held by
ESOP.............................................................. (2,652) (2,082)
------- -------
Total stockholders' equity................................... 1,132 2,813
------- -------
$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>
YEAR ENDED JANUARY 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues............................................... $ 54,403 $ 52,928 $ 57,656
---------- ---------- ----------
Costs and expenses:
Cost of revenues..................................... 44,930 43,803 47,846
Selling, general and administrative.................. 6,449 5,977 7,363
Research and development............................. 532 560 228
---------- ---------- ----------
51,911 50,340 55,437
---------- ---------- ----------
Operating income....................................... 2,492 2,588 2,219
Interest expense....................................... 1,888 2,018 1,721
---------- ---------- ----------
Income before income taxes............................. 604 570 498
Provision for income taxes............................. 247 234 176
---------- ---------- ----------
Net income............................................. $ 357 $ 336 $ 322
========== ========== ==========
Net earnings per share................................. $ 0.17 $ 0.16 $ 0.15
========== ========== ==========
Shares used in per share calculation................... 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)
========= === ==== ====== ======= =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 67
JAYMARK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 357 $ 336 $ 322
------- ------- -------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 1,681 1,837 2,054
(Gain) loss on disposal of assets................................. (5) (14) 11
Increase (decrease) in cash, net of the effects of acquisitions,
due to changes in:
Accounts receivable............................................. 2,725 (481) (501)
Inventories..................................................... (203) (105) 57
Prepaid expenses and other current assets....................... 218 (145) (51)
Other assets.................................................... 65 (195) (125)
Accounts payable and accrued liabilities........................ 307 (670) (191)
Deferred income taxes........................................... (921) (152) 149
Deferred compensation........................................... (42) 108 114
Other liabilities............................................... (312) (8) 33
------- ------- -------
Total adjustments............................................ 3,513 175 1,550
------- ------- -------
Net cash provided by operating activities.................. 3,870 511 1,872
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of assets........................................ 24 31 7
Expenditures for property and equipment............................. (1,005) (623) (676)
Acquisitions of certain assets...................................... (273) (606)
Payments received on notes receivable............................... 22 782
------- ------- -------
Net cash (used in) provided by investing activities........ (1,254) (1,176) 113
------- ------- -------
Cash flows from financing activities:
Changes in net borrowings under bank line of credit................. (667) 2,401 (895)
Principal payments under capital lease obligations.................. (354) (376) (341)
Repayments of long-term debt........................................ (1,080) (1,795) (1,207)
Proceeds from issuances of long-term debt........................... 642 642
Repurchases of Class B Common Stock................................. (519) (288) (109)
Proceeds from issuances of Class B Common Stock..................... 36 18
------- ------- -------
Net cash (used in) provided by financing activities........ (2,584) 584 (1,892)
------- ------- -------
Net increase (decrease) in cash....................................... 32 (81) 93
Cash at beginning of period........................................... 53 134 41
------- ------- -------
Cash at end of period................................................. $ 85 $ 53 $ 134
======= ======= =======
Supplemental disclosure of cash paid during the year for:
Interest............................................................ $ 1,751 $ 2,016 $ 1,825
Income taxes........................................................ 443 1,075 225
Supplemental non-cash investing and financing activities:
Capital lease obligations originated................................ $ 274 $ 403 $ 87
Issuances of Class B Common Stock................................... 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. and its predecessors (the "Company"), provides 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
Prior to the effectiveness of the Company's proposed initial public
offering (the "Offering"), the Company will merge with and into a newly
incorporated Delaware corporation, Jaymark, Inc., a wholly-owned subsidiary,
which will be the surviving corporation. In conjunction with the merger, each
outstanding share of the Company's common stock will be 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 will be 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.
and its wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated.
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.
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.
F-7
<PAGE> 69
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
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
F-8
<PAGE> 70
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
NOTE 2 -- COMPOSITION OF CERTAIN CONSOLIDATED FINANCIAL STATEMENT CAPTIONS
Accounts receivable:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Contract receivables:
Billed............................................ $ 6,838 $ 7,391
Unbilled, net of progress payments of $1,316 and
$2,057.......................................... 3,278 4,743
------- -------
10,116 12,134
Income taxes receivable................................. 69 688
Other receivables....................................... 162 186
------- -------
$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
F-9
<PAGE> 71
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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>
JANUARY 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Land.................................................. $ 3,300 $ 3,300
Buildings............................................. 14,816 14,816
Computer and test equipment........................... 10,381 10,533
Leasehold improvements................................ 1,704 2,673
Office furniture and equipment, vehicles and other
equipment........................................... 2,280 2,078
-------- --------
32,481 33,400
Less accumulated depreciation and amortization........ (12,850) (13,526)
-------- --------
$ 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.
Accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Accounts payable...................................... $ 3,093 $ 3,220
Accrued salaries, benefits and payroll taxes.......... 1,769 1,041
Accrued vacation...................................... 983 1,024
Accrued retirement plan contributions................. 189 207
Other................................................. 292 510
-------- --------
$ 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.
F-10
<PAGE> 72
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Industry segment information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenues:
Advanced technology products and
services............................... $52,840 $52,620 $57,646
Network products......................... 520 75 10
Other.................................... 1,043 233
------- ------- -------
$54,403 $52,928 $57,656
======= ======= =======
Operating profit:
Advanced technology products and
services............................... $ 3,631 $ 2,984 $ 2,403
Network products......................... (818) (267) (184)
Other.................................... (321) (129)
------- ------- -------
$ 2,492 $ 2,588 $ 2,219
======= ======= =======
Capital expenditures:
Advanced technology products and
services............................... $ 639 $ 83 $ 525
Network products......................... 83 8 31
Other.................................... 248 451
------- ------- -------
970 542 556
Capital expenditures on other assets.......... 35 81 120
------- ------- -------
$ 1,005 $ 623 $ 676
======= ======= =======
Depreciation and amortization of property and
equipment:
Advanced technology products and
services............................... $ 948 $ 1,193 $ 1,479
Network products......................... 18 21 18
Other.................................... 181 67
------- ------- -------
1,147 1,281 1,497
Depreciation and amortization of other
assets...................................... 534 556 557
------- ------- -------
$ 1,681 $ 1,837 $ 2,054
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Identifiable assets:
Advanced technology products and services.......... $15,524 $17,748
Network products................................... 620 150
Other.............................................. 1,126 896
------- -------
17,270 18,794
Other assets............................................ 14,600 15,985
------- -------
$31,870 $34,779
======= =======
</TABLE>
F-11
<PAGE> 73
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, and property and equipment.
Other assets are principally land, building, prepaid expenses, deposits, 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 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>
JANUARY 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Building mortgage......................................... $13,652 $14,015
Term loans................................................ 520 1,236
Capital lease obligations................................. 505 586
------- -------
14,677 15,837
Less current portion...................................... (1,090) (1,380)
------- -------
$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%.
F-12
<PAGE> 74
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. 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.
The Company has a defined contribution Employee Stock Ownership Plan (the
"ESOP"), which enables substantially all employees to acquire stock ownership
interests in the Company. At January 31, 1997 and 1996, all shares of Class B
Common Stock 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 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%
F-13
<PAGE> 75
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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 at prices determined by the Board
of Directors (Note 10). The expiration date and the vesting schedule are also
determined by the Board of Directors. At January 31, 1997, options for 248,700
shares were available for future grant.
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.
F-14
<PAGE> 76
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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>
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>
YEAR ENDED JANUARY 31,
-------------------------
1997 1996 1995
------ ----- ----
<S> <C> <C> <C>
Current:
Federal...................................... $ 851 $ 411 $147
State........................................ 206 95 27
------ ---- -----
1,057 506 174
------ ---- -----
Deferred:
Federal...................................... (670) (223) 3
State........................................ (140) (49) (1)
------ ---- -----
(810) (272) 2
------ ---- -----
$ 247 $ 234 $176
====== ==== =====
</TABLE>
The balance sheet classification of the net deferred tax asset (liability)
is as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------
1997 1996
----- -------
<S> <C> <C>
Non-current deferred asset.................................. $ 527 $ 638
Current deferred liability.................................. (379) (1,300)
----- -------
$ 148 $ (662)
===== =======
</TABLE>
F-15
<PAGE> 77
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------
1997 1996
----- -------
<S> <C> <C>
Unbilled receivables...................................... $(690) $(1,645)
Accrued compensation and benefits......................... 301 301
Deferred compensation..................................... 343 402
Depreciation.............................................. 271 359
Retirement plan contributions............................. (116) (138)
State income taxes........................................ 27 60
Other..................................................... 12 (1)
----- -------
$ 148 $ (662)
===== =======
</TABLE>
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statutory rate................................... 34% 34% 34%
State income taxes, net of federal tax benefit... 5 5 5
Non-deductible meals and entertainment........... 5 5 7
Research and development tax credit.............. (6) (4) (5)
Revision to state apportionment factor........... 1 (3)
Other............................................ 2 1 (3)
-- - -- -
---
41% 41% 35%
=== === ===
</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
F-16
<PAGE> 78
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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.
NOTE 10 -- SUBSEQUENT EVENTS
During February 1997, the Company's 1996 Option Plan was amended 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.
During February 1997, the Company established the 1997 Outside Directors
Stock Option Plan (the "Directors Plan"), the 1997 Employee Stock Purchase Plan
(the "Purchase Plan"), and the Jaycor Networks, Inc. 1997 Stock Option Plan (the
"JNI Plan").
A total of 75,000 shares of Class A Common Stock have been reserved for
issuance under the Directors Plan. 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 will 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.
A total of 200,000 shares of the Company's Class A Common Stock have been
reserved for issuance under the Purchase Plan. The Purchase Plan permits
eligible employees to purchase shares of Class A Common Stock at a fifteen
percent (15%) discount through payroll deductions 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.
F-17
<PAGE> 79
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JNI, a wholly-owned subsidiary of the Company, has adopted a
subsidiary-level option plan known as 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 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
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.
F-18
<PAGE> 80
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 ACOUSTIC IMAGING DEVICE
automobile.]
AUTO-ARRESTOR
[Picture of a pepper spray gun and three
spherical gel balls.]
[Picture of a Hummer equipped with horn antennas [Picture of an electrical projectile attached to
for the detection of buried land mines.] a piece of clothing.]
GROUND PENETRATING MINE RADAR NON-LETHAL PROJECTILES
</TABLE>
<PAGE> 81
[Jaymark Logo]
[Jaycor Logo] [Jaycor Networks, Inc. Logo]
<PAGE> 82
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> 83
the three-for-five reverse split to be effected prior to the effectiveness of
this Registration Statement (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. Prior to the effectiveness of
this Registration Statement, Jaymark and JETI will enter into an Agreement and
Plan of Merger (the "Merger Agreement"), pursuant to which (i) JETI will merge
with and into Jaymark, with Jaymark as the surviving corporation, (ii) the 100
issued and outstanding shares of common stock of Jaymark will be canceled and
retired, and (iii) each issued and outstanding share of common stock of JETI
will convert into three-fifths of a share of Class B Common Stock of Jaymark.
(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. Upon the consummation
of the merger contemplated by the Merger Agreement, each such outstanding option
will convert 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. 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. 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> 84
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,
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> 85
<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> 86
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 13th day of May, 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 May 13, 1997
- ------------------------------------------ Officer, Chairman of the Board
Eric P. Wenaas and Director (Principal
Executive Officer)
P. RANDY JOHNSON* Vice President, Finance and May 13, 1997
- ------------------------------------------ Chief Financial Officer
P. Randy Johnson (Principal Financial and
Accounting Officer)
JAMES H. STUHMILLER* Director May 13, 1997
- ------------------------------------------
James H. Stuhmiller
TERRY M. FLANAGAN* Director May 13, 1997
- ------------------------------------------
Terry M. Flanagan
JOHN C. STISKA* Director May 13, 1997
- ------------------------------------------
John C. Stiska
JOHN S. FOSTER, JR.* Director May 13, 1997
- ------------------------------------------
John S. Foster, Jr.
DAVID R. HEEBNER* Director May 13, 1997
- ------------------------------------------
David R. Heebner
*By: /s/ ERIC P. WENAAS
- ------------------------------------------
Eric P. Wenaas
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 87
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, 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
May 13, 1997
II-6
<PAGE> 88
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> 89
<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 2.1
AGREEMENT FOR PURCHASE AND SALE OF ASSETS
between
HOWELL INTELLIGENCE SERVICES, INC., A DELAWARE CORPORATION,
as Buyer
and
ROBERT M. HOWELL, AN INDIVIDUAL,
as Seller
<PAGE> 2
AGREEMENT FOR PURCHASE AND SALE OF ASSETS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
I THE TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1.1 Tangible Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.2 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.3 Intangible Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.4 Files and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.5 Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.6 Prepaid Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.7 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.8 Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2.1 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2.2 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2.3 Duplicate Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2.4 Excluded Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2.5 Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 Purchase Price and Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.5 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.5.1 Adjustment Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.6 Employment and Noncompetition Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.7 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.8 Jaycor Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.9 Physical Condition of the Tangible Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
II SELLER'S REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.1 Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.4 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.5 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.6 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.7 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.8 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.9 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.12 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.13 Complete Copies of Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.14 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
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<TABLE>
<S> <C> <C>
III BUYER'S REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1 Corporate Organization and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2 Agreement Will Not Cause Breach or Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Buyer's Authority and Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.4 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
IV CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.1 Representations and Warranties True as of the Closing Date . . . . . . . . . . . . . . . . . . . . . . . . 10
4.2 Compliance with this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.3 No Threatened or Pending Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.4 Howell Employment and Noncompetition Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.5 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.6 Board and Other Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.7 Consents and Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.8 Seller's Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.9 Due Diligence Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.10 Consent to Assignment of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.11 Confidentiality and Inventions Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
V CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.1 Accuracy of Buyer's Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 Performance by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.3 Absence of Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.4 Buyer's Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
VI INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.1 Indemnity by Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.2 Indemnity by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.3 Limitation of Indemnification Liability of Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.4 Limitation of Indemnification Liability of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.5 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.6 Indemnification Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
VII THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.1 Seller's Deliveries at Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.1.1 Bill of Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.1.2 Possession of the Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.1.4 Howell Employment and Noncompetition Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.1.5 Third-Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.1.6 Lessor's Consent to Assignment of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.1.7 Lien Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.1.8 Bills of Sale and Other Instruments of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.1.9 Confidentiality and Inventions Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.2 Buyer's Deliveries at Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.2.1 Closing Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.3 Further Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
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<TABLE>
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VIII TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.1 Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
IX GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.1 Effect of Headings; Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.2 Entire Agreement; Modification; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.4 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.5 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.6 Recovery of Litigation or Arbitration Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.7 Nature and Survival of Representations and Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.9 Necessary Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.10 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.11 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.12 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.12.1 Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.12.2 Selection of Arbitrators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.12.3 Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.12.4 Case Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.12.5 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.12.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.12.7 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.13 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.14 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
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EXHIBITS:
A Assignment and Assumption of Contracts
B Howell Employment and Noncompetition Agreement
C Schedule of Exceptions
D Confidentiality and Inventions Agreement
SCHEDULES:
1.1.1 Tangible Personal Property
1.1.2 Contracts
1.1.3 Intangible Rights
1.1.8 Accounts Receivable
1.2.4 Excluded Contracts
1.3.4 Assumed Contracts
1.4 Creditor Payments
2.11 Agreements, Contracts and Commitments
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AGREEMENT FOR PURCHASE AND SALE OF ASSETS
This Agreement for Purchase and Sale of Assets (this "Agreement") is
entered into as of March 4, 1996 by and among Howell Intelligence Services,
Inc., a Delaware corporation ("Buyer"), and Robert M. Howell, an individual
("Seller"), with respect to the following facts:
RECITALS
A. Seller is the owner of a sole proprietorship, Howell
Intelligence Service, engaged in the business of providing security guard and
patrol services to its customers (the "Business").
B. Buyer is a newly-formed corporation possessing surveillance
and security technologies and capabilities, which it believes are complementary
to the Business.
C. Seller is the beneficial owner of all of the assets used or
usable in connection with the Business.
D. Seller desires to sell Buyer substantially all of the assets
used in the Business.
E. Buyer desires to purchase certain specified assets from Seller
and to assume certain specified liabilities of Seller, all as set forth in this
Agreement.
AGREEMENT
NOW, THEREFORE, for and in consideration of the mutual agreements set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and subject to the terms and
provisions set forth herein, the parties hereto mutually agree as follows:
ARTICLE I
THE TRANSACTION
1.1 Assets. Subject to and in reliance upon the
representations, warranties and agreements herein set forth, and subject to the
terms and conditions herein contained, Seller agrees to grant, convey, sell,
assign, transfer and deliver to Buyer on the Closing Date (as hereinafter
defined), and Buyer agrees on the Closing Date to purchase, accept and assume,
all properties and assets, real and personal, tangible and intangible, of every
type and description owned by Seller and used or
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held for use in connection with the Business set forth in this Section 1.1 and
the schedules attached hereto, including its business and goodwill
(collectively, the "Assets"). The Assets shall include the following, except
to the extent that any of the following are Excluded Assets:
1.1.1 Tangible Personal Property. All equipment,
telecommunications equipment, electrical devices, antennas, cables, vehicles,
furniture, fixtures, office materials and supplies, uniforms, hardware, tools,
spare parts, films, records, tapes, discs and other tangible personal property
of every kind and description owned and used or held for use by Seller as of
the date of this Agreement in connection with the Business which are listed and
described on Schedule 1.1.1 attached hereto (collectively, the "Tangible
Personal Property").
1.1.2 Contracts. All contracts and leases in
connection with the Business listed and described on Schedule 1.1.2 attached
hereto (collectively, the "Contracts").
1.1.3 Intangible Rights. All trademarks, trade
names, service marks, franchises, patents, jingles, slogans, logotypes and
other intangible rights, owned and used or held for use by Seller as of the
date of this Agreement in connection with the Business which are listed and
described on Schedule 1.1.3 attached hereto (collectively, the "Intangible
Property").
1.1.4 Files and Records. All files and records of
Seller relating to the Business (other than duplicate copies of such files,
hereinafter "Duplicate Records" which Seller may elect to retain) other than
the contents of files and other records that refer to operations of Seller
(other than the Business or that are privileged), including without limitation
all available schematics, blueprints, engineering data, customer lists,
reports, specifications, projections, statistics, promotional graphics,
original art work, mats, plates, negatives and other advertising, marketing or
related materials, and all other technical and financial information concerning
Seller and the Assets.
1.1.5 Claims. Any and all claims, choses in
action, and rights against third parties if and to the extent that they relate
to (i) the condition of the Assets, including, without limitation, all rights
under manufacturers' and vendors' warranties, or (ii) the operation of the
Business prior to the Closing (collectively, the "Claims").
1.1.6 Prepaid Items. All deposits, reserves and
prepaid expenses relating to the Business and prepaid ad valorem taxes relating
to the Business or the Assets (which shall be prorated as provided in Section
1.5).
1.1.7 Goodwill. All of Seller's goodwill in, and
going concern value of, the Business.
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1.1.8 Accounts and Notes Receivable. All accounts
receivable, notes receivable and any notes or written obligations reflecting
accounts receivable, of Seller relating to the Business (collectively, the
"Receivables") existing as of the Closing Date which are listed on Schedule
1.1.8 attached hereto.
1.2 Excluded Assets. There shall be excluded from the
Assets and retained by Seller, to the extent in existence on the Closing Date,
the following assets (collectively, the "Excluded Assets"):
1.2.1 Securities. Any securities owned or held by
Seller.
1.2.2 Insurance. All contracts of insurance.
1.2.3 Duplicate Records. All Duplicate Records and
other files and records not acquired by Buyer pursuant to Section 1.1.4.
1.2.4 Excluded Contracts. Any Contracts not being
assumed by Buyer pursuant to Section 1.3.4 hereof, which are listed and
described on Schedule 1.2.4 attached hereto.
1.2.5 Claims. Any and all claims, choses in
action, and rights against third parties other than the Claims as defined in
Section 1.1.5.
1.2.6 Datamate. The custom software associated
with the Datamate 841 mobile communications terminal product and integrated
office software, and future versions thereof.
1.3 Liabilities.
1.3.1 Seller shall sell and convey the Assets to
Buyer free and clear of all mortgages, liens, deeds of trust, security
interests, pledges, restrictions, prior assignments, charges, claims, defects
in title and encumbrances of any kind or type whatsoever (collectively, the
"Security Interests") except: (i) for liens for taxes not yet due and payable
or that are being contested in good faith by appropriate proceedings, and (ii)
for the obligations of Seller under leases and contracts which Buyer hereby
agrees to assume as described in Section 1.3.4 of this Agreement.
1.3.2 Except as otherwise specifically provided
herein, or as otherwise specifically agreed by Seller and Buyer, Buyer shall
not assume or be liable for, and does not, and does not undertake to attempt
to, assume or discharge:
a. any liability or obligation of
Seller arising out of or relating to any contract or agreement;
b. any liability or obligation of
Seller arising out of or relating to any pension, retirement or profit-sharing
plan or trust;
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c. any liability or obligation of
Seller arising out of or relating to any lease of Tangible Personal Property or
Intangible Property;
d. any liability or obligation of
Seller arising out of or relating to any litigation, proceeding or claim by any
person or entity relating to the business or operations of or otherwise
relating to the Business or the Assets before the Closing Date, whether or not
such litigation, proceeding or claim is pending, threatened or asserted before,
on or after the Closing Date;
e. any and all other liabilities,
obligations, debts or commitments of Seller whatsoever, whether accrued now or
hereafter, whether fixed or contingent, whether known or unknown, arising prior
to the Closing Date, or any claims asserted against the Seller or any of the
Assets or other items transferred to Buyer by Seller relating to any event
(whether act or omission) prior to the Closing Date, including without
limitation, the payment of all taxes; and
f. any liability or obligation of
Seller arising out of or relating to any employment agreement, including the
payment of severance pay, if any, to present or former employees of Seller. No
employee of Seller who becomes an employee of Buyer shall have any entitlement
to severance pay by virtue of this provision.
1.3.3 Seller retains and shall hereafter pay,
satisfy, discharge, perform and fulfill all such obligations and liabilities
not expressly assumed by Buyer hereunder as they become due, without any charge
or cost to Buyer, and Seller agrees to indemnify and hold Buyer and its
successors and assigns harmless from and against any and all such liabilities
in accordance with the terms of Article VI below.
1.3.4 Buyer agrees to execute and assume, at the
Closing, the obligations arising, and expressly provided to be performed by
Seller, after the Closing Date under those Contracts listed on Schedule 1.3.4
hereto. All such Contracts will be assigned and assumed pursuant to the form
of Assignment and Assumption of Contracts attached hereto as Exhibit A.
Notwithstanding the foregoing, Buyer shall not be obligated to assume any
obligations under any contract as to which Seller fail to deliver the written
consent of all other parties thereto.
1.4 Purchase Price and Method of Payment. The purchase
price to be paid for the Assets (the "Purchase Price") shall be comprised of
(i) One Hundred Seventy-Two Thousand Eight Hundred Ten Dollars and Fifty-Nine
Cents ($172,810.59) the ("Seller Payment"), and (ii) Buyer's payoff, on or
before the Closing Date, of the creditors listed on Schedule 1.4 hereto in the
amounts set forth opposite each such creditor's name (each a "Creditor
Payment," and collectively the "Creditor Payments"), payable on the Closing
Date by check or bank wire transfer of immediately available federal funds, as
instructed by Seller.
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1.5 Adjustments. The operation of the Business and the
income and normal operating expenses attributable thereto through the date
preceding the Closing Date shall be for the account of Seller and thereafter
for the account of Buyer, and any income or expense shall be allocated, charged
or prorated accordingly. Expenses for goods or services received both before
and after the Closing Date, power and utilities charges, wages, payroll taxes,
and rents and similar prepaid and deferred items shall be prorated between
Seller and Buyer as of the Closing Date. All special assessments and similar
charges or liens imposed against the Tangible Personal Property in respect of
any period of time through the Closing Date, whether payable in installments or
otherwise, shall be the responsibility of Seller, and amounts payable with
respect to such special assessments, charges or liens in respect of any period
of time after the Closing Date shall be the responsibility of Buyer, and such
charges shall be adjusted as required hereunder.
1.5.1 Adjustment Procedure. Within thirty (30)
days after the Closing, Seller shall deliver to Buyer a Certificate ("Seller's
Adjustment Certificate") dated the Closing Date and signed by Seller, setting
forth the adjustments provided for in Section 1.5, if any, certified to be true
and correct on the basis of the then most recently available financial
statements of the Business, with the supporting documentation as to how such
amount was derived annexed to the Seller's Adjustment Certificate. Within
sixty (60) days after the Closing Date, Seller and Buyer will use their good
faith efforts to agree upon a final Closing Statement setting forth the final
proration adjustments required under Section 1.5, and any required refund or
payment shall be made on the basis of such Closing Statement. Any payment due
hereunder shall be paid by check to the party to which such refund or payment
is due within sixty (60) days after the Closing Date. Failure of the parties
to agree on the final proration adjustments after a good faith effort to so
agree by the parties shall not constitute grounds to rescind the transactions
contemplated in this Agreement.
1.6 Employment and Noncompetition Agreement. On the
Closing Date, Seller shall enter into to enter into an Employment and
Noncompetition Agreement with Buyer substantially in the form attached hereto
as Exhibit B.
1.7 Closing. The closing (the "Closing") of the sale and
purchase of the Assets shall take place at the offices of Gray Cary Ware &
Freidenrich, 4365 Executive Drive, Suite 1600, San Diego, California, on March
1, 1996 at 1:00 p.m., Pacific Standard Time, or on such other date and time as
may be mutually agreed upon in writing by Buyer and Seller. The date of the
Closing is sometimes herein referred to as the "Closing Date."
1.8 Jaycor Stock Options. Buyer hereby covenants that in
the event the Business achieves extraordinary growth (after the Closing Date),
Buyer will use its best efforts to cause Jaycor, Inc., a California corporation
("Jaycor"), to make key employees of the Business eligible to receive Jaycor
stock options, consistent with Jaycor's practice of awarding other similarly
situated Jaycor key top management;
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provided, however, that the award of such Jaycor stock options is subject to
the prior approval of Jaycor's Chief Executive Officer and Board of Directors.
1.9 Physical Condition of the Tangible Personal Property.
Buyer acknowledges that with respect to the physical condition of the Tangible
Personal Property, Buyer is purchasing such items of Tangible Personal Property
on an "as-is" basis and without any representations or warranties by the Seller
as to the physical condition of such items. Nothing in this provision,
however, shall be construed to limit or diminish any other representation or
warranty made by Seller herein, including but not limited to, Seller's
representations and warranties regarding Seller's title to the Assets in
general and the Tangible Personal Property in particular.
ARTICLE II
SELLER'S REPRESENTATIONS AND WARRANTIES
Seller hereby represents and warrants to Buyer and covenants
and agrees with Buyer, except as set forth on the Schedule of Exceptions
attached hereto as Exhibit C (the "Schedule of Exceptions"), each of which
exceptions shall specifically identify the relevant subsection hereof to which
it relates and shall be deemed to be representations and warranties as if made
hereunder, that:
2.1 Existence. Seller is a sole proprietorship, validly
existing and in good standing under the laws of the State of California, and
has the requisite power to own and operate its properties and assets, and to
carry on its business as presently conducted. Seller does not now and has not
at any time in the past used any name in its business operations other than
Howell Intelligence Service. Seller is not required to be qualified to do
business as a foreign entity in any state of the United States or any other
jurisdiction where the failure to be so qualified would have a material adverse
effect on the Business or the Assets.
2.2 Authorization. Seller has the sole power, authority
and legal right to execute, deliver, and perform this Agreement. This
Agreement has been, and the other agreements, documents and instruments
required to be delivered by Seller in accordance with the provisions hereof
(the "Seller's Documents") will be, duly executed and delivered on behalf of
Seller, and this Agreement constitutes, and the Seller's Documents when
executed and delivered on behalf of Seller will constitute, the legal, valid
and binding obligations of Seller, enforceable against Seller in accordance
with such Documents' respective terms.
2.3 No Violation. Neither the execution and delivery of
this Agreement nor the consummation of the transactions contemplated hereby,
nor compliance with the terms hereof, will (i) violate, conflict with or result
in a breach of or default under any of the terms, conditions or provisions of
any agreement, understanding, arrangement, indenture, contract, lease,
sublease, loan agreement,
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note, restriction, obligation or liability to which Seller is a party or by
which it is bound or to which it or its assets are subject (individually, an
"Instrument" and collectively, the "Instruments"), or (ii) accelerate or give
to others any interests or rights, including rights of acceleration,
termination, modification or cancellation, under any Instrument or in or with
respect to the Business or the Assets, or (iii) conflict with, violate or
result in a breach of or constitute a default under any law, statute, rule,
judgment, order, decree, injunction, ruling or regulation of any government,
governmental agency, authority or instrumentality, court or arbitration
tribunal to which Seller or any of the Seller's assets or properties are
subject, or (v) require Seller to give notice to, or obtain an authorization,
approval, order, license, franchise, declaration or consent of, or make a
filing with, any foreign, federal, state, county, local or other governmental
or regulatory body.
2.4 Financial Statements. Seller has delivered to Buyer
an unaudited income statement of Seller for the period ended December 31, 1995,
an unaudited balance sheet of Seller as of December 31, 1995 (the "Balance
Sheet") (collectively, the "Financial Statements"). The Financial Statements
are complete and correct in all material respects and have been prepared in a
manner consistent with Seller's past practices throughout the periods
indicated. The Financial Statements fairly present the results of operations
and financial condition of Seller for the periods, and at the dates, to which
they relate. The books and records of Seller upon which the Financial
Statements are based accurately reflect all transactions of Seller. As of
December 31, 1995, Seller owned all property, equipment, and assets shown on
the Financial Statements to and through such date, subject to no lien, charge,
mortgage or other encumbrance, except as (a) therein noted and (b) items leased
under valid and subsisting leases.
2.5 Absence of Undisclosed Liabilities. Seller has no
liabilities or obligations with respect to the Business, either direct or
indirect, matured or unmatured or absolute, contingent or otherwise, except:
a. those liabilities or obligations set forth on
the Balance Sheet and not heretofore paid or discharged;
b. liabilities arising in the ordinary course of
business under any agreement, contract, commitment, lease or plan specifically
disclosed on the Schedule of Exceptions or not required to be disclosed because
of the term or amount involved; and
c. those liabilities or obligations incurred,
consistently with past business practice, in or as a result of the normal and
ordinary course of business since December 31, 1995.
For purposes of this Agreement, the term
"liabilities" shall include, without limitation, any direct or indirect
indebtedness, guaranty, endorsement, claim, loss, damage, deficiency, cost,
expense, obligation or
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responsibility, fixed or unfixed, known or unknown, asserted or unasserted,
choate or inchoate, liquidated or unliquidated, secured on unsecured.
2.6 Accounts Receivable. The accounts receivable of
Seller arising from the Business as set forth on the Balance Sheet or arising
since the date thereof (i) are valid and genuine; (ii) have arisen solely out
of bona fide sales and deliveries of goods, performance of services and other
business transactions in the ordinary course of business consistent with past
practice; (iii) are, to the best of Seller's knowledge, not subject to valid
defenses, set-offs or counterclaims; and (iv) are, to the best of Seller's
knowledge, collectible within one hundred twenty (120) days after billing at
the full recorded amount thereof less, the recorded allowance for collection
losses on the Balance Sheet. The allowance for collection losses on the
Balance Sheet has been determined in a manner acceptable to Buyer consistent
with Seller's past practice.
2.7 Absence of Certain Changes. Since December 31, 1995,
there has not been (i) any change in the assets, liabilities, financial
condition or operations of Seller from that reflected in the Balance Sheet
other than changes in the ordinary course of business, none of which
individually or in the aggregate have had a material adverse effect on such
assets, liabilities, financial condition or operations or business prospects of
Seller, (ii) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the Assets or the Business; (iii)
any mortgage, pledge or subjection to lien, charge or encumbrance of any kind
of any of the Assets; (iv) any sale, transfer or assignment of any Assets,
including any intangible assets, except sales for fair value in the ordinary
course of business or the transactions contemplated in this Agreement; (v) any
material amendment or termination of any contracts or commitments or licenses,
except in the ordinary course of business; (vi) any issuance of ownership
interests, rights to purchase ownership interests or any agreement concerning
ownership interests of Seller; or (vii) any other event or condition of any
character, materially and adversely affecting the Assets or the Business;
provided, however, that Seller has made expenditures of cash to fund Seller's
continuing operating expenses in the ordinary course of Seller's business as
conducted to date.
2.8 Title to Assets. Seller has good, valid and
marketable title to all of its properties and assets, real, personal and mixed,
which would be included in the Assets if the Closing took place on the date
hereof, which it purports to own, including without limitation all properties
and assets reflected in the Balance Sheet free and clear of all mortgages,
liens, pledges, security interests, charges, claims, restrictions and other
encumbrances and defects of title of any nature whatsoever.
2.9 Taxes. Seller has timely filed within the time
period required for filing or any extension granted with respect thereto all
federal, state, local and other returns and reports relating to any and all
taxes or any other governmental charges, obligations or fees for taxes and any
related interest or penalties ("Tax" or "Taxes") required to be filed by it and
such returns and reports are true and correct. Seller
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has paid all Taxes, if any, shown to be due and payable on said returns and
reports and has withheld with respect to employees all federal and state income
Taxes, FICA, FUTA and other Taxes required to be withheld and has timely paid
all sales, use and similar Taxes. No income, sales, use or similar Tax return
or report of Seller has been examined or audited by the Internal Revenue
Service or any state taxing authority. There are no pending or threatened
audits, examinations, assessments, asserted deficiencies or claims for
additional Taxes. There are (and as of immediately following the Closing there
will be) no liens or similar encumbrances relating to or attributable to Taxes
on the Assets, other than liens for Taxes not yet due.
2.10 Litigation. There is no claim, action, proceeding or
investigation pending or threatened against or by the Seller, or which
questions or challenges the validity of this Agreement or any action taken by
the Seller pursuant to this Agreement or in connection with the transactions
contemplated hereby or which could be reasonably expected to have a material
adverse effect on Seller's ability to perform its obligations hereunder or on
Buyer's use and enjoyment of the Assets; and, to the best of Seller's
knowledge, there is no valid basis for any such claim, action, proceeding or
investigation. The Seller is not subject to any judgment, order or decree
entered in any lawsuit or proceeding which has had or may have a material
adverse effect on the business or its business practices or which could
materially adversely affect Buyer's use and enjoyment of the Assets.
2.11 Agreements, Contracts and Commitments. Schedule 2.11
hereto truly and accurately lists all material licenses, agreements and
undertakings of the Seller to which any of its properties or assets are or will
be subject, Seller has performed in all material aspects all obligations
required to be performed by Seller under any and all such agreements listed in
Schedule 2.11 to which it is a party or to which any of its property or assets
is subject, and neither it nor, to the best of its knowledge, any other party
thereto is in default under any such agreement or obligation.
2.12 Compliance with Laws. To the best of Seller's
knowledge, Seller is not in violation of any federal, state or local statute,
law, rule or regulation with respect to or affecting the Assets. Seller has
obtained all licenses, orders, approvals, and authorizations required in
connection with the conduct of the Business.
2.13 Complete Copies of Materials. Seller has made
available to Buyer true and complete copies of each contract, agreement,
license, lease and similar document referred to in any exhibit hereunder or
included in the Assets.
2.14 Disclosure. No representation or warranty by Seller
in this Agreement or the Exhibits attached hereto, nor any document, written
information, statement or certificate furnished or to be furnished by Seller to
Buyer pursuant hereto or in connection with the transactions contemplated
hereby, notwithstanding any investigation by Buyer, contains or will contain
any untrue statement of a
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material fact, or omits or will omit to state a material fact necessary to make
the statement contained herein or therein not misleading.
ARTICLE III
BUYER'S REPRESENTATIONS
Buyer hereby represents as follows:
3.1 Corporate Organization and Authority. Buyer is a
corporation duly organized, validly existing, and in good standing under the
laws of Delaware. Buyer has all necessary corporate powers, authority, and
approvals to purchase the Assets and consummate the transactions contemplated
pursuant to this Agreement.
3.2 Agreement Will Not Cause Breach or Violation. The
consummation of the transactions contemplated by this Agreement will not result
in or constitute a default or an event that, with notice or lapse of time or
both, would be a default, breach, or violation of the certificate of
incorporation or bylaws of Buyer or any lease, license, promissory note,
conditional sales contract, permit, license, commitment, indenture, mortgage,
deed of trust, or other agreement, instrument, or arrangement to which Buyer is
party.
3.3 Buyer's Authority and Consents. Buyer has the right,
power, legal capacity and authority to enter into, and perform its obligations
under this Agreement, and no approvals or consents of any person are necessary
in connection with it.
3.4 Full Disclosure. None of the representations made by
Buyer contains or will contain any untrue statement of a material fact, or omit
any material fact the omission of which would be misleading.
ARTICLE IV
CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE
The obligation of Buyer to consummate the transactions
contemplated by this Agreement is subject to the satisfaction, at or before the
Closing of all the conditions set out below in this Article IV. Buyer may
waive in writing any or all of these conditions, in whole or in part, without
prior notice; provided, however, that no such waiver of a condition shall
constitute a waiver by Buyer of any of its other rights or remedies, at law or
in equity, if Seller shall be in default of any of the representations or
covenants under this Agreement.
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4.1 Representations and Warranties True as of the Closing
Date. The representations and warranties of Seller contained in this Agreement
or in any schedule, certificate or document delivered by Seller to Buyer
pursuant to the provisions hereof shall have been true on the date hereof and
shall be true on the Closing Date with the same effect as though such
representations and warranties were made as of such date.
4.2 Compliance with this Agreement. Seller shall have
performed and complied with all agreements and conditions required by this
Agreement to be performed or complied with by it prior to or at the Closing.
4.3 No Threatened or Pending Litigation. On the Closing
Date, no suit, action or other proceeding, or injunction or final judgment
relating thereto, shall be threatened or be pending before any court or
governmental or regulatory official, body or authority in which it is sought to
restrain or prohibit or to obtain damages or other relief in connection with
this Agreement or the consummation of the transactions contemplated hereby, and
no investigation that might result in any such suit, action or proceeding shall
be pending or threatened.
4.4 Howell Employment and Noncompetition Agreement.
Buyer and Seller shall have executed and delivered an employment agreement in
the form attached as Exhibit B hereto.
4.5 No Material Adverse Change. The Assets and the
business, operations, assets, properties or prospects of the Business shall not
have been and shall not be threatened to be materially adversely affected in
any way as a result of any event or occurrence.
4.6 Board and Other Approvals. The Board of Directors of
Buyer, the Board of Directors of Jaycor, a California corporation ("Jaycor"),
and Jaycor's Chief Executive Officer and President shall have authorized and
approved this Agreement and the transactions contemplated hereby.
4.7 Consents and Proceedings. Seller shall have obtained
all of the consents (including third party consents), authorizations, orders
and approvals required in order to execute and deliver this Agreement and to
perform its obligations hereunder and all actions, proceedings, instruments and
documents deemed necessary or appropriate by Buyer and its counsel to
effectuate this Agreement and the consummation of the transactions contemplated
hereby, or incidental thereto, shall have been obtained and all other related
legal matters shall have been approved by such counsel.
4.8 Seller's Deliveries. Seller shall have delivered to
Buyer all the items set forth in Section 7.1 hereof.
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4.9 Due Diligence Review. Buyer shall have completed its
due diligence review of Seller and be satisfied in its sole discretion with the
results thereof.
4.10 Consent to Assignment of Lease. Seller shall have
obtained and delivered the lessor's consent to Seller's assignment to Buyer of
the 2611 Temple Heights Drive, Suite E lease.
4.11 Confidentiality and Inventions Agreement. Seller
shall have executed and delivered a confidentiality and inventions agreement in
the form attached as Exhibit D hereto.
ARTICLE V
CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE
The obligation of Seller to consummate the transactions
contemplated by this Agreement is subject to the satisfaction, at or before the
Closing of all the conditions set out below in this Article V. Seller may
waive in writing any or all of these conditions, in whole or in part, without
prior notice; provided, however, that no such waiver of a condition shall
constitute a waiver by Seller of any of its other rights or remedies, at law or
in equity, if Buyer shall be in default of any of the representations or
covenants under this Agreement.
5.1 Accuracy of Buyer's Representations and Warranties.
Except as otherwise permitted by this Agreement, all representations by Buyer
in this Agreement or in any written statement that shall be delivered to Seller
under this Agreement shall be true on and as of the Closing as though made at
that time.
5.2 Performance by Buyer. Buyer shall have performed,
satisfied, and complied with all covenants, agreements, and conditions required
by this Agreement to be performed or complied with by Buyer on or before the
Closing including, but not limited to, executing the Assignment and Assumption
Agreement in the form attached hereto as Exhibit A.
5.3 Absence of Litigation. No action, suit, or
proceeding before any court or any governmental body or authority, pertaining
to the transaction contemplated by this Agreement or to its consummation, shall
have been instituted or threatened on or before the Closing.
5.4 Buyer's Deliveries. Buyer shall have delivered to
Seller all the items set forth in Section 7.2 hereof.
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ARTICLE VI
INDEMNIFICATION
6.1 Indemnity by Seller. Seller shall indemnify Buyer,
and its affiliates, directors, officers, stockholders, employees, agents,
representatives, successors and assigns against any and all claims, losses,
liabilities, damages, expenses (including reasonable attorneys' fees and costs
of suit) which may be asserted against, incurred or required to be paid by
Buyer or its affiliates, directors, officers, stockholders, employees, agents,
representatives, successors and assigns by reason or on account of (i) any
representation or warranty made by Seller herein being untrue or incorrect; or
(ii) any failure by Seller to observe or perform their covenants and agreements
set forth herein or in any agreement entered into pursuant to this Agreement;
or (iii) any liabilities of Seller incurred in connection with the Business
prior to the Closing Date.
6.2 Indemnity by Buyer. Buyer shall indemnify Seller and
its employees, agents, representatives, successors and assigns against any and
all claims, losses, liabilities, damages, expenses (including reasonable
attorneys' fees and costs of suit) which may be asserted against, incurred or
required to be paid by Seller and its employees, agents, representatives,
successors and assigns by reason or on account of (i) any representation or
warranty made by Buyer herein being untrue or incorrect or (ii) any failure by
Buyer to observe or perform its covenants and agreements herein or in any
agreement entered into pursuant to this Agreement.
6.3 Limitation of Indemnification Liability of Seller.
Seller shall have no liability for indemnification hereunder with respect to
any claim resulting from a breach of their representations and warranties set
forth in this Agreement unless Seller has been notified of the claim, in the
manner provided under Section 9.11 hereof, within the survival period specified
in Section 6.5 hereof.
6.4 Limitation of Indemnification Liability of Buyer.
Buyer shall have no liability for indemnification hereunder with respect to any
claim resulting from a breach of its representations and warranties set forth
in this Agreement unless it has been notified of the claim, in the manner
provided under Section 9.11 hereof, within the survival period specified in
Section 6.5 hereof.
6.5 Survival. All representations and warranties
contained in or made pursuant to this Agreement or in any agreement,
certificate, document or statement delivered pursuant hereto shall survive the
Closing for a period of three (3) years; provided, however, that,
notwithstanding the foregoing, the representations and warranties set forth in
Section 2.10 shall survive the Closing for the applicable tax statute of
limitations plus ninety (90) days.
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6.6 Indemnification Procedures. Any party making a claim
for indemnification under this Article VI (the "Indemnitee") shall notify the
indemnifying party (the "Indemnitor") of the claim in writing promptly after
discovering the claim or receiving written notice of a claim against it if by a
third party), describing the claim, the amount thereof (if known and
quantifiable), and the basis thereof. The obligations and liabilities of the
Indemnitor with respect to claims resulting from the assertion of liability by
any third party shall be subject to the following terms and conditions:
a. In the event any action, suit or proceeding
is brought against the Indemnitee, with respect to which the Indemnitor may
have liability under the indemnity agreements contained herein, the action,
suit or proceeding shall be defended including all proceedings on appeal or for
review which counsel for the Indemnitee shall deem appropriate) by the
Indemnitor. The Indemnitee shall have the right to employ its own counsel in
any such case, but the fees and expenses of such counsel shall be at the
Indemnitee's own expense unless the employment of such counsel and the payment
of such fees and expenses both shall have been specifically authorized by the
Indemnitor in connection with the defense of such action, suit or proceeding.
In such case only that portion of such fees and expenses reasonably related to
matters covered by the indemnity agreements contained herein shall be borne by
the Indemnitor. The Indemnitee shall be kept fully informed of such action,
suit or proceeding at all stages thereof whether or not it is so represented.
The Indemnitee shall make available to the Indemnitor and its attorneys and
accountants all books and records of the Indemnitee relating to such
proceedings or litigation and the parties hereto agree to render to each other
such assistance as they may reasonably require of each other in order to ensure
the proper and adequate defense of any such action, suit or proceeding.
b. The Indemnitee shall not make any settlement
of any claims without the written consent of the Indemnitor, which consent
shall not be unreasonably withheld or delayed.
ARTICLE VII
THE CLOSING
The Closing shall occur at the place and time as specified in
Section 1.7 unless extended as set forth in Section 1.7 or the Agreement is
terminated earlier in accordance with Article VIII.
7.1 Seller's Deliveries at Closing. At the Closing,
Seller shall deliver or cause to be delivered to Buyer:
7.1.1 Bill of Sale. A signed bill of sale for the
Assets.
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7.1.2 Possession of the Assets. Possession of the
Assets.
7.1.3 Assignment and Assumption of Contracts. A
signed Assignment and Assumption of Contracts substantially in the form
attached hereto as Exhibit A.
7.1.4 Howell Employment and Noncompetition
Agreement. A signed Employment and Noncompetition Agreement substantially in
the form attached hereto as Exhibit B.
7.1.5 Third-Party Consents. The consents discussed
in Section 4.7 hereof.
7.1.6 Lessor's Consent to Assignment of Lease. The
consent specified in Section 4.10 executed by the lessor.
7.1.7 Lien Releases. Termination statements
executed by the appropriate secured party for each of the following UCC-1
financing statements: Number 94155679 and Number 9254778; and evidence of the
release of liens against vehicles number 10, 12 and 13 in favor of North County
Bank (#33201201), North County Bank (#33201209), and Toyota Motor Credit
Corporation, respectively.
7.1.8 Bills of Sale and Other Instruments of
Transfer. Any bills of sale, deeds, assignments, receipts, or other
instruments of transfer reasonably requested by Buyer to effectuate the
transactions contemplated by this Agreement.
7.1.9 Confidentiality and Inventions Agreement. A
signed Confidentiality and Inventions Agreement substantially in the form
attached hereto as Exhibit D.
7.2 Buyer's Deliveries at Closing. At the Closing, Buyer
shall deliver to Seller:
7.2.1 Closing Purchase Price. The Closing Purchase
Price, which shall be paid in the manner specified in Section 1.4, in return
for Seller's delivery of the items specified in Section 7.1.
7.3 Further Documents. At any time before or after the
Closing, Seller will execute, acknowledge, and deliver any further deeds,
assignments, conveyances, and other assurances, documents, and instruments of
transfer, reasonably requested by Buyer, and will take any other action
consistent with the terms of this Agreement that may reasonably be requested by
Buyer, for the purpose of assigning, transferring, granting, conveying, and
confirming to Buyer, or reducing to possession, any of the Assets to be
conveyed and transferred by this Agreement.
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ARTICLE VIII
TERMINATION
8.1 Termination of Agreement. This Agreement may be
terminated at any time prior to the Closing (i) by Buyer in its sole
discretion, without cause, (ii) by the mutual consent of Seller and Buyer, or
(iii) by either party as long as such party is not in default if the Closing
has not taken place by the scheduled Closing Date (including the permissible
extensions of the Closing, if applicable) as set forth in Section 1.7 hereof,
or (iv) by Seller if Buyer is in default of its obligations or representations
under this Agreement.
8.2 Remedies. Subject to the controlling provisions in
Article VIII, in the event of a material breach of this Agreement, the
non-breaching party shall have the right to pursue all remedies available to it
under this Agreement or otherwise at law or in equity.
ARTICLE IX
GENERAL PROVISIONS
9.1 Effect of Headings; Exhibits. The subject headings
of the sections of this Agreement are included for purposes of convenience
only, and shall not affect the construction or interpretation of any of its
provisions. All Exhibits and Schedules to this Agreement are incorporated
herein in their entirety.
9.2 Entire Agreement; Modification; Waiver. This
Agreement constitutes the entire agreement between the parties pertaining to
the subject matter contained in it, except for any other agreements referenced
herein. This Agreement supersedes all prior and contemporaneous agreements
(other than those entered into in writing simultaneously with this Agreement),
representations, and understandings of the parties. No supplement,
modification, or amendment of this Agreement shall be binding unless executed
in writing by all the parties. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a waiver of any other
provisions, whether or not similar, nor shall any waiver constitute a
continuing waiver. No waiver shall be binding unless executed in writing by
the party making the waiver.
9.3 Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. Counterparts of
this Agreement may be signed and the signature pages transmitted by facsimile;
provided, however, that the person transmitting such signature page by
facsimile must deliver the originally executed counterpart signature page via
express courier within two (2) business days.
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9.4 Parties in Interest. Nothing in this Agreement,
whether express or implied, is intended to confer any rights or remedies under
or by reason of this Agreement on any persons other than the parties to it and
their respective successors and assigns. Nothing in this Agreement is intended
to relieve or discharge the obligation or liability of any third person to any
party to this Agreement, nor shall any provision give any third person any
right of subrogation or action over against any party to this Agreement.
9.5 Assignment. Neither party may assign its rights or
obligations under this Agreement without the prior written consent of the other
party. Subject to the foregoing, this Agreement shall be binding on and shall
inure to the benefit of the parties to it and their respective permitted
successors and assigns.
9.6 Recovery of Litigation or Arbitration Costs. If any
legal action, arbitration or other proceeding is brought for the enforcement of
this Agreement, or because of an alleged dispute, breach, default, or
misrepresentation in connection with any of the provisions of this Agreement,
the successful or prevailing party or parties shall be entitled to recover
reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be
entitled, as may be decided by the arbitrators pursuant to Section 9.12.6
hereof.
9.7 Nature and Survival of Representations and Covenants.
Subject to any limitations set forth in Article VI, all representations,
covenants, and agreements of the parties contained in this Agreement, or in any
instrument, certificate, opinion, or other writing provided for in it, shall
survive the Closing.
9.8 Severability. Each term, covenant, condition or
provision of this Agreement shall be viewed as separate and distinct, and in
the event that any such term, covenant, condition or provision shall be held by
a court of competent jurisdiction to be invalid, the remaining provisions shall
continue in full force and effect, so long as the essential benefits of this
Agreement will still be realized by the parties.
9.9 Necessary Acts. Each party to this Agreement agrees
to perform any further acts and execute and deliver any further documents that
may be reasonably necessary to carry out the provisions of this Agreement.
9.10 Time of Essence. Time is of the essence in the
performance of all obligations under this Agreement.
9.11 Notices. All notices to be given with respect to
this Agreement shall be given in writing to the party, at the appropriate
address listed below. Each notice shall be deemed delivered whenever it
arrives at the party's address, by any written means, including without
limitation, facsimile, telegraph, teletype personal delivery, express delivery,
or mail.
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9.11.1 If to Buyer, then to:
Jaycor Security Intelligence Services, Inc.
9775 Towne Centre Drive
San Diego, CA 92121
Attn: P. Randy Johnson, Chief Financial Officer
Telephone: (619) 535-3129
Facsimile: (619) 452-0108
with a copy to:
Cameron Jay Rains, Esq.
Gray Cary Ware & Freidenrich
4365 Executive Drive, Suite 1600
San Diego, CA 92121
Telephone: (619) 677-1476
Facsimile: (619) 677-1477
9.11.2 If to Seller, then to:
Robert M. Howell
2611 Temple Heights Drive, Suite E
Oceanside, CA 92056
Telephone: (619) 758-9953
Facsimile: (619) 758-5973
with a copy to:
Wesley W. Lee, Esq.
Kolodny & Pressman, A.P.C.
11975 El Camino Real
San Diego, CA 92130-2593
Telephone: (619) 453-0309
Facsimile: (619) 453-9347
9.12 Arbitration. Any controversy or claim arising out of
or relating to this Agreement, or the breach thereof, shall be settled by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association ("AAA"), and the procedures set forth below.
In the event of any inconsistency between the Rules of AAA and the procedures
set forth below, the procedures set forth below shall control. Judgment upon
the award rendered by the arbitrators may be enforced in any court having
jurisdiction thereof.
9.12.1 Location. The location of the arbitration
shall be in San Diego County, California.
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9.12.2 Selection of Arbitrators. The arbitration
shall be conducted by a panel of three neutral arbitrators who are independent
and disinterested with respect to the parties, this Agreement, and the outcome
of the arbitration. Each party shall appoint one neutral arbitrator, and these
two arbitrators so selected by the parties shall then select the third
arbitrator. If one party has given written notice to the other party as to the
identity of the arbitrator appointed by the party, and the party thereafter
makes a written demand on the other party to appoint its designated arbitrator
within the next ten days, and the other party fails to appoint its designated
arbitrator within ten (10) days after receiving said written demand, then the
arbitrator who has already been designated shall appoint the other two
arbitrators. Notwithstanding anything in this Section 9.12 to the contrary,
the arbitration may be conducted by a sole arbitrator; provided, however, that
Buyer and Seller shall have mutually agreed upon the selection of such sole
arbitrator.
9.12.3 Discovery. Unless the parties mutually agree
in writing to some additional and specific pre-hearing discovery, the only
pre-hearing discovery shall be (a) reasonably limited production of relevant
and non-privileged documents, and (b) the identification of witnesses to be
called at the hearing, which identification shall give the witness's name,
general qualifications and position, and a brief statement as to the general
scope of the testimony to be given by the witness. The arbitrators shall
decide any disputes and shall control the process concerning these pre-hearing
discovery matters. Pursuant to the Rules of AAA, the parties may subpoena
witnesses and documents for presentation at the hearing.
9.12.4 Case Management. Prompt resolution of any
dispute is important to both parties; and the parties agree that the
arbitration of any dispute shall be conducted expeditiously. The arbitrators
are instructed and directed to assume case management initiative and control
over the arbitration process (including scheduling of events, pre-hearing
discovery and activities, and the conduct of the hearing), in order to complete
the arbitration as expeditiously as is reasonably practical for obtaining a
just resolution of the dispute.
9.12.5 Remedies. The arbitrators shall follow and
apply applicable law. The arbitrators shall grant such legal or equitable
remedies and relief in compliance with applicable law that the arbitrators deem
just and equitable, to the same extent that remedies or relief could be granted
by a state or federal court, provided, however, that no punitive damages may be
awarded. No court action may be maintained seeking punitive damages. The
decision of any two of the three arbitrators appointed shall be binding upon
the parties.
9.12.6 Expenses. The expenses of the arbitration,
including the arbitrators' fees, expert witness fees, and attorney's fees, may
be awarded to the prevailing party, in the discretion of the arbitrators, or
may be apportioned between the parties in any manner deemed appropriate by the
arbitrators. Unless and until the arbitrators decide that one party is to pay
for all (or a share) of such expenses,
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both parties shall share equally in the payment of the arbitrators' fees as and
when billed by the arbitrators.
9.12.7 Confidentiality. Except as set forth below,
the parties shall keep confidential the fact of the arbitration, the dispute
being arbitrated, and the decision of the arbitrators. Notwithstanding the
foregoing, the parties may disclose information about the arbitration to
persons who have a need to know, such as directors, trustees, management
employees, witnesses, experts, investors, attorneys, lenders, insurers, and
others who may be directly affected. Additionally, if a party has stock which
is publicly traded, the party may make such disclosures as are required by
applicable securities laws. Further, if a party is expressly asked by a third
party about the dispute or the arbitration, the party may disclose and
acknowledge in general and limited terms that there is a dispute with the other
party which is being (or has been) arbitrated. Once the arbitration award has
become final, if the arbitration award is not promptly satisfied, then these
confidentiality provisions shall no longer be applicable.
9.13 Governing Law. This Agreement and all questions
relating to its validity, interpretation, performance and enforcement shall be
governed by and construed in accordance with the laws of the State of
California without giving effect to principles of conflict of laws.
9.14 Construction. This Agreement shall be construed and
interpreted in accordance with the plain meaning of the entirety of the
provisions of this Agreement, consistent with the overall intent and spirit of
the parties and the entire Agreement. As both parties and their legal counsel
have participated in the negotiations and the drafting for this Agreement, any
ambiguity or inconsistency in any of the provisions of this Agreement shall not
be construed against either party as the draftsman of this Agreement.
IN WITNESS WHEREOF, the parties to this Agreement have duly executed
it as of the date set forth above.
HOWELL INTELLIGENCE SERVICES,
INC., A DELAWARE CORPORATION
By: /s/ Eric P. Wenaas
------------------------------------------
ERIC P. WENAAS, President
and Chief Executive Officer
ROBERT M. HOWELL, AN INDIVIDUAL
By: /s/ Robert M. Howell
------------------------------------------
ROBERT M. HOWELL
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Exhibit 2.5
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") is entered into
as of May ___, 1997 by and between Jaycor Emerging Technologies, Inc., a
California corporation ("JETI"), and Jaymark, Inc., a Delaware corporation
("Jaymark").
WITNESSETH:
WHEREAS, Jaymark is a corporation duly organized and validly existing under
the laws of the State of Delaware;
WHEREAS, JETI is a corporation duly organized and validly existing under
the laws of the State of California;
WHEREAS, on the date of this Merger Agreement, Jaymark has authority to
issue one thousand (1,000) shares of Common Stock, par value One-Tenth of One
Cent ($0.001) per share (the "Jaymark Common Stock"), of which one hundred (100)
shares are issued and outstanding and owned by JETI;
WHEREAS, on the date of this Merger Agreement, JETI has authority to issue
twelve million (12,000,000) shares of Common Stock (the "JETI Common Stock"), of
which three million one hundred two thousand seven hundred seventy (3,102,770)
shares are issued and outstanding;
WHEREAS, the respective Boards of Directors for Jaymark and JETI have
determined that, for the purpose of effecting the reincorporation of JETI in the
State of Delaware, it is advisable and to the advantage of said two corporations
and their respective shareholders that JETI merge with and into Jaymark upon the
terms and conditions herein provided; and
WHEREAS, the respective Boards of Directors of Jaymark and JETI, the
shareholders of JETI, and the sole stockholder of Jaymark have adopted and
approved this Merger Agreement;
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, JETI and Jaymark hereby agree to merge as follows:
1. Merger. JETI shall be merged with and into Jaymark, and Jaymark shall
survive the merger ("Merger"), effective upon the date when this Merger
Agreement is made effective in accordance with applicable law (the "Effective
Date").
2. Governing Documents. The Certificate of Incorporation of Jaymark shall
be amended to read in full as follows:
FIRST: The name of the Corporation is Jaymark, Inc. (hereinafter sometimes
referred to as the "Corporation").
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SECOND: The address of the registered office of the Corporation in the
State of Delaware is The Corporation Trust Company, 1209 Orange
Street, in the City of Wilmington, County of New Castle, Delaware,
19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of Delaware.
FOURTH:
A. Classes of Stock. The total number of shares which the Corporation
is authorized to issue is sixteen million (16,000,000) shares of
common stock, One-Tenth of One Cent ($0.001) par value per share
("the Common Stock").
B. Rights, Preferences and Restrictions of the Common Stock. The
Common Stock authorized by this Certificate of Incorporation may be
issued from time to time in two (2) classes. The first class of
Common Stock shall be designated "Class A Common Stock," which
class shall consist of twelve million (12,000,000) shares. The
second class of Common Stock shall be designated "Class B Common
Stock", which class shall consist of four million (4,000,000)
shares and shall be issued in five series, the first of which shall
be designated "Series B-1 Common Stock," which series shall consist
of eight hundred thousand (800,000) shares. The second series of
Class B Common Stock shall be designated "Series B-2 Common Stock,"
which series shall consist of eight hundred thousand (800,000)
shares. The third series of Class B Common Stock shall be
designated "Series B-3 Common Stock," which series shall consist of
eight hundred thousand (800,000) shares. The fourth series of Class
B Common Stock shall be designated "Series B-4 Common Stock," which
series shall consist of eight hundred thousand (800,000) shares.
The fifth series of Class B Common Stock shall be designated
"Series B-5 Common Stock," which series shall consist of eight
hundred thousand (800,000) shares. The relative rights,
preferences, privileges and restrictions granted to or imposed upon
the shares of the Class A Common Stock, the Series B-1 Common
Stock, the Series B-2 Common Stock, the Series B-3 Common Stock,
the Series B-4 Common Stock and the Series B-5 Common Stock
(collectively, the "Common Stock") are as follows:
1. Dividend Provisions. The holders of shares of the Common Stock
shall be entitled to dividends out of funds legally available
therefor, when and as declared by the Board of Directors. Dividends
shall be nonmandatory and noncumulative, and no undeclared or
unpaid dividend shall bear interest.
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2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding
up of this Corporation, either voluntary or involuntary, all assets
and funds of the Corporation legally available for distribution to
stockholders shall be distributed among the holders of Common Stock
pro rata on the basis of the number of shares of Class A Common
Stock outstanding and issuable upon conversion of such 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 held by such
holder (as adjusted for stock splits, stock dividends,
recapitalizations, and the like, plus any declared but unpaid
dividends on such shares).
(b) A consolidation or merger of this Corporation with or
into any other corporation or corporations pursuant to which more
than fifty percent (50%) of the voting power of the Corporation is
transferred to third parties, or a sale, conveyance or disposition
of all or substantially all of the assets of this Corporation or
the effectuation by the Corporation of a transaction or series of
related transactions in which more than fifty percent (50%) of the
voting power of the Corporation is disposed of (other than as a
result of the Corporation's issuance of voting securities), shall
be deemed to be a liquidation, dissolution or winding up within the
meaning of this Section 2.
3. Conversion. The holders of the 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 shall have conversion rights as follows
(the "Conversion Rights"):
(a) Automatic Conversion.
(i) Each outstanding share of Series B-1 Common
Stock shall automatically be converted into one (1) fully paid and
nonassessable share of Class A Common Stock (as adjusted to reflect
subsequent stock dividends, stock splits, recapitalizations, and
the like) immediately upon the date of consummation (the "B-1
Conversion Date") of the Corporation's sale of its Class A Common
Stock in a bona fide, firm commitment underwriting pursuant to a
registration statement on Form S-1 under the Securities Act of
1933, as amended, ("Securities Act") (the "Initial Public
Offering"). Each outstanding share of Series B-2 Common Stock shall
automatically be converted into one (1) fully paid and
nonassessable share of Class A Common Stock (as adjusted to reflect
subsequent stock dividends, stock splits, recapitalizations, and
the like) immediately upon the first anniversary of the
consummation of the Initial Public Offering (the "B-2 Conversion
Date"). Each outstanding share of Series B-3 Common Stock shall
automatically be converted into fully paid and nonassessable
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shares of Class A Common Stock (as adjusted to reflect subsequent
stock dividends, stock splits, recapitalizations, and the like)
immediately upon the second anniversary of the consummation of the
Initial Public Offering (the "B-3 Conversion Date"). Each
outstanding share of Series B-4 Common Stock shall automatically be
converted into one (1) fully paid and nonassessable share of Class
A Common Stock (as adjusted to reflect subsequent stock dividends,
stock splits, recapitalizations, and the like) immediately upon the
third anniversary of the consummation of the Initial Public
Offering (the "B-4 Conversion Date"). Each outstanding share of
Series B-5 Common Stock shall automatically be converted into one
(1) fully paid and nonassessable share of Class A Common Stock (as
adjusted to reflect subsequent stock dividends, stock splits,
recapitalizations, and the like) immediately upon the fourth
anniversary of the consummation of the Initial Public Offering (the
"B-5 Conversion Date"). In the event that the Initial Public
Offering has not been consummated by December 31, 1997, (the "Class
B Conversion Date"), then each outstanding share of each series of
Class B Common Stock shall automatically be converted into one (1)
fully paid and nonassessable share of Class A Common Stock (as
adjusted to reflect subsequent stock dividends, stock splits,
recapitalizations and the like) on such date.
(b) Mechanics of Conversion. Conversion of the 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 in accordance
with Section C.3(a)(i) of this Article Fourth shall be automatic,
and (i) on and after the B-1 Conversion Date, all of the
outstanding certificates which prior to that time represented
shares of Series B-1 Common Stock shall be deemed for all purposes
to evidence ownership of and to represent the shares of Class A
Common Stock into which the shares of B-1 Common Stock have been
converted, (ii) on and after the B-2 Conversion Date, all of the
outstanding certificates which prior to that time represented
shares of Series B-2 Common Stock shall be deemed for all purposes
to evidence ownership of and to represent the shares of Class A
Common Stock into which the shares of Series B-2 Conversion Stock
have been converted, (iii) on and after the B-3 Conversion Date,
all of the outstanding certificates which prior to that time
represented shares of Series B-3 Common Stock shall be deemed for
all purposes to evidence ownership of and to represent the shares
of Class A Common Stock into which the shares of Series B-3 Common
Stock have been converted, (iv) on and after the B-4 Conversion
Date, all of the outstanding certificates which prior to that time
represented shares of Series B-4 Common Stock shall be deemed for
all purposes to evidence ownership of and to represent the shares
of Class A Common Stock into which the shares of Series B-4 Common
Stock have been converted, (v) on and after the B-5 Conversion
Date, all of the outstanding certificates which prior to that time
represented shares of Series B-5 Common Stock shall be deemed for
all purposes to evidence
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ownership of and to represent the shares of Class A Common Stock
into which the shares of Series B-5 Common Stock have been
converted, and (vi) on and after the Class B Conversion Date, in
the event that the Initial Public Offering has not been consummated
by such date, all outstanding certificates which prior to that time
represented shares of any series of Class B Common Stock shall be
deemed for all purposes to evidence ownership of and to represent
the shares of Class A Common Stock into which the shares of Class B
Common Stock have been converted.
(c) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon
conversion of the Series B-1 Common Stock, Series B-2 Common Stock,
Series B-3 Common Stock, Series B-4 Common Stock or Series B-5
Common Stock, and the number of shares of Class A Common Stock to
be issued upon such conversion shall be rounded to the nearest
whole share.
(d) Notices of Record Date. In the event of any taking by
this Corporation of a record of the holders of any class of
securities for the purpose of determining the holders thereof who
are entitled to receive any dividend (other than a cash dividend)
or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, this
Corporation shall mail to each holder of Common Stock at least
twenty (20) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
(e) Reservation of Stock Issuable Upon Conversion. This
Corporation shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock solely for the
purpose of effecting the conversion of the shares of the 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 such number of
its shares of Class A Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of
the 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;
and if at any time the number of authorized but unissued shares of
Class A Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of the 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, in addition to such other
remedies as shall be available to the holder of such stock, this
Corporation will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but
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unissued shares of Class A Common Stock to such number of shares as
shall be sufficient for such purposes.
(f) Notices. Any notice required by the provisions of this
Certificate of Incorporation to be given to the holders of shares
of Series B-1 Common Stock, Series B-2 Common Stock, Series B-3
Common Stock, Series B-4 Common Stock, or Series B-5 Common Stock
shall be addressed to each holder of record at his address
appearing on the books of this Corporation and shall be deemed
given (i), if sent by mail, three (3) days after deposit in the
United States mail, first class postage prepaid, and, (ii), if sent
by messenger or courier, three (3) days after delivery to the
messenger or courier, or upon receipt by such holder, if earlier.
5. Voting Rights. The holder of each share of Common Stock shall
have the right to one vote for each share of Class A Common Stock
outstanding or each share of Class A Common Stock into which such
share of Series B-1 Common Stock, Series B-2 Common Stock, Series
B-3 Common Stock, Series B-4 Common Stock or Series B-5 Common
Stock would be converted on the applicable Conversion Date (with
any fractional share determined on an aggregate conversion basis
being rounded to the nearest whole share) held by such holder, and
with respect to such vote, such holder shall have full voting
rights and powers equal to the voting rights and powers of the
holders of Common Stock shall be entitled, notwithstanding any
provision hereof, to notice of any stockholders' meeting in
accordance with the by-laws of this Corporation (the "Bylaws"), and
shall be entitled to vote, together with holders of Common Stock,
with respect to any questions upon which holders of Common Stock
have the right to vote.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the
powers and authority expressly conferred upon them by statute or by
this certificate of incorporation or the By-laws, the directors are
hereby empowered to exercise all such powers and do all such acts
and things as may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
C. On and after the consummation of the Initial Public Offering, any
action required or permitted to be taken by the stockholders of the
Corporation
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must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders. Prior to such sale, unless
otherwise provided by law, any action which may otherwise be taken
at any meeting of the stockholders may be taken without a meeting
and without prior notice, if a written consent describing such
actions is signed by the holders of outstanding shares having not
less than the minimum number of votes which would be necessary to
authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted.
SIXTH:
A. The number of directors shall initially be set at six (6) and,
thereafter, shall be fixed from time to time exclusively by the
Board of Directors pursuant to a resolution adopted by a majority
of the total number of authorized directors (whether or not there
exist any vacancies in previously authorized directorships at the
time any such resolution is presented to the Board of Directors for
adoption). A vacancy resulting from the removal of a director by
the stockholders as provided in Article SIXTH, Section C below may
be filled at a special meeting of the stockholders held for that
purpose.
B. Newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of
Directors resulting from death, resignation or other cause (other
than removal from office by a vote of the stockholders) may be
filled only by a majority vote of the directors then in office,
though less than a quorum, and directors so chosen shall hold
office for a term expiring at the next annual meeting of
stockholders at which the term of office to which they have been
elected expires, and until their respective successors are elected,
except in the case of the death, resignation, or removal of any
director. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent
director.
C. Any directors, or the entire Board of Directors, may be removed
from office at any time, with or without cause, but only by the
affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting
together as a single class. Vacancies in the Board of Directors
resulting from such removal may be filled by a majority of the
directors then in office, though less than a quorum, or by the
stockholders as provided in Article SIXTH, Section A above.
Directors so chosen shall hold office for a term expiring at the
next annual meeting of stockholders at which the term of office to
which they have been elected expires, and until their respective
successors are elected, except in the case of the death,
resignation, or removal of any director.
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SEVENTH:The Board of Directors is expressly empowered to adopt, amend or
repeal the By-laws. Any adoption, amendment or repeal of By-laws by
the Board of Directors shall require the approval of a majority of
the total number of authorized directors (whether or not there
exist any vacancies in previously authorized directorships at the
time any resolution providing for adoption, amendment or repeal is
presented to the Board of Directors). The stockholders shall also
have power to adopt, amend or repeal the By-laws; provided,
however, that any adoption, amendment or repeal of By-laws of the
Corporation by the stockholders without the prior approval of the
Board of Directors shall require, in addition to any vote of the
holders of any class or series of stock of the Corporation required
by law or by this certificate of incorporation, the affirmative
vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then-outstanding shares
of the capital stock of the Corporation entitled to vote generally
in the election of directors, voting together as a single class.
EIGHTH: To the fullest extent permitted by the Delaware General Corporation
Law, a director of this Corporation shall not be liable to this
Corporation or its stockholders for monetary damages for any breach
of a fiduciary duty as a director.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the liability of
a director, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended. Any repeal or
modification of the foregoing provisions of this Article EIGHTH by
the stockholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at
the time of such repeal or modification.
NINTH: The Corporation reserves the right to amend or repeal any provision
contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights
conferred upon stockholders are granted subject to this
reservation; provided, however, that, notwithstanding any other
provision of this certificate of incorporation or any provision of
law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the
stock of this Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then-outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to
amend or repeal this Article NINTH, Article FIFTH, Article SIXTH,
Article SEVENTH or Article EIGHTH.
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The Certificate of Incorporation of Jaymark, as amended herein, shall
continue to be the Certificate of Incorporation of Jaymark as the surviving
Corporation without change or amendment until further amended in accordance with
the provisions thereof and applicable laws. The by-laws of Jaymark, in effect on
the Effective Date, shall continue to be the by-laws of Jaymark as the surviving
Corporation without change or amendment until further amended in accordance with
the provisions thereof and applicable laws.
TENTH The name and mailing address of the incorporator of Jaymark is:
David R. Young, Esq.
Gary Cary Ware & Freidenrich
4365 Executive Drive, Suite 1600
San Diego, California 92121
3. Directors. The directors of JETI shall become the directors of Jaymark
upon the Effective Date and the members of any committee of the board of
directors of JETI shall become the members of such committees for Jaymark.
4. Succession. On the Effective Date, Jaymark shall succeed to JETI in the
manner of and as more fully set forth in Section 259 of the General Corporation
Law of the State of Delaware.
5. Further Assurances. From time to time, as and when required by Jaymark
or by its successors and assigns, there shall be executed and delivered on
behalf of JETI such deeds and other instruments, and there shall be taken or
caused to be taken by it such further and other action, as shall be appropriate
or necessary in order to vest, perfect or confirm, of record or otherwise, in
Jaymark the title to and possession of all the property, interests, assets,
rights, privileges, immunities, powers, franchises and authority of JETI, and
otherwise to carry out the purposes of this Merger Agreement and the officers
and directors of Jaymark are fully authorized in the name and on behalf of JETI
or otherwise to take any and all such action and to execute and deliver any and
all such deeds and other instruments.
6. Stock of JETI.
a. Common Stock. Upon the Effective Date, by virtue of the Merger and
without any action on the part of the holder thereof, each five (5) shares of
JETI Common Stock outstanding immediately prior thereto shall be changed and
converted into three (3) fully paid and nonassessable shares of Jaymark Common
Stock, of which one-fifth (1/5) will be Series B-1 Common Stock, one-fifth (1/5)
will be Series B-2 Common Stock, one-fifth (1/5) will be Series B-3 Common
Stock, one-fifth (1/5) will be Series B-4 Common Stock and one-fifth (1/5) will
be Series B-5 Common Stock. In the event that the outstanding shares represented
by a stock certificate do not divide evenly among such five series, the
fractional portions thereof shall become shares of Series B-5 Common Stock.
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b. Fractional Shares. No fractional shares which a Jaymark stockholder
would otherwise be entitled to receive by reason of the exchange of JETI stock
for Jaymark stock shall be issued, and the number of shares of Jaymark Common
Stock shall be rounded to the nearest whole share.
7. Stock Certificates. On and after the Effective Date, all of the
outstanding certificates which prior to that time represented shares of JETI
capital stock shall be deemed for all purposes to evidence ownership of and to
represent the shares of Jaymark Common stock into which the shares of JETI
capital stock represented by such certificates have been converted as herein
provided. The registered owner on the books and records of Jaymark or its
transfer agent of any such outstanding stock certificate shall, until such
certificate shall have been surrendered for transfer or otherwise accounted for
to Jaymark or its transfer agent, have and be entitled to exercise any voting
and other rights with respect to and to receive any dividend and other
distributions upon the shares of Jaymark stock evidenced by such outstanding
certificate as above provided.
8. Options. Upon the Effective Date, each outstanding option, warrant or
other right to purchase five (5) shares of JETI stock, including those options
granted and outstanding under the 1980 Stock Option Plan, the 1990 Incentive
Stock Option Plan, the 1991 Stock Option Plan, the 1996 Stock Option Plan, the
1997 Outside Directors Stock Option Plan, the Employee Stock Ownership Plan and
the 1997 Employee Stock Purchase Plan (collectively, the "Plans") of JETI, shall
be converted into and become an option, warrant, or right to purchase three (3)
shares of Jaymark Class B Common Stock (rounded to the nearest whole share) at a
price per share equal to one hundred sixty-six and two-thirds percent (166 2/3%)
of the exercise price of the option, warrant or right to purchase JETI Common
Stock, and upon the same terms and subject to the same conditions as set forth
in such plan and other agreements entered into by JETI pertaining to such
options, warrants, or rights. Upon the exercise of an option, warrant or right
to purchase Class B Common Stock, the shares so issued shall be comprised of (a)
one-fifth (1/5) of Series B-1 Common Stock, one-fifth (1/5) of Series B-2 Common
Stock, one-fifth (1/5) of Series B-3 Common Stock, one-fifth (1/5) of Series B-4
Common Stock and one-fifth (1/5) of Series B-5 Common Stock; provided, however,
that if on the date of exercise a series of Class B Common Stock has been
earlier converted pursuant to Article Fourth, Section C, 3, then the holder
shall receive the number of shares of Series A Common Stock into which such
series of Class B Common Stock had been converted. A number of shares of Jaymark
Common Stock shall be reserved for purposes of such options, warrants, and
rights equal to the number of shares of JETI stock so reserved as of the
Effective Date. As of the Effective Date, Jaymark shall assume all obligations
of JETI under agreements pertaining to such options, warrants, and rights,
including the Plans, and the outstanding options, warrants, or other rights, or
portions thereof, granted pursuant thereto.
9. Other Employee Benefit Plans. As of the Effective Date, Jaymark hereby
assumes all obligations of JETI under any and all employee benefit plans in
effect as of said date or with respect to which employee rights or accrued
benefits are outstanding as of said date.
10. Outstanding Common Stock of Jaymark. Forthwith upon the Effective Date,
the one hundred (100) shares of Jaymark Common Stock presently issued and
outstanding in the
10
<PAGE> 11
name of JETI shall be canceled and retired and resume the status of authorized
and unissued shares of Jaymark Common Stock, and no shares of Jaymark Common
Stock or other securities of Jaymark shall be issued in respect thereof.
11. Covenants of Jaymark. Jaymark covenants and agrees that it will, on or
before the Effective Date:
a. Qualify to do business as a foreign corporation in the State of
California, and in all other states in which JETI is so qualified and in which
the failure so to qualify would have a material adverse impact on the business
or financial condition of Jaymark. In connection therewith, Jaymark shall
irrevocably appoint an agent for service of process as required under the
provisions of Section 2105 of the California Corporations Code and under
applicable provisions of state law in other states in which qualification is
required hereunder.
b. File any and all documents with the California Franchise Tax Board
necessary to the assumption by Jaymark of all of the franchise tax liabilities
of JETI.
12. Amendment. At any time before or after approval and adoption by the
stockholders of JETI, this Merger Agreement may be amended in any manner as may
be determined in the judgment of the respective boards of directors of Jaymark
and JETI to be necessary, desirable or expedient in order to clarify the
intention of the parties hereto or to effect or facilitate the purposes and
intent of this Merger Agreement.
13. Abandonment. At any time before the Effective Date, this Merger
Agreement may be terminated and the Merger may be abandoned by the board of
directors of either JETI or Jaymark or both, notwithstanding approval of this
Merger Agreement by the sole stockholder of Jaymark and the stockholders of
JETI.
14. Counterparts. In order to facilitate the filing and recording of this
Merger Agreement, the same may be executed in any number of counterparts, each
of which shall be deemed to be an original.
11
<PAGE> 12
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by resolution of the respective board of directors of JETI and Jaymark, is
hereby executed on behalf of each of said two corporations by their respective
officers thereunto duly authorized.
JAYMARK:
JAYMARK, INC.,
a Delaware corporation
By:________________________________
Eric P. Wenaas, President
ATTEST:
___________________________________
Dorothy K. Bidwell , Secretary
JETI:
JAYCOR EMERGING
TECHNOLOGIES, INC.,
a California corporation
By:________________________________
Eric P. Wenaas, President
ATTEST:
___________________________________
Dorothy K. Bidwell, Secretary
12
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
JAYMARK, INC.
<PAGE> 2
TABLE OF CONTENTS
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ARTICLE I
STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3. Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.4. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.5. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.6. Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.7. Notice of Stockholder Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.8. Proxies and Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 1.9. Stock List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II
BOARD OF DIRECTORS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.1. Number and Term of Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.2. Vacancies and Newly Created Directorships . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.3. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.4. Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.5. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.6. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.7. Participation in Meetings by Conference Telephone . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.8. Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.9. Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.10. Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.11. Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.12. Nomination of Director Candidates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III
COMMITTEES
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.1. Committees of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.2. Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV
OFFICERS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.1. Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4.2. Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.3. President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.4. Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.5. Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.6. Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.7. Delegation of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
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<TABLE>
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Section 4.8. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.9. Action With Respect to Securities of Other Corporations . . . . . . . . . . . . . . . . . . . . 9
ARTICLE V
STOCK
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5.1. Certificates of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5.2. Transfers of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 5.3. Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5.4. Lost, Stolen or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5.5. Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VI
NOTICES
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6.1. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 6.2. Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VII
MISCELLANEOUS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.1. Facsimile Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.2. Corporate Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.3. Reliance Upon Books, Reports and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.4. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.5. Time Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 8.1. Right to Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 8.2. Right of Claimant to Bring Suit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 8.3. Indemnification of Employees and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 8.4 Non-Exclusivity of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 8.5. Indemnification Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 8.6. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 8.7. Effect of Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 8.8. Savings Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE IX
AMENDMENTS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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<PAGE> 4
BY-LAWS
OF
JAYMARK, INC.
ARTICLE I
STOCKHOLDERS
Section 1.1. Annual Meeting.
An annual meeting of the stockholders, for the election of directors
and for the transaction of such other business as may properly come before the
meeting, shall be held at such place, on such date, and at such time as the
Board of Directors shall each year fix, which date shall be within thirteen
(13) months after the organization of the corporation or after its last annual
meeting of stockholders.
Section 1.2. Special Meetings.
Special meetings of the stockholders, for any purpose or purposes
prescribed in the notice of the meeting, may be called by (a) the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board for adoption), (b) the Chairman of the Board, (c) the President, or (d)
pursuant to a written request of a stockholder or stockholders owning at least
ten percent (10%) of the number of shares of stock (or, with respect to
meetings of a specific class, the number of shares of such specific class
thereof) of the Corporation issued and outstanding and entitled to vote. Such
request for a special meeting of stockholders shall state the purpose or
purposes of the proposed meeting and all business transacted at any such
special meeting shall be confined to the purpose or purposes stated in the
written notice.
Section 1.3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time
by the Delaware General Corporation Law or the Certificate of Incorporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than
thirty (30) days after the date for which the meeting was originally noticed,
or if a new record date is fixed for the adjourned meeting, written notice of
the place, date, and time of the adjourned meeting shall be given in conformity
herewith. At any adjourned meeting, any business may be transacted which might
have been transacted at the original meeting.
1
<PAGE> 5
Section 1.4. Quorum.
At any meeting of the stockholders, the holders of a majority of all
of the shares of the stock entitled to vote at the meeting, present in person
or by proxy, shall constitute a quorum for all purposes, unless or except to
the extent that the presence of a larger number may be required by law or by
the Certificate of Incorporation.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote
who are present, in person or by proxy, may adjourn the meeting to another
place, date, or time.
If a notice of any adjourned special meeting of stockholders is sent
to all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 1.5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the chief executive officer of the Corporation or, in
his absence, such person as may be chosen by the holders of a majority of the
shares entitled to vote who are present, in person or by proxy, shall call to
order any meeting of the stockholders and act as chairman of the meeting. The
secretary of the meeting shall be such person as the chairman appoints.
Section 1.6. Conduct of Business.
The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him in order.
Section 1.7. Notice of Stockholder Business.
At an annual or special meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before a meeting, business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) properly brought before the
meeting by or at the direction of the Board of Directors, or (c) properly
brought before an annual meeting by a stockholder and if, and only if, the
notice of a special meeting provides for business to be brought before the
meeting by stockholders, properly brought before the special meeting by a
stockholder. For business to be properly brought before a meeting by a
stockholder, the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice must
be delivered to or mailed and received at the principal offices of the
Corporation no later than (i) in the case of an annual meeting, ninety (90)
days before the anticipated date of the next annual meeting, under the
assumption that the next annual meeting will occur on the same calendar day as
the day of the most recent annual meeting, and (ii) in the case of a special
meeting, ten (10) days prior to date of such meeting. A stockholder's notice
to the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual or special meeting (1) a brief
2
<PAGE> 6
description of the business desired to be brought before the annual or special
meeting and the reasons for conducting such business at the annual or special
meeting, (2) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business, (3) the class and number of shares
of the Corporation which are beneficially owned by the stockholder, and (4) any
material interest of the stockholder in such business. Notwithstanding
anything in the By-Laws to the contrary, no business shall be conducted at an
annual or special meeting except in accordance with the procedures set forth in
this Section 1.7. The chairman of an annual or special meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this Section 1.7, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
Section 1.8. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing filed in
accordance with the procedure established for the meeting.
Each stockholder shall have one vote for every share of stock entitled
to vote which is registered in his name on the record date for the meeting,
except as otherwise provided herein or required by law.
All voting, including on the election of directors, and except where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or by his proxy, a stock vote
shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast,
and except as otherwise required by law or the Certificate of Incorporation or
the By-Laws of this Corporation, all other matters shall be determined by a
majority of the votes cast.
Section 1.9. Stock List.
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and
showing the address of each such stockholder and the number of shares
registered in his name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during
the whole time thereof and shall be open to the examination of any such
stockholder who is present. This list shall presumptively determine the
identity of the stockholders entitled to vote at the meeting and the number of
shares held by each of them.
3
<PAGE> 7
ARTICLE II
BOARD OF DIRECTORS
Section 2.1. Number and Term of Office.
The number of directors shall initially be not less than five (5) and
not more than nine (9), and the initial number of directors shall be fixed at
six (6) directors. The exact number of directors may be changed from time to
time within the limits specified in this Section 2.1 exclusively by the Board
of Directors pursuant to a resolution adopted by a majority of the total number
of authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board for adoption). The minimum or maximum number of directors provided in
this Section 2.1 may be changed or a definite number fixed without provision
for an indefinite majority of the outstanding shares entitled to vote. The
term of office shall be fixed from time to time exclusively by the Board of
Directors pursuant to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board for adoption). Each director shall hold office until his successor is
elected and qualified or until his earlier death, resignation, retirement,
disqualification or removal.
Section 2.2. Vacancies and Newly Created Directorships.
Newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, or other cause
(other than removal from office by a vote of the stockholders) may be filled
only by a majority vote of the directors then in office, though less than a
quorum, and directors so chosen shall hold office for a term expiring at the
next annual meeting of stockholders. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
Section 2.3. Removal.
Any director, or the entire Board of Directors, may be removed from
office at any time, with or without cause, but only by the affirmative vote of
the holders of at least a sixty-six and two-thirds percent (66 2/3%) of the
voting power of its then outstanding shares of stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class. Vacancies in the Board of Directors resulting from such removal
may be filled by (i) a majority of the directors then in office, though less
than a quorum, or (ii) the stockholders at a special meeting of the
stockholders properly called for that purpose, by the vote of the holders of a
plurality of the shares entitled to vote at such special meeting. Directors so
chosen shall hold office until the next annual meeting of stockholders.
Section 2.4. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of
4
<PAGE> 8
Directors and publicized among all directors. A notice of each regular meeting
shall not be required.
Section 2.5. Special Meetings.
Special meetings of the Board of Directors may be called by three (3)
of the directors then in office, by the chairman of the board or by the chief
executive officer and shall be held at such place, on such date, and at such
time as such directors or such officers shall fix. Notice of the place, date,
and time of each such special meeting shall be given to each director who does
not waive the right to a notice by (i) mailing written notice not less than
five (5) days before the meeting, (ii) sending notice one (1) day before the
meeting by an overnight courier service and two (2) days before the meeting if
by overseas courier service, or (iii) by telephoning, telecopying, telegraphing
or personally delivering the same not less than twenty-four (24) hours before
the meeting. Unless otherwise indicated in the notice thereof, any and all
business may be transacted at a special meeting.
Section 2.6. Quorum.
At any meeting of the Board of Directors, a majority of the total
number of authorized directors shall constitute a quorum for all purposes. If
a quorum shall fail to attend any meeting, a majority of those present may
adjourn the meeting to another place, date, or time, without further notice or
waiver thereof.
Section 2.7. Participation in Meetings by Conference Telephone.
Members of the Board of Directors, or of any committee of the Board of
Directors, may participate in a meeting of such Board or committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other and such participation
shall constitute presence in person at such meeting.
Section 2.8. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law.
Section 2.9. Powers.
The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, including, without limiting the generality of the
foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
5
<PAGE> 9
(3) To authorize the creation, making and issuance, in such form
as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any officer of the Corporation with or without
cause, and from time to time to pass on the powers and duties of any officer
upon any other person for the time being;
(5) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock option, stock purchase,
bonus or other compensation plans for directors, officers, employees and agents
of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and
other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(8) To adopt from time to time regulations, not inconsistent with
these By-Laws, for the management of the Corporation's business and affairs.
Section 2.10. Action Without Meeting.
Any action required or permitted to be taken at any meeting of the
Board of Directors may be taken without a meeting, if all members of the board
shall individually or collectively consent in writing to such action. Such
written consent or consents shall be filed with the minutes of the proceedings
of the board. Such action by written consent shall have the same force and
effect as a unanimous vote of such directors.
Section 2.11. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board
of Directors, fixed fees and other compensation for their services as
directors, including, without limitation, their services as members of
committees of the Board of Directors.
Section 2.12. Nomination of Director Candidates.
Subject to any limitations stated in the Certificate of Incorporation
of this Corporation, nominations for the election of Directors may be made by
the Board of Directors or a proxy committee appointed by the Board of Directors
or by any stockholder entitled to vote in the election of Directors.
6
<PAGE> 10
ARTICLE III
COMMITTEES
Section 3.1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the whole Board,
may from time to time designate one or more committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for those committees and any others provided
for herein, elect a director or directors to serve as the member or members,
designating, if it desires, other directors as alternate members who may
replace any absent or disqualified member at any meeting of the committee. Any
committee so designated may exercise the power and authority of the Board of
Directors to declare a dividend, to authorize the issuance of stock or to adopt
a certificate of ownership and merger if the resolution which designates the
committee or a supplemental resolution of the Board of Directors shall so
provide. In the absence or disqualification of any member of any committee and
any alternate member in his place, the member or members of the committee
present at the meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may by unanimous vote appoint another member of the
Board of Directors to act at the meeting in the place of the absent or
disqualified member.
Section 3.2. Conduct of Business.
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-half of the authorized members shall
constitute a quorum unless the committee shall consist of one or two members,
in which event all members of the committee shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing. Such written consent or consents shall be filed with the
minutes of the proceedings of such committee.
ARTICLE IV
OFFICERS
Section 4.1. Generally.
The officers of the Corporation shall consist of a President, a
Secretary and a Treasurer. The Corporation may also have, at the discretion of
the Board of Directors, a Chairman of the Board, one or more Vice Presidents,
and such other officers as may from time to time be appointed by the Board of
Directors. Officers shall be elected by the Board of Directors, which shall
consider that subject at its first meeting after every annual meeting of
stockholders. Each officer shall hold office at the pleasure of the Board,
until his successor is elected and qualified or until his earlier resignation
or removal. Any number of offices may be held by the same person.
7
<PAGE> 11
Section 4.2. Chairman of the Board.
The Chairman of the Board, if there shall be such an officer, shall,
if present, preside at all meetings of the Board of Directors, and exercise and
perform such other powers and duties as may be from time to time assigned to
him by the Board of Directors or as provided by these By-Laws.
Section 4.3. President.
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the Chairman of the Board, if there be such an officer,
the President shall be the general manager and chief executive officer of the
Corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction, and control of the business and other officers,
employees and agents of the Corporation. He shall preside at all meetings of
the stockholders. He shall be ex-officio a member of all the standing
committees, including the executive committee, if any, and shall have the
general powers and duties of management usually vested in the office of
president of a corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors or by these By-Laws. He shall have
power to sign all stock certificates, contracts and other instruments of the
Corporation which are authorized by the Board of Directors.
Section 4.4. Vice President.
In the absence or disability of the President, the Vice Presidents, if
any, in order of their rank as fixed by the Board of Directors, or if not
ranked, the Vice President designated by the Board of Directors, shall perform
the duties of the President, and when so acting shall have all the powers of,
and be subject to all the restrictions upon, the President. The Vice
Presidents, if any, shall have such other powers and perform such other duties
as from time to time may be prescribed for them respectively by the Board of
Directors or these By-Laws.
Section 4.5. Treasurer.
The Treasurer shall keep and maintain or cause to be kept and
maintained, adequate and correct financial books and records of account of the
Corporation in written form or any other form capable of being converted into
written form.
The Treasurer shall deposit all monies and other valuables in the name
and to the credit of the Corporation with such depositaries as may be
designated by the Board of Directors. He shall disburse all funds of the
Corporation as may be ordered by the Board of Directors, shall render to the
President and Directors, whenever they request it, an account of all of his
transactions as Treasurer and of the financial condition of the Corporation,
and shall have such other powers and perform such other duties as may be
prescribed by the Board of Directors or by these By-Laws.
Section 4.6. Secretary.
The Secretary shall keep, or cause to be kept, a book of minutes in
written form of the proceedings of the Board of Directors, committees of the
Board, and stockholders. Such minutes shall include all waivers of notice,
consents to the holding of meetings, or approvals
8
<PAGE> 12
of the minutes of meetings executed pursuant to these By-Laws or the General
Delaware Corporation Law. The Secretary shall keep, or cause to be kept at the
principal executive office or at the office of the Corporation's transfer agent
or registrar, a record of its stockholders, giving the names and addresses of
all stockholders and the number and class of shares held by each.
The Secretary shall give or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required by these By-Laws or
by law to be given, and shall keep the seal of the Corporation in safe custody,
and shall have such other powers and perform such other duties as may be
prescribed by the Board of Directors or these By-Laws.
Section 4.7. Delegation of Authority.
The Board of Directors may from time to time delegate the powers or
duties of any officer to any other officers or agents, notwithstanding any
provision hereof.
Section 4.8. Removal.
Subject to the rights and obligations set forth in a written
Employment Agreement, if any, any officer of the Corporation may be removed at
any time, with or without cause, by the Board of Directors.
Section 4.9. Action With Respect to Securities of Other
Corporations.
Unless otherwise directed by the Board of Directors, the President or
any officer of the Corporation authorized by the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other corporation.
ARTICLE V
STOCK
Section 5.1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in
the name of the Corporation by, the President or a Vice President, and the
Secretary, an Assistant Secretary or the Treasurer, certifying the number of
shares owned by him or her. Any or all the signatures on the certificate may
be facsimile.
Section 5.2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 5.4 of
9
<PAGE> 13
these By-Laws, an outstanding certificate for the number of shares involved
shall be surrendered for cancellation before a new certificate is issued
therefor.
Section 5.3. Record Date.
The Board of Directors may fix a record date, which shall not be more
than sixty (60) nor fewer than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for the other
action hereinafter described, as of which there shall be determined the
stockholders who are entitled: to notice of or to vote at any meeting of
stockholders or any adjournment thereof; to express consent to corporate action
in writing without a meeting; to receive payment of any dividend or other
distribution or allotment of any rights; or to exercise any rights with respect
to any change, conversion or exchange of stock or with respect to any other
lawful action.
Section 5.4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5.5. Regulations.
The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI
NOTICES
Section 6.1. Notices.
Except as otherwise specifically provided herein or required by law,
all notices required to be given to any stockholder, director, officer,
employee or agent shall be in writing and may in every instance be effectively
given by hand delivery to the recipient thereof, by depositing such notice in
the mails, postage paid, or by sending such notice by prepaid telegram,
mailgram or commercial courier service. Any such notice shall be addressed to
such stockholder, director, officer, employee or agent at this last known
address as the same appears on the books of the Corporation. The time when
such notice is received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or dispatched, if delivered through the mails or by telegram,
courier or mailgram, shall be the time of the giving of the notice.
Section 6.2. Waivers.
A written waiver of any notice, signed by a stockholder, director,
officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, director, officer,
10
<PAGE> 14
employee or agent. Neither the business nor the purpose of any meeting need be
specified in such a waiver. Attendance of a person at a meeting shall
constitute a waiver of notice for such meeting, except when the person attends
a meeting for the express purpose of objecting, and does in fact object, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
ARTICLE VII
MISCELLANEOUS
Section 7.1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures
elsewhere specifically authorized in these By-Laws, facsimile signatures of any
officer or officers of the Corporation may be used whenever and as authorized
by the Board of Directors or a committee thereof.
Section 7.2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the
name of the Corporation, which seal shall be in the charge of the Secretary.
If and when so directed by the Board of Directors or a committee thereof,
duplicates of the seal may be kept and used by the Treasurer or by an Assistant
Secretary or other officer designated by the Board of Directors.
Section 7.3. Reliance Upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
duties, be fully protected in relying in good faith upon the books of account
or other records of the Corporation, including reports made to the Corporation
by any of its officers, by an independent certified public accountant, or by an
appraiser.
Section 7.4. Fiscal Year.
The Corporation's fiscal year shall end on the Friday closest to
January 31 each year.
Section 7.5. Time Periods.
In applying any provision of these By-Laws which require that an act
be done or not done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded,
and the day of the event shall be included.
11
<PAGE> 15
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.1. Right to Indemnification.
Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative ("Proceeding"), by reason of the fact
that he or she, or a person of whom he or she is the legal representative, is
or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such Proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the General Corporation Law
of Delaware, as the same exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said Law permitted
the Corporation to provide prior to such amendment) against all expenses,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
Section 8.2, the Corporation shall indemnify any such person seeking indemnity
in connection with a Proceeding (or part thereof) initiated by such person only
if such Proceeding (or part thereof) was authorized by the Board of Directors
of the Corporation. Such right shall be a contract right and shall include the
right to be paid by the Corporation expenses incurred in defending any such
Proceeding in advance of its final disposition; provided, however, that, if
required by the General Corporation Law of Delaware, the payment of such
expenses incurred by a director or officer in his or her capacity as a director
or officer (and not in any other capacity in which service was or is rendered
by such person while a director or officer, including, without limitation,
service to an employee benefit plan) in advance of the final disposition of
such Proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it should be determined ultimately that such director or officer
is not entitled to be indemnified under this Section or otherwise.
Any indemnification as provided herein (unless ordered by a court)
shall be made by the Corporation only as authorized in the specific case upon a
determination that indemnification of a director, officer, employee or agent is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the General Corporation Law of Delaware. Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
12
<PAGE> 16
Section 8.2. Right of Claimant to Bring Suit.
If a claim under Section 8.1 is not paid in full by the Corporation
within ninety (90) days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than
an action brought to enforce a claim for expenses incurred in defending any
Proceeding in advance of its final disposition where the required undertaking,
if any, has been tendered to the Corporation) that the claimant has not met the
standards of conduct which make it permissible under the General Corporation
Law of Delaware for the Corporation to indemnify the claimant for the amount
claimed. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the General Corporation Law of
Delaware, nor an actual determination by the Corporation (including its Board
of Directors, independent legal counsel, or its stockholders) that the claimant
has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that claimant has not met the applicable
standard of conduct.
Section 8.3. Indemnification of Employees and Agents.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification, and to the advancement of
related expenses, to any employee or agent of the Corporation to the fullest
extent of the provisions of this Article with respect to the indemnification of
and advancement of expenses to directors and officers of the Corporation.
Section 8.4 Non-Exclusivity of Rights.
The rights conferred on any person by Sections 8.1, 8.2 and 8.3 shall
not be exclusive of any other right which such persons may have or hereafter
acquire under any statute, provisions of the Certificate of Incorporation,
by-law, agreement, vote of stockholders or disinterested directors or
otherwise.
Section 8.5. Indemnification Contracts.
The Board of Directors is authorized to enter into a contract with any
director, officer, employee or agent of the Corporation, or any person serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
including employee benefit plans, providing for indemnification rights
equivalent to those provided for in this Article VIII.
Section 8.6. Insurance.
The Corporation may maintain insurance, at its expense, to protect
itself and any such director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture trust or other enterprise
against any such expense, liability or loss, whether or
13
<PAGE> 17
not the Corporation would have the power to indemnify such person against such
expenses, liability or loss under Delaware General Corporation Law.
Section 8.7. Effect of Amendment.
Any amendment, repeal or modification of any provision of this Article
VIII by the stockholders or the directors of the Corporation shall not
adversely affect any right or protection of a director or officer of the
Corporation existing at the time of such amendment, repeal or modification.
Section 8.8. Savings Clause.
If this Article or any portion hereof shall be invalidated on any
ground by any court of competent jurisdiction, then the Corporation shall
nevertheless indemnify each director, officer, employee and agent of the
Corporation as to costs, charges and expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement with respect to any action,
suit or proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the Corporation, to the fullest
extent permitted by any applicable portion of this Article that shall not have
been invalidated and to the fullest extent permitted by applicable law.
ARTICLE IX
AMENDMENTS
The Board of Directors is expressly empowered to adopt, amend, alter
or repeal By-Laws of the Corporation, subject to the right of the stockholders
to adopt, amend, alter or repeal the By-Laws of the Corporation. Any adoption,
amendment or repeal of By-Laws of the Corporation by the Board of Directors
shall require the approval of a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any resolution providing for adoption, amendment or
repeal is presented to the Board). The stockholders shall also have power to
adopt, amend, alter or repeal the By-Laws of the Corporation; provided,
however, that any adoption, amendment or repeal of By-laws by the stockholders
without the prior approval of the Board of Directors shall require, in addition
to any vote of the holders of any class or series of stock of the Corporation
required by law or by the Certificate of Incorporation, the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
voting power of all of the then-outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.
[The remainder of this page deliberately left blank]
14
<PAGE> 18
Secretary's Certificate of Adoption of By-Laws
I hereby certify that I am the duly elected and acting Secretary of
Jaymark, Inc., a Delaware corporation (the "Corporation"), and that the
foregoing By-Laws, comprising sixteen (16) pages, constitute the By-Laws of the
Corporation as duly adopted on March 5, 1997, by written consent of the board
of directors of the Corporation.
IN WITNESS WHEREOF, I have hereunto subscribed my name on March 5,
1997.
/s/ DOROTHY K. BIDWELL
-----------------------------
Dorothy K. Bidwell, Secretary
15
<PAGE> 1
EXHIBIT 4.1
[JAYMARK LOGO]
COMMON STOCK
_______________
Shares
See reverse for certain definitions
CUSIP 47211P 10 0
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
----------------------------------------
IS THE RECORD
HOLDER OF
----------------------------------------
FULLY PAID AND NONASSESSABLE SHARES OF CLASS A COMMON STOCK,
$.001 PAR VALUE, OF
[JAYMARK, INC.]
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
-------------------
[SEAL]
/s/ DOROTHY K. BIDWELL /s/ ERIC P. WENAAS
---------------------- -----------------------
Secretary President and Chief
Executive Officer
Countersigned and registered:
U.S. STOCK TRANSFER CORPORATION
(Glendale, CA)
Transfer Agent and Registrar
By:
------------------------------------
Authorized Signature
<PAGE> 2
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preference and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preference and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ...................Custodian...............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act........................................
in common (State)
UNIF TRF MIN ACT -- .............Custodian (until age.........)
(Cust)
....................under Uniform Transfers
(Minor)
to Minors Act..............................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,___________________________hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated________________________
X_______________________________________________
X_______________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
NOTICE: FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed
By___________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 4.2
[JAYMARK LOGO]
_______________
Shares
See reverse for certain definitions
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
----------------------------------------
IS THE RECORD
HOLDER OF
----------------------------------------
FULLY PAID AND NONASSESSABLE SHARES OF CLASS B COMMON STOCK,
$.001 PAR VALUE, OF
[JAYMARK INC.]
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
-------------------
[SEAL]
/s/ DOROTHY K. BIDWELL /s/ ERIC P. WENAAS
---------------------- -----------------------
Secretary President and Chief
Executive Officer
Countersigned and registered:
U.S. STOCK TRANSFER CORPORATION
(Glendale, CA)
Transfer Agent and Registrar
By:
------------------------------------
Authorized Signature
<PAGE> 2
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preference and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ...................Custodian...............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act........................................
in common (State)
UNIF TRF MIN ACT -- .............Custodian (until age.........)
(Cust)
....................under Uniform Transfers
(Minor)
to Minors Act..............................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,___________________________hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated________________________
X_______________________________________________
X_______________________________________________
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
NOTICE: FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guaranteed
By___________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 11.1
JAYMARK, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except for share and per share amounts)
<TABLE>
<CAPTION>
Year ended January 31,
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Net income $357 $336 $322
========= ========= =========
Weighted average number of common shares outstanding 1,891,852 1,924,461 1,980,048
Common stock equivalent shares(1) 151,391 151,391 151,391
--------- --------- ---------
Total number of shares for computing primary and
fully diluted earnings per share 2,043,243 2,075,852 2,131,439
========= ========= =========
Primary net earnings per share $0.17 $0.16 $0.15
========= ========= =========
Fully diluted net earnings per share(2) $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> YEAR YEAR
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1996
<PERIOD-START> FEB-01-1996 FEB-01-1995
<PERIOD-END> JAN-31-1997 JAN-31-1996
<CASH> 85 53
<SECURITIES> 0 0
<RECEIVABLES> 10,347 13,008
<ALLOWANCES> 0 0
<INVENTORY> 370 131
<CURRENT-ASSETS> 11,275 13,876
<PP&E> 32,481 33,400
<DEPRECIATION> 12,850 13,526
<TOTAL-ASSETS> 31,870 34,779
<CURRENT-LIABILITIES> 12,081 13,635
<BONDS> 13,587 14,457
4,159 2,579
0 0
<COMMON> 1 1
<OTHER-SE> 1,131 2,812
<TOTAL-LIABILITY-AND-EQUITY> 31,870 34,779
<SALES> 0 0
<TOTAL-REVENUES> 54,403 52,928
<CGS> 0 0
<TOTAL-COSTS> 51,911 50,340
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,888 2,018
<INCOME-PRETAX> 604 570
<INCOME-TAX> 247 234
<INCOME-CONTINUING> 357 336
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 357 336
<EPS-PRIMARY> 0.17 0.16
<EPS-DILUTED> 0.17 0.16
</TABLE>
