SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 5, 1997
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JAY JACOBS, INC.
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(Exact name of registrant as specified in its charter)
Washington 000-15934 91-0698077
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(State or other jurisdiction of (Commission (IRS Employer
incorporation or organization) File No.) Identification No.)
1530 Fifth Avenue, Seattle, Washington 98101
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(Address of principal executive offices) (Zip Code)
(206) 622-5400
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
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Preliminary Note Regarding Forward-Looking Statements
The information set forth in this Report may contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Certain factors that realistically
could cause results to differ materially from those projected in the
forward-looking statements are set forth in Item 5.B.1 -- "Risk Factors." The
forward-looking statements should be considered in light of these factors.
Item 1. Change in Control of Registrant
On December 5, 1997 (the "Closing Date"), the Registrant created two new
series of its Preferred Stock, denominated Series A Preferred Stock and Series B
Preferred Stock (the "A Stock" and the "B Stock", respectively, and,
collectively, the "Preferred Stock") and sold the entirety of both series (the
"Sale") to a group of investors (the "Investors") led by Cahill, Warnock &
Company, LLC ("Cahill"). The A Stock is non convertible and non voting. The B
Stock is convertible into 86.25% of the sum of (i) the outstanding Common Stock
on the Closing Date, (ii) additional shares of Common Stock issuable to certain
creditors of the Registrant immediately following the Closing Date and (iii) the
shares of Common Stock into which the B Stock is convertible. The B Stock votes
in the election of directors and other general corporate matters on an "as
converted" basis as a single class with the Common Stock.
Two funds managed by Cahill (the "Funds") purchased, in the aggregate,
63.4% of each series of Preferred Stock. T. Rowe Price Recovery Fund II, L.P.
("TRP") also purchased shares of each series of Preferred Stock representing
35.2% of the class. The shares of B Stock purchased by the Funds represents
approximately 55.4% of the voting power of the Registrant in the election of
directors and other general corporate matters. Accordingly, Cahill may be deemed
to control the Registrant. On the Closing Date, the purchasers of the B Stock
agreed with Rex L. Steffey and William L. Lawrence, Jr. the Registrant's
President--Chief Executive Officer and Executive Vice President--Chief Financial
Officer, respectively, that they would vote and otherwise act so as to cause
Messrs. Steffey and Lawrence to be elected and to continue as directors of the
Registrant so long as they are employed by the Registrant. The Investors, other
than TRP, also agreed that they would vote and otherwise act so as to cause a
representative of TRP to be elected and to continue as a director of the
Registrant for as long as TRP continues to own at least 50% of the investment
represented by its A Stock and B Stock. The Registrant believes that neither of
these agreements would prevent the exercise of control by Cahill.
Prior to the Closing Date, the Registrant had operated under a Second
Amended Chapter 11 Plan of Reorganization (the "Plan") confirmed pursuant to
Chapter 11 of Title 11 of the United States Code ("Chapter 11") and was
effectively controlled by representatives of the Postconfirmation Creditors
Committee formed in connection with the Plan and the Registrant's petition under
Chapter 11. Concurrently with the Sale, the Plan was modified to provide for the
discharge of certain of the Registrant's obligations to its pre-petition general
unsecured creditors upon the payment of $1,500,000 in cash and the issuance of
1,889,763
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shares of Common Stock. Accordingly, the directors of the Registrant prior to
the Closing Date, except Mr. Steffey, have resigned and been replaced by Mr.
Lawrence, a representative of TRP, a representative of Cahill and an independent
director. Two director positions remain open and are expected to be filled by an
additional representative of Cahill and an additional independent director.
The Funds were formed to invest in other businesses, such as the Registrant
and used exclusively contributed capital to fund the purchase of the A Stock and
the B Stock.
The Registrant does not know of any arrangement, including any pledge by
any person of securities of the Registrant, the operation of which may, at any
future date, result in a change in control of the Registrant.
Item 5. Other Events
A. EVENTS OCCURRING CONCURRENTLY WITH THE SALE
1. Creation of Series A Preferred Stock and Series B Preferred Stock. On
December 3, 1997, the Registrant amended its Articles of Incorporation to create
two new series of Preferred Stock. The rights and preferences of each such new
series are set forth in the Statement of Rights and Preferences filed with the
Secretary of State of Washington as a part of such amendment. Copies of the
Registrant's Amended and Restated Articles of Incorporation are filed as an
Exhibit to this Report on Form 8-K. The following descriptions of certain of the
rights and preferences of the A Stock and the B Stock are qualified in their
entirety by reference to such Exhibit.
(a) Series A Preferred Stock. 46,000 shares of A Stock are authorized
and all of them are issued and outstanding. Shares of A Stock redeemed by the
Registrant as described below will be retired and are not reissuable by the
Registrant.
(i) Dividends. Holders of A Stock are entitled to cumulative
dividends at the rate of $5.00 per share per annum until December 31, 2002.
Thereafter, dividends on the A Stock cumulate and accrue on a daily basis,
without interest, at the rate of $20.00 per share per annum. Dividends are
payable out of funds legally available therefor when, as and if declared by the
Board of Directors of the Registrant. The Registrant may not pay dividends on
the B Stock unless and until an equivalent dividend has been paid on the A Stock
and may not pay dividends (other than dividends payable in Common Stock) on the
Common Stock unless and until all accrued and unpaid dividends on the A Stock
have been paid. Without the written consent of the holders of 80% of the
outstanding shares of A Stock no shares of Common Stock may be purchased or
redeemed by the Registrant, nor shall any moneys be paid to or made available
for a sinking fund for the purchase or redemption of any Common Stock, unless
and until all accrued and unpaid dividends on the A Stock have been paid.
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(ii) Liquidation Preference. The A Stock ranks pari passu with
the B Stock and senior to the Common Stock on liquidation. Upon liquidation, the
holders of the A Stock are entitled, to the extent funds are available therefor,
to $100 per share plus accrued and unpaid dividends.
(iii) Redemption. The A Stock is redeemable at any time at the
option of the Registrant for $105 per share plus accrued and unpaid dividends.
The Registrant may redeem less than all of the A Stock but must do so pro rata.
The A Stock is redeemable at the option of the holder thereof for $105 per share
in the event of certain Restructuring Events or for $100 per share upon the sale
or series of related sales by the Registrant for cash of its equity securities
the net proceeds to the Registrant from which (after deduction of discounts,
commissions and other offering expenses) equals or exceed $5,000,000, or at any
time after December 31, 2002.
(iv) Voting; Consent. The A Stock is entitled to vote as a
separate class with respect to (a) the issuance of any class or series of
securities of the Registrant having rights senior to or pari passu with the A
Stock or any transaction known by the Registrant to result in a deemed dividend
to the holders of the A Stock pursuant to section 305 of the Internal Revenue
Code of 1986, as amended, or any rule or regulation adopted thereunder or any
equivalent provision of federal law. Except as described above or as otherwise
provided by law, the A Stock is nonvoting. Without the written consent of the
holders of 80% of the outstanding A Stock, the Registrant will not amend, alter
or repeal the its Articles of Incorporation or Bylaws in any manner which
adversely affects the rights or preferences of the A Stock.
(b) Series B Preferred Stock. 25,000 shares of B Stock are authorized
and all of them are issued and outstanding. Shares of B Stock redeemed by the
Registrant as described below will be retired and are not reissuable by the
Registrant.
(i) Dividends. Holders of B Stock are entitled to cumulative
dividends at the rate of $8.00 per share per annum commencing December 3, 1999
until December 31, 2002. Thereafter, dividends on the B Stock cumulate and
accrue on a daily basis, without interest, at the rate of $20.00 per share per
annum. If, prior to December 31, 2002, the Registrant consummates a
Restructuring Event, the dividend rate will increase to $20.00 per share per
annum as of the date of such event. Dividends are payable out of funds legally
available therefor when, as and if declared by the Board of Directors of the
Registrant. The Registrant may not pay dividends (other than dividends payable
in Common Stock) on the Common Stock unless and until all accrued and unpaid
dividends on the B stock have been paid. Without the written consent of the
holders of 80% of the outstanding shares of B Stock no shares of Common Stock
may be purchased or redeemed by the Registrant, nor shall any moneys be paid to
or made available for a sinking fund for the purchase or redemption of any
Common Stock, unless and until all accrued and unpaid dividends on the B stock
have been paid.
(ii) Liquidation Preference. The B Stock ranks pari passu with
the A Stock and senior to the Common Stock on liquidation. Upon liquidation, the
holders of the B
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Stock are entitled, to the extent funds are available therefor, to $100 per
share plus accrued and unpaid dividends.
(iii) Redemption. Commencing January 1, 2003, if all of the A
Stock have been redeemed by the Registrant and with the written consent of the
holders of not less than a majority of the B Stock then outstanding, the
Registrant may redeem the B Stock upon not less than 30 days prior notice to
each holder all or any of the B Stock for $105.00 per share, plus accrued but
unpaid dividends. Any redemption of less than all the outstanding shares of B
Stock shall be on a pro rata basis.
(iv) Voting; Consent. In general, the B Stock is entitled to vote
with the Common Stock on an "as converted" basis as a single class. While any
shares of B Stock are outstanding, the Board of Directors of the Registrant
shall consist of seven director positions. At any time at which the B Stock
constitutes less than a majority, by voting power, of the stock entitled to vote
in the election of directors of the Registrant, then (i) the B Stock, voting as
a separate class, shall be entitled to elect not less than three directors and
the remaining four directors shall be elected by the B Stock and the Common
Stock, voting as a single class, and (ii) not less than two directors elected by
the B Stock and the Common Stock, voting as a single class, shall be
non-employee directors reasonably satisfactory to the holders of the B Stock.
The Registrant will not, without the written consent of a majority of the then
outstanding B Stock, create or authorize the creation of any additional class or
series of capital stock of the Registrant, or increase the authorized amount of
the A Stock, or increase the authorized amount of any additional class or series
of capital stock of the Registrant, or create or authorize any obligations or
securities convertible into shares of A Stock or any other class of capital
stock unless the same ranks junior to the B Stock both as to dividends and as to
the distribution of assets on liquidation. Without the written consent of the
holders of 80% of the outstanding B Stock the Registrant will not (i) increase
the authorized amount of the B Stock or create or authorize any obligations or
securities convertible into shares of B Stock, or (ii) amend, alter or repeal
its Articles of Incorporation or Bylaws in any manner which adversely affects
the rights or preferences of the B Stock.
(v) Conversion. The B Stock is convertible at any time at the
option of the holder into Common Stock, initially at a Conversion Price per
share of Common Stock of $0.04414. The B Stock is also subject to automatic
conversion upon the consummation of an underwritten public offering of Common
Stock that (i) is priced at a value representing an internal rate of return of
30% per annum on the original purchase price of the B Stock, and (ii) provides
proceeds, net of Commissions, to the Registrant of not less than $25,000,000.
Upon any conversion of B Stock, all accrued and unpaid dividends thereon are
immediately due and payable, provided that any holder of B Stock may elect to
convert any or all such accrued and unpaid dividends to Common Stock at the
Conversion Price then in effect.
The kind and number of securities or other property into which the B Stock
is convertible is subject to adjustment in certain cases, including (i) the
declaration or payment of a dividend payable in Common Stock or options or other
rights to purchase Common Stock, (ii) the
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subdivision or combination of the Common Stock, (iii) certain reorganizations,
reclassifications, consolidations, mergers or sales of all or substantially all
of the Registrant's assets, and (iv) the sale of Common Stock at a price less
than the then effective Conversion Price. The issuance by the Registrant of
options or other rights to purchase Common Stock or securities convertible into
Common Stock ("Convertible Securities") is generally treated, for the purpose of
the adjustment described in clause (iv), above, as if the Common Stock for which
such Convertible Securities are convertible or exercisable had been issued and
sold on the date of issuance of such Convertible Securities for the sum of the
purchase price of such Convertible Securities and the minimum exercise or
conversion price applicable thereto.
2. Modification and Performance of Plan.
As confirmed in November 1995, the Plan provided for the Registrant to pay
its Class 3 (general unsecured) Creditors on January 2, 1997 30% of the amount
of their allowed Class 3 Claims, an amount equal to approximately $2,500,000.
The Registrant was unable to make such payments and entered into certain
forbearance agreements with the Postconfirmation Creditors Committee relating
thereto. In connection with the Sale, by an Order dated December 1, 1997, the
United States Bankruptcy Court for the Western District of Washington at Seattle
conditionally approved a modification of the Plan (the "Plan Modification") to
provide for the distribution to Registrant's Class 3 Creditors thereunder of
1,889,763 shares of Common Stock in lieu of $1,000,000 in cash. The Plan
Modification became effective upon the filing of a Notice of Effectiveness of
Plan Modification on December 5, 1997. Solely in connection with the Plan
Modification, the Registrant's Chapter 11 case was re-opened and re-closed on
December 5, 1997. The Registrant has since distributed $1,500,000 in cash and
1,889,763 shares of Common Stock to its Class 3 Creditors under the Plan in full
satisfaction of its remaining obligations to Class 3 Creditors thereunder.
3. Amendment of Headquarters and Downtown Seattle Store Lease.
The Registrant's corporate offices and its flagship store are located in
downtown Seattle. The leases relating to both properties (the "Leases")
contained a provision requiring the consent of O'Shea Building Company Seattle,
LLC (the "Landlord") to any change in control of the Registrant. Because the
Sale effected a change in control for this purpose, the Registrant entered into
discussions with the landlord with a view to amending the Leases. By a
Modification of Leases dated December 1, 1997 (the "Modification") between the
Registrant and the Landlord, the Registrant and the Landlord modified the terms
of the Leases. The Modification sets the expiration date of the Leases at
January 31, 2000. The Modification also modified the annual minimum rental and
percentage rent terms of the Leases and deleted in their entirety restrictions
on the Registrant's ability to open competing retail outlets within a stated
radius of the leased premises. For the remainder of the term of the Leases, no
consent of the Landlord will be required to a change in control of the
Registrant so long as the leased premises are not used in a manner that is
substantially different from the Registrant's current use. Additionally, the
Modification restricts those provisions of the Leases which require continuous
operation of the Registrant's business on the leased premises.
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4. Adoption of 1998 Stock Incentive Plan; Grants of Options.
At a meeting held December 3, 1997, the Registrant's Board of Directors
adopted its 1998 Stock Incentive Plan (the "Incentive Plan"). The Incentive
Plan, and any grants of options thereunder is subject to approval by the
shareholders at a meeting expected to be held in March 1998. 17,342,761 shares
of Common Stock will be issuable on exercise of options subject to the Incentive
Plan.
The Incentive Plan is administered by a committee of the Board of Directors
of the Registrant (the "Committee") which shall determine and designate from
time to time the individuals to whom awards shall be made, the amount of the
awards, and the other terms and conditions of the awards. The Committee may,
from time to time, grant or award any of the following awards (i) Incentive
Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"); (ii) options other than Incentive Stock Options; (iii)
stock bonuses; (iv) shares subject to restrictions; (v) stock appreciation
rights; (vi) cash bonus rights; (vii) performance units and (viii) foreign
qualified awards. Any such grants or awards may be made to employees, including
employees who are officers or directors, and to other individuals described in
the Incentive Plan who the Committee believes have made or will make an
important contribution to the Registrant or its subsidiaries; provided, however,
that only employees of the Registrant are eligible to receive Incentive Stock
Options under the Incentive Plan. At the discretion of the Committee, an
individual may be given an election to surrender an award in exchange for the
grant of a new award. No employee may be granted options or stock appreciation
rights under the Incentive Plan for more than 5,000,000 shares of Common Stock
in any calendar year.
Subject to shareholder approval of the Incentive Plan, on December 3, 1997,
the Board of Directors granted an additional 1,871,538 options, exercisable at
$0.13 per share, to employees of the Registrant. The Board of Directors, at its
meeting of December 3, 1997, set the exercise price of those options outstanding
as of the date of such meeting at $0.13 per share. Upon approval of the
Incentive Plan, the Registrant intends to cancel those options to purchase the
Registrant's Common Stock outstanding prior to December 3, 1997 and issue
replacement options granted under the Incentive Plan. The exercise price of such
new options would be $0.13 per share. This price is substantially lower than the
price of the options replaced by the new options. The exercise price of all such
options is subject to adjustment in certain events to prevent dilution.
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5. Changes in Management and Management Compensation.
As a result of the Sale, all but one of the Directors of the Registrant
have been replaced. The following table sets forth certain information with
respect to the directors and executive officers of the Registrant:
Name Age Position
Rex L. Steffey 48 President; Chief Executive Officer; Director
William L. Lawrence 46 Executive Vice President; Chief Financial Officer;
Director
Michael D. Sullivan 58 Chairman of the Board
Edward L. Cahill 44 Director
Kim Z. Golden 42 Director
Rex Loren Steffey has served as the Registrant's President and Chief
Executive Officer since September 1994 and has been a Director of the Registrant
since September 1994. From March 1993 to September 1994 Mr. Steffey held various
positions with Paul Harris Stores, Inc. ("Paul Harris"), an Indiana-based
fashion retailer and, immediately prior to joining the Registrant, was Paul
Harris' President and Chief Operating Officer.
William L. Lawrence, Jr. has served as the Registrant's Chief Financial
Officer since January 1995, and has served as its Executive Vice President and a
Director since December 1997. Prior to joining the Registrant, Mr. Lawrence was
Senior Vice President and Chief Financial Officer for Paul Harris Stores, Inc.
from March 1994 until January 1995. From March 1993 to March 1994, Mr. Lawrence
was Senior Vice President-Finance of Paul Harris, and from 1990 until March 1993
he served as Paul Harris' Vice President-Controller, Corporate Secretary, and
Assistant Treasurer.
Michael D. Sullivan has served as a Director of the Registrant since
December 1997. From March 1995 to the present, Mr. Sullivan has been Chairman
of the Board of Golf America Stores, Inc., a golf apparel retailing company.
Mr. Sullivan has also been Chairman of the Board of Pro Axon International, LLC,
a hair care products company since December 1994. From August 1974 to November
1994, Mr. Sullivan was President and Chief Executive Officer of Merry-Go-Round
Enterprises, Inc., a fashion retailer. Merry-Go-Round filed a reorganization
petition under Chapter XI of the Federal Bankruptcy law in January 1994, and
subsequently announced a bankruptcy liquidation. Mr. Sullivan is also a director
of Baltimore Gas and Electric Company.
Edward L. Cahill has served as a Director of the Registrant since December
1997. Mr. Cahill is a founding partner of Cahill, Warnock & Company, LLC, an
asset management firm
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established to invest in small public companies. Prior to founding Cahill,
Warnock & Company in July 1995, Mr. Cahill was a Managing Director at Alex Brown
& Sons Incorporated where, from 1986 through 1995, he headed the firm's Health
Care Investment Banking Group. Mr. Cahill is also a director of Occupational
Health + Rehabilitation Inc, GENEMEDICINE, INC., Prism Health Group, Inc. and
The Maryland Bioprocessing Center.
Kim Z. Golden has served as a Director of the Registrant since December
1997. Mr. Golden is a Managing Director of T. Rowe Price Recovery Fund II, L.P.
From May 1991 to the present, Mr. Golden has been a Vice President of T. Rowe
Price Associates ("TRPA"), a mutual fund company. Prior to joining TRPA Mr.
Golden held various positions at Chemical Banking Corporation (now Chase
Manhattan) where he was a Vice President of Corporate Finance. Mr. Golden is
also a Director of Seaman Furniture Company.
Concurrently with the Sale, the Registrant entered into new employment
agreements with Messrs. Steffey and Lawrence. The agreements are for five-year
terms and provide for an annual salary of $300,000 and $175,000 for Mr. Steffey
and Mr. Lawrence, respectively, subject to increase on an annual basis in
accordance with the Consumer Price Index. The agreements also provide for annual
bonuses of up to 45% of the employee's base salary if certain performance goals
agreed to by the employee and the Compensation Committee of the Board of
Directors are met. The agreements may be terminated by the Registrant with or
without cause and without notice, and may be terminated by Messrs. Steffey and
Lawrence for "Good Reason" (as defined in the agreements) upon 30 days' prior
written notice to the Registrant. In the event of termination by the Registrant
without cause, or termination by the employee for Good Reason, the employee is
entitled to receive payment of his base salary for a period of two years
following termination, plus any bonus accrued through the date of termination
(the "Severance Payment"). For a period of two years following termination the
employee is subject to a covenant not to compete with the Registrant; provided,
that if termination by the Registrant is without cause and occurs within 60 days
of a change in control of the Registrant (as defined in the agreement), the
employee may elect not to receive the Severance Payment and the covenant not to
compete will not then apply.
As of the date of this Report, Messrs. Steffey and Lawrence were grantees
of 1,083,522 and 788,016 options, respectively, all of which have been granted
under the Incentive Plan or are subject to reissuance thereunder, subject to
approval of the Incentive Plan by the shareholders. The exercise price of all
such options is $0.13. All of the options granted to Messrs. Steffey and
Lawrence are fully vested.
6. Principal Shareholders.
The following table sets forth certain information regarding the beneficial
ownership of the Registrant's Common Stock as of the date of this Report by:
each of the Directors and named Executive Officers of the Registrant; all
Directors and Executive Officers of the Registrant as a group; and each other
person known by the Registrant to own beneficially more than 5% of the
Registrant's Common Stock. Except as otherwise noted, beneficial ownership
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of Common Stock by each person listed below is based on such person's beneficial
ownership of B Stock. Numbers of shares beneficially owned by holders of B Stock
and all percentage calculations assume that all outstanding shares of B Stock
have been converted to Common Stock at the currently applicable Conversion
Price:
Number of Shares Percentage of
Beneficially Shares
Name Owned (#) Outstanding (%)
Rex L. Steffey(1) 1,443,022 2.2
William L. Lawrence(2) 912,016 1.4
Michael D. Sullivan 797,463 1.2
Edward L. Cahill(3) 35,897,145 55.4
Kim Z. Golden(4) 19,943,362 30.8
T. Rowe Price Recovery Fund II, L.P. 19,943,362 30.8
Cahill, Warnock Strategic Partners Fund, 34,014,499 52.5
L.P.
Strategic Associates, L.P. 1,882,646 2.9
All Officers and Directors as a Group 59,084,008 91.1
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1. Includes 1,346,522 shares issuable on exercise of currently exercisable
options or options exercisable within 60 days of the date of this Report, and
assumes that 1,083,522 options granted subject to approval of the Incentive Plan
are exercisable within 60 days of this Report. The number of options includes
options to purchase 163,000 held by Mr. Steffey's wife.
2. Consists of shares issuable on exercise of currently exercisable options or
options exercisable within 60 days of the date of this Report, and assumes that
788,016 options granted subject to approval of the Incentive Plan are
exercisable within 60 days of this Report.
3. Consists of shares issuable on conversion of B Stock held by Cahill, Warnock
Strategic Partners Fund, L.P. and Strategic Associates, L.P., both limited
partnerships managed by Cahill, Warnock & Company, LLC. Mr. Cahill is a managing
member of Cahill, Warnock & Company, LLC. Mr. Cahill disclaims beneficial
ownership of shares owned by Cahill, Warnock Strategic Partners Fund, L.P. and
by Strategic Associates, L.P.
4. Consists of shares issuable on conversion of B Stock held by T. Rowe Price
Recovery Fund II, L.P., a limited partnership managed by T. Rowe Price Recovery
Fund II Associates, LLC. Mr. Golden is a Managing Director of T. Rowe Price
Recovery Fund II Associates, LLC. Mr.
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Golden disclaims beneficial ownership of shares owned by T. Rowe Price Recovery
Fund II, L.P. or T. Rowe Price Recovery Fund II Associates, LLC.
B. CERTAIN INFORMATION WITH RESPECT TO THE REGISTRANT
1. Risk Factors.
Management believes that the Registrant's financial condition has been
materially improved by the changes described in this Report. See the
Registrant's quarterly report on Form 10-Q for the quarter ended November 2,
1997. However, the Registrant's business continues to be subject to significant
risks, including those described below. Prospective investors in the Registrant
are urged to consider the following factors, among others, in deciding whether
to invest in the Registrant:
Recent Losses. Beginning in mid-1992, the Registrant experienced
significant operating losses that resulted, among other things, in its filing a
petition for relief under Chapter 11 in May 1994. Since November 28, 1995, the
Registrant has operated under the Plan. As a result of the payments and
issuances of Common Stock to its Class 3 Creditors described above, the
Registrant has fully performed its obligations to such Creditors under the Plan,
as modified, though the Registrant has other continuing obligations under the
Plan. The Registrant has continued to incur operating losses on an annual basis,
however, and, while the Registrant has posted small profits in three of its past
four quarterly periods, there is no assurance that the Registrant will not incur
a loss for the current fiscal year or in the future. Since 1992, the
Registrant's operations have been adversely affected by a lack of working
capital. While the Sale has resulted in a significant improvement in the
Registrant's working capital position, there is no assurance that its current
capital resources will be sufficient to meet its requirements, nor that any
additional funding will be available to the Registrant on commercially
attractive terms or at all.
Apparel Industry and Competition. The retail sale of men's and women's
apparel is intensely competitive. The Registrant believes that key competitive
factors include price, quality, fashion and merchandise selection. Other factors
include brand name recognition, store location and layout and customer service.
In the broadest sense, the Registrant competes with all retailers that sell
fashionable apparel to young women and men. The Registrant's specific
competitors include a large and diverse group of regional and national retail
chains, including boutiques such as the Limited Express, Structure, J. Riggins,
The Gap, Banana Republic and The Buckle and department stores such as Nordstrom,
The Bon, Lamonts, Mervyn's, Federated and Dayton Hudson. Most of the
Registrant's competitors have substantially greater financial and other
resources than does the Registrant and may benefit from strong relationships
with suppliers. The retail fashion industry is subject to rapid and substantial
change based on economic conditions generally or in the regions in which the
Registrant's stores are concentrated, and on factors, such as changes in style,
that are not generally objectively quantifiable or accurately predictable. The
Registrant's ability to compete successfully will depend, among
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other things, on the ability of its management to predict the amount, nature and
timing of consumer demand for its products. There is no assurance that the
Registrant will be successful in anticipating consumer demand.
Ability to Manage Growth; Store Locations. The Registrant intends to expand
its business through the opening of new stores. The Registrant's ability to
achieve its expansion plans will depend on a variety of factors, many of which
may be beyond the Registrant's control, including the Registrant's ability to
locate suitable new store locations, to negotiate acceptable lease terms, to
obtain the required permits and construct new stores in a timely manner, to
attract, train and retain qualified and experienced personnel and management,
and to operate its existing stores profitably and with positive cash flow.
Failure to maintain adequate operating and financial control systems or
unexpected difficulties encountered during expansion could adversely affect the
Registrant's business, financial condition and results of operations. The
Registrant attempts to locate stores in areas where market research indicates
the probability of success. Although the Registrant bases its store location
decisions on careful market research, it is not possible to predict sales volume
accurately in any new store and there is no assurance that any new store will
achieve the results that formed the basis for the Registrant's decision to open
it. Demographic, economic and other changes in the communities in which existing
stores are located can have a substantial impact on store performance. While the
Registrant attempts to react to adverse changes in store performance by changing
merchandizing techniques or by closing unprofitable stores, the Registrant's
investment in store improvements, real property leases and other factors cause
the cost associated with shutting down a store to be significant. Other factors,
such as lease rates, employment costs, weather or changes in the makeup of other
retail establishments in the area can have a substantial impact on short or long
term performance and are difficult or impossible to predict. There is no
assurance that the Registrant will be successful in opening and maintaining
profitable stores.
Seasonality. The Registrant's business is highly seasonal, with peak
periods occurring in the fourth and, to a lesser extent, the third fiscal
quarters and low periods occurring in January and February. As a result, the
Registrant's performance for a given fiscal year is highly dependent on its
results for the last six months and, particularly, the last quarter.
Dependence on Key Personnel. The Registrant is highly dependent on the
continued services of its key employees, including Messrs. Steffey and Lawrence.
The loss of a key employee could have a material, adverse impact on the
Registrant's performance until a suitable replacement could be found. Although
the Registrant has employment contracts with Messrs. Steffey and Lawrence, there
is no assurance that either will continue to be available to the Registrant.
Competition for qualified managers of retail apparel businesses is intense and
there is no assurance that the Registrant will be successful in attracting and
retaining qualified personnel. The Registrant does not maintain "key person"
insurance policies on the lives of any of its employees.
Dependence on Suppliers. The Registrant does not manufacture any of the
merchandise it sells, nor does it own, directly or indirectly, any interest in a
merchandise manufacturer or
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in any manufacturing facilities. The Registrant has ongoing commercial
relationships with many of its suppliers but has no material long-term contracts
for the purchase of merchandise. Although the Registrant works with some
suppliers with respect to the quality and identity of the merchandise available
to it, the Registrant has no means to control directly or to a substantial
degree the quality or nature of the merchandise available to it from its
suppliers other than by changing suppliers. The availability to the Registrant
of merchandise is affected by numerous factors affecting its suppliers,
including economic and other business factors affecting such suppliers,
competing orders from the Registrant's competitors and changes in the legal and
regulatory environment applicable to such suppliers. From time to time, public
opinion has been materially changed by news stories and other publicity related
to the employment, environmental, management or other business practices of
clothing manufacturers. Such events are difficult or impossible to predict and
can have a material impact on consumer preferences. Substantially all of the
Registrant's current suppliers are domestic manufacturers because the Registrant
has recently lacked the financial strength to support global purchasing. As a
result of the Sale, the Registrant believes that it may have be ability to
expand its supplier base to include significant foreign purchases. Dependance on
foreign suppliers is subject to several risks not directly applicable to
domestic purchasing, including the risk of currency fluctuations, changes in
tariff rates or policies, political instability in the source country,
difficulty in the enforcement of agreements, and unavailability of effective
transportation during key periods. To the extent the Registrant expands its
reliance on foreign suppliers, it will be subject to these risks.
Factors Affecting Markets for the Registrant's Common Stock. The Common
Stock is listed on the NASDAQ bulletin board. Trading in the Common Stock has
not been heavy or continuous and, on some trading days, there has been no
activity in the Common Stock. The Registrant is not regularly followed by
experienced market analysts and is not actively traded by securities firms.
Accordingly, there is no assurance that the quoted price of the Common Stock at
any given point in time represents a price at which significant quantities of
the Common Stock could be sold or fairly reflects the underlying value of the
Registrant as a business enterprise. The Registrant is obligated to file a
resale registration statement covering the Common Stock obtainable on conversion
of the B Stock, which will cause all such Common Stock to be immediately
saleable to the general public. Substantially all of the currently outstanding
Common Stock, including the Common Stock issued to the Class 3 (general
unsecured) Creditors, is freely tradeable. Registrant's prepetition creditors
will be freely tradable upon issuance. A substantial number of additional shares
of Common Stock are obtainable on exercise of currently vested options and will
be immediately tradable upon such exercise. A substantial number of existing
shares of Common Stock were, and substantially all of the Common Stock
obtainable on exercise or conversion of existing securities of the Registrant
may be, purchased at prices substantially less than the current market price of
the Common Stock. Sales of substantial numbers of shares of Common Stock in the
open market or otherwise could be expected to adversely affect the price of the
Common Stock. The market price of all public companies, but particularly of
small-cap companies, has been affected by events occurring in the economy
generally or with respect to capital markets generally that are not related to
the performance of the individual companies, themselves. The
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Registrant expects that the price of its Common Stock would be similarly
affected by any such future events.
Item 7. Financial Statements and Exhibits
(c) Exhibits.
2.1 Preferred Stock Purchase Agreement
3.1* Amendment to Articles of Incorporation
4.1* 1998 Stock Incentive Plan
4.2 Voting Agreement between Investors and Messrs. Steffey and
Lawrence
4.3 Agreement of remaining Investors to vote in favor of T. Rowe
Price Recovery Fund II, L.P. Board designee
4.4* Registration Rights Agreement
10.1 Modification of Leases
10.2* Employment Agreement (Rex L. Steffey)
10.3* Employment Agreement (William L. Lawrence, Jr.)
99.1 Press release dated December 5, 1997
99.2 Order Reopening Case, Modifying Treatment of Class 3 (General
Unsecured) Claims under Registrant's Plan of Reorganization,
and Reclosing Case
99.3 Notice of Effectiveness of Plan Modification
* Included in Exhibit 2.1
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: December 15, 1997
JAY JACOBS, INC.
By /s/ WILLIAM L. LAWRENCE
------------------------------------------------
William L Lawrence, Jr., Chief Financial Officer
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EXHIBIT INDEX
Exhibit Description
2.1 Preferred Stock Purchase Agreement
3.1* Amendment to Articles of Incorporation
4.1* 1998 Stock Incentive Plan
4.2 Voting Agreement between Investors and Messrs. Steffey and Lawrence
4.3 Agreement of remaining Investors to vote in favor of T. Rowe Price
Recovery Fund II, L.P. Board designee
4.4* Registration Rights Agreement
10.1 Modification of Leases
10.2* Employment Agreement (Rex L. Steffey)
10.3* Employment Agreement (William L. Lawrence, Jr.)
99.1 Press release dated December 5, 1997
99.2 Order Reopening Case, Modifying Treatment of Class 3 (General
Unsecured) Claims under Registrant's Plan of Reorganization, and
Reclosing Case
99.3 Notice of Effectiveness of Plan Modification
* Included in Exhibit 2.1
JAY JACOBS, INC.
PREFERRED STOCK PURCHASE AGREEMENT
THIS PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is dated as of
December 5, 1997, by and among JAY JACOBS, INC., a Washington corporation (the
"Company"), CAHILL, WARNOCK & COMPANY, LLC, a limited liability company
organized under the laws of the State of Maryland ("Cahill"), and the persons
listed on Exhibit A hereto. The persons listed on Exhibit A hereto are herein
sometimes referred to individually as a "Purchaser" and collectively as the
"Purchasers."
W I T N E S S E T H
WHEREAS, the Company has issued and outstanding the shares of capital stock
described in Section 4.2 hereof and the Company has reserved for issuance
additional shares of capital stock upon the exercise of the outstanding
convertible securities, including rights, options and warrants, identified in
Section 4.2; and
WHEREAS, the Company proposes to issue and sell, and the Purchasers desire
to purchase from the Company, severally and in the amounts set forth on Exhibit
A hereto, shares of the Company's Series A Preferred Stock, par value $.01 per
share, on the terms and conditions set forth herein; and
WHEREAS, the Company proposes to issue and sell, and the Purchasers desire
to purchase from the Company, severally and in the amounts set forth on Exhibit
A hereto, shares of the Company's Series B Preferred Stock, par value $.01 per
share, on the terms and conditions set forth herein; and
WHEREAS, the Company and the Purchasers desire to enter into a registration
rights agreement of even date herewith (the "Registration Rights Agreement"),
attached hereto as Exhibit B, pursuant to which the Purchasers have, among other
rights, certain registration rights; and
WHEREAS, concurrent with the Closing (as defined in Section 3.1), the
Company shall issue 1,889,763 shares of the Company's Common Stock and shall pay
One Million Five Hundred Thousand Dollars ($1,500,000), less certain expenses,
to the holders of allowed Class 3 Claims against the Company pursuant to the
Company's Plan of Reorganization, such issuance and payment being in full
satisfaction of all such allowed Class 3 Claims against the Company.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties hereto agree as follows:
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SECTION 1
Definitions
1.1 Defined Terms. The following terms are defined as follows:
"Affiliate" means, with respect to any Person, (i) any Person that holds
direct or indirect beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act) of voting securities or other voting interests representing at
least 5% of the outstanding voting power of a Person or equity securities or
other equity interests representing at least 5% of the outstanding equity
securities or equity interests in a Person, (ii) any brother, sister, parent,
child or spouse of such Person or any Person described in clause (i), and (iii)
any Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such entity.
"Benefit Arrangement" means any benefit arrangement, obligation, custom, or
practice, whether or not legally enforceable, to provide benefits, other than
salary, as compensation for services rendered, to present or former directors,
employees, agents, or independent contractors, other than any obligation,
arrangement, custom or practice that is an Employee Benefit Plan, including,
without limitation, employment agreements, severance agreements, executive
compensation arrangements, incentive programs or arrangements, sick leave,
vacation pay, severance pay policies, plant closing benefits, salary
continuation for disability, consulting, or other compensation arrangements,
workers' compensation, retirement, deferred compensation, bonus, stock option or
purchase, hospitalization, medical insurance, life insurance, tuition
reimbursement or scholarship programs, employee discounts, any plans subject to
Section 125 of the Code, and any plans providing benefits or payments in the
event of a change of control, change in ownership, or sale of a substantial
portion (including all or substantially all) of the assets of any business or
portion thereof, in each case with respect to any present or former employees,
directors, or agents.
"Class 3 Creditors" means the holders of allowed Class 3 Claims against the
Company, as defined in the Plan of Reorganization.
"Code" means the Internal Revenue Code of 1986 (or any successor thereto),
as amended from time to time.
"Common Stock" means the Company's Common Stock, par value $.01 per share.
"Company Benefit Arrangement" means any Benefit Arrangement sponsored or
maintained by the Company or its Subsidiaries or with respect to which the
Company or a Subsidiary has or may have any liability (whether actual,
contingent, with respect to any of its
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assets or otherwise) as of the Closing Date, in each case with respect to any
present or former directors, employees, or agents of the Company or the
Subsidiaries.
"Company Plan" means, as of the Closing Date, any Employee Benefit Plan for
which the Company or any Subsidiary is the "plan sponsor" (as defined in Section
3(16)(B) of ERISA) or any Employee Benefit Plan maintained by the Company or any
Subsidiary or to which the Company or any Subsidiary is obligated to make
payments, in each case with respect to any present or former employees of the
Company or the Subsidiaries.
"Creditors' Cash Payment" means the payment to be made to the Class 3
Creditors on the Closing Date in the amount of One Million Five Hundred Thousand
Dollars ($1,500,000), less certain expenses.
"Creditors' Shares" means 1,889,763 shares of the Company's Common Stock.
"Effectiveness Period" means the period commencing on the Closing Date and
ending on the date that all Registrable Securities (as hereafter defined) shall
have ceased to be Registrable Securities.
"Employee Benefit Plan" has the meaning given in Section 3(3) of ERISA.
"Environmental Law" means any applicable foreign, federal, state or local
statute, regulation, ordinance or rule of common law as now in effect in any way
relating to the protection of human health and the environment including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. ss. 9601 et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. App. ss. 1801 et seq.), the Resource Conservation
and Recovery Act (42 U.S.C. ss. 6901 et seq.), the Clean Water Act (33 U.S.C.
ss. 1251 et seq.), the Clean Air Act (42 U.S.C. ss. 7401 et seq.), the Toxic
Substances Control Act (15 U.S.C. ss. 2601 et seq.), the Federal Insecticide,
Fungicide, and Rodenticide Act (7 U.S.C. ss. 136 et seq.), and the Occupational
Safety and Health Act (29 U.S.C. ss. 651 et seq.), regulations promulgated
pursuant to these statutes, and common law principles of tort liability.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any regulation or rule issued thereunder.
"ERISA Affiliate" means any Person that together with the Company, would be
or was at any time treated as a single employer under Section 414 of the Code or
Section 4001 of ERISA and any general partnership of which the Company is or has
been a general partner.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"Hazardous Material" means any substance, material or waste that is
regulated by the United States, the foreign jurisdictions in which the Company
or its Subsidiaries conducts business, or any applicable state or local
governmental authority including, without limitation, petroleum and its
by-products, asbestos, and any material or substance that is defined as a
"hazardous waste," "hazardous substance," "hazardous material," "restricted
hazardous waste," "industrial waste," "solid waste," "contaminant," "pollutant,"
"toxic waste" or "toxic substance" under any provision of Environmental Law.
"Knowledge" or derivations thereof shall mean the knowledge of the officers
of the Company and each Subsidiary, and, with respect to Sections 4.20 and 4.22,
each person who conducts human resource and employee benefits management
functions for the Company or any Subsidiary, whether or not an officer of the
Company or such Subsidiary.
"Lien" means any lien, pledge, mortgage, deed of trust, security interest,
claim, lease, charge, option, right of first refusal, easement, servitude,
transfer restriction under any shareholder or similar agreement, encumbrance or
any other restriction or limitation whatsoever.
"Management Option Plan" means the Jay Jacobs, Inc. 1998 Stock Incentive
Plan as adopted by the Board of Directors of the Company on December 3, 1997.
"Material Adverse Effect" means any materially adverse effect on the
business, assets, liabilities, condition (financial or otherwise), results of
operations or prospects of the Company.
"Multiemployer Plan" means any Employee Benefit Plan described in Section
3(37) of ERISA.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PCC" means the Postconfirmation Creditors Committee formed pursuant to the
Plan of Reorganization.
"Permits" means any approvals, authorizations, consents, licenses, permits
or certificates.
"Person" means an individual, partnership, limited liability company,
corporation, joint stock company, trust, unincorporated association, joint
venture or other entity, or a government or any political subdivision or agency
thereof.
"Plan of Reorganization" means the Company's Second Amended Chapter 11 Plan
of Reorganization, as confirmed by order of the United States District Court for
the Western District of Washington dated November 16, 1995, and as modified by
order entered on December 1, 1997.
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"Preferred Stock" means the Series A Stock and the Series B Stock.
"Qualified Plan" means any Employee Benefit Plan that meets, purports to
meet, or is intended to meet the requirements of Section 401(a) of the Code.
"Registrable Securities" means (i) shares of Common Stock or other
securities issued or issuable upon exercise of the Series B Stock and; (ii) any
other shares of Common Stock or securities issued in respect of such shares
(because of stock splits, stock dividends, reclassifications, recapitalization,
mergers, consolidation, share exchange or similar events).
"Registration Rights Agreement" means the registration rights agreement of
even date herewith by and between the Company and the Purchasers.
"Release" means any release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal or leaching into the indoor or outdoor
environment, or into or out of any property.
"Remedial Action" means all actions to (x) clean up, remove, treat or in
any other way address any Hazardous Material; (y) prevent the Release of any
Hazardous Material so it does not endanger or threaten to endanger public health
or welfare or the indoor or outdoor environment; or (z) perform pre-remedial
studies and investigations or post-remedial monitoring and care.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Stock" means the Series A Preferred stock of the Company, $.01
par value per share.
"Series B Stock" means the Series B Preferred Stock of the Company, $.01
par value per share.
"Subsidiaries" means each corporation in which the Company owns or
controls, directly or indirectly, capital stock or other equity interests
representing at least 50% of the outstanding voting stock or other equity
interests, and includes without limitation J.J. Distribution Company.
"U.S. Foreign Corrupt Practices Act" means the U.S. Foreign Corrupt
Practices Act of 1977, Pub. L. No. 95-213, Sections 101-104, as amended, and any
other U.S. law, regulation, order, decree or directive having the force of law
and relating to bribes, kick-backs or similar business practices.
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"Welfare Plan" means any Employee Benefit Plan described in Section 3(1) of
ERISA.
1.2 Other Defined Terms. Additional capitalized terms shall have the
meanings assigned to them in the text of this Agreement. Terms defined in the
singular shall have a comparable meaning when used in the plural and vice versa.
SECTION 2
Authorization and Sale of Preferred Stock
2.1 Authorization of Series A Stock. At Closing, the Company will have
authorized the issuance and sale to each Purchaser of the number of shares of
Series A Stock set forth opposite its name in Exhibit A. The Series A Stock will
have the rights, preferences, privileges and restrictions set forth in the
Statement of Rights and Preferences attached to this Agreement as Exhibit C
hereto (the "Statement of Rights and Preferences").
2.2 Authorization of Series B Stock. At Closing, the Company will have
authorized the issuance and sale to each Purchaser of the number of shares of
Series B Stock set forth opposite its name in Exhibit A. The Series B Stock will
have the rights, preferences, privileges and restrictions set forth in the
Statement of Rights and Preferences.
2.3 Sale and Purchase of Preferred Stock. In reliance on the
representations and warranties of the Company contained herein and subject to
the terms and conditions hereof, at Closing, each Purchaser agrees to purchase
from the Company, severally, the number of Shares of Series A Stock and Series B
Stock set forth opposite its name on Exhibit A hereto, and the Company agrees to
sell to each Purchaser, such number of shares of Series A Stock and Series B
Stock. The aggregate purchase price for all of the Series A Stock to be sold to
the Purchasers as provided herein shall be Four Million Six Hundred Thousand
Dollars ($4,600,000) and the aggregate purchase price of all of the Series B
Stock to be sold to the Purchasers as provided herein shall be Two Million Five
Hundred Thousand Dollars ($2,500,000). Each aggregate purchase price shall be
payable by the Purchasers on an equal, per-share basis.
SECTION 3
Closing Date; Delivery
3.1 Closing Date. The closing of the purchase and sale of the Preferred
Stock (the "Closing") shall be held at the offices of Stoel Rives, LLP, 600
University Street, Suite 3600, Seattle, Washington 98101 on December 5, 1997, or
on such other date or at such other place as the Purchasers and the Company
shall mutually agree (the date of the Closing being referred to herein as the
"Closing Date").
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3.2 Delivery. At the Closing, the Company shall: (a) deliver to each
Purchaser a certificate or certificates evidencing the shares of Series A Stock
or Series B Stock being purchased by it registered in such Purchaser's name
against delivery to the Company of payment in an amount equal to the full
purchase price of the shares of Series A Stock or Series B Stock being purchased
by the Purchasers by certified check or wire transfer to an account designated
by the Company; (b) pay the Creditors' Cash Payment to the Class 3 Creditors, to
be followed as soon as practicable after the Closing by the issuance of the
Creditors' Shares to the Class 3 Creditors; and (c) make such other deliveries
as may be required under the terms of this Agreement.
SECTION 4
Representations and Warranties of the Company
The Company hereby represents and warrants to, and agrees with, the
Purchasers as follows:
4.1 Organization, Good Standing and Qualification. Each of the Company and
its Subsidiaries (i) is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, (ii) has all
requisite power and authority to carry on its business, (iii) is duly qualified
to transact business and is in good standing in all jurisdictions where its
ownership, lease or operation of property or the conduct of its business
requires such qualification, except where the failure to do so would not be
material to the Company. The Company and each of the Subsidiaries has the
corporate power and authority and is in possession of all material franchises,
grants, authorizations, licenses, permits, easements, consents, certificates,
approvals and orders (a) to own, lease and operate its properties and to carry
on its business as now being conducted and (b) in the case of the Company, to
execute and deliver this Agreement and the documents and instruments
contemplated hereby and to consummate the transactions contemplated hereby.
4.2 Capitalization.
(a) The authorized capital stock of the Company is 25,000,000 shares,
consisting of 20,000,000 shares of common stock, par value $.01 per share
("Common Stock") of which 6,213,837 shares are issued and outstanding and
no shares are held in treasury, and 5,000,000 shares of preferred stock
undesignated as to series, none of which are issued and outstanding. Upon
the filing with the Secretary of State of Washington of the Statement of
Rights and Preferences, there will have been designated two series of
preferred stock, consisting of 46,000 shares of Series A Stock and 25,000
shares of Series B Stock, none of which will have been issued or
outstanding. Schedule 4.2 lists all options, warrants or other rights of
any kind granted by the Company to purchase or otherwise acquire capital
stock of the Company issued and outstanding prior to Closing.
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The Company has duly and validly reserved for issuance 925,754 shares of
Common Stock upon exercise or conversion of currently outstanding rights,
options, warrants and other convertible securities. The Company has
reserved or, prior to the Closing, will reserve 56,637,970 shares of Common
Stock for issuance upon conversion of the Series B Stock, and will,
concurrent with the termination of all currently outstanding options,
reserve 17,342,761 shares of Common Stock for issuance upon exercise of
options authorized under the Management Option Plan. Except as listed on
Schedule 4.2, there are outstanding (a) no shares of capital stock or other
voting stock of the Company or any Subsidiary, (b) no securities of the
Company, any Subsidiary or any Person convertible into or exchangeable for
shares of capital stock or voting securities of the Company or any
Subsidiary, (c) no options, warrants or other rights to acquire from the
Company or any Subsidiary (including any rights issuable or issued under
any shareholder rights plan or similar arrangement), and no obligations,
contingent or otherwise, of the Company or any Subsidiary to issue any
capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company or any
Subsidiary, (d) no equity equivalent in the earnings or ownership of the
Company, any Subsidiary or any Person or any similar rights to share
earnings or ownership, and (e) no outstanding obligations of the Company to
repurchase, redeem or otherwise acquire any of its securities or to make
any investment (by loan, capital contribution or otherwise) in any entity
or Person. All outstanding options, rights and warrants have been duly and
validly issued and are in full force and effect. All shares of capital
stock subject to issuance upon exercise of any options, rights or warrants
or otherwise, upon issuance pursuant to the instruments under which they
are issuable, shall be duly authorized, validly issued, fully paid for and
non-assessable and free of all preemptive rights. No outstanding options,
warrants or other securities exercisable for or convertible into shares of
capital stock of the Company require anti-dilution adjustments by reason of
the consummation of the transactions contemplated hereby.
(b) The issued and outstanding shares of capital stock of the Company are duly
authorized, validly issued, fully paid and non-assessable. The shares of
Series A Stock and Series B Stock to be issued pursuant to this Agreement,
upon delivery to the Purchasers of certificates therefor against payment in
accordance with the terms of this Agreement, the shares of Common Stock to
be issued to the Class 3 Creditors as provided herein and the shares of
Common Stock issuable upon conversion of the Series B Stock, (i) will be
validly issued, fully paid and non-assessable, (ii) will be free and clear
of all Liens, and (iii) assuming that the representations of the Purchasers
in Section 5 hereof are true and correct, will be issued in compliance with
all applicable federal and state securities laws.
4.3 Subsidiaries. Schedule 4.3 sets forth a complete and accurate list of
all Subsidiaries of the Company, showing (as to each such Subsidiary) the date
of its incorporation, the jurisdiction of its incorporation, the number of
shares of its authorized capital stock, the number and class of shares thereof
duly issued and outstanding, the names of all stockholders
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of such Subsidiaries and the number and percentage of the outstanding shares of
each such class owned, directly or indirectly, by all such stockholders,
including the Company. At Closing, all of the outstanding capital stock of, or
other ownership interests in, each Subsidiary, is owned by the Company, directly
or indirectly, free and clear of any Lien or any other limitation or limitation
or restriction (including restrictions on the right to vote). All outstanding
shares of the capital stock of the Company and any Subsidiary have been duly
authorized and validly issued and are fully paid and non-assessable and are free
of any preemptive rights. There are no outstanding securities of any Subsidiary
convertible into or evidencing the right to purchase or subscribe for any shares
of capital stock of any Subsidiary, there are no outstanding or authorized
options, warrants, calls, subscriptions, rights, commitments or any other
agreements of any character obligating any Subsidiary to issue any shares of its
capital stock or any securities convertible into or evidencing the right to
purchase or subscribe for any shares of such stock, and there are no agreements
or understandings with respect to the voting, sale, transfer or registration of
any shares of capital stock of any Subsidiary.
4.4 Partnerships, Joint Ventures. The Company is not a party to, and does
not hold, any equity interests in any partnership, limited partnership, limited
liability company or other joint venture of any kind.
4.5 Authorization. The Company has all requisite corporate power and
authority to execute and deliver this Agreement and each agreement, document or
instrument adopted, entered into or delivered by it as contemplated herewith
(the "Transaction Documents") and to perform its obligations hereunder and
thereunder. The execution, delivery and performance of the Agreement and the
transactions contemplated hereby have been duly authorized by all necessary
corporate, including shareholder (if required), action on the part of the
Company. Each Transaction Document to which it is a party has been duly and
validly executed and delivered by the Company and constitutes the legal, valid
and binding obligation of the Company, enforceable against it in accordance with
its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally, and subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity).
4.6 Governmental Consents. No consent, approval, order or authorization of,
or registration, qualification, designation, declaration or filing with, any
federal, state, or local governmental authority on the part of the Company is
required in connection with the valid execution and delivery by the Company of
the Transaction Documents to which it is a party, or the consummation by the
Company of the transactions contemplated by the Transaction Documents to which
it is a party, except for (i) filings pursuant to federal or state securities
laws and (ii) the filing of registration statements with the SEC and any
applicable state securities commission.
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4.7 Conformity with Law; Absence of Litigation. To its knowledge, the
Company has not violated any law or regulation or any order of any court or
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality having jurisdiction over it which would have a
Material Adverse Effect. Except as set forth on Schedule 4.7, there are no
claims, actions, suits, proceedings or investigations pending or, to the
Knowledge of the Company, threatened, nor, to the Knowledge of the Company are
there any facts which with the passage of time, the giving of notice or both
would likely result in any such claims, actions, suits, proceedings or
investigations against the Company or any of its Subsidiaries, or any properties
or rights of the Company or its Subsidiaries, before any court, arbitrator or
administrative, governmental or regulatory authority or body, domestic or
foreign which would have a Material Adverse Effect.
4.8 Insurance. The Company and its Subsidiaries maintain adequate insurance
with respect to their respective businesses and are in compliance with all
material requirements and provisions thereof.
4.9 Patents and Trademarks. The Company and its Subsidiaries have
sufficient title and ownership of (or rights under license agreements to use)
all patents, trademarks, service marks, trade names, copyrights, trade secrets,
proprietary rights and processes ("Intellectual Property") necessary for their
businesses. There are no outstanding options, licenses or agreements of any kind
relating to the foregoing, nor is the Company or any of its Subsidiaries bound
by or a party to any options, licenses or agreements of any kind with respect to
the patents, trademarks, service marks, trade names, copyrights, trade secrets,
proprietary rights and processes of any other Person. A list of all patents,
patent applications, registered trademarks, trademark applications, registered
copyrights and copyright applications owned by the Company or any of its
Subsidiaries is set forth on Schedule 4.9. Within the past five years, the
Company has not received any communications alleging that the Company or any of
its Subsidiaries has violated or, by conducting its business as proposed, would
violate any of the patents, trademarks, service marks, trade names, copyrights,
trade secrets, proprietary rights and processes of any other Person, nor is the
Company aware of any such violations.
4.10 Compliance with Other Instruments and Legal Requirements.
(a) None of the Company or any of its Subsidiaries is in violation or default
of any provisions of its certificate of incorporation, by-laws, or
comparable organizational documents. None of the Company or any of its
Subsidiaries is in violation or default in any respect under any provision,
instrument, judgment, order, writ, decree, contract or agreement to which
it is a party or by which it is bound or of any provision of any federal,
state or local statute, rule or regulation applicable to the Company or any
of its Subsidiaries (including, without limitation, any law, rule or
regulation relating to protection of the environment and the maintenance of
safe and sanitary premises) that would be material to the Company. The
execution, delivery and performance of each
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Transaction Document and the consummation of the transactions contemplated
hereby and thereby will not result in any such violation or be in conflict
with or constitute, with or without the passage of time or giving of
notice, either a default under or give rise to any obligations under, the
Articles of Incorporation or By-Laws of the Company, or any note, bond,
mortgage, indenture, lease, license, permit, contract, agreement or other
instrument or obligation, decree or order to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary or its
properties or assets is or may be bound, or violate any law, order, rule or
regulation, including, without limitation, any federal or state securities
laws, rules or regulations, applicable to the Company or any Subsidiary,
and, does not require any consent, waiver or approval thereunder, or
constitute an event that results in the creation of any Lien upon any
assets of the Company or any of its Subsidiaries.
(b) The Company and its Subsidiaries have all Permits of all governmental
entities required to conduct their respective businesses as currently
conducted.
4.11 Material Agreements; Action. Except as set forth on Schedule 4.11 or
on any other Schedule hereto, there are no material contracts, agreements,
commitments, understandings or proposed transactions, whether written or oral,
to which the Company or any of its Subsidiaries is a party or by which it is
bound that involve or relate to: (i) any of their respective officers,
directors, stockholders or partners or any Affiliate thereof; (ii) the sale of
any of the assets of the Company or any of its Subsidiaries other than in the
ordinary course of business; (iii) covenants of the Company or any of its
Subsidiaries not to compete in any line of business or with any Person in any
geographical area or covenants of any other Person not to compete with the
Company or any of its Subsidiaries in any line of business or in any
geographical area; (iv) the acquisition by the Company or any of its
Subsidiaries of any operating business or the capital stock of any other Person;
(v) the borrowing of money; (vi) the expenditure of more than $50,000 in the
aggregate or the performance by the Company or any Subsidiary extending for a
period more than one year from the date hereof, other than in the ordinary
course of business, or (vii) the license of any Intellectual Property or other
material proprietary right to or from the Company or any of its Subsidiaries.
There have been made available to the Purchasers and its representatives true
and complete copies of all such agreements. All such agreements are in full
force and effect and are the legal, valid and binding obligation of the Company
or its Subsidiaries, enforceable against them in accordance with their terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and subject, as
to enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity). Except as indicated
on Schedule 4.11 none of the Company or any of its Subsidiaries is in default
under any such agreements nor is any other party to any such agreements in
default thereunder in any respect.
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4.12 Brokers' Fees. Except as set forth on Schedule 4.12, no broker,
finder, investment banker or other Person is entitled to any brokerage fee,
finder's fee or other commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by the Company.
4.13 Registration Rights. Except for rights granted pursuant to the
Registration Rights Agreement, the Company has not granted or agreed to grant
any registration rights, including piggyback registration rights, to any Person.
4.14 Corporate Documents. True and correct copies of the Articles of
Incorporation and the By-laws of the Company, as amended and as are currently in
effect, have been delivered to the Purchasers.
4.15 Real Property.
(a) Schedule 4.15(a) sets forth a complete list of all real property and
interests in real property owned (the "Owned Properties") or leased (the
"Leased Properties") by the Company and its Subsidiaries as lessee or
lessor (the Leased Properties together with the Owned Properties, being
referred to herein individually as a "Company Property" and collectively as
the "Company Properties"). The Company Property constitutes all interests
in real property currently used or currently held for use in connection
with the businesses of the Company and its Subsidiaries and which is
necessary for the continued operation of the businesses of the Company and
its Subsidiaries as such businesses are currently conducted. Except as
indicated on Schedule 4.15(a), the Company and its Subsidiaries have a
valid and enforceable leasehold interest under each of the leases for
Leased Property (the "Real Property Leases"), and none of the Company or
any of its Subsidiaries has received any written notice of any default or
event which, with notice or lapse of time, or both, would constitute a
default by the Company or any of its Subsidiaries under any of the Real
Property Leases. All of the Company Property, buildings, fixtures and
improvements thereon owned or leased by the Company and its Subsidiaries
are in good operating condition and repair (subject to normal wear and
tear). The Company has delivered or otherwise made available to the
Purchasers true, correct and complete copies of the Real Property Leases,
together with all amendments, modifications or supplements, if any,
thereto.
(b) The Company and its Subsidiaries have all certificates of occupancy and
Permits of any governmental body necessary or useful for the current use
and operation of each Company Property, and the Company and its
Subsidiaries have fully complied with all conditions of the Permits
applicable to them. No default or violation, or event which, with the lapse
of time or giving of notice or both would become a default or violation,
has occurred in the due observance of any such Permit.
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<PAGE>
(c) There does not exist any actual or threatened or contemplated condemnation
or eminent domain proceedings that affect any Company Property or any part
thereof, and none of the Company or any of its Subsidiaries has received
any notice, oral or written, of the intention of any governmental body or
other Person to take or use all or any part thereof.
(d) None of the Company or any of its Subsidiaries has received any written
notice from any insurance company that has issued a policy with respect to
any Company Property requiring performance of any structural or other
repairs or alterations to such Company Property.
(e) None of the Company or any of its Subsidiaries owns or holds, and is
obligated under or a party to, any option, right of first refusal or other
contractual right to purchase, acquire, sell, assign or dispose of any real
estate or any portion thereof or interest therein.
4.16 Tangible Personal Property.
(a) Schedule 4.16(a) sets forth all leases of personal property ("Personal
Property Leases") involving annual payments in excess of $15,000 relating
to personal property used in the business of the Company and its
Subsidiaries or to which the Company or any of its Subsidiaries is a party
or by which the properties or assets of the Company or any of its
Subsidiaries is bound. The Company has delivered or otherwise made
available to the Purchasers true, correct and complete copies of the
Personal Property Leases, together with all amendments, modifications or
supplements, if any, thereto.
(b) Each of the Company and its Subsidiaries has a valid leasehold interest
under each of the Personal Property Leases under which it is a lessee, and
there is no default under any Personal Property Lease by the Company or any
of its Subsidiaries, by any other party thereto, and no event has occurred
which, with the lapse of time or the giving of notice or both would
constitute a default thereunder.
(c) Except as set forth on Schedule 4.16(c), each of the Company and its
Subsidiaries has good and marketable title to all of the items of tangible
personal property reflected in the balance sheets referred to in Section
4.18 and Schedule 4.16(c) hereto (except as sold or disposed of subsequent
to the date thereof in the ordinary course of business consistent with past
practice), free and clear of any and all Liens. All such items of tangible
personal property that, individually or in the aggregate, are material to
the operation of the business of the Company and its Subsidiaries are in
good condition and in a state of good maintenance and repair (ordinary wear
and tear excepted) and are suitable for the purposes used.
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<PAGE>
(d) All of the items of tangible personal property used by the Company and its
Subsidiaries under the Personal Property Leases are in good condition and
repair (ordinary wear and tear excepted) and are suitable for the purposes
used.
4.17 Environmental Matters.
Except as set forth on Schedule 4.17:
(a) The operations of each of the Company and its Subsidiaries are in
compliance with all applicable Environmental Laws and all Permits issued
pursuant to Environmental Laws or otherwise;
(b) None of the Company or any of its Subsidiaries is the subject of any
outstanding written order, agreement or arrangement with any governmental
authority or Person respecting (i) Environmental Laws, (ii) Remedial Action
or (iii) any Release or threatened Release of a Hazardous Material;
(c) None of the Company or any of its Subsidiaries has received any written
communication alleging either or both that the Company or any of its
Subsidiaries may be in violation of any Environmental Law, or any Permit
issued pursuant to Environmental Law, or may have any liability under any
Environmental Law;
(d) At Closing, none of the Company or any of its Subsidiaries has any current
contingent liability in connection with any Release of any Hazardous
Materials into the indoor or outdoor environment (whether on-site or
off-site) and has no reason to believe that such contingent liability
exists;
(e) There are no investigations of the business, operations, or currently or
previously owned, operated or leased property of the Company or any of its
Subsidiaries pending or, to its Knowledge, threatened that could lead to
the imposition of any liability pursuant to Environmental Law;
(f) There is not located at any of the properties owned at any of the
properties leased or operated by the Company or any of its Subsidiaries any
(i) underground storage tanks, (ii) asbestos-containing material, (iii)
equipment containing polychlorinated biphenyls, any (iv) Hazardous
Materials located at any Company Property (other than for Hazardous
Materials used or stored by the Company or any Subsidiary in the ordinary
course of business and in material compliance with applicable Environmental
Laws and Permits); and
(g) The Company has provided to the Purchasers all environmentally related
audits, studies, reports, analyses and results of investigations, if any,
that have been performed with
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respect to the currently or previously owned, leased or operated properties
of the Company or any of its Subsidiaries.
4.18 Company SEC Reports and Financial Statements.
(a) The Company has made available to Purchasers true and complete copies of
all periodic reports, statements and other documents that the Company has
filed with the SEC under the Exchange Act for the past three years
(collectively, the "Company SEC Reports"), each in the form (including
exhibits and any amendments thereto) required to be filed with the SEC. As
of their respective dates, each of the Company's SEC Reports (i) complied
in all respects with all applicable requirements of the Securities Act and
the Exchange Act, and the rules and regulations promulgated thereunder,
respectively, (ii) were filed in a timely manner, and (iii) did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the Subsidiaries is required to file any forms, reports
or other documents with the SEC.
(b) Each of the audited consolidated financial statements of the Company
(including any related notes and schedules thereto) included (or
incorporated by reference) in its Annual Report on Form 10-K for the fiscal
year ended February 1, 1997, is accurate and complete and fairly presents,
in conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved (except as
may be noted therein), and in conformity with the SEC's Regulation S-X, the
consolidated financial position of the Company and its consolidated
subsidiaries as of its date and the consolidated results of operations and
changes in financial position for the period then ended. Each of the
unaudited consolidated financial statements of the Company (including any
related notes and schedules thereto) included (or incorporated by
reference) in its Quarterly Report on Form 10-Q for the quarter and
six-month period ended August 2, 1997, is accurate and complete and fairly
presents, in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved
(except as may be noted therein), and in conformity with the SEC's
Regulation S-X, the consolidated financial position of the Company and its
consolidated subsidiaries as of its date and the consolidated results of
operations and changes in financial position for the periods then ended.
(c) Except as and to the extent set forth (or incorporated by reference) in the
Company's Annual Report on Form 10-K for the fiscal year ended February 1,
1997 (the "Balance Sheet Date"), none of the Company or any of its
Subsidiaries has incurred any liability or obligation of any nature
whatsoever (whether due or to become due, accrued, fixed, contingent,
liquidated, unliquidated or otherwise) that would be required by GAAP to be
accrued on, reflected on, or reserved against it on, a consolidated balance
sheet (the
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<PAGE>
"Balance Sheet") (or in the applicable notes thereto) of the Company or any
of its Subsidiaries prepared in accordance with GAAP consistently applied
as of the date and for the period required.
4.19 Changes. Except as set forth on Schedule 4.19, since the Balance
Sheet Date, there has not been:
(a) any change in the assets, liabilities, financial condition or operating
results of the Company or any of its Subsidiaries, except changes in the
ordinary course of business;
(b) any damage, destruction or loss to real or personal property, whether or
not covered by insurance;
(c) any waiver by the Company or any of its Subsidiaries of a legal or
contractual valuable right or of a debt owed to it outside of the ordinary
course of business;
(d) any satisfaction or discharge of any Lien or payment of any obligation by
the Company or any of its Subsidiaries;
(e) any change or amendment to a contract or arrangement by which the Company
or any of its Subsidiaries or any of their respective assets or properties
is bound or subject;
(f) other than in the ordinary course of business, any material increase in
excess of $15,000 annually in any compensation arrangement or agreement
with any employee of the Company or any of its Subsidiaries receiving
compensation;
(g) any events or circumstances that otherwise could reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect; and
(h) none of the Company or any of its Subsidiaries has (i) declared or paid any
dividends, or authorized or made any distribution upon or with respect to
any class or series of its capital stock or equity interests, (ii) incurred
any indebtedness for money borrowed in excess of $15,000, (iii) made any
loans or advances to any Person, other than ordinary advances for travel
expenses not exceeding $15,000, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights for consideration in excess of
$15,000 in any one transaction or series of related transactions.
4.20 Employee Benefit Plans.
(a) Schedule 4.20(a) contains a complete and accurate list of all Company Plans
and Company Benefit Arrangements. Schedule 4.20(a) specifically identifies
all Company Plans (if any) that are Qualified Plans.
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<PAGE>
(b) With respect, as applicable, to Employee Benefit Plans and Benefit
Arrangements:
(i) true, correct, and complete copies of all of the following
documents with respect to each Company Plan and Company Benefit Arrangement, to
the extent applicable, have been delivered to the Purchasers: (A) all documents
constituting the Company Plans and Company Benefit Arrangements, including, but
not limited to, trust agreements, insurance policies, service agreements, and
formal and informal amendments thereto; (B) the most recent Forms 5500 or 5500
C/R and any financial statements attached thereto for the prior three years; (C)
the most recent Internal Revenue Service (the "IRS") determination letter and
the latest IRS determination letter that covered the qualification of the entire
Company Plan (if different), and copies of the materials submitted by the
Company to obtain those letters; (D) the most recent summary plan descriptions;
(E) the most recent written descriptions of all non-written agreements relating
to any such plan or arrangement (if such documents or writings exist); (F) all
reports submitted within the four years preceding the date of this Agreement by
third-party administrators, actuaries, investment managers, consultants, or
other independent contractors; (G) all notices that were given to the Company
within the three years preceding the date of this Agreement by the IRS,
Department of Labor, or any other governmental agency or entity with respect to
any plan or arrangement; and (H) employee manuals or handbooks containing
personnel or employee relations policies;
(ii) neither the Company nor any Subsidiary has ever maintained,
contributed to, or been obligated to contribute to any Qualified Plan;
(iii) the Company and the Subsidiaries have never sponsored or
maintained, had any obligation to sponsor or maintain, or had any liability
(whether actual or contingent, with respect to any of its assets or otherwise)
with respect to any Employee Benefit Plan subject to Section 302 of ERISA or
Section 412 of the Code or Title IV of ERISA (including any Multiemployer Plan);
(iv) each Company Plan and each Company Benefit Arrangement has
been operated with its constituent documents and with all applicable provisions
of the Code, ERISA and other laws, including federal and state securities laws;
(v) there are no pending claims or lawsuits by, against, or
relating to any Employee Benefit Plans or Benefit Arrangements that are Company
Plans or Company Benefit Arrangements that would, if successful, result in
liability of the Company or any Stockholder, and no claims or lawsuits have been
asserted, instituted or to the Company's Knowledge threatened by, against, or
relating to any Company Plan or Company Benefit Arrangement, against the assets
of any trust or other funding arrangement under any such Company Plan, by or
against the Company or the Subsidiaries with respect to any Company Plan or
Company Benefit Arrangement, or by or against the plan administrator or any
fiduciary of
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<PAGE>
any Company Plan or Company Benefit Arrangement, and the Company and the
Subsidiaries do not have knowledge of any fact that could form the basis for any
such claim or lawsuit. The Company Plans and Company Benefit Arrangements are
not presently under audit or examination (nor has notice been received of a
potential audit or examination) by the IRS, Department of Labor, or any other
governmental agency or entity;
(vi) no Company Plan or Company Benefit Arrangement contains any
provision or is subject to any law that would prohibit the transactions
contemplated by this Agreement or that would give rise to any vesting of
benefits, severance, termination, or other payments or liabilities as a result
of the transactions contemplated by this Agreement;
(vii) with respect to each Company Plan, there has occurred no
non- exempt "prohibited transaction" (within the meaning of Section 4975 of the
Code) or transaction prohibited by Section 406 of ERISA or breach of any
fiduciary duty described in Section 404 of ERISA that would, if successful,
result in any liability for the Company or any Stockholder, officer, director,
or employee of the Company;
(viii) all reporting, disclosure, and notice requirements of
ERISA and the Code have been fully and completely satisfied with respect to each
Company Plan and each Company Benefit Arrangement;
(ix) all amendments and actions required to bring the Company
Benefit Plans into conformity with the applicable provisions of ERISA, the Code,
and other applicable laws have been made or taken;
(x) payment has been made of all amounts that the Company and
each Subsidiary is required to pay as contributions to the Company Benefit Plans
as of the last day of the most recent fiscal year of each of the plans ended
before the date of this Agreement; all benefits accrued under any unfunded
Company Plan or Company Benefit Arrangement will have been paid, accrued, or
otherwise adequately reserved in accordance with GAAP as of the Balance Sheet
Date; and all monies withheld from employee paychecks with respect to Company
Plans have been transferred to the appropriate plan within 30 days of such
withholding;
(xi) the Company and the Subsidiaries have not prepaid or
prefunded any Welfare Plan through a trust, reserve, premium stabilization, or
similar account, nor do they provide benefits through a voluntary employee
beneficiary association as defined in Section 501(c)(9);
(xii) no statement, either written or oral, has been made by the
Company or the Subsidiaries to any Person with regard to any Company Plan or
Company Benefit Arrangement that was not in accordance with the Company Plan or
Company Benefit
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Arrangement and that could have an adverse economic consequence to the Company
or the Subsidiaries;
(xiii) the Company and the Subsidiaries have no liability
(whether actual, contingent, with respect to any of its assets or otherwise)
with respect to any Employee Benefit Plan or Benefit Arrangement that is not a
Company Benefit Arrangement or with respect to any Employee Benefit Plan
sponsored or maintained (or which has been or should have been sponsored or
maintained) by any ERISA Affiliate;
(xiv) all group health plans of the Company and its ERISA
Affiliates have been operated in material compliance with the requirements of
Sections 4980B (and its predecessor) and 5000 of the Code; and
(xv) no employee or former employee of the Company or beneficiary
of any such employee or former employee is, by reason of such employee's or
former employee's employment, entitled to receive any benefits, including,
without limitation, death or medical benefits (whether or not insured) beyond
retirement or other termination of employment as described in Statement of
Financial Accounting Standards No. 106, other than (i) death or retirement
benefits under a Qualified Plan, (ii) deferred compensation benefits accrued as
liabilities on the Closing Statement or (iii) continuation coverage mandated
under Section 4980B of the Code or other applicable law.
(c) Schedule 4.20(c) hereto sets forth an accurate list, as of the date hereof,
of all officers, directors, and key employees of the Company and lists all
employment agreements with such officers, directors, and key employees and
the rate of compensation (and the portions thereof attributable to salary,
bonus, and other compensation respectively) of each such Person as of (i)
February 1, 1997 and (ii) the date hereof.
(d) The Company has not declared or paid any bonus compensation in
contemplation of the transactions contemplated by this Agreement.
4.21 Taxes. All federal, state and local and foreign tax returns, reports
and statements required to be filed by the Company and its Subsidiaries have
been filed or have been caused to be filed with the appropriate governmental
agencies in all jurisdictions in which such returns, reports and statements are
required to be filed and all such returns, reports and statements are true,
complete and correct in all respects. All taxes, charges and other impositions
due and payable by the Company and its Subsidiaries have been paid in full on a
timely basis except where contested in good faith and by appropriate proceedings
if adequate reserves therefor have been established on the books and records of
the Company or Subsidiary in accordance with GAAP. The provision for taxes of
each of the Company and its Subsidiaries as shown in the Company SEC Reports is
sufficient for all unpaid taxes, charges and other impositions of any nature due
or accrued as of the date thereof, whether or not assessed or disputed. Proper
and
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accurate amounts have been withheld by the Company and its Subsidiaries from
their respective employees for all periods in full and complete compliance with
the tax, social security and unemployment withholding provisions of applicable
federal, state, local and foreign law and such withholdings have been timely
paid to the respective governmental agencies. Except as disclosed on Schedule
4.21, the Company has not received notice of any audit or of any proposed
deficiencies from any governmental authority, and no controversy with respect to
taxes of any type is pending or to its Knowledge threatened. Except for routine
filing extensions granted as a matter of right under applicable law, none of the
Company or any of its Subsidiaries has executed or filed with the IRS or any
other governmental authority any agreement or other document extending, or
having the effect of extending, the period of assessment or collection of any
taxes, charges or other impositions. None of the Company or any of its
Subsidiaries has agreed or is required to make any adjustment under Section
481(a) of the Code by reason of a change in accounting method or otherwise.
Further, none of the Company or any of its Subsidiaries has any obligation under
any tax-sharing agreement.
4.22 Labor and Employment Matters. With respect to employees of and service
providers to the Company and the Subsidiaries: (a) the Company and the
Subsidiaries are and have been in compliance in all material respects with all
applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, including without limitation any
such laws respecting employment discrimination, workers' compensation, family
and medical leave, the Immigration Reform and Control Act, and occupational
safety and health requirements, and have not and are not engaged in any unfair
labor practice; (b) there is not now, nor within the past five years has there
been, any unfair labor practice complaint against the Company or any Subsidiary
pending or, to the Company's or any Subsidiary's Knowledge, threatened before
the National Labor Relations Board or any other comparable authority; (c) there
is not now, nor within the past three years has there been, any labor strike,
slowdown or stoppage actually pending or, to the Company's or any Subsidiary's
Knowledge, threatened against or directly affecting the Company or any
Subsidiary; (d) to the Company's or any Subsidiary's Knowledge, no labor
representation organization effort exists nor has there been any such activity
within the past three years; (e) no grievance or arbitration proceeding arising
out of or under collective bargaining agreements is pending and, to the
Company's or any Subsidiary's Knowledge, no claims therefor exist or have been
threatened; (f) the employees of the Company and the Subsidiaries are not and
have never been represented by any labor union, and no collective bargaining
agreement is binding and in force against the Company or any Subsidiary or
currently being negotiated by the Company or any Subsidiary; and (g) all Persons
classified by the Company or its Subsidiaries as independent contractors do
satisfy and have satisfied the requirements of law to be so classified, and the
Company and its Subsidiaries have fully and accurately reported their
compensation on IRS Forms 1099 when required to do so.
4.23 No Pending Transactions. Except for the transactions contemplated by
this Agreement, neither the Company nor any Subsidiary is a party to or bound by
or the subject of
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any agreement, undertaking, commitment or discussions or negotiations with any
person that could result in (i) the sale, merger, consolidation or
recapitalization of the Company or any Subsidiary, (ii) the sale of all or
substantially all of the assets of the Company or any Subsidiary, or (iii) a
change of control of more than five percent of the outstanding capital stock of
the Company or any Subsidiary.
4.24 Disclosure. All written agreements, lists, schedules, instruments,
exhibits, documents, certificates, reports, statements and other writings
furnished to the Purchasers pursuant hereto or in connection with this Agreement
or the transactions contemplated hereby, are and will be complete and accurate
in all material respects. No representation or warranty by the Company contained
in this Agreement, in the schedules attached hereto or in any certificate
furnished or to be furnished by the Company to the Purchasers in connection
herewith or pursuant hereto contains or will contain any untrue statement or a
material fact or omits or will omit to state any material fact necessary in
order to make any statement contained herein or therein not misleading. There is
no fact known to the officers and directors of the Company that has specific
application to the Company (other than general economic or industry conditions)
and that materially adversely affects or, as far as such officers and directors
can reasonably foresee, materially threatens, the assets, business, prospects,
financial condition, or results of operations of the Company that has not been
set forth in this Agreement or any Schedule hereto.
4.25 Minute Books. The minute books of the Company and each of its
Subsidiaries contain a complete summary of all material actions by their
respective directors and stockholders since the date of their respective
incorporation and reflect all transactions referred to in such minutes
accurately in all material respects.
4.26 Foreign Corrupt Practices. Neither the Company nor any Subsidiary has
made, offered or agreed to offer anything of value to any governmental official,
political party or candidate for government office nor has it otherwise taken
any action that would cause the Company to be in violation of the U.S. Foreign
Corrupt Practices Act or any law of similar effect.
4.27 No Undisclosed Liabilities. Neither the Company or any Subsidiary has
any obligation or liability (contingent or otherwise) that would be required to
be reflected in the financial statements of the Company in accordance with GAAP
except as reflected in the Company's Balance Sheet.
4.28 Status of Plan of Reorganization. The Plan of Reorganization is in
full force and effect in the form confirmed on November 16, 1995 and, except for
the order to modify the Plan of Reorganization entered on December 1, 1997 in
connection with the transactions contemplated by this Agreement, there is no
motion or action pending or to the Company's knowledge proposed to modify the
Plan of Reorganization. Except as indicated on Schedule 4.28, the Company is not
in default in any respect in performance of its obligations under the Plan of
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Reorganization, Title 11 of the United States Code, the Federal Rules of
Bankruptcy Procedure, or 28 U.S.C. Section 1930(a) or (b).
4.29 U.S. Real Property Holding Corporation. The Company is not now and has
never been a "United States real property holding corporation," as defined in
Section 897(c)(2) of the Code and Section 1.897-2(b) of the Regulations
promulgated by the Internal Revenue Service, and the Company has filed with the
Internal Revenue Service all statements, if any, with its United States income
tax returns which are required under Section 1.897-2(h) of such Regulations.
4.30 Federal Reserve Regulations. The Company is not engaged in the
business of extending credit for the purpose of purchasing or carrying margin
securities (within the meaning of Regulation G of the Board of Governors of the
Federal Reserve System), and no part of the proceeds of the Preferred Stock will
be used to purchase or carry any margin security or to extend credit to others
for the purpose of purchasing of carrying any margin security or in any other
manner which would involve a violation of any of the regulations of the Board of
Governors of the Federal Reserve System.
SECTION 5
Representations and Warranties of the Purchasers
Each of the Purchasers (severally and not jointly), hereby represents and
warrants to and agrees with the Company, as follows:
5.1 Accredited Investor; Experience; Risk.
(a) Such Purchaser is an accredited investor and has been advised and
understands that the Preferred Stock has not been registered under the
Securities Act, on the basis that no distribution or public offering of the
Preferred Stock is to be effected, except in compliance with the applicable
securities laws and regulations or pursuant to an exemption therefrom;
provided, however, that nothing in this Section 5.1 shall limit the
Purchasers right to convert the Series B Stock for Common Stock as set
forth in this Agreement, the Registration Rights Agreement, or the
Statement of Rights and Preferences.
(b) Such Purchaser is purchasing the Preferred Stock for investment purposes,
for its own account and not with a view to, or for sale in connection with,
any distribution thereof in violation of federal or state securities laws.
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(c) Such Purchaser has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of the
purchase of the Preferred Stock pursuant to this Agreement.
(d) The certificates representing the Preferred Stock and any Conversion Shares
shall bear a legend evidencing such restriction on transfer substantially
in the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE
SOLD OR TRANSFERRED EXCEPT PURSUANT TO REGISTRATION UNDER THE ACT OR AN
EXEMPTION THEREFROM."
5.2 Investment. Such Purchaser is acquiring the Preferred Stock for
investment purposes only, for its own account and not as a nominee or agent for
any other Person, and not with a view to, or for resale in connection with, any
distribution thereof in violation of applicable law.
5.3 Authorization. Such Purchaser has all requisite power and authority to
execute and deliver this Agreement and each of the Transaction Documents and to
perform its obligations hereunder and thereunder. The execution, delivery and
performance of the Agreement and the transactions contemplated hereby have been
duly authorized by all necessary, action on the part of such Purchaser. Each
Transaction Document to which it is a party has been duly and validly executed
and delivered by such Purchaser and constitutes the legal, valid and binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally, and subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity).
5.4 Governmental Consents. No consent, approval, order or authorization of,
or registration, qualification, designation, declaration or filing with, any
federal, state, or local governmental authority on the part of such Purchaser is
required in connection with the valid execution and delivery by such Purchaser
of the Transaction Documents to which it is a party, or the consummation by such
Purchaser of the transactions contemplated by the Transaction Documents to which
it is a party, except for such filings as have been made prior to the Closing.
5.5 Organization, Good Standing and Qualification. To the extent
applicable, such Purchaser (i) is an entity duly organized, validly existing and
in good standing under the laws of the jurisdiction of its organization, (ii)
has all requisite power and authority to carry on its
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business, (iii) is duly qualified to transact business and is in good standing
in all jurisdictions where its ownership, lease or operation of property or the
conduct of its business requires such qualification, except where the failure to
do so would not be material to the Purchaser.
SECTION 6
Conditions to Closing of Purchasers
Each Purchaser's obligation to purchase the Preferred Stock at the Closing
is, at the option of such Purchaser, subject to the fulfillment to such
Purchaser's reasonable satisfaction on or prior to the Closing Date of the
following conditions:
6.1 Representations and Warranties Correct. The representations and
warranties made by the Company in Section 4 hereof shall be true and correct
when made, and shall be true and correct on the Closing Date with the same force
and effect as if they had been made on and as of such date.
6.2 Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed by the Company on or prior to the Closing Date shall
have been performed or complied with in all respects.
6.3 Opinion of Company's Counsel. The Purchasers shall have received from
Vandeberg Johnson & Gandara, counsel to the Company, an opinion addressed to the
Purchasers, dated the Closing Date, in the form set forth on Exhibit D.
6.4 No Material Adverse Change. There shall not have occurred any events or
circumstances that could reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect.
6.5 Statement of Rights and Preferences. The Company's Articles of
Incorporation shall have been duly amended by the Company to include the
Statement of Rights and Preferences and filed with the Washington Secretary of
State.
6.6 State Securities Laws. All registrations, qualifications and Permits
required under applicable state securities laws, if any, shall have been
obtained for the lawful execution, delivery and performance of this Agreement.
6.7 Issuance of Shares to Purchasers. The Company shall have issued 46,000
shares of Series A Stock and 25,000 shares of Series B Stock at the Closing
pursuant to this Agreement, and shall have delivered to each Purchaser a stock
certificate or certificates representing such Preferred Stock.
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6.8 Certificates. Each of the Purchasers shall have received a certificate
of the Chief Executive Officer or Chief Financial Officer of the Company to the
effect set forth in Sections 6.1, 6.2 and 6.4.
6.9 Registration Rights Agreement. The Company and all other parties
thereto shall have executed and delivered the Registration Rights Agreement in
the form of Exhibit B hereto to Purchasers.
6.10 Consent of Class 3 Creditors. Class 3 Creditors holding at least 95%
in the aggregate of the Class 3 Claims shall have agreed to accept the
Creditors' Shares and Creditors' Cash Payment in full satisfaction of all of
their Class 3 Claims. If this condition is to be satisfied through a
modification of the Plan of Reorganization, then an unstayed order of the United
States Bankruptcy Court for the Western District of Washington, at Seattle,
shall have been entered confirming such modification of the Plan of
Reorganization.
6.11 Employment Agreements. The Company will have executed employment
agreements with each of Rex Loren Steffey and William L. Lawrence, Jr. in the
forms set forth as Exhibits E and F hereto.
6.12 Management Option Plan. The Board of Directors of the Company will
have adopted the Management Option Plan in the form set forth on Exhibit G
hereto, subject to the approval of the shareholders of the Company, and will
have authorized, subject to the approval of the shareholders of the Company, (i)
the reissuance of all existing options under the Management Option Plan and (ii)
the issuance of new options as set forth in Exhibit H hereto.
6.13 Consents. The Company shall have obtained all written consents
necessary for the Company to complete the transactions contemplated hereby,
including without limitation the consent of General Electric Capital Corporation
pursuant to that certain Loan and Security Agreement dated August 29, 1997 and
any consents required pursuant to any Real Property Lease.
6.14 Headquarters Lease. Purchasers shall have received assurances
reasonably satisfactory to Purchasers that the Real Property Lease for the
Company's downtown Seattle, Washington facilities will remain in effect until at
least January 31, 2000 and that the radius provisions therein will be amended or
waived to the Purchaser's satisfaction.
6.15 Fairness Opinion. The Company shall have received the favorable
opinion of Chanen & Painter as to the fairness of the transactions contemplated
hereby.
SECTION 7
Conditions to Closing of the Company
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The Company's obligation to issue and sell the Preferred Stock at the
Closing is, at the option of the Company, subject to the fulfillment of the
following conditions:
7.1 Representations. The representations and warranties made by the
Purchasers in Section 5 hereof shall be true and correct when made, and shall be
true and correct on the Closing Date with the same force and effect as if they
had been made on and as of such date.
7.2 Purchase Price.
(a) The Purchasers shall have tendered the purchase price for the Series A
Stock of Four Million Six Hundred Thousand Dollars ($4,600,000).
(b) The Purchasers shall have tendered the purchase price for the Series B
Stock of Two Million Five Hundred Thousand Dollars ($2,500,000).
7.3 Certificate. The Company shall have received a certificate from the
Purchasers to the effect set forth in Section 7.1.
7.4 State Securities Laws. All registrations, qualifications and Permits
required under applicable state securities laws, if any, shall have been
obtained for the lawful execution, delivery and performance of this Agreement.
7.5 Registration Rights Agreement. The Purchasers and the Company shall
have executed and delivered the Registration Rights Agreement in the form of
Exhibit B hereto to the Company.
SECTION 8
Covenants of the Company
8.1 Information. Following the Closing Date and continuing so long as any
shares of Preferred Stock remain outstanding (or such earlier time as provided
below), the Company shall deliver to Cahill and each of the Purchasers the
information specified in this Section 8.1 unless Cahill or any such Purchaser at
any time specifically requests that such information not be delivered to it:
(a) Quarterly Financial Statements. As soon as available, but in any event not
later than forty-five (45) days after the end of each quarterly fiscal
period (other than the last quarterly fiscal period in any fiscal year of
the Company), the unaudited consolidated balance sheet of the Company and
its Subsidiaries as at the end of each such period and the related
unaudited consolidated statements of income and cash flows of the Company
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and its Subsidiaries for such period and for the elapsed period in such
fiscal year, all in reasonable detail and stating in comparative form (i)
the figures as of the end of and for the comparable periods of the
preceding fiscal year and (ii) the figures reflected in the operating
budget (if any) for such period as specified in the financial plan of the
Company. All such financial statements shall be prepared in accordance with
GAAP applied on a consistent basis throughout the periods reflected therein
except as stated therein.
(b) Annual Financial Statements. As soon as available, but in any event within
one hundred twenty (120) days after the end of each fiscal year of the
Company, a copy of the audited consolidated balance sheets of the Company
and its Subsidiaries as at the end of such fiscal year and the related
audited consolidated statements of operations, stockholders' equity and
cash flows of the Company and its Subsidiaries for such fiscal year, all in
reasonable detail and stating in comparative form the figures as at the end
of and for the immediately preceding fiscal year, accompanied (in the case
of the audited consolidated financial statements) by an opinion of an
accounting firm of recognized national standing selected by the Company,
which opinion shall state that such accounting firm's audit was conducted
in accordance with generally accepted auditing standards. All such
financial statements shall be prepared in accordance with GAAP applied on a
consistent basis throughout the periods reflected therein except as stated
therein.
(c) Material Litigation. Within twenty (20) days after the Company learns of
the commencement or written threat of commencement of any litigation or
proceeding against the Company, any of its Subsidiaries or any of the
Partnerships or any of their respective assets that could reasonably be
expected to have a Material Adverse Effect, written notice of the nature
and extent of such litigation or proceeding.
(d) Material Agreements. Within five (5) days after the expiration of the
applicable cure period, if any, or if no such cure period exists within
five (5) days after the receipt by the Company of written notice of a
default by the Company or any of its Subsidiaries under any material
contract, agreement or document to which it is a party or by which it is
bound, written notice of the nature and extent of such default.
(e) Other Reports and Statements. Promptly upon (i) any distribution to its
stockholders generally, to its directors or to the financial community of
an annual report, quarterly report, proxy statement, registration statement
or other similar report or communication, (ii) filing by the Company with
the SEC or with The National Market System, Inc., the National Association
of Securities Dealers, Inc. or any national securities exchange or other
market system of any and all regular and other reports or applications, or
(iii) the issuance of any press release or other communication to the
general public, a copy of each such report, application release or other
communication.
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(f) Accountants' Management Letters, Etc. Promptly after receipt by the
Company, copies of all accountants' management letters and all management
and board responses to such letters, and copies of all certificates as to
compliance, defaults, material adverse changes, material litigation or
similar matters relating to the Company and its Subsidiaries, which shall
be prepared by the Company or its officers and delivered to the third
parties.
(g) Stockholders' Lists. Within sixty (60) days after the end of each fiscal
year, a stockholders' list, showing the authorized and outstanding shares
by class (including the Common Stock equivalents of any convertible
security), the holders of all outstanding shares (both before giving effect
to dilution and on a fully diluted basis) and all outstanding options,
warrants and convertible securities, and detailing all options and warrants
granted, exercised or lapsed (including in each case, without limitation,
all option and warrant exercise prices, stock issuance prices' and other
terms) and all shares issued or sold (whether to directors or managers, in
connection with financing or otherwise).
8.2 Regulatory Matters. Each of the Company and Purchasers will (i) make on
a prompt and timely basis all governmental or regulatory notifications, filings
or submissions, as necessary for the consummation of the transactions
contemplated hereby, including any filings required pursuant to the
Hart-Scott-Rodino Antitrust Act, if required, (ii) use all reasonable efforts to
cooperate with the other and its representatives in (A) determining which
notifications, filings and submissions are required to be made prior to the
Closing Date with, and which consents, approvals, permits or authorizations are
required to he obtained prior to the Closing Date from, any governmental
authority in connection with the execution, delivery and performance of this
Agreement and the transactions contemplated hereby, and (B) timely making of all
such notifications, filings or submissions and timely seeking all such consents,
approvals, permits or authorizations, and (iii) use all reasonable efforts to
take, or cause to be taken, all other action and do, or cause to be done, all
other reasonable things necessary or appropriate to consummate the transactions
contemplated by this Agreement. The Purchasers shall have no obligation to
expend any funds in connection with the action to be taken by the Company
pursuant to this section; provided however that Purchasers shall pay their own
attorney fees, if any.
8.3 Access. So long as the Purchasers hold at least fifteen percent (15%)
of the Preferred Stock purchased hereunder upon the written request of the
Purchasers, the Company shall afford the Purchasers and its accountants, counsel
and other representatives, full access during normal business hours to all of
its properties, books, contracts, commitments and records, permit them to copy
or make extracts therefrom and, the Company shall furnish promptly to Purchasers
all information concerning its business, properties and personnel as Purchasers
may reasonably request; provided, however, that no investigation pursuant to
this Section 8.3 shall affect any representations or warranties of either party
hereunder.
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8.4 Directors' and Officers' Insurance. The Company shall maintain a
directors' and officers' liability insurance policy providing coverage in the
amount of not less than One Million Dollars ($1,000,000) and having such other
terms as are reasonably acceptable to Purchasers.
8.5 Confidentiality. From and after the date of this Agreement, each of the
Company and Purchasers agree to hold, and will cause its employees, agents and
representatives to hold, in confidence, unless compelled to disclose by judicial
or administrative process or, in the written opinion of their counsel, by other
requirements of law, information furnished by the Company, on the one hand, to
Purchasers and information furnished by Purchasers, on the other hand, to the
Company in connection with the transactions contemplated by this Agreement, and
each of such persons agree that they shall not release or disclose such
information to any other person, except their respective officers, directors,
partners, employees, auditors, attorneys, financial advisors and other
consultants, advisors and representatives who need to know such information and
who have been informed of the confidential nature of such information and have
been directed to treat such information as confidential. The foregoing
provisions of this Section 8.5 shall not apply to any such information which (i)
becomes generally available to the public other than as a result of a disclosure
by any person bound hereunder, (ii) was available to a person bound hereunder on
a non-confidential basis prior to its disclosure hereunder, (iii) becomes
available to any person bound hereunder on a non-confidential basis by virtue of
the disclosure thereof by a source other than the party providing such
information in reliance upon the protection of confidentiality reposed hereby,
or (iv) is required to be disclosed pursuant to an order of a court of competent
jurisdiction, provided that if disclosure is so required, the disclosing party
shall provide notice of the same to each other party hereto.
Notwithstanding anything herein to the contrary, from and after the date of
this Agreement, if either party to this Agreement or any agreement contemplated
herein shall be required by law to file as part of any public record this
Agreement or the agreements relating to any transactions contemplated hereby,
both parties shall jointly identify those provisions, if any, of such agreements
that shall remain confidential and shall request and seek confidential treatment
of those provisions in accordance with the applicable provisions of any
applicable law, rule or regulation, and shall take all reasonable actions
necessary to secure such confidential treatment.
8.6 Shelf Registration.
(a) Within 180 days following the Closing Date, the Company shall prepare and
file with the SEC a Registration Statement for an offering to be made on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act (a
"Shelf Registration") registering the resale from time to time by
Purchasers and their transferees and distributees of all of the Registrable
Securities (the "Initial Shelf Registration"). The Registration Statement
for any Shelf Registration shall be on Form S-3 or another appropriate form
permitting registration of such Registrable Securities for resale by
Purchasers and their transferees
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and distributees in the manner or manners designed by them. The Company
shall use its best efforts to cause the Initial Shelf Registration to
become effective under the Securities Act as promptly as is practicable and
to keep the Initial Shelf Registration continuously effective under the
Securities Act until the end of the Effectiveness Period.
(b) If the Initial Shelf Registration or any Subsequent Shelf Registration (as
defined below) ceases to be effective for any reason at any time during the
Effectiveness Period (other than because all Registrable Securities shall
have been sold or shall have ceased to be Registrable Securities), the
Company shall use its best efforts to obtain the prompt withdrawal of any
order suspending the effectiveness thereof, and in any event shall within
thirty days of such cessation of effectiveness amend the Shelf Registration
in a manner reasonably expected to obtain the withdrawal of the order
suspending the effectiveness thereof, or file an additional Shelf
Registration covering all of the Registrable Securities (a "Subsequent
Shelf Registration"). If a Subsequent Shelf Registration is filed, the
Company shall use all reasonable efforts to cause the Subsequent Shelf
Registration to become effective as promptly as is practicable after such
filing and to keep such Registration Statement continuously effective until
the end of the Effectiveness Period.
(c) The Company shall supplement and amend the Shelf Registration if required
by the rules, regulations or instructions applicable to the registration
form used by the Company for such Shelf Registration, if required by the
Securities Act or the SEC, or if reasonably requested by Purchasers.
(d) From time to time, the Company shall prepare and file with the SEC a
post-effective amendment to the Shelf Registration or a supplement to the
related Prospectus or a supplement or amendment to any document
incorporated therein by reference or any other required document, so that
such Registration Statement will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and so
that, as thereafter delivered to purchasers of the Registrable Securities
being sold thereunder, such Prospectus will not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; provide
Purchasers copies of any documents filed in such numbers as Purchasers
shall reasonably request; and inform Purchasers that the Company has
complied with its obligations and that the Registration Statement and
related Prospectus may be used for the purpose of selling all or any of
such Registrable Securities (or that, if the Company has filed a
post-effective amendment to the Shelf Registration which has not yet been
declared effective, the Company will notify Purchasers to that effect, will
use its best efforts to secure promptly the effectiveness of such
post-effective amendment and will immediately so notify Purchasers when the
amendment has become effective).
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(e) In the event of a Shelf Registration by the Company, the Company shall
indemnify the Purchasers and the Purchasers shall indemnify the Company in
accordance with the indemnification provisions of the Registration Rights
Agreement, which provisions are incorporated herein by this reference.
8.7 Foreign Corrupt Practices. Neither the Company nor any Subsidiary will
offer or agree to offer anything of value to any governmental official,
political party or candidate for government office nor will it otherwise take
any action that would cause the Company to be in violation of the U.S. Foreign
Corrupt Practices Act or any law of similar effect.
8.8 Payment of Expenses. As soon as practicable following the Closing, the
Company shall pay the reasonable due diligence, legal, accounting and other
expenses of Cahill, Warnock & Company, LLC, not to exceed Forty Thousand Dollars
($40,000).
8.9 Investment Banking Fees. On or before the first anniversary of the
Closing Date, the Company shall pay to the Purchasers, on a pro-rata basis, an
investment banking fee equal to 5% of the aggregate price paid for the Preferred
Stock.
SECTION 9
Miscellaneous
9.1 Amendment; Waiver. Neither this Agreement nor any provision hereof may
be amended, modified, supplemented or waived, except by a written instrument
executed by (i) the Company and (ii) the Purchasers.
9.2 Notices. Any notices or other communications required or permitted
hereunder shall be sufficiently given if in writing and delivered in Person,
transmitted by facsimile transmission (fax) or sent by registered or certified
mail (return receipt requested) or recognized overnight delivery service,
postage pre-paid, addressed as follows, or to such other address has such party
may notify to the other parties in writing:
(a) if to the Company:
Jay Jacobs, Inc.
1530 Fifth Avenue
Seattle, Washington 98101
Attn: William L. Lawrence, Jr.
Telephone No.: 206-622-5400
Facsimile No.: 206-621-9830
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with a copy to:
Vandeberg Johnson & Gandara
600 University Street, Suite 2424
Seattle, Washington 98101
Attn: James L. Vandeberg, Esq.
Telephone No.: 206-386-8080
Facsimile No.: 206-386-7500
(b) if to the Purchasers:
c/o Cahill, Warnock & Company, LLC
One South Street, Suite 2150
Baltimore, Maryland 21202
Attn: Edward L. Cahill
Telephone No.: 410-895-3800
Facsimile No.: 410-464-0484
with a copy to:
Stoel Rives, LLP
600 University Street, Suite 3600
Seattle, Washington 98101
Attn: John J. Halle, Esq.
Telephone No.: 206-624-0900
Facsimile No.: 206-386-7500
and a copy to:
T. Rowe Price Associates
100 East Pratt Street, 7th Floor
Baltimore, MD 21202
Attn: Kim Golden
Telephone No.: 410-345-6703
Facsimile No.: 410-345-2304
A notice or communication will be effective (i) if delivered in Person or by
overnight courier, on the business day it is delivered, (ii) if transmitted by
telecopier, on the business day of actual confirmed receipt by the addressee
thereof, and (iii) if sent by registered or certified mail, three (3) business
days after dispatch.
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9.3 Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
9.4 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors and permitted assigns of the parties hereto. No party hereto may
assign its rights or delegate its obligations under this Agreement without the
prior written consent of the other parties hereto.
9.5 Survival of Representations, Warranties and Covenants. All
representations and warranties made in, pursuant to or in connection with this
Agreement shall survive the execution and delivery of this Agreement, any
investigation at any time made by or on behalf of any Purchaser, and the sale
and purchase of the Preferred Stock and payment therefor for a period of two (2)
years; provided, however, that the representations and warranties made in
Sections 4.17 (Environmental), 4.20 (Benefits) and 4.21 (Taxes) shall survive
the applicable statutory period of limitations with respect to any liabilities
covered thereby.
9.6 Entire Agreement. This Agreement and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subject matter hereof and thereof and
supersede and cancel all prior representations, alleged warranties, statements,
negotiations, undertakings, letters, acceptances, understandings, contracts and
communications, whether verbal or written, among the parties hereto and thereto
or their respective agents with respect to or in connection with the subject
matter hereof.
9.7 Choice of Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Washington, without regard to
principles of conflict of laws.
9.8 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, with the
same effect as if all parties had signed the same document. All such
counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.
9.9 Costs and Expenses. Except as otherwise expressly provided herein, the
Company and Purchasers shall each pay their own respective fees and
disbursements incurred in connection with this Agreement; provided, however,
that the Company shall pay all fees and expenses of any required governmental
filings or other filings.
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9.10 No Third-Party Beneficiaries. Nothing in this Agreement will confer
any third party beneficiary or other rights upon any Person (specifically
including any employees of the Company and its Subsidiaries) or entity that is
not a party to this Agreement.
9.11 Indemnification.
(a) The Company agrees to indemnify and hold harmless Cahill, the Purchasers
and their Affiliates, and their respective partners, co-investors,
officers, directors, employees, agents, consultants, attorneys and advisers
(each, an "Indemnified Party"), from and against any and all actual losses,
claims, damages, liabilities, costs and expenses (including, without
limitation, environmental liabilities, costs and expenses and all
reasonable fees, expenses and disbursements of counsel), joint or several
(hereinafter collectively referred to as a "Loss"), which may be incurred
by or asserted or awarded against any Indemnified Party in connection with
or in any manner arising out of or relating to any investigation,
litigation or proceeding or the preparation of any defense with respect
thereto, arising out of or in connection with or relating to this
Agreement, the other Transaction Documents or the transactions contemplated
hereby or thereby or any use made or proposal to be made with the proceeds
of the Purchasers' purchase of the Preferred Stock pursuant to this
Agreement, whether or not such investigation, litigation or proceeding is
brought by the Company, any of its Subsidiaries, shareholders or creditors,
whether or not any of the transactions contemplated by this Agreement or
the other Transaction Documents are consummated, except to the extent such
Loss is found in a final judgment by a court of competent jurisdiction to
have resulted from such Indemnified Party's gross negligence or willful
misconduct.
(b) An Indemnified Party shall give written notice to the Company of any claim
with respect to which it seeks indemnification within ten (10) days after
the discovery by such parties of any matters giving arise to a claim for
indemnification pursuant to Section 9.11(a); provided that the failure of
any Indemnified Party to give notice as provided herein shall not relieve
the Company of its obligations under this Section 9.11, except to the
extent that the Company is actually prejudiced by such failure to give
notice. In case any such action or claim is brought against any Indemnified
Party, the Company shall be entitled to participate in and, unless in the
reasonable good faith judgment of the Indemnified Party a conflict of
interest between such Indemnified Party and the Company may exist in
respect of such action or claim, to assume the defense thereof, with
counsel satisfactory to the Indemnified Party and after notice from the
Company to the Indemnified Party of its election so to assume the defense
thereof, the Company shall not be liable to such Indemnified Party for any
legal or other expenses subsequently incurred by the latter in connection
with the defense thereof other than reasonable costs of investigation. In
any event, unless and until the Company elects in writing to assume and
does so assume the defense of any such action or claim the Indemnified
Party's costs and expenses arising out of the defense, settlement or
compromise of any such action or
-34-
<PAGE>
claim shall be Losses subject to indemnification hereunder. If the Company
elects to defend any such action or claim, then the Indemnified Party shall
be entitled to participate in such defense with counsel of its choice at
its sole cost and expense. The Company shall not be liable for any
settlement of any action or claim effected without its written consent.
Anything in this Section 9.11 to the contrary notwithstanding, the Company
shall not, without the Indemnified Party's prior written consent, settle or
compromise any claim or consent to entry of any judgment in respect thereof
that imposes any future obligation on the Indemnified Party or that does
not include, as an unconditional term thereof, the giving by the claimant
or the plaintiff to the Indemnified Party, a release from all liability in
respect of such claim.
[Remainder of Page Intentionally Left Blank]
-35-
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT SIGNATURE PAGE
IN WITNESS WHEREOF, the Company and the Purchasers have caused this
Agreement to be executed effective as of the date first above written.
JAY JACOBS, INC.
By: /s/ REX LOREN STEFFEY
-----------------------------------------
Rex Loren Steffey
President and Chief Executive Officer
CAHILL, WARNOCK & COMPANY, LLC
By: /s/ EDWARD L. CAHILL
-----------------------------------------
Edward L. Cahill, a managing member
CAHILL, WARNOCK STRATEGIC
PARTNERS FUND, L.P.
By: Cahill, Warnock Strategic Partners, L.P.,
its general partner
By: /s/ EDWARD L. CAHILL
------------------------------------------
Edward L. Cahill, a general partner
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Company, LLC, its
general partner
By: /s/ EDWARD L. CAHILL
-----------------------------------------
Edward L. Cahill, a managing member
-36-
<PAGE>
T. ROWE PRICE RECOVERY FUND II, L.P.
By: T. Rowe Price Recovery Fund II
Associates, LLC, its general partner
By: /s/ KIM Z. GOLDEN
-----------------------------------------
Kim Z. Golden, its managing director
/s/ MICHAEL D. SULLIVAN
--------------------------------------------
MICHAEL D. SULLIVAN
-37-
<PAGE>
Exhibit A
<TABLE>
<CAPTION>
Class of Total Number
Name Shares of Shares Total Cost
<S> <C> <C> <C>
Cahill, Warnock Strategic Partners Fund, L.P. Series A 27,624 $2,762,400
Strategic Associates, L.P. Series A 1,531 $153,100
T. Rowe Price Recovery Fund II, L.P. Series A 16,197 $1,619,700
Michael D. Sullivan Series A 648 $64,800
Subtotal 46,000 $4,600,000
Cahill, Warnock Strategic Partners Fund, L.P. Series B 15,014 $1,501,400
Strategic Associates, L.P. Series B 831 $83,100
T. Rowe Price Recovery Fund II, L.P. Series B 8,803 $880,300
Michael D. Sullivan Series B 352 $35,200
Subtotal 25,000 $2,500,000
</TABLE>
<PAGE>
Exhibit B
- 1 -
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement"), dated as of December
5, 1997, is by and among Jay Jacobs, Inc. (the "Company") and the parties listed
under the heading of Investors on Schedule A attached hereto (the "Investors").
WHEREAS, the Investors and the Company are, on the date hereof, entering
into a Stock Purchase Agreement (the "Purchase Agreement") pursuant to which the
Company is issuing to the Investors, among other securities, 25,000 shares of
Series B Convertible Preferred Stock, par value $.01 per share, of the Company
(the "Series B Preferred Shares"); and
WHEREAS, the Company has agreed to grant to the Investors, as an inducement
to enter into the Purchase Agreement, certain rights with respect to the Series
B Preferred Shares;
NOW, THEREFORE, in consideration of the premises set forth herein, the
parties hereto hereby agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, $.01 par value, of the
Company, as constituted as of the date of this Agreement.
"Conversion Shares" shall mean shares of Common Stock issued or
issuable upon conversion of the Series B Preferred Shares, and any shares of
capital stock received in respect thereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Holder" shall mean the person who is the then record owner of
Restricted Stock.
<PAGE>
- 2 -
"Registrable Shares" shall mean the shares of Restricted Stock.
"Registration Expenses" shall mean the expenses so described in
Section 8.
"Restricted Stock" shall mean the Conversion Shares, excluding shares
which have been (a) registered under the Securities Act pursuant to an effective
registration statement filed thereunder and disposed of in accordance with the
registration statement covering them or (b) publicly sold pursuant to Rule 144
under the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
2. Restrictive Legend.
Each certificate representing the Restricted Stock shall bear a legend
stating in substance:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO
DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED [FOR NON U.S. PERSONS ADD: IN THE
UNITED STATES OR TO U.S. PERSONS] WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 AND
APPLICABLE STATE SECURITIES LAWS, OR THE AVAILABILITY OF AN EXEMPTION FROM
THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933 AND APPLICABLE
STATE SECURITIES LAWS.
A certificate shall not be required to bear such legend if, in the opinion
of counsel satisfactory to the Company, the securities represented thereby may
be publicly sold without registration under the Securities Act.
3. Notice of Proposed Transfer.
Prior to any proposed transfer of any Restricted Stock (other than under
the circumstances described in Section 4, 5 or 6), the Holder thereof shall give
written notice to the Company of its intention to effect such transfer. Each
such notice shall describe the manner of the proposed transfer and, if requested
by the Company, shall be accompanied by an opinion of
<PAGE>
- 3 -
counsel satisfactory to the Company to the effect that the proposed transfer may
be effected without registration under the Securities Act, whereupon the Holder
of such stock shall be entitled to transfer such stock in accordance with the
terms of its notice; provided, however, that no such opinion of counsel shall be
required for a distribution by a corporation, partnership, limited partnership,
limited liability company or other entity formed to hold investments in other
businesses to its shareholders, partners, members or other equity holders of
such stock in respect of such interest. Each certificate for shares of
Restricted Stock transferred as above provided shall bear the legend set forth
in Section 2, except that such certificate shall not bear such legend if (i)
such transfer is in accordance with the provisions of Rule 144 (or any other
rule permitting public sale without registration under the Securities Act) or
(ii) the opinion of counsel referred to above is to the further effect that the
transferee and any subsequent transferee (other than an affiliate of the
Company) would be entitled to transfer such securities in a public sale without
registration under the Securities Act. The restrictions provided for in this
Section 3 shall not apply to securities which are not required to bear the
legend prescribed by Section 2 in accordance with the provisions of that
Section.
4. Required Registration.
(a) At any time prior to December 31, 2007, the Holders of Registrable
Shares constituting at least 51% of the total shares of Registrable Shares then
outstanding may request the Company to register under the Securities Act all or
any portion of the Registrable Shares held by such requesting Holder or Holders
for sale in the manner specified in such notice, provided that the Registrable
Shares for which registration has been requested shall constitute at least 25%
of the total Registrable Shares originally issued if such Holder or Holders
shall request the registration of less than all Registrable Shares then held by
such Holder or Holders. Notwithstanding anything to the contrary contained
herein, no request may be made under this Section 4 within 180 days after the
effective date of a registration statement filed by the Company covering a firm
commitment underwritten public offering in which the Holders of Registrable
Shares shall have been entitled to join pursuant to Section 5 or 6 and in which
there shall have been effectively registered all Registrable Shares to which
registration shall have been requested.
(b) Following receipt of any notice under this Section 4, the Company
shall immediately notify all Holders of Registrable Shares from whom notice has
not been received and shall use its reasonable best efforts to register under
the Securities Act, for public sale in accordance with the method of disposition
specified in such notice from requesting Holders, the number of Registrable
Shares specified in such notice (and in all notices received by the Company from
other Holders within 30 days after the giving of such notice by the Company). If
such method of disposition shall be an underwritten public offering, the Holders
of a majority of the Registrable Shares to be sold in such offering may
designate the managing
<PAGE>
- 4 -
underwriter of such offering, subject to the approval of the Company, which
approval shall not be unreasonably withheld or delayed. The Company shall be
obligated to register Registrable Shares pursuant to this Section 4 on two
occasions only, provided, however, that such obligation shall be deemed
satisfied only when a registration statement, which covers all Registrable
Shares specified in notices received as aforesaid and with respect to which the
request for registration has not been withdrawn and provides for sale of such
shares in accordance with the method of disposition specified by the requesting
Holders, shall have become effective and, if such method of disposition is a
firm commitment underwritten public offering, all such shares shall have been
sold pursuant thereto.
(c) The Company shall be entitled to include in any registration
statement referred to in this Section 4, for sale in accordance with the method
of disposition specified by the requesting Holders, shares of Common Stock to be
sold by the Company for its own account, except as and to the extent that, in
the opinion of the managing underwriter (if such method of disposition shall be
an underwritten public offering), such inclusion would adversely affect the
marketing of the Registrable Shares to be sold. Except for registration
statements on Form S-4, S-8 or any successor thereto, the Company will not file
with the Commission any other registration statement with respect to its Common
Stock, whether for its own account or that of other stockholders, from the date
of receipt of a notice from requesting Holders pursuant to this Section 4 (the
"Demand Holders")until the first to occur of (i) withdrawal of such registration
statement or (ii) the effectiveness of such registration statement unless such
registration statement relates to a firm commitment underwritten public
offering, then the completion of the period of distribution of the registration
contemplated thereby; provided, however, that following receipt of any notice
under this Section 4, the Company shall immediately notify all holders of the
Company's Common Stock who have contractual rights to demand registrations
pursuant to the terms of any other registration rights agreement to which the
Company is a party. Upon the written request of such demand rights holders
constituting the requisite percentages of shares to initiate a demand under such
other registration rights agreement specifying the number of shares to be
registered, which request shall be deemed to be an exercise of a demand right
under the terms of the registration rights agreement to which they are parties,
such demand rights holders shall be deemed to be Demand Holders and the shares
requested to be registered by such Demand Holders shall be deemed to be
Registrable Shares, in each case, for purposes of Section 4(d), provided that
such written request is received by the Company within 30 days of the giving of
notice by the Company.
(d) If, in the opinion of the managing underwriter, the inclusion in a
registration statement to be filed under this Section of any shares other than
the Registrable Shares requested to be registered under this Section by Demand
Holders would adversely affect the marketing of such shares, then, in such event
(a) such other shares may be included
<PAGE>
- 5 -
in such registration only if all of the Registrable Shares requested to be
registered by Demand Holders hereunder are included, and (b) such other shares
shall be subject to the provisions of Section 5 and the first sentence of
Section 4(c) as to priority of inclusion. If, in the opinion of the managing
underwriter, the inclusion of the Registrable Shares requested to be registered
under this Section by Demand Holders would adversely affect the marketing of
such Registrable Shares, Registrable Shares to be sold by the Demand Holders
shall be excluded in such manner that the Registrable Shares to be excluded
shall first be the Registrable Shares of Demand Holders who are not affiliates
(as defined in Rule 144 of the Securities Act) of the Company (the "Affiliate
Holders") and whose Registrable Shares are then saleable under Rule 144(e) or
Rule 144(k) under the Securities Act and then pro rata among them, and if
further reduction is necessary, shall next be pro rata among the remaining
Registrable Shares of the Demand Holders who are Affiliate Holders or whose
Registrable Shares are not then saleable under Rule 144(e) or Rule 144(k) ,
provided, however, that, notwithstanding anything in this Agreement to the
contrary, in respect of the first underwritten public offering following the
date of this Agreement, no reduction shall reduce the number of shares which may
be sold by requesting Holders to less than 25% of the shares to be sold in such
offering.
<PAGE>
- 6 -
5. Incidental Registration.
If the Company at any time (other than pursuant to Section 4 or Section 6)
proposes to register any of its securities under the Securities Act for sale to
the public, whether for its own account or for the account of other
securityholders or both (except with respect to registration statements on Forms
S-4, S-8 or another form not available for registering the Restricted Stock for
sale to the public), each such time the Company will give written notice to all
Holders of outstanding Restricted Stock of its intention to do so. Upon the
written request of any such Holder received by the Company within 30 days of the
giving of any such notice by the Company to register any of such Holder's
Restricted Stock (which request shall state the intended method of disposition
thereof), the Company will use its reasonable best efforts to cause the
Restricted Stock as to which registration shall have been so requested to be
included in the securities to be covered by the registration statement proposed
to be filed by the Company, all to the extent requisite to permit the sale or
other disposition by the Holder (in accordance with such Holder's written
request) of such Restricted Stock so registered. In the event that any
registration pursuant to this Section 5 shall be, in whole or in part, an
underwritten public offering of Common Stock, the number of shares of Restricted
Stock to be included in such an underwriting may be reduced if and to the extent
that the managing underwriter shall be of the opinion that such inclusion would
adversely affect the marketing of the securities to be sold by the Company or
the requesting party therein or that such reduction is otherwise advisable,
provided, however, that after any shares to be sold by holders that do not have
contractual rights to have shares included in such registration have been
excluded, shares to be sold by the Holders shall be excluded in such manner that
the shares to be excluded shall first be the shares of selling Holders and other
requesting holders who, in each case, are not Affiliate Holders and whose shares
are then saleable under Rule 144(e) or Rule 144(k) under the Securities Act and
then pro rata among them, and if further reduction is necessary, shall next be
pro rata among the remaining shares of the selling Holders and other requesting
holders who are Affiliate Holders or whose shares are not then saleable under
Rule 144(e) or Rule 144(k), unless such registration is pursuant to the exercise
of a demand right of another securityholder, in which event such securityholder
shall be entitled to include all shares it desires to have so included before
any shares of Restricted Stock or shares of any other holder are included
therein and provided, however, that, notwithstanding anything in this Agreement
to the contrary, in respect of the first underwritten public offering following
the date of this Agreement, no reduction shall reduce the number of shares which
may be sold by requesting Holders to less than 25% of the shares to be sold in
such offering.
<PAGE>
- 7 -
6. Registration on Form S-3.
If at any time prior to December 31, 2007 (i) a Holder or Holders of
Registrable Shares request that the Company file a registration statement on
Form S-3 or any successor thereto for a public offering of all or any portion of
the Registrable Shares held by such requesting Holder or Holders, the reasonably
anticipated aggregate price to the public of at least $500,000, and (ii) the
Company is a registrant entitled to use Form S-3 or any successor thereto to
register such shares, then the Company shall use its reasonable best efforts to
register under the Securities Act on Form S-3 or any successor thereto, for
public sale in accordance with the method of disposition specified in such
notice, the number of Registrable Shares specified in such notice. Whenever the
Company is required by this Section 6 to use its reasonable best efforts to
effect the registration of Registrable Shares, each of the procedures and
requirements of Section 4 (including but not limited to the requirement that the
Company notify all Holders of Registrable Shares from whom notice has not been
received and provide them with the opportunity to participate in the offering)
shall apply to such registration, provided, however, that there shall be up to
five (5) registrations on Form S-3 which may be requested and obtained under
this Section 6, and the Company shall not be obligated to register Registrable
Shares pursuant to this Section 6 on more than one occasion per twelve (12)
month period, and provided, further, however, that the requirements contained in
the first sentence of Section 4(a) shall not apply to any registration on Form
S-3 which may be requested and obtained under this Section 6.
7. Registration Procedures.
If and whenever the Company is required by the provisions of Section 4, 5
or 6 to use its reasonable best efforts to effect the registration of any shares
of Restricted Stock under the Securities Act, the Company will, as expeditiously
as possible:
(a) prepare and file with the Commission a registration statement
(which, in the case of an underwritten public offering pursuant to Section 4,
shall be on Form S-1 or other form of general applicability satisfactory to the
managing underwriter selected as therein provided) with respect to such
securities and use its reasonable best efforts to cause such registration
statement to become and remain effective for the period of the distribution
contemplated thereby (determined as hereinafter provided);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Securities Act with respect to the disposition of all Restricted Stock
covered by such registration statement in accordance with
<PAGE>
- 8 -
the sellers' intended method of disposition set forth in such registration
statement for such period;
(c) furnish to each seller of Restricted Stock and to each underwriter
such number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or other disposition of the
Restricted Stock covered by such registration statement;
(d) use its reasonable best efforts to register or qualify the
Restricted Stock covered by such registration statement under the securities or
"blue sky" laws of such jurisdictions as the sellers of Restricted Stock or, in
the case of an underwritten public offering, the managing underwriter reasonably
shall request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) use its reasonable best efforts to list the Restricted Stock
covered by such registration statement with any securities exchange on which the
Common Stock is then listed;
(f) immediately notify each seller of Restricted Stock and each
underwriter under such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event of which the Company has knowledge as a result of which
the prospectus contained in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing, and promptly prepare
and furnish to such seller a reasonable number of copies of a prospectus
supplemented or amended so that, as thereafter delivered to the purchasers of
such Restricted Stock, such prospectus shall not include an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing;
(g) if the offering is underwritten and at the request of any seller
of Restricted Stock as provided herein, use its reasonable best efforts to
furnish on the date that Restricted Stock is delivered to the underwriters for
sale pursuant to such registration: (i) an opinion dated such date of counsel
representing the Company for the purposes of such registration, addressed to the
underwriters and to such seller, stating that such registration statement has
become effective under the Securities Act and that (A) to the knowledge of such
counsel, no stop order suspending the effectiveness thereof has been issued and
no proceedings for that purpose have been instituted or are pending or
threatened under the Securities Act, (B) the
<PAGE>
- 9 -
registration statement, the related prospectus and each amendment or supplement
thereof comply as to form in all material respects with the requirements of the
Securities Act (except that such counsel need not express any opinion as to
financial statements, schedules and other financial or statistical information
contained therein) and (C) to such other effects as reasonably may be requested
by counsel for the underwriters or by such seller or its counsel; and (ii) a
letter dated such date from the independent public accountants retained by the
Company, addressed to the underwriters and to such seller, stating that they are
independent public accountants within the meaning of the Securities Act and
that, in the opinion of such accountants, the financial statements of the
Company included in the registration statement or the prospectus, or any
amendment or supplement thereof, comply as to form in all material respects with
the applicable accounting requirements of the Securities Act, and such letter
shall additionally cover such other financial matters (including information as
to the period ending no more than five business days prior to the date of such
letter) with respect to such registration as such underwriters reasonably may
request;
(h) make available for inspection by each seller of Restricted Stock,
any underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by such seller
or underwriter, all financial and other records, pertinent corporate documents
and properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such seller,
underwriter, attorney, accountant or agent in connection with such registration
statement;
(i) cooperate with the selling holders of Restricted Stock and the
managing underwriters, if any, to facilitate the timely preparation and delivery
of certificates representing Restricted Stock to be sold, such certificates to
be in such denominations and registered in such names as such holders or the
managing underwriters may request at least two business days prior to any sale
of Restricted Stock; and
(j) permit any holder of Restricted Stock which holder, in the sole
and exclusive judgment, exercised in good faith, of such holder, might be deemed
to be a controlling person of the Company, to participate in good faith in the
preparation of such registration or comparable statement and to require the
insertion therein of material, furnished to the Company in writing, which in the
reasonable judgment of such holder and its counsel should be included.
For purposes of Section 7(a) and 7(b) and of Section 4(c), the period of
distribution of Restricted Stock included therein shall be deemed to extend
until the first to occur of (i) each underwriter's completion of the
distribution of all securities purchased by it, and (ii) one hundred and twenty
(120) days.
<PAGE>
- 10 -
In connection with each registration hereunder, the sellers of Restricted
Stock will furnish to the Company in writing such information with respect to
themselves and the proposed distribution by them as reasonably shall be
necessary in order to assure compliance with federal and applicable state
securities laws.
In connection with each registration pursuant to Section 4, 5 or 6 covering
an underwritten public offering, the Company and each seller agree to enter into
a written agreement with the managing underwriter selected in the manner herein
provided in such form and containing such provisions as are customary in the
securities business for such an arrangement between such underwriter and
companies of the Company's size and investment stature.
No Holder of shares of Restricted Stock included in a registration
statement shall (until further notice) effect sales thereof after receipt of
telegraphic or written notice from the Company to suspend sales to permit the
Company to correct or update a registration statement or prospectus; but the
obligations of the Company with respect to maintaining any registration
statement current and effective shall be extended by a period of days equal to
the period such suspension is in effect unless (i) such extension would result
in the Company's inability to use the financial statements in the registration
statement as initially filed and (ii) such correction or update did not result
from the Company's acts or failures to act.
At the end of the period during which the Company is obligated to keep the
registration statement current and effective as described above (and any
extensions thereof required by the preceding sentence), the Holders of shares of
Restricted Stock included in the registration statement shall discontinue sales
of shares pursuant to such registration statement upon receipt of notice from
the Company of its intention to remove from registration the shares covered by
such registration statement which remain unsold, and such Holders shall notify
the Company of the number of shares registered which remain unsold immediately
upon receipt of such notice from the Company.
8. Expenses.
All expenses incurred by the Company in complying with Sections 4, 5 and 6,
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel and independent public accountants
for the Company, fees and expenses (including counsel fees) incurred in
connection with complying with state securities or "blue sky" laws, fees of the
National Association of Securities Dealers, Inc., transfer taxes, fees of
transfer agents and registrars, costs of insurance, and fees and disbursements
of one counsel for the sellers of Restricted Stock, but excluding any Selling
Expenses, are called "Registration Expenses." All underwriting discounts and
selling commissions applicable to the sale of Restricted Stock are called
"Selling Expenses."
<PAGE>
- 11 -
The Company will pay all Registration Expenses in connection with each
registration statement under Sections 4, 5 or 6. All Selling Expenses in
connection with each registration statement under Sections 4, 5 or 6 shall be
borne by the participating sellers in proportion to the number of shares sold by
each, or by such participating sellers other than the Company (except to the
extent the Company shall be a seller) as they may agree.
9. Indemnification and Contribution.
(a) In the event of a registration of any of the Restricted Stock
under the Securities Act pursuant to Sections 4, 5 or 6, the Company will
indemnify and hold harmless each seller of such Restricted Stock thereunder, its
officers and directors, each underwriter of such Restricted Stock thereunder and
each other person, if any, who controls such seller or underwriter within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such seller, officer, director,
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such Restricted Stock was registered under the Securities
Act pursuant to Sections 4, 5 or 6, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, (ii) any
blue sky application or other document executed by the Company specifically for
that purpose or based upon written information furnished by the Company filed in
any state or other jurisdiction in order to qualify any or all of the Restricted
Stock under the securities laws thereof (any such application, document or
information herein called a "Blue Sky Application"), (iii) the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, (iv) any violation
by the Company or its agents of any rule or regulation promulgated under the
Securities Act applicable to the Company or its agents and relating to action or
inaction required of the Company in connection with such registration, or (v)
any failure to register or qualify the Restricted Stock in any state where the
Company or its agents has affirmatively undertaken or agreed in writing that the
Company (the undertaking of any underwriter chosen by the Company being
attributed to the Company) will undertake such registration or qualification on
the seller's behalf (provided that in such instance the Company shall not be so
liable if it has undertaken its best efforts to so register or qualify the
Restricted Stock) and will reimburse each such seller, and such officer and
director, each such underwriter and each such controlling person for any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such loss, claim, damage, liability or action, provided,
however, that the Company will not be liable in any such case if and to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with information furnished
<PAGE>
- 12 -
by any such seller, any such underwriter or any such controlling person in
writing specifically for use in such registration statement or prospectus, and
except that the foregoing indemnity agreement is subject to the condition that,
insofar as it relates to any such untrue statement or alleged untrue statement
or omission or alleged omission made in the preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the Commission at
the time the registration statement becomes effective or in the amended
prospectus filed with the Commission pursuant to Rule 424(b) or in the
prospectus subject to completion and term sheet under Rule 434 of the Securities
Act, which together meet the requirements of Section 10(a) of the Securities Act
(the "Final Prospectus"), such indemnity agreement shall not inure to the
benefit of any such seller, any such underwriter or any such controlling person,
if such seller, underwriter or controlling person was obligated under law to
provide a copy of the Final Prospectus to the person or entity asserting the
loss, liability, claim or damage and failed to do so after sufficient copies of
the Final Prospectus were delivered by the Company to such seller, underwriter
or controlling person in sufficient time to deliver the Final Prospectus within
the period required by the Securities Act; provided, further, that this
indemnity shall not be deemed to relieve any underwriter of any of its due
diligence obligations.
(b) To the extent permitted by law, in the event of a registration of
any of the Restricted Stock under the Securities Act pursuant to Section 4, 5 or
6, each seller of such Restricted Stock thereunder, severally and not jointly,
will indemnify and hold harmless the Company, each person, if any, who controls
the Company within the meaning of the Securities Act, each officer of the
Company who signs the registration statement, each director of the Company, each
underwriter and each person who controls any underwriter within the meaning of
the Securities Act, against all losses, claims, damages or liabilities, joint or
several, to which the Company or such officer, director, underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any registration statement under
which such Restricted Stock was registered under the Securities Act pursuant to
Section 4, 5 or 6, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances in which they were made, and will reimburse
the Company and each such officer, director, underwriter or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action,
provided, however, that such seller will be liable hereunder in any such case if
and only to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission so made in reliance
<PAGE>
- 13 -
upon and in conformity with information pertaining to such seller furnished in
writing to the Company by such seller specifically for use in such registration
statement or prospectus, and provided, further, that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any such
untrue statement or alleged untrue statement or omission or alleged omission
made in the preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the Commission at the time the registration statement
becomes effective or in the Final Prospectus, such indemnity agreement shall not
inure to the benefit of the Company, any controlling person or any underwriter,
if the Company, underwriter or controlling person was obligated under law to
provide a copy of the Final Prospectus to the person or entity asserting the
loss, liability, claim or damage and failed to do so within the period required
by the Securities Act; provided, further, that this indemnity shall not be
deemed to relieve any underwriter of any of its due diligence obligations; and
provided, further, that in no event shall any indemnity by a seller under this
Section 9(b) exceed the gross proceeds from the offering received by such
seller.
(c) Promptly after receipt by an indemnified party hereunder of notice
of the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 9 and shall only relieve it
from any liability which it may have to such indemnified party under this
Section 9 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 9 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected, provided,
however, that, if the defendants in any such action include both the indemnified
party and the indemnifying party and counsel to the indemnified party shall have
reasonably concluded that there are reasonable defenses available to the
indemnified party which are different from or additional to those available to
the indemnifying party or if the interests of the indemnified party reasonably
may be deemed to conflict with the interests of the indemnifying party, the
indemnified party shall have the right to select a separate counsel and to
assume such legal defenses and otherwise to participate in the defense of such
action, with the expenses and fees of such separate counsel and other expenses
related to such participation to be reimbursed by the indemnifying party as
incurred. No indemnifying party, in the defense of any such claim or litigation,
shall, except with the consent of each
<PAGE>
- 14 -
indemnified party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability
in respect to such claim or litigation.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any Holder of
Restricted Stock exercising rights under this Agreement, or any controlling
person of any such Holder, makes a claim for Indemnification pursuant to this
Section 9 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any such selling Holder or any such controlling
person in circumstances for which indemnification is provided under this Section
9; then, and in each such case, the Company and such Holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that such Holder
is responsible for the portion represented by the percentage that the public
offering price of its Restricted Stock offered by the registration statement
bears to the public offering price of all securities offered by such
registration statement, and the Company is responsible for the remaining
portion; provided, however, that, in any such case, (A) no such Holder will be
required to contribute any amount in excess of the public offering price of all
such Restricted Stock offered by it pursuant to such registration statement; and
(B) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
10. Changes in Common Stock or Series A Preferred Stock. If, and as often
as, there is any change in the Common Stock or Series A Preferred Stock by way
of a stock split, stock dividend, combination or reclassification, or through a
merger, consolidation, reorganization or recapitalization, or by any other
means, appropriate adjustment shall be made in the provisions hereof so that the
rights and privileges granted hereby shall continue with respect to the Common
Stock or Series A Preferred Stock as so changed.
11. Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Stock to the public without registration, the Company
agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
<PAGE>
- 15 -
(b) use its reasonable best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) furnish to each Holder of Restricted Stock forthwith upon request
a written statement by the Company as to its compliance with the reporting
requirements of such Rule 144 and of the Securities Act and the Exchange Act, a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents so filed by the Company as such Holder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing such Holder to sell any Restricted Stock without
registration.
The Company shall not be required to effect a registration pursuant to
Section 4, 5 or 6 hereof for any Holder desiring to participate in such
registration who (a) may then dispose of all of its shares of Restricted Stock
pursuant to Rule 144 within the three-month period following such proposed
registration; and (b) holds less than 1% of the outstanding capital stock of the
Company (on a common stock-equivalent basis) at the time of such registration.
12. Representations and Warranties of the Company. The Company represents
and warrants to you as follows:
(a) The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and will not
violate any provision of law, any order of any court or other agency of
government, the Charter or Bylaws of the Company or any provision of any
indenture, agreement or other instrument to which it or any or its properties or
assets is bound, conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any such indenture, agreement
or other instrument or result in the creation or imposition of any lien, charge
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Company.
(b) This Agreement has been duly executed and delivered by the Company
and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms (subject, as to enforcement of
remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and
similar laws affecting the rights of creditors generally), except to the extent
the indemnification provisions herein may be deemed not enforceable.
(c) The Company has not granted any registration rights, and no such
registration rights exist, that conflict with the registrations rights set forth
herein or contemplated hereby. All registration rights agreements relating to
the capital stock of the
<PAGE>
- 16 -
Company permit, or have been amended to permit, the transactions and rights set
forth herein and contemplated hereby.
13. Miscellaneous.
(a) All covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto (including without
limitation transferees of any of the shares of Restricted Stock), whether so
expressed or not, provided, however, that registration rights conferred herein
on the Holders of shares of Restricted Stock shall only inure to the benefit of
a transferee of shares of Restricted Stock if such transferee, in the Company's
reasonable judgment, is not a competitor of the Company, and (i) there is
transferred to such transferee at least 20% of the total shares of Restricted
Stock originally issued to the direct or indirect transferor of such transferee
by the Company or (ii) such transfer is made in connection with the distribution
by a Holder to such Holders beneficial owners (including, without limitation, to
partners of a general or limited partnership, shareholders of a corporation and
beneficiaries of a trust) of securities of the Holder or to the partners or
employees of the Holder, provided that at the Company's request, one person
shall be designated by such transferees as their agent for purposes of their
rights hereunder and the provision of a notice by the Company to such agent in
accordance with the provisions hereof shall be deemed compliance with such
provisions for all such beneficial owners, partners and employees, and following
such request by the Company, the Company shall have no obligation under said
provisions with respect to such transferees until it shall have been notified of
the name and address of such agent.
(b) Each Holder agrees that it will provide notice to the Company of
any transfer or assignment of its rights or interests hereunder. Any failure by
the Company to fulfill a covenant or obligation hereunder which is the direct
result of a failure by a Holder to provide such notice shall not be deemed to be
a breach of any covenant or obligation hereunder.
Nothing in this Agreement shall be construed to create any rights or
obligations except among the parties hereto and their respective and permitted
successors and assigns, and no person or entity shall be regarded as a
third-party beneficiary of this Agreement.
Except as provided in Section 13(a) above, all notices, requests, consents
and other communications hereunder shall be in writing, shall be addressed to
the receiving party's address set forth below or to such other address as a
party may designate by notice hereunder, and shall be either (i) delivered by
hand, (ii) sent by overnight courier, with a receipt obtained or (iii) sent by
registered or certified mail, return receipt requested, postage prepaid.
<PAGE>
- 17 -
If to the Company:
Jay Jacobs, Inc.
1530 Fifth Avenue
Seattle, WA 98101
Attn: Chief Executive Officer
If to an Investor: To such Investor at the address
of such Investor set forth in Schedule A to the
Purchase Agreement
All notices, requests, consents and other communications hereunder shall be
deemed to have been given (i) if by hand, at the time of the delivery thereof to
the receiving party at the address of such party set forth above, (ii) if sent
by overnight courier, on the next business day following the day such notice is
delivered to the courier service, or (iii) if sent by registered or certified
mail, on the 5th business day following the day such mailing is made.
(c) This Agreement shall be governed and construed in accordance with
the law of the Sate of Washington, without giving effect to the conflict of laws
principles thereof.
(d) This Agreement may be amended or modified, and any provision
hereof may be waived in whole or in part, but only by the written consent of the
Company and the holders of a majority of the aggregate number of outstanding
shares of Restricted Stock held of record by the Holders or their permitted
successors and assigns. This Agreement may be terminated by written agreement of
the Company and the holders of at least a majority of the aggregate number of
outstanding shares of Restricted Stock held of record by the Holders or their
permitted successors and assigns.
(e) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(f) Except as otherwise expressly provided herein, the obligations of
the Company to register shares of Restricted Stock under Section 4, 5 or 6 as
provided herein shall terminate on December 31, 2007.
(g) If requested by the underwriter or underwriters for an
underwritten public offering of securities of the Company which offering is by
the Company, each Holder of Restricted Stock who is a party to this Agreement
(including, without limitation, a successor or permitted assignee of a party)
shall agree not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any shares of Restricted Stock or any
<PAGE>
- 18 -
other shares of Common Stock (other than shares being registered in such
offering), without the consent of such underwriter or underwriters, for a period
of not more than 90 days following the effective date of the registration
statement relating to such offering (unless in any event such underwriter or
underwriters shall, based on then current market conditions, agree to a shorter
period), provided, with respect to each such offering, that all persons entitled
to registration rights in such offering who are not parties to this Agreement,
all other persons selling shares of Common Stock in such offering and all
executive officers of the Company shall also have agreed to be bound by
provisions pertaining to the sale of their shares of Common Stock following such
offering which provisions are substantially similar to the provisions binding
upon the Holders of Restricted Stock obligated under this Agreement with respect
to the sale of their shares following such offering.
(h) The Company shall be permitted to require any Holders requesting
registration under Section 4, 5 or 6 to delay any request for registration or to
cease sales under any effective registration statement if the Company is then
contemplating a transaction that could reasonably be expected to be adversely
affected or the Company would be required to make public disclosure of
information, the disclosure of which at such time could reasonably be expected
to cause a material adverse effect upon the Company's business.
In addition, if at the time of any request to register Registrable Shares
pursuant to Section 4 or Section 6 hereof, the Company is engaged or has fixed
plans to engage within ninety (90) days of the time of the request in a
registered public offering as to which such Holders may include Registrable
Shares pursuant to Section 5 hereof, then the Company may at its option direct
that such request be delayed.
(i) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
In the event that any court of competent jurisdiction shall determine that
any provision, or any portion thereof, contained in this Agreement shall be
unreasonable or unenforceable in any respect, then such provision shall be
deemed limited to the extent that such court deems it reasonable and
enforceable, and as so limited shall remain in full force and effect.
(j) The headings and captions of the various subdivisions of this
Agreement are for convenience of reference only and shall in no way modify, or
affect the meaning or construction of any of the terms or provisions hereof.
<PAGE>
- 19 -
14. Entire Agreement.
This Agreement embodies the entire agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersedes all
prior oral or written agreements and understandings related to the subject
matter hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
- 20 -
IN WITNESS WHEREOF, the undersigned have executed this Registration Rights
Agreement as a sealed instrument as of the day and year first written above.
THE COMPANY: INVESTORS:
JAY JACOBS, INC. CAHILL, WARNOCK STRATEGIC
PARTNERS FUND, L.P.
By: Cahill, Warnock Strategic Partners, L.P.
By: /s/ REX LOREN STEFFEY By: /s/
---------------------------- ------------------------------------------
Title: President and CEO Title: General Partner
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Company, LLC
By: /s/
-----------------------------------------
Title: Managing Member
T. ROWE PRICE RECOVERY FUND II, L.P.
By: T. Rowe Price Recovery Fund II
Associates, LLC
By: /s/
-----------------------------------------
Title: Managing Director
/s/ MICHAEL D. SULLIVAN
--------------------------------------------
MICHAEL D. SULLIVAN
<PAGE>
- 21 -
SCHEDULE A
INVESTORS
Cahill, Warnock Strategic Partners Fund, L.P.
10 North Calvert Street
Suite 735
Baltimore, Maryland 21202
Attn: Mr. Edward L. Cahill
Strategic Associates, L.P.
10 North Calvert Street
Suite 735
Baltimore, Maryland 21202
Attn: Mr. Edward L. Cahill
T. Rowe Price Associates
100 East Pratt Street
Seventh Floor
Baltimore, MD 21202
Attn: Mr. Kim Golden
Michael D. Sullivan
9101G Yellow Brick Rd.
Rosedale, MD 21237
<PAGE>
Exhibit C
STATE OF WASHINGTON ARTICLES OF AMENDMENT
SECRETARY OF STATE WASHINGTON
Ralph Munro, Secretary of State PROFIT CORPORATION
(Per Chapter 23B.10 RCW)
Please PRINT or TYPE in black ink FEE: $30
Sign, date and return original EXPEDITED (24-HOUR) SERVICE AVAILABLE -
AND ONE COPY to:
$20 PER ENTITY INCLUDE FEE AND WRITE
CORPORATIONS DIVISION "EXPEDITE" IN BOLD LETTERS ON OUTSIDE OF
505 E. UNION . PO BOX 40234 ENVELOPE
OLYMPIA, WA 98504-0234
BE SURE TO INCLUDE FILING FEE. Checks FOR OFFICE USE ONLY
should be made payable to "Secretary FILED: 12/03/97
of State.
IMPORTANT: Person to contact about Daytime Phone Number (with area code)
this filing James Vandeberg (206) 464-0404
AMENDMENT TO ARTICLES OF INCORPORATION
NAME OF CORPORATION (As currently recorded with the Office of the Secretary of
State) Jay Jacobs, Inc.
UBI NUMBER CORPORATION NUMBER AMENDMENTS TO ARTICLES OF INCORPORATION
(if known) WERE ADOPTED ON
578 042 302 2145 8112 Date: December 2, 1997
EFFECTIVE DATE OF
ARTICLES OF AMENDMENT X Upon filing by the Secretary of State
ARTICLES OF AMENDMENT WERE ADOPTED BY (Please check ONE of the following)
Incorporators. Shareholders action was not required
X Board of Directors. Shareholders action was not required
Duly approved shareholders action in accordance with Chapter 23B.10 RCW
AMENDMENTS TO THE ARTICLES OF INCORPORATION ARE AS FOLLOWS
If amendment provides for an exchange, reclassification, or cancellation of
issued shares, provisions for implementing the amendment must be included.
If necessary, attach additional amendments or information.
Pursuant to RCW 23B.06.020, Jay Jacobs, Inc., a Washington Corporation,
hereby states that the Statement of Rights and Preferences of Series A Preferred
Stock and Series B Preferred Stock, attached hereto as EXHIBIT A, was duly
adopted by its Board of Directors on December 2, 1997.
SIGNATURE OF OFFICER
This document is hereby executed under penalties of perjury, and is, to the best
of my knowledge, true and correct.
/s/ REX LOREN STEFFEY PRES. 12/2/97
Signature of Officer Printed Name Date
INFORMATION AND ASSISTANCE - 360/753-7115 (TDD - 360-753-1435)
<PAGE>
EXHIBIT A
Statement of Rights and Preferences
of
Series A Preferred Stock and Series B Preferred Stock
of
Jay Jacobs, Inc.
1. Series A Stock. An aggregate of 46,000 shares of Preferred Stock are hereby
designated as Series A Preferred Stock, $.01 par value (the "Series A Preferred
Stock"). The rights, preferences, privileges and limitations granted to and
imposed on the Series A Preferred Stock are as set forth below:
1.1 Cumulative Dividends. Dividends on the Series A Preferred Stock
shall be cumulative and shall cumulate and accrue on a daily basis, without
interest, at the rate of $5.00 per share per annum commencing December 3, 1997
and until December 31, 2002. Thereafter, dividends on the Series A Preferred
Stock shall cumulate and accrue on a daily basis, without interest, at the rate
of $20.00 per share per annum. The cumulation and accrual of dividends on the
Series A Preferred Stock shall occur regardless of whether or not the
Corporation shall have funds legally available for the payment of dividends. The
holders of the Series A Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors, out of funds legally available for such
purpose, cumulative dividends at the rates specified above and no more.
In no event, as long as any Series A Preferred Stock shall remain
outstanding, shall any dividend whatsoever be declared or paid upon any Series B
Preferred Stock unless, prior to or simultaneously with such declaration and
payment, pro rata dividends have been or are declared and paid on all
outstanding shares of Series A Preferred Stock so that the aggregate, cumulative
dividends paid on the Series B Preferred Stock are not greater, on a pro rata
basis, than the aggregate cumulative dividends paid on the Series A Preferred
Stock.
In no event, so long as any Series A Preferred Stock shall remain
outstanding, shall any dividend whatsoever be declared or paid upon, nor shall
any distribution be made upon, any Common Stock, other than a dividend or
distribution payable in shares of Common Stock, nor (without the written consent
of the holders of 80% of the outstanding shares of Series A Preferred Stock)
shall any shares of Common Stock be purchased or redeemed by the Corporation,
nor shall any moneys be paid to or made available for a sinking fund for the
purchase or redemption of any Common Stock, unless in each instance cumulative
dividends accrued and unpaid on all outstanding shares of the Series A Preferred
Stock for all past dividend periods shall have been paid in full and any
arrearage in the redemption of the Series A Preferred Stock shall have been made
good.
1.2 Redemption.
a. Right or Obligation to Redeem Series A Preferred Stock.
1
<PAGE>
(a) At any time or from time to time the Corporation may
redeem (in the manner and with the effect provided in this Section 1.2) all or
any of the outstanding shares of Series A Preferred Stock at the redemption
price of $105.00 per share, plus any accrued but unpaid dividends to the date
fixed for redemption. Any redemption of less than all the outstanding shares of
Series A Preferred Stock shall be made pro rata among all holders of Series A
Preferred Stock according to the respective numbers of shares of Preferred Stock
held by them.
(b) If a Restructuring Event (defined below) occurs, the
Corporation shall, not later than 30 days prior to the effective date of such
Restructuring Event, give notice thereof to the holders of Series A Preferred
Stock and, in the event that within 20 days after receipt of such notice, any
holder or holders of Series A Preferred Stock shall elect, by written notice to
the Corporation, to have any or all of its or their Series A Preferred Stock
redeemed, the Corporation shall redeem the same (in the manner and with the
effect provided in this Section 1.2) not later than the day prior to the
effective date of such Restructuring Event, at the redemption price of $105.00
per share, plus any accrued but unpaid dividends to the date fixed for
redemption. As used herein, a Restructuring Event consists of any of (i) the
consolidation, merger or share exchange of the Corporation with or into any
other corporation, other than a merger in which the Corporation is the surviving
corporation and as a result of which the persons who owned, directly or
indirectly, a majori ty of the Common Stock of the Corporation both as issued
and on a fully diluted basis (giving effect to conversion of all outstanding
securities convertible into Common Stock and the exercise of all outstanding
options and warrants to purchase Common Stock) immediately prior to such merger
continue to own, directly or indirectly, both as issued and on a fully diluted
basis, in substantially the same proportions, a majority of such Common Stock
immediately after such merger, or (ii) the sale of all or substantially all of
the properties and assets of the Corporation as an entirety to any other person
or persons, other than the sale of such properties and assets to a person or
persons the majority, by voting power, of the capital stock of each of which,
both as issued and on a fully diluted basis, is owned, directly or indirectly,
by persons who owned, directly or indirectly, a majority of the Common Stock of
the Corporation.
(c) If the Corporation shall consummate the sale or series
of related sales for cash of equity securities the net proceeds to the
Corporation from which (after deduction of discounts, commissions and other
offering expenses) shall equal or exceed $5,000,000, the Corporation shall, not
later than the date on which such net proceeds have been received by the
Corporation, give notice thereof to the holders of Series A Preferred Stock and,
in the event that within 20 days after receipt of such notice, any holder or
holders of Series A Preferred Stock shall elect, by written notice to the
Corporation, to have any or all of its or their Series A Preferred Stock
redeemed, the Corporation shall redeem the same (in the manner and with the
effect provided in this Section 1.2) not later than the day prior to the
effective date of such Restructuring Event, at the redemption price of $100.00
per share, plus any accrued but unpaid dividends to the date fixed for
redemption.
2
<PAGE>
(d) At any time on or after January 1, 2003, any holder or
holders of Series A Preferred Stock may elect, by written notice to the
Corporation, to have any or all of its or their Series A Preferred Stock
redeemed, in which event the Corporation shall redeem the same (in the manner
and with the effect provided in this Section 1.2) on such date, not later than
60 days following receipt of such notice, as the Corporation may determine by
written notice to the holder or holders electing redemption, at the redemption
price of $100.00 per share, plus any accrued but unpaid dividends to the date
fixed for redemption.
(e) Any date on which the Corporation is required or elects
to redeem Series A Preferred Stock hereunder is herein called a "Series A
Redemption Date".
b. Redemption Procedure. If notice of election to redeem shall
have been duly given by any holder or holders of Series A Preferred Stock
pursuant to paragraph (c) above or if the Corporation shall have duly given
notice of redemption pursuant to paragraphs (a) or (b) above to holders of
Series A Preferred Stock at their addresses as shown on the records of the
Corporation, specifying the number of shares to be redeemed and the paragraph
pursuant to which the redemption is to be made and if on or before such Series A
Redemption Date the funds necessary for redemption shall have been set aside so
as to be and continue to be available therefor, then, notwithstanding that any
certificate for shares of Series A Preferred Stock to be redeemed shall not have
been surrendered for cancellation, after the close of business on such Series A
Redemption Date, such shares shall no longer be deemed outstanding, the
dividends thereon shall cease to accrue, and all rights with respect to such
shares shall forthwith after the close of business on the Series A Redemption
Date, cease, except only the right of the holders thereof to receive the
redemption price for such shares, plus any accrued but unpaid dividends to such
Series A Redemption Date, without interest.
c. Shares to Be Redeemed. In case of the redemption, for any
reason, of only a part of the outstanding shares of Series A Preferred Stock
required to be redeemed on a Series A Redemption Date, all shares of Series A
Preferred Stock to be re deemed shall be selected pro rata, and there shall be
redeemed from each registered holder a number of shares, as nearly as
practicable to the nearest share, equal to the total number of shares of Series
A Preferred Stock held of record by such holder multiplied by a fraction, of
which the numerator shall be the aggregate number of shares of Series A
Preferred Stock actually being redeemed on such Series A Redemption Date, and
the denominator shall be the aggregate number of shares of Series A Preferred
Stock required to be redeemed on such Series A Redemption Date.
d. Redeemed or Otherwise Acquired Shares to Be Retired. Any
shares of the Series A Preferred Stock redeemed pursuant to this Section 1.2 or
otherwise acquired by the Corporation in any manner whatsoever shall be
permanently retired and shall not under any circumstances be reissued; and the
Corporation may from time to time take
3
<PAGE>
such appropriate corporate action as may be necessary to reduce the authorized
Preferred Stock accordingly.
1.3 Liquidation. Upon any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of the shares of
Series A Preferred Stock, pari passu together with the holders of Series B
Preferred Stock, shall be entitled before any distribution or payment is made
upon any Common Stock, to be paid an amount equal to $100.00 per share, plus any
accrued but unpaid dividends to the date of such payment, and the holders of the
Series A Preferred Stock shall not be entitled to any further payment, such
amounts being herein sometimes referred to as the "Liquidation Payments". If
upon such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Series A Preferred Stock and Series B Preferred Stock of the Corporation shall
be insufficient to permit payment to the holders of Series A Preferred Stock and
Series B Preferred Stock of the amount distributable to them as provided herein,
then the entire assets of the Corporation legally permitted to be distributed
shall be distributed ratably among the holders of Series A Preferred Stock, pari
passu together with the holders of Series B Preferred Stock. Upon any such
liquidation, dissolution or winding up of the Corporation, after the holders of
the Series A Preferred Stock and Series B Preferred Stock shall have been paid
in full the amounts to which they shall be entitled, the remaining net assets of
the Corporation may be distributed to the holders of Common Stock. Written
notice of such liquidation, dissolution or winding up, stating a payment date,
the amount of the Liquidation Payments and the place where said sums shall be
payable shall be given by mail, postage prepaid, not less than 30 days prior to
the payment date stated therein, to the holders of record of the Series A
Preferred Stock, such notice to be addressed to each stockholder at his or its
post office address as shown by the records of the Corporation. Neither the
consolidation or merger of the Corporation into or with any other corporation or
corporations, nor the sale or transfer by the Corporation of all or any part of
its assets, nor the reduction of the capital stock of the Corporation, shall be
deemed to be a liquidation, dissolution or winding up of the Corporation within
the meaning of any of the provisions of this Section 1.3.
1.4 Voting Rights. Each holder of Series A Preferred Stock shall be
entitled to vote on such matters and in the manner provided herein and by law,
and otherwise the Series A Preferred Stock shall be non voting.
a. Each holder of Series A Preferred Stock shall be entitled to
one vote for each share thereof held, voting as a single class and series
separate from the Common Stock and from the Series B Preferred Stock, with
respect to any of the following matters:
(a) the issuance of any class or series of securities of the
Corporation having rights senior to or pari passu with the Series A Preferred
Stock as to dividend or liquidation preference or as to redemption preference in
the event that funds are not legally available to satisfy such redemption
preference as to all classes of stock entitled to
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the benefit thereof, or the issuance of any other security convertible into or
exchangeable for shares of such class or series;
(b) any transaction that, to the actual knowledge of the
Corporation, following reasonable inquiry of its legal counsel, will result in a
deemed dividend to the holders of the Series A Preferred Stock pursuant to
section 305 of the Internal Revenue Code of 1986, as amended, or any rule or
regulation adopted thereunder or any equivalent provision of federal law; or
b. Except as otherwise provided by law and the Articles of
Incorporation, as amended, the holders of Series A Preferred Stock shall not be
entitled to notice of any stockholders meeting in accordance with the bylaws of
the Corporation.
1.5 Restriction. At any time when shares of Series A Preferred Stock
are outstanding, except where the vote or written consent of the holders of a
greater number of shares of the Corporation is required by law or by the
Articles of Incorporation, as amended, and in addition to any other vote
required by law, without the written consent of the holders of 80% of the
outstanding Series A Preferred Stock, the Corporation will not amend, alter or
repeal the Corporation's Articles of Incorporation (as amended) or Bylaws in any
manner which adversely affects the rights or preferences of the Series A
Preferred Stock.
1.6 Preemptive Rights. No holder of the Series A Preferred Stock, as
such, shall have any preemptive rights to subscribe for shares, obligations,
warrants or other securities of this Corporation, of this or any other class or
series, whether now or hereafter authorized, unless as may be otherwise agreed
by this Corporation or be provided by the Board of Directors.
2. Series B Stock. An aggregate of 25,000 shares of Preferred Stock are
hereby designated as Series B Convertible Preferred Stock, $.01 par value (the
"Series B Preferred Stock"). The rights, preferences, privileges and limitations
granted to and imposed on the Series B Preferred Stock are as set forth below:
2.1 Cumulative Dividends. Dividends on the Series B Preferred Stock
shall be cumulative and shall cumulate and accrue on a daily basis, without
interest, and, except as provided to the contrary in this Section 2.1, at the
rate of $8.00 per share per annum commencing December 3, 1999 and until December
31, 2002. Thereafter, dividends on the Series B Preferred Stock shall cumulate
and accrue on a daily basis, without interest, at the rate of $20.00 per share
per annum. If a Restructuring Event occurs, (i) the Corporation shall, not later
than 30 days prior to the effective date of such Restructuring Event, give
notice thereof to the holders of Series B Preferred Stock, and (ii) from and
after the effective date of such Restructuring Event, dividends on the Series B
Preferred Stock shall cumulate and accrue on a daily basis, without interest, at
the rate of $20.00 per share per annum. The cumulation and accrual of dividends
on the Series B Preferred Stock shall occur regardless of
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whether or not the Corporation shall have funds legally available for the
payment of dividends.
In no event, so long as any Series B Preferred Stock shall remain
outstanding, shall any dividend whatsoever be declared or paid upon, nor shall
any distribution be made upon, any Common Stock, other than a dividend or
distribution payable in shares of Common Stock, nor (without the written consent
of the holders of 80% of the outstanding shares of Series B Preferred Stock)
shall any shares of Common Stock be purchased or redeemed by the Corporation,
nor shall any moneys be paid to or made available for a sinking fund for the
purchase or redemption of any Common Stock, unless in each instance cumulative
dividends accrued and unpaid on all outstanding shares of the Series B Preferred
Stock for all past dividend periods shall have been paid in full and any
arrearage in the redemption of the Series B Preferred Stock shall have been made
good.
2.2 Redemption.
a. Right or Obligation to Redeem Series B Preferred Stock.
(a) If on or before the date of any redemption pursuant to
this Section 2.2a(b), all of the Series A Preferred Stock shall have been
redeemed by the Corporation, the Corporation may, on January 1, 2003 or at any
time or from time to time thereafter, subject to the conditions set forth in
this Section 2.2a(a), upon not less than 30 days prior notice to each holder of
Series B Preferred Stock, redeem (in the manner and with the effect provided in
this Section 2.2) all or any of the outstanding shares of Series B Preferred
Stock at the redemption price of $105.00 per share, plus any accrued but unpaid
dividends to the date fixed for redemption. Any redemption of less than all the
outstanding shares of Preferred Stock shall be made pro rata among all holders
of Preferred Stock according to the respective numbers of shares of Preferred
Stock held by them. As a condition to any redemption pursuant to this Section
2.2a(b), the Company shall obtain the written consent of the holders of not less
than a majority of the Series B Preferred Stock then outstanding.
(b) Any date on which the Corporation elects to redeem
Series B Preferred Stock hereunder is herein called a "Series B Redemption
Date".
b. Redemption Procedure. If the Corporation shall have duly given
notice of redemption pursuant to paragraph a(a) above to holders of Series B
Preferred Stock at their addresses as shown on the records of the Corporation,
specifying the number of shares to be redeemed and if on or before such Series B
Redemption Date the funds necessary for redemption shall have been set aside so
as to be and continue to be available therefor, and with respect to all shares
of Series B Preferred Stock that have not been the subject of a valid conversion
notice, then, notwithstanding that any certificate for shares of Series B
Preferred Stock to be redeemed shall not have been surrendered for cancellation,
after the close of business on such Series B Redemption Date, such shares shall
no longer be
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deemed outstanding, the dividends thereon shall cease to accrue, and all rights
with respect to such shares shall forthwith after the close of business on the
Series B Redemption Date, cease, except only the right of the holders thereof to
receive the redemption price for such shares, plus any accrued but unpaid
dividends to such Series B Redemption Date, without interest.
c. Shares to Be Redeemed. In case of the redemption, for any
reason, of only a part of the outstanding shares of Series B Preferred Stock
required to be redeemed on a Series B Redemption Date, all shares of Series B
Preferred Stock to be re deemed shall be selected pro rata, and there shall be
redeemed from each registered holder a number of shares, as nearly as
practicable to the nearest share, equal to the total number of shares of Series
B Preferred Stock held of record by such holder multiplied by a fraction, of
which the numerator shall be the aggregate number of shares of Series B
Preferred Stock actually being redeemed on such Series B Redemption Date, and
the denominator shall be the aggregate number of shares of Series B Preferred
Stock required to be redeemed on such Series B Redemption Date.
d. Redeemed or Otherwise Acquired Shares to Be Retired. Any
shares of the Series B Preferred Stock redeemed pursuant to this Section 2.2 or
otherwise acquired by the Corporation in any manner whatsoever shall be
permanently retired and shall not under any circumstances be reissued; and the
Corporation may from time to time take such appropriate corporate action as may
be necessary to reduce the authorized Preferred Stock accordingly.
2.3 Liquidation. Upon any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, the holders of the shares of
Series B Preferred Stock, pari passu together with holders of Series A Preferred
Stock, shall be entitled before any distribution or payment is made upon any
Common Stock, to be paid an amount equal to $100.00 per share, plus any accrued
but unpaid dividends to the date of such payment, and the holders of the Series
B Preferred Stock shall not be entitled to any further payment, such amounts
being herein sometimes referred to as the "Liquidation Payments". If upon such
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the assets to be distributed among the holders of Series A
Preferred Stock and Series B Preferred Stock of the Corporation shall be
insufficient to permit payment to the holders of Series A Preferred Stock and
Series B Preferred Stock of the amount distributable to them as provided herein,
then the entire assets of the Corporation legally permitted to be distributed
shall be distributed ratably among the holders of Series A Preferred Stock, pari
passu together with the holders of Series B Preferred Stock. Upon any such
liquidation, dissolution or winding up of the Corporation, after the holders of
the Series A Preferred Stock and Series B Preferred Stock shall have been paid
in full the amounts to which they shall be entitled, the remaining net assets of
the Corporation may be distributed to the holders of Common Stock. Written
notice of such liquidation, dissolution or winding up, stating a payment date,
the amount of the Liquidation Payments and the place where said sums shall be
payable shall be given by mail, postage prepaid, not less than 30 days prior to
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the payment date stated therein, to the holders of record of the Series B
Preferred Stock, such notice to be addressed to each stockholder at his or its
post office address as shown by the records of the Corporation. Neither the
consolidation or merger of the Corporation into or with any other corporation or
corporations, nor the sale or transfer by the Corporation of all or any part of
its assets, nor the reduction of the capital stock of the Corporation, shall be
deemed to be a liquidation, dissolution or winding up of the Corporation within
the meaning of any of the provisions of this Section 2.3.
2.4 Voting Rights.
a. Voting in the Election of Directors; Constitution of
Committees of the Board of Directors. While any shares of Series B Preferred
Stock are outstanding, the Board of Directors of the Corporation shall consist
of seven director positions all of which are to be elected by the Series B
Preferred Stock and the Common Stock, voting together as a single class,
provided, however, that at any time at which the Series B Preferred Stock
constitutes less than a majority, by voting power, of the stock entitled to vote
in the election of directors of the Corporation, then (i) the Series B Preferred
Stock, voting as a separate class, shall be entitled to elect not less than
three directors and the remaining four directors shall be elected by the Series
B Preferred Stock and the Common Stock, voting as a single class, and (ii) not
less than two directors elected by the Series B Preferred Stock and the Common
Stock, voting as a single class, shall be non-employee directors reasonably
satisfactory to the holders of the Series B Preferred Stock. Any director may be
removed and/or replaced, without prior notice, by, and only by, a vote or
consent of the voting constituency that elected or appointed such director.
While any shares of Series B Preferred Stock are outstanding, no committee of
the Board of directors shall be formed unless a majority of such committee
consists of directors approved by the directors elected or appointed by the
holders of the Series B Preferred Stock, voting as a separate class.
b. Voting, Generally. Except as otherwise provided by law and the
Articles of Incorporation, as amended, the holders of Series B Preferred Stock
shall be entitled to notice of any stockholders meeting in accordance with the
bylaws of the Corpo ration and to vote, together with the holders of Common
Stock and Series B Preferred Stock as a single class, on any matter submitted to
the stockholders for a vote.
c. Number of Votes . In any vote on which the Common Stock and
the Series B Preferred Stock vote as a single class, the holders of Series B
Preferred Stock shall have one vote for each full share of Common Stock into
which their shares of Series B Preferred Stock are convertible on the record
date for the vote, and (ii) the holders of Common Stock shall have one vote per
share.
2.5 Restrictions. At any time when shares of Series B Preferred Stock
are outstanding, except where the vote or written consent of the holders of a
greater number of shares of the Corporation is required by law or by the
Articles of Incorporation, as amended, and in addition to any other vote
required by law:
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a. The Corporation will not, without the written consent of a
majority of the then outstanding Series B Preferred Stock, create or authorize
the creation of any additional class or series of capital stock of the
Corporation, or increase the authorized amount of the Series A Preferred Stock,
or increase the authorized amount of any additional class or series of capital
stock of the Corporation, or create or authorize any obligations or securities
convertible into shares of Series A Preferred Stock or any other class of
capital stock unless the same ranks junior to the Series B Preferred Stock both
as to dividends and as to the distribution of assets on liquidation, whether any
such creation or authorization or increase shall be by means of amendment of the
Articles of Incorporation (as amended), merger, consolidation or otherwise.
b. The Corporation will not, without the written consent of the
holders of 80% of the outstanding Series B Preferred Stock (i) increase the
authorized amount of the Series B Preferred Stock or create or authorize any
obligations or securities convertible into shares of Series B Preferred Stock,
or (ii) amend, alter or repeal the Corporation's Articles of Incorporation (as
amended) or Bylaws in any manner which adversely affects the rights or
preferences of the Series B Preferred Stock.
2.6 Preemptive Rights. No holder of the Series B Preferred Stock, as
such, shall have any preemptive rights to subscribe for shares, obligations,
warrants or other securities of this Corporation, of this or any other class or
series, whether now or hereafter authorized, unless as may be otherwise agreed
by this Corporation or be provided by the Board of Directors.
2.7 Conversion.
a. Right to Convert.
(a) Subject to the terms and conditions of this Section 2.7,
the holder of any share or shares of Series B Preferred Stock shall have the
right, at its option at any time, to convert any such shares of Series B
Preferred Stock (except that upon any liquidation, dissolution or winding up of
the Corporation the right of conversion shall terminate at the close of business
on the last full business day next preceding the date fixed for payment of the
amount distributable on the Series B Preferred Stock), into such number of fully
paid and nonassessable whole shares of Common Stock as is obtained by
multiplying the number of shares of Series B Preferred Stock so to be converted
by $100.00, and dividing the result by the conversion price of $0.04414 per
share or by the conversion price as last adjusted and in effect at the date any
share or shares of Series B Preferred Stock are surrendered for conversion (such
price, or such price as last adjusted, being referred to herein as the "Series B
Conversion Price"). The rights of conversion contained in this Section 2.7 shall
be exercised by the holder of shares of Series B Preferred Stock by giving
written notice that such holder elects to convert a stated number of shares of
Series B Preferred Stock into Common Stock, and by surrender of a certificate or
certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or
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agency of the Corporation as the Corporation may designate by notice in writing
to the holder or holders of the Series B Preferred Stock) at any time during its
usual business hours set forth in such notice, together with a statement of the
name or names (with address) in which the certificate or certificates for shares
of Common Stock shall be issued.
(b) In the event that the Corporation shall consummate an
underwritten public offering involving the sale by the Corporation of shares of
Common Stock (A) at an initial public offering price per share such that the
value of the Common Stock issuable on conversion of the Series B Preferred Stock
has a value (based on such initial public offering price) representing an
annualized rate of return of 30% on the original purchase price of the Series B
Preferred Stock, and (B) in which the aggregate net proceeds to the Corporation
(after deduction of underwriting discounts and commissions and expenses to the
offering) are at least $25,000,000 (a "Qualified Public Offering"), all
outstanding shares of Series B Preferred Stock shall automatically be converted,
without any action (including without limitation the surrender of certificates
therefor) on the part of the holder thereof into fully paid and nonassessable
shares of Common Stock at the Series B Conversion Price then in effect.
(c) Upon any conversion of Series B Preferred Stock, all
accrued and unpaid dividends thereon shall become immediately due and payable,
provided, however, that, any holder of Series B Preferred Stock may elect to
convert any or all such accrued and unpaid dividends to Common Stock at the
Series B Conversion Price then in effect.
b. Issuance of Certificates; Time Conversion Effected. Promptly
after the receipt of the written notice referred to in Section 2.7a(a) and
surrender of the certificate or certificates for the share or shares of Series B
Preferred Stock to be converted, or upon consummation of the Qualified Public
Offering), the Corporation shall issue and deliver, or cause to be issued and
delivered, to the holder, registered in such name or names as such holder may
direct, a certificate or certificates for the number of whole shares of Common
Stock issuable upon the conversion of such share or shares of Series B Preferred
Stock. To the extent permitted by law, such conversion shall be deemed to have
been effected, and the Series B Conversion Price shall be determined, as of the
close of business on (i) in the case of a conversion pursuant to Section
2.7a(a), the date on which such written notice shall have been received by the
Corporation and the certificate or certificates for such share or shares shall
have been surrendered as aforesaid or, (ii) in the case of a conversion pursuant
to Section 2.7a(b), the date of consummation of such public offering, and at
such time the rights of the holder of such share or shares of Series B Preferred
Stock shall cease, and the person or persons in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become the holder or holders of record
of the shares represented thereby.
c. Fractional Shares; Dividends; Partial Conversion. No
fractional shares may be issued upon conversion of the Series B Preferred Stock
into Common Stock,
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and no payment or adjustment shall be made upon any conversion on account of any
cash dividends on the Common Stock issued upon such conversion. In case the
number of shares of Series B Preferred Stock represented by the certificate or
certificates surrendered pursuant to Section 2.7a exceeds the number of shares
converted, the Corporation shall, upon such conversion, execute and deliver to
the holder thereof, at the expense of the Corporation, a new certificate or
certificates for the number of shares of Series B Preferred Stock represented by
the certificate or certificates surrendered which are not to be converted. If
any fractional interest in a share of Common Stock would, except for the
provisions of the first sentence of this Section 2.7c, be deliverable upon any
such conversion, the Corporation, in lieu of delivering the fractional share
thereof, shall pay to the holder surrendering the Series B Preferred Stock for
conversion an amount in cash equal to the current market price of such
fractional interest as determined in good faith by the Board of Directors of the
Corporation.
d. Adjustment of Price Upon Issuance of Common Stock. Except as
provided in Section 2.7(e) hereof, if and whenever the Corporation shall issue
or sell, or is, in accordance with Sections 2.7d(a) through 2.7d(f), deemed to
have issued or sold, any shares of its Common Stock for a consideration per
share less than the Series B Conversion Price in effect immediately prior to the
time of such issue or sale, then, forthwith upon such issue or sale, the Series
B Conversion Price shall be determined by dividing (i) an amount equal to the
sum of (a) the number of shares of Common Stock outstanding immediately prior to
such issue or sale (including as outstanding all shares of Common Stock issuable
upon conversion of outstanding Series B Preferred Stock) multiplied by the then
existing Series B Conversion Price, and (b) the consideration, if any, received
by the Corporation upon such issue or sale, by (ii) the total number of shares
of Common Stock outstanding immediately after such issue or sale (including as
outstanding all shares of Common Stock issuable upon conversion of outstanding
Series B Preferred Stock).
No adjustment of the Series B Conversion Price, however, shall be made in
an amount less than $.01 per share, and any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment that together with the adjustments so carried forward
shall amount to $.01 per share or more.
For purposes of this Section 2.7d, the following Sections 2.7d(a) to
2.7d(f) shall also be applicable:
(a) Issuance of Rights or Options. In case at any time the
Corporation shall in any manner grant (whether directly or by assumption in
a merger or otherwise) any rights to subscribe for or to purchase, or any
options for the pur chase of, Common Stock or any stock or securities
convertible into or exchangeable for Common Stock (such rights or options
being herein called "Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities") whether or not
such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which
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Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities (determined by
dividing (A) the total amount, if any, received or receivable by the
Corporation as consideration for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, in the case of
such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration payable to the Corporation upon the
exercise of all such Options, plus, in the case of such Options which
relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the issue or sale of such
Convertible Securities and upon the conversion or exchange thereof, by (B)
the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options) shall be
less than the Series B Conversion Price in effect immediately prior to the
time of the granting of such Op tions, then the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed to
have been issued for such price per share as of the date of granting of
such Options and thereafter shall be deemed to be outstanding. Except as
otherwise provided in Section 2.7d(c), no adjustment of the Series B
Conversion Price shall be made upon the actual issue of such Common Stock
or of such Convertible Securities upon exercise of such Options or upon the
actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.
(b) Issuance of Convertible Securities. In case the
Corporation shall in any manner issue (whether directly or by assumption in
a merger or otherwise) or sell any Convertible Securities, whether or not
the rights to exchange or convert thereunder are immediately exercisable,
and the price per share for which Common Stock is issuable upon such
conversion or exchange (determined by dividing (A) the total amount
received or receivable by the Corporation as consideration for the issue or
sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof, by (B) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the Series B Conversion Price in
effect immediately prior to the time of such issue or sale, then the total
maximum number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall be deemed to have been
issued for such price per share as of the date of the issue or sale of such
Convertible Securities and thereafter shall be deemed to be outstanding,
provided that (a) except as otherwise provided in Section 2.7d(c) below, no
adjustment of the Series B Conversion Price shall be made upon the actual
issue of such Common Stock upon conversion or exchange of such Convertible
Securities, and (b) if any such issue or sale of such Convertible
Securities is made upon exercise of any Option to purchase any such
Convertible Securities for which adjustments of the Series B Conversion
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Price have been or are to be made pursuant to other provisions of this
Section 2.7d no further adjustment of the Series B Conversion Price shall
be made by reason of such issue or sale.
(c) Change in Option Price or Conversion Rate. If (A) the
purchase price provided for in any Option referred to in Section 2.7d(a),
(B) the additional consideration, if any, payable upon the conversion or
exchange of any Convertible Securities referred to in Section 2.7d(a) or
2.7d(b) or (C) the rate at which any Convertible Securities referred to in
Section 2.7d(a) or 2.7d(b) are convertible into or exchangeable for Common
Stock shall change at any time (in each case other than under or by reason
of provisions designed to protect against dilution), then the Series B
Conversion Price in effect at the time of such event shall, as re quired,
forthwith be readjusted to such Series B Conversion Price which would have
been in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time initially
granted, issued or sold; and on the expiration of any such Option or the
termination of any such right to convert or exchange such Convertible
Securities, the Series B Conversion Price then in effect hereunder shall,
as required, forthwith be increased to the Series B Conversion Price which
would have been in effect at the time of such expiration or termination had
such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination, never been issued, and
the Common Stock issuable thereunder shall no longer be deemed to be
outstanding. If the purchase price provided for in any such Option referred
to in Section 2.7d(a) or the rate at which any Convertible Securities
referred to in Section 2.7d(a) or 2.7d(b) are convertible into or
exchangeable for Common Stock shall be reduced at any time under or by
reason of provisions with respect thereto designed to protect against
dilution, then, in case of the delivery of Common Stock upon the exercise
of any such Option or upon conversion or exchange of any such Convertible
Securities, the Series B Conversion Price then in effect hereunder shall,
as required, forthwith be adjusted to such respective amount as would have
been obtained had such Option or Convertible Securities never been issued
as to such Common Stock and had adjustments been made upon the issuance of
the shares of Common Stock delivered as aforesaid, but only if as a result
of such adjustment the Series B Conversion Price then in effect hereunder
is thereby reduced.
(d) Stock Dividends. In case the Corporation shall declare a
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock, Options or Convertible Securities, any Common
Stock, Options or Convertible Securities, as the case may be, issuable in
payment of such dividend or distribution shall be deemed to have been
issued or sold without consideration, and the Series B Conversion Price
shall be reduced as if the Corporation had subdivided its outstanding
shares of Common Stock into a greater number of shares, as provided in
Section 2.7f hereof.
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(e) Consideration for Stock. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for cash,
the consideration received therefor shall be deemed to be the amount
received by the Corporation therefor, without deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid or
allowed by the Corporation in connection therewith. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or sold for
a consideration other than cash, the amount of the consideration other than
cash received by the Corporation shall be deemed to be the fair value of
such consideration as determined in good faith by the Board of Directors of
the Corporation, without deduction therefrom of any expenses incurred or
any underwriting commissions or concessions paid or allowed by the
Corporation in connection therewith. In case any Options shall be issued in
connection with the issue and sale of other securities of the Corporation,
together comprising one integral transaction in which no specific
consideration is allocated to such Options by the Corporation, such Options
shall be deemed to have been issued without consideration.
(f) Record Date. In case the Corporation shall take a record
of the holders of its Common Stock for the purpose of entitling them (A) to
receive a dividend or other distribution payable in Common Stock, Options
or Convertible Securities, or (B) to subscribe for or purchase Common
Stock, Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be, provided that such
shares of Common Stock shall in fact have been issued or sold.
e. Certain Issues of Common Stock Excepted. Anything herein to
the contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Series B Conversion Price upon the occurrence of any of the
following events: (i) the issuance of Common Stock upon conversion of
outstanding shares of Series B Preferred Stock, and (ii) the issuance by the
Corporation of options pursuant to stock option plans adopted by the Corporation
to persons eligible to participate in such stock option plans.
f. Subdivision or Combination of Stock. In case the Corporation
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Series B Conversion Price in effect immediately
prior to such subdivision shall be proportionately reduced, and conversely, in
case the outstanding shares of Common Stock of the Corporation shall be combined
into a smaller number of shares, the Series B Conversion Price in effect
immediately prior to such combination shall be proportionately increased.
g. Reorganization, Reclassification, Consolidation, Merger or
Sale. If any capital reorganization or reclassification of the capital stock of
the Corporation or any consolidation or merger of the Corporation with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way (including,
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without limitation, by way of consolidation or merger) that holders of Common
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provisions
(in form reasonably satisfactory to the holders of at least 80% of the
outstanding shares of Series B Preferred Stock) shall be made whereby each
holder of a share or shares of Series B Preferred Stock shall thereafter have
the right to receive, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock immediately theretofore
receivable upon the conversion of such shares or shares of the Series B
Preferred Stock, such shares of stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
Common Stock equal to the number of shares of such stock immediately theretofore
so receivable had such reorganization, reclassification, consolidation, merger
or sale not taken place, and in any such case appropriate provision shall be
made with respect to the rights and interests of such holder to the end that the
provisions hereof (including, without limitation, provisions for adjustment of
the Series B Conversion Price) shall thereafter be applicable, as nearly
practicable, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of such conversion rights (including, if necessary
to effect the adjustments contemplated herein, an immediate adjustment, by
reason of such reorganization, reclassification, consolidation, merger or sale,
of the Series B Conversion Price to the value for the Common Stock reflected by
the terms of such reorganization, reclassification, consolidation, merger or
sale if the value so reflected is less than the Series B Conversion Price in
effect immediately prior to such reorganization, reclassification,
consolidation, merger or sale). In the event of a merger or consolidation of the
Corporation as a result of which a greater or lesser number of shares of Common
Stock of the surviving corporation is issuable to holders of Common Stock of the
Corporation outstanding immediately prior to such merger or consolidation, the
Series B Conversion Price in effect immediately prior to such merger or
consolidation shall be adjusted in the same manner as though there were a
subdivision or combination of the outstanding shares of Common Stock of the
Corporation. The Corporation will not effect any such consolidation or merger,
or any sale of all or substantially all of its assets and properties, unless
prior to the consummation thereof the successor corporation (if other than the
Corporation) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument (in form reasonably
satisfactory to the holders of at least 80% of the shares of Series B Preferred
Stock at the time outstanding), executed and mailed or delivered to each holder
of shares of Series B Preferred Stock at the last address of such holder
appearing on the books of the Corporation, the obligation to deliver to such
holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to receive.
h. Notice of Adjustment. Upon any change or adjustment of the
Series B Conversion Price, then and in each such case the Corporation shall give
written notice thereof, by first class mail, postage prepaid, addressed to each
holder of shares of Series B Preferred Stock at the address of such holder as
shown on the books of the Corporation, which notice shall state the Series B
Conversion Price resulting from such
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adjustment, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
i. Other Notices. In case at any time:
(a) the Corporation shall declare any dividend upon its
Common Stock payable in cash or stock or make any other distribution to the
holders of its Common Stock;
(b) the Corporation shall offer for subscription pro rata to
the holders of its Common Stock any additional shares of stock of any class
or other rights;
(c) there shall be any capital reorganization or reclassifi
cation of the capital stock of the Corporation, or a consolidation or
merger of the Corporation with, or a sale of all or substantially all its
assets to, another corporation;
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation; or
(e) the Corporation shall take any action or there shall be
any event which would result in an automatic conversion of the Series B
Preferred Stock pursuant to Section 2.7a(b);
then, in any one or more of said cases, the Corporation shall give, by first
class mail, postage prepaid, addressed to each holder of any shares of Series B
Preferred Stock at the address of such holder as shown on the books of the
Corporation, (a) at least 20 days' prior written notice of the date on which the
books of the Corporation shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, (b) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 20 days' prior written notice of the date
when the same shall take place, and (c) in the case of any event which would
result in an automatic conversion of the Series B Preferred Stock pursuant to
Section 2.7a (b), at least 20 days' prior written notice of the date on which
the same is expected to be completed. Such notice in accordance with the
foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto, and such notice in accordance with the
foregoing clause (b) shall also specify the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be.
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j. Stock to Be Reserved. The Corporation will at all times
reserve and keep available out of its authorized Common Stock or its treasury
shares, solely for the purpose of issue upon the conversion of the Series B
Preferred Stock as herein provided, such number of shares of Common Stock as
shall then be issuable upon the conversion of all outstanding shares of Series B
Preferred Stock. The Corporation covenants that all shares of Common Stock which
shall be so issued shall be duly and validly issued and fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action as may
be requisite to assure that the par value per share of the Common Stock is at
all times equal to or less than the effective Series B Conversion Price. The
Corporation will take all such action as may be necessary to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirements of any national securities exchange
upon which the Common Stock of the Corporation may be listed. The Corporation
will not take any action which results in any adjustment of the Series B
Conversion Price if the total number of shares of Common Stock issued and
issuable after such action upon conversion of the Series B Preferred Stock would
exceed the total number of shares of Common Stock then authorized by the
Corporation's Articles of Incorporation.
k. No Reissuance of Series B Preferred Stock. Shares of Series B
Preferred Stock that are converted into shares of Common Stock as provided
herein shall not be reissued.
l. Issue Tax. The issuance of certificates for shares of Common
Stock upon conversion of the Series B Preferred Stock shall be made without
charge to the holders thereof for any issuance tax in respect thereof, provided
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in issuance and delivery of any certificate
in a name other than that of the holder of the Series B Preferred Stock which is
being converted.
m. Closing of Books. The Corporation will at no time close its
transfer books against the transfer of any Series B Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series B Preferred Stock in any manner which interferes with the timely
conversion of such Series B Preferred Stock.
n. Definition of Common Stock. The shares of Common Stock
receivable upon conversion of shares of the Series B Preferred Stock, shall
include only shares designated as Common Stock of the Corporation on December 3,
1997, or in case of any reorganization or reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in Section 2.7g.
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Exhibit D
EXHIBIT D
[Vandeberg Johnson & Gandara Letterhead]
December 3, 1997
The Purchasers Listed
on Exhibit A hereto
RE: JAY JACOBS, INC.
Gentlemen and Ladies:
We have acted as counsel for Jay Jacobs, Inc., a Washington corporation
(the "Company"), in connection with the issuance and sale by the Company of
46,000 shares of Series A Preferred Stock, $.01 par value, of the Company (the
"Series A Preferred Shares"), and 25,000 shares of Series B Preferred Stock, $.1
par value, of the Company (the "Series B Preferred Shares", and together with
the Series A Preferred Shares, the "Preferred Shares"), pursuant to the
Preferred Stock Purchase Agreement, dated as of December 3, 1997 (the "Preferred
Stock Purchase Agreement"), among the Company, Cahill, Warnock & Company, LLC,
and the other Purchasers. This opinion is delivered to you pursuant to Section
6.3 of the Preferred Stock Purchase Agreement. Capitalized terms not otherwise
defined in this opinion shall have the meanings given to them in the Preferred
Stock Purchase Agreement.
In rendering this opinion, we have reviewed the Preferred Stock Purchase
Agreement, the Registration Rights Agreement dated as of December 3, 1997
between the Company and the Purchasers (the "Registration Rights Agreement") and
the Articles of Amendment of the Restated Articles of Incorporation which sets
forth the Statement of Rights and Preferences relating to the Preferred Stock
(the "Articles of Amendment"). The Preferred Stock Purchase Agreement, the
Registration Rights Agreement and the Articles of Amendment are hereinafter
referred to as the "Transaction Documents." We also have examined and relied on
originals or copies, certified or otherwise identified to our satisfaction, of
such other documents, records, certificates, and other instruments as we have
deemed necessary or appropriate for purposes of the opinions set forth herein,
and we have relied as to certain factual matters on certain representations of
officers of the Company and certificates from public officials.
<PAGE>
Based on the foregoing and subject to the qualifications and limitations
contained herein, we are of the opinion that:
(a) The Company and J.J. Distribution Company (the "Subsidiary") are
corporations that have been duly incorporated and are validly existing
under the laws of the State of Washington. The Subsidiary is
wholly-owned by the Company.
(b) Each of the Company and the Subsidiary has all requisite corporate
power and corporate authority to own its properties and carry on the
business in which it is now engaged and the Company has all requisite
corporate power and corporate authority to deliver and to perform its
obligations under the Transaction Documents. The execution, delivery,
and performance of the Transaction Documents have been duly authorized
by all requisite corporate action of the Company and the Transaction
Documents have been duly and validly executed and delivered by the
Company.
(c) The Transaction Documents are legal, valid, and binding obligations of
the Company, enforceable against the Company in accordance with their
respective terms.
(d) The Articles of Amendment in the same form filed with the Secretary of
State of the State of Washington has been duly adopted by all
requisite corporate action by the Company as an amendment to the
Restated Articles of Incorporation of the Company and has been filed
with the office of the Secretary of State of the State of Washington.
(e) The issuance, sale, and delivery of the Preferred Stock have been duly
authorized by all requisite corporate action of the Company, and when
issued, sold and delivered in accordance with the terms of the
Preferred Stock Purchase Agreement, and on receipt of the
consideration therefor pursuant to the Preferred Stock Purchase
Agreement, the Preferred Stock will be validly issued, fully paid, and
nonassessable. The Common Shares have been duly authorized and, when
issued in accordance with the Transaction Documents and the Articles
of Amendment, will be validly issued, fully paid, and nonassessable.
(f) As of the date hereof, the authorized capital stock of the Company
consists of (i) 20,000,000 shares of Common Stock, $.01 par value, of
which 6,213,837 shares are validly issued and outstanding, fully paid
and non-assessable and (ii) 5,000,000 shares of Preferred Stock, $.01
par value, of which none are issued and outstanding and of which
46,000 shares have been designated as "Series A
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Preferred Stock" and 25,000 shares have been designated as "Series B
Preferred Stock", none of which have been issued except as
contemplated by the Preferred Stock Purchase Agreement. To our
knowledge, the Company does not have outstanding any securities (or
obligations to issue any securities) convertible into, exchangeable
for or otherwise entitling the holders thereof to acquire shares of
Common Stock, except as disclosed in Schedule 4.2 to the Preferred
Stock Purchase Agreement. The outstanding shares of Common Stock and
outstanding options, warrants, and other securities to purchase Common
Stock have been duly authorized and validly issued. None of such
outstanding shares of Common Stock, options, warrants and other
securities has been issued in violation of any statutory or, to our
knowledge, any other preemptive rights of any securityholder of the
Company, and to our knowledge no holder of any of the Company's
securities has any rights, "demand," 4 piggyback" or otherwise, to
have such securities registered by reason of the intention to file,
filing or effectiveness of the Registration Statement required to be
filed pursuant to the Registration Rights Agreement except as set
forth in Schedule 4.13 to the Preferred Stock Purchase Agreement.
Their are no statutory or, to our knowledge, other preemptive rights
of any shareholder of the Company, as such, to acquire the Preferred
Stock. The Common Stock is traded on the Over the Counter Electronic
Bulletin Board, and, to our knowledge no suspension of trading in the
Common Stock is in effect or threatened.
(g) The Preferred Stock may be issued to you pursuant to the Preferred
Stock Purchase Agreement and the Common Shares may be issued to you
upon conversion of the Preferred Stock without registration under the
1933 Act.
(h) No authorization, approval or consent of, or filing with, any court,
governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market or the shareholders of the Company is
required to be obtained or made by the Company for the issuance and
sale of the Preferred Stock as contemplated by the Transaction
Documents or the issuance of the Common Shares on conversion of the
Preferred Stock, except such as have been obtained or made and other
than such as may be required under the securities or "blue sky" laws
of certain jurisdictions (as to which we express no opinion).
(i) Except as disclosed and explained in Schedule 4.7 to the Preferred
Stock Purchase Agreement, to our knowledge there is no action, suit or
proceeding before or by any court, public board or body or
governmental agency pending or threatened against or affecting the
Company and, to our knowledge, there is no inquiry or investigation
before or by any court, public board or body or governmental
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agency pending or threatened against or affecting the Company, in any
such case wherein an unfavorable decision, ruling or finding could
have a Material Adverse Effect. None of the matters disclosed in
Schedule 4.7 to the Preferred Stock Purchase Agreement questions the
validity of any of the Transaction Documents or any action taken or to
be taken pursuant thereto or would adversely affect the validity or
enforceability of, or the authority or ability of the Company to
perform its obligations thereunder.
(j) To our knowledge, the Company has timely filed with the SEC all forms,
reports and other documents required to be filed with the SEC under
the 1934 Act since December 1995, and all of such forms, reports, and
other documents complied as to form, when filed, in all material
respects, with all applicable requirements of the 1933 Act and the
1934 Act.
(k) To our knowledge, the Company is not in default with respect to any
order, writ, injunction or decree of any court, or under any law,
rule, statute, regulation, or demand of any governmental authority.
(1) To our knowledge, except for defaults to be cured pursuant to the
Preferred Stock Purchase Agreement, neither the Company nor any third
party is in default under or with respect to any contract, agreement,
lease, or other instrument to which the Company is a party, which
default, individually or collectively with all other such defaults,
would have a Material Adverse Effect.
(m) Assuming that the effectiveness of the Order Re-Opening Case,
Modifying Treatment of Class 3 (General Unsecured) Claims Under Plan,
and Re-Closing Case entered by the U.S. Bankruptcy Court for the
Western District of Washington at Seattle on December 1, 1997 is not
stayed or reversed on appeal, upon the distribution by the Company to
the Class 3 Creditors of the Creditors' Shares and Creditors' Cash
Payment, the Company will have satisfied all of its obligations to
Class 3 Creditors under the Plan of Reorganization.
QUALIFICATIONS
The opinions expressed herein are subject to and limited by the following
qualifications, assumptions and exclusions:
SPECIFIED LAWS. The opinions as to the enforceability of the Transaction
Documents are subject to the qualification that the enforceability of those
instruments may be limited or affected by (i) principles of equity which may
limit the availability of equitable remedies; (ii) bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other laws affecting
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creditors' rights or the collection of debtors' obligations generally; (iii) the
power of courts to award damages in lieu of granting equitable remedies; and
(iv) requirements that contracting parties act with reasonableness and good
faith toward one another.
GENERAL LAWS. The opinion as to the validity and enforceability of the
Transaction Documents is further subject to the qualification that the validity
and enforceability of certain of the remedial, waiver and other provisions of
the Transaction Documents may be further limited by applicable laws, in addition
to those described in subparagraph (a) above. However, such additional laws do
not, in our opinion, substantially interfere with the practical realization of
the benefits intended to be conferred by the Transaction Documents, except for
the economic consequences of any procedural delay which may result from such
laws.
ASSUMPTIONS. The opinions expressed herein are based upon the assumption
that: (i) all signatures of all Persons (other than the Company) are genuine;
(ii) all documents submitted to us as originals are authentic; (iii) all
documents submitted to us as copies are true and correct reproductions of the
originals of such documents; (iv) in the case of the Transaction Documents, we
have assumed the power, legal capacity and authority of each person or entity,
except the Company, to execute, deliver and perform their respective obligations
under such instrument and document, and that such instrument or document
constitutes a valid and binding obligation of each such entity, enforceable
against each such entity as appropriate, to the extent that such validity,
binding effect and enforceability affects the opinions herein expressed; and (v)
each individual executing and delivering any Document was, at the time of such
execution and delivery, sui juris, and under no legal disability (we have no
knowledge and have made no examination and express no opinion with respect to
the effect of forgery, the legal capacity or competency of any natural person,
alteration after delivery, or fraud, duress or undue influence). Further, we
have relied upon, and assumed the accuracy of, the representations and other
statements of fact contained in the Certificate of the President and Chief
Executive Officer, as set forth pursuant to Section 6.8 of the Preferred Stock
Purchase Agreement.
REPRESENTATIONS AND WARRANTIES. No opinion is given or expressed, nor
should any opinion be inferred or implied, as to: (i) the financial ability of
any party to meet or satisfy their respective obligations under the Transaction
Documents or any other documents or instruments identified in the Transaction
Documents; (ii) the truthfulness, completeness or accuracy of any
representations, warranties, documents, financial statements, statements in any
of the Transaction Documents, or any documents, instruments or information
furnished to any party in conjunction with the transactions contemplated by the
Transaction Documents, except with respect to the opinions expressly set forth
herein.
KNOWLEDGE. The qualification of any opinion or statement herein by the use
of the words "knowledge," "current actual knowledge, "to our knowledge" or
"known to us," means that during the course of our general representation of the
Company in connection with the
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<PAGE>
Transaction Documents, no fact or circumstance has come to the attention of the
attorneys directly involved in such activities or transactions which give such
attorneys actual knowledge of the existence of the facts so qualified.
Furthermore, except as otherwise expressly set forth herein, we have not
undertaken any investigation to determine the existence of any such documents or
facts, and no inference as to our knowledge thereof shall be drawn from the fact
of our representation of any party or otherwise.
EXTRINSIC EVIDENCE. Under Washington law, the interpretation of any
contract is based on the intent of the parties and evidence extrinsic to a
contract may be introduced to ascertain the intent of the parties regardless of
the presence or absence of ambiguity, and regardless of a statement by the
parties that their written agreement constitutes an integrated expression of
their agreement. This opinion is expressly qualified to the extent that
determination of the intent of the parties based on evidence other than the
words used in the Transaction Documents would lead to a result differing from
our opinion.
SCOPE AND GENERAL STATEMENTS
This opinion is provided for the purpose of complying with the requirements
of the Transaction Documents and without our prior written consent may not be
relied upon, used, circulated, quoted or otherwise referred to in any manner by
any person, firm, governmental authority or entity whatsoever, other than
reliance thereon by the Purchasers solely with respect to the Closing on the
Closing Date of the transactions evidenced by the Transaction Documents. This
opinion letter shall not be construed as or deemed to be a guaranty or insuring
agreement.
We have acted as counsel for the Company in connection with the
transactions relating to or in respect of the Transaction Documents.
Nevertheless, factual matters or agreements pertaining to the Transaction
Documents, entities, and the Company's businesses and properties may exist of
which we have no knowledge or information. However, we have no current actual
knowledge of any facts or circumstances which would make any opinion expressed
herein incorrect or subject to question or require further investigation of any
laws, facts or circumstances. Further, we hereby advise you that, in our
capacity as counsel for the Company we are not handling or directing substantive
legal attention to pending litigation, overtly threatened litigation or claims
of violation by the Company of any applicable laws or regulations governing the
activities of the Company which could have a material adverse consequence on the
validity or enforceability of the Transaction Documents.
We have relied upon, and the opinions expressed herein are subject to, the
correctness of our understanding that the parties executing the Transaction
Documents have no knowledge of any facts or circumstances which would make any
opinion expressed herein incorrect, subject to question, or require further
investigation of any laws, facts or circumstances. Qualification of the
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<PAGE>
preceding sentence by the use of the word "knowledge" means that during the
course of such parties' representation as described herein, no information has
come to the attention of the attorneys involved in the transaction described
herein which could give such attorneys actual knowledge of the existence of the
documents or facts so qualified.
Our opinions herein are limited to the matters expressly set forth in this
opinion letter and are subject to the qualifications and limitations herein, and
no opinion is to be implied or may be inferred beyond the matters expressly so
stated. This opinion is rendered as of the date hereof, and we expressly
disclaim any responsibility for notifying you of any changes affecting this
opinion that later come to our attention. This opinion is rendered solely for
your information in connection with this transaction and may not be relied on by
any other person for any purpose without our prior written consent, except for
the opinions in paragraphs (e) and (g), which may be relied upon by Chase Mellon
Bank as the Company's transfer agent and registrar.
We are licensed to practice law only in the State of Washington, and we
express no opinion with respect to the effect of any laws other than the laws of
the State of Washington, the securities laws of the states in which the
Purchasers have indicated they are resident, and the United States.
Very truly yours,
VANDEBERG JOHNSON & GANDARA
James L. Vandeberg
JLV:dw
<PAGE>
Exhibit E
EMPLOYMENT AGREEMENT
This Employment Agreement, dated as of December 5, 1997 (this "Agreement"),
is entered into by and between Jay Jacobs, Inc., a Washington corporation
("Employer"), and Rex Loren Steffey ("Employee").
In consideration of the mutual covenants contained in this Agreement and
other good and valuable consideration, and with knowledge that each party
intends to rely hereon, Employer and Employee hereby agree as follows:
1 Employment; Duties.
1.1 Employment. Employer hereby employs Employee as President and
Chief Executive Officer of Employer, and Employee accepts such employment, upon
the terms and conditions of this Agreement.
1.2 Duties. Employee shall hold the office of President and Chief
Executive Officer of Employer and shall perform those duties customarily
performed by a President and Chief Executive Officer of a corporation comparable
to Employer. Employee shall report to the Board of Directors of Employer, which
may, from time to time, prescribe such modifications or additions to Employee's
duties as it may in good faith determine. During Employee's employment, Employee
agrees to devote his best efforts, expertise and full attention and working time
to the business and affairs of Employer. Employee's devotion of reasonable
periods of time to personal purposes, outside business activities, or charitable
activities shall not be deemed a breach of this Agreement, if such purposes or
activities do not violate any other provision of this Agreement or materially
interfere with the services Employee is required to render to or on behalf of
Employer.
2 Term of Agreement.
The term of this Agreement (the "Contract Term") shall begin on the date
hereof and shall continue through the fifth anniversary of such date, unless
such employment is earlier terminated as set forth below.
3 Compensation.
3.1 Base Salary. For services rendered by Employee under this
Agreement, Employer agrees to pay to Employee, and Employee agrees to accept, an
annual base salary ("Base Salary") of $300,000 from the date hereof through the
first full fiscal year of Employer completed during the Contract Term.
Commencing with
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Employer's second full fiscal year during the Contract Base Salary shall
increase in proportion to the percentage increase in the Consumer Price Index
("CPI") between the date hereof and the commencement of such second fiscal year.
Each year thereafter, Base Salary shall increase in proportion to the percentage
increase in the CPI between the commencement of such year and the commencement
of the prior fiscal year. Employer shall pay Employee's Base Salary in
installments not less frequently than monthly, less all amounts required by law
to be withheld, deducted or collected, in accordance with Employer's normal
payroll policies for management-level employees, as such policies may be changed
from time to time. For purposes of this Agreement, CPI shall be the Consumer
Price Index (C.P.I.-U), Seattle-Tacoma, All Items Index (base
year/1982-1984=100) as published by the United States Bureau of Labor
Statistics.
3.2 Bonus. Employee shall be eligible for an annual bonus ("Bonus")
targeted at a maximum of 45% of Employee's Base Salary. Within 60 days of the
date hereof and 30 days of each anniversary hereof during the Contract Term,
Employee and the Compensation Committee of the Board of Directors of Employer
shall agree on performance goals for the coming fiscal year on which Employee's
bonus will be based, including (i) financial performance goals relating to
Employer's business as a whole, and (ii) performance goals specific to the
performance of Employee. Employer and Employee shall memorialize the agreed upon
performance goals. In the event Employee and the Compensation Committee of the
Board of Directors is unable to agree on performance goals within the specified
time, a final determination of performance goals shall be decided by a vote of
the full Board of Directors.
3.3 Signing Incentive. As incentive for and in further consideration
of Employee's execution of this Agreement, and in particular Employee's
agreement to the covenants included in Section 5 hereof, and except as otherwise
provided herein, Employer shall issue to Employee (i) a number of options
("Rollover Options") equal to, and with vesting dates identical to, existing
Employer stock options issued to Employee; and (ii) additional options ("New
Options") to purchase 1,083,522 shares of Employer's Common Stock. The Rollover
Options and the New Options shall be granted under Employer's 1998 Stock
Incentive Plan (the "Plan") dated December 3, 1997 and shall be subject to
approval of the Plan by Employer's shareholders at the next annual meeting of
the shareholders of Employer the ("Meeting"). Employee agrees that (i) all of
Employee's existing options to purchase stock of Employer, whether vested or
unvested, to the extent not exercised before the Meeting, and (ii) any Rollover
Options issued under the Plan as provided in this Section 3.3 in respect of
existing options exercised prior to the Meeting shall, upon approval of the Plan
by the shareholders of Employer, be canceled. Options issued to Employee
pursuant to this Section 3.3 shall be exercisable for $0.13 per share, subject
to adjustment as provided in the Plan and the option agreements issued
thereunder. New Options shall vest immediately upon approval of the Plan by
Employer's shareholders. In the event of a termination of Employee's employment
by Employer pursuant to Section 6.4 hereof, all options held by Employee at the
time of such termination shall immediately vest.
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3.4 Fiscal 1998 Bonus. In recognition of Employee's service to
Employer during fiscal year 1998, Employer agrees to pay Employee a cash bonus
of $100,000 upon execution of this Agreement.
4 Benefits.
Employer agrees to include Employee in any applicable benefit programs
which Employer provides to management generally (the "Benefits"), including,
without limitation, disability insurance coverage which will compensate Employee
for not less than 60% of Employee's Base Salary at the time of such disability
for a period not shorter than the remainder of the Contract Term. In no event
shall benefits available to Employee be less than those available to Employee
immediately prior to the date hereof.
5 Restrictive Covenants.
5.1 Protected Information.
5.1.1 Covenant. Either during or after expiration of the Contract
Term, Employee shall not, directly or indirectly, divulge, furnish or make
accessible to any person, firm, corporation, association or other entity, or use
in any manner, any Protected Information (as defined below), or cause any
Protected Information to enter the public domain, except as may be required in
the regular course of Employee's employment by Employer.
5.1.2 Access to Protected Information. Employer has advised
Employee and Employee has acknowledged that it is the policy of Employer to
maintain as secret and confidential all Protected Information, and that
Protected Information has been and will be developed at substantial cost and
effort to Employer. Employee acknowledges that he will acquire Protected
Information with respect to Employer, which information is a valuable, special,
and unique asset of Employer's business and operations, and that disclosure of
such Protected Information would cause irreparable damage to Employer.
5.1.3 Employee-Created Protected Information. Employee agrees to
promptly disclose to Employer all Protected Information developed in whole or in
part by Employee during his employment with Employer and which relates to
Employer's business. Such Protected Information is, and shall remain, the
exclusive property of Employer. All writings created during Employee's
employment with Employer (excluding writings unrelated to Employer's business)
are considered to be "works-for-hire" for the benefit of Employer, and Employer
shall own all rights in such writings. Washington law requires the following
notice to be given to Employee:
This Agreement does not require Employee to assign to Employer any
invention by Employee for which no equipment, supplies, facility or trade
secret information of
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Employer was used and which was developed entirely on Employee's own time
unless the invention related (i) directly to Employer's business, or (ii)
to Employer's actual or demonstrably anticipated research or development,
or (iii) the development results from any work performed by Employee for
Employer.
5.1.4 Return of Confidential Records. All forms of information
and all physical property made or compiled by Employee prior to or during the
Contract Term containing or relating in any way to Protected Information shall
be Employer's exclusive property. All such materials and any copies thereof
shall be held by Employee in trust solely for the benefit of Employer and shall
be delivered to Employer upon expiration of the Contract Term, or at any other
time upon Employer's request.
5.1.5 Protected Information. "Protected Information" means trade
secrets, confidential and propriety business information of Employer, any
information of Employer other than information which has entered the public
domain (unless Employee caused such information to enter the public domain), and
all valuable and unique information, techniques, and strategies acquired,
developed or used by Employer relating to its business, operations, employees,
customers and suppliers, which give Employer a competitive advantage over those
who do not know the information, techniques and strategies and which are
protected by Employer from unauthorized disclosure, including but not limited
to, product designs, store location analyses, customer lists (including
potential customers), sources of supply, processes, plans, materials, pricing
information, internal memoranda, marketing plans, internal policies, and
products and services which may be developed from time to time by Employer and
its agents or employees.
5.2 Non-Competition.
5.2.1 Covenant. Employee agrees that, during the term of
Employee's employment by Employer and for a period of two years after the
termination of Employee's employment by Employer (whether by expiration of the
Contract Term or otherwise), he will not (i) directly or indirectly, in any
capacity, engage or participate in, or become employed by or render advisory or
consulting or other services in connection with, any Prohibited Business, as
defined below, or (ii) make any financial investment, whether in the form of
equity or debt, or own any interest, directly or indirectly, in any Prohibited
Business.
5.2.2 Exceptions.
5.2.3.1 Nothing in this Section 5.2 shall restrict Employee
from making any investment in any company whose stock is listed on a national
securities exchange or actively traded in the over-the-counter market; provided
that (i) such investment does not give Employee the right or ability to control
or influence the policy decisions of any Prohibited Business, and (ii) such
investment does not create a conflict of interest between Employee's duties
hereunder and Employee's interest in such investment.
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5.2.3.2 Anything in this Section 5.2 to the contrary
notwithstanding, at any time after the termination of Employee's employment by
Employer, Employee may engage in consulting activities in connection a
Prohibited Business, provided that: (i) Employee's consulting activities shall
at all times be project-specific and not of a general managerial nature; (ii)
Employee shall not act as an officer or manager of any Prohibited Business; and
(iii) with respect to any single Prohibited Business or affiliated group of
Prohibited Businesses, (a) Employee shall engage in such consulting activities
for no more than ten hours each month, and (b) Employee shall not receive
compensation in excess of $5,000 in any one month. This exception shall be null
and void in the event of any breach of the terms of this Agreement by Employee.
5.2.3 Prohibited Business. "Prohibited Business" means any entity
that is engaged in the business of Fashion Retailing and whose activities or
products are directly or indirectly competitive with those of Employer. For
purposes of this Agreement "Fashion Retailing" shall mean the retail marketing
and sales of men's and women's apparel and fashion accessories, including both
casual and formal attire.
5.3 Disclosure of Business Opportunities. Employee agrees promptly and
fully to disclose to Employer, and not to divert to his own use or benefit or
the use or benefit of others, any business opportunities involving any existing
or prospective line of business, supplier, product or activity of Employer, or
any business opportunities that otherwise should be afforded to Employer.
5.4 Survival of Undertakings and Injunctive Relief.
5.4.1 Survival. Except as otherwise specifically provided herein,
the provisions of Sections 5.1, 5.2 and 5.3 shall survive the expiration of the
Contract Term, irrespective of the reasons therefor. In the event of any such
violation of Sections 5.1, 5.2 or 5.3, Employee further agrees that the time
periods set forth in such sections shall be extended by the period of such
violation.
5.4.2 Injunctive Relief. Employee acknowledges and agrees that
the restrictions imposed upon him by Sections 5.1, 5.2 and 5.3 and the purposes
of such restrictions are reasonable and are designed to protect the Protected
Information and the continued success of Employer without unduly restricting
Employee's future employment by others. Furthermore, Employee acknowledges that,
in view of the Protected Information which Employee has or will acquire or has
or will have access to, and in view of the necessity of the restrictions
contained in Sections 5.1, 5.2 and 5.3, any violation of any provision of
Sections 5.1, 5.2 and 5.3 hereof would cause irreparable injury to Employer with
respect to the resulting disruption in its operations. By reason of the
foregoing, Employee consents and agrees that if Employee violates any of the
provisions of Sections 5.1, 5.2 or 5.3, Employer shall be entitled, in addition
to any other remedies that it may have, including money damages, to an
injunction to be issued by a court of competent jurisdiction, restraining
Employee from committing or continuing any violation of such sections of this
Agreement.
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5.5 References to Employer. All references to Employer in this Section
5 shall be deemed to include any subsidiary, parent, successor in interest, or
other affiliate of Employer.
6 Termination.
6.1 Termination of Employment. Employee's employment may be terminated
at any time during the Contract Term by mutual agreement of the parties, or as
otherwise provided in this Section 6.
6.2 Termination for Cause. Employer may terminate Employee's
employment without notice at any time for Cause. For purposes of this Agreement,
the term "Cause" shall mean any of the following: (i) Employee's continued
failure or refusal to perform his duties and obligations under this Agreement
following written notice from Employer specifying the factors or events
constituting such failure or refusal; (ii) any material breach by Employee of
any term or provision of this Agreement following written notice of such breach
from Employer; (iii) any act or action of Employee during the Contract Term
involving fraud, dishonesty or unethical conduct relating to Employer or
Employer's business; (iv) Employee's use of alcohol or drugs in violation of
Employer's then-current policy; (v) Employee's conviction of any felony; or (vi)
Employee's inability to perform the essential functions of his position, with or
without reasonable accommodation, by virtue of any physical or mental
incapacity. Upon termination for Cause, Employee shall not be entitled to
payment of any compensation other than Base Salary, Bonus and accrued benefits
under this Agreement earned up to the date of such termination.
6.3 Death. In the event of Employee's death while he is employed by
Employer pursuant to this Agreement, Employer shall, in addition to paying to
the estate of Employee any unpaid Base Salary and Bonus earned through the last
day on which he performed services for Employer, pay to Employee's estate an
amount equal to one year of Base Salary at the same intervals and in the same
amounts as Employer's payments of Base Salary to Employee.
6.4 Termination without Cause. Employer may terminate Employee's
employment without notice at any time without Cause.
6.5 Termination by Employee for Diminution of Duties. Employee may
terminate his employment upon 30 days prior written notice to Employer for Good
Reason. For purposes of this Agreement, "Good Reason" shall mean the reduction
by Employer of Employee's title or duties so that Employee no longer serves as
President and Chief Executive Officer, reporting to the Board of Directors of
Employer, and performing services and duties assigned to him by the Board of
Directors; provided, however, that the exercise by the Board of Directors of the
Employer of its authority with respect to the oversight and management of the
Employer shall be conclusively deemed not to constitute Good Reason.
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6.6 Severance Obligations. In the event of any termination pursuant to
Sections 6.4 or 6.5, Employee shall be entitled to receive from Employer an
amount (the "Severance Amount") equal to the sum of two years' Base Salary. The
Severance Amount shall be payable at the same intervals and in the same amounts
as Employer's payments of Base Salary. In addition, Employer shall, to the
extent permitted by law, continue for a period of two years to provide those
Benefits to which Employee was entitled at the time of termination of Employee's
employment. To the extent Employer is prevented from continuing Employee's
Benefits, Employer shall pay Employee an amount sufficient to replace such
Benefits. Any amount payable pursuant to this Section, together with any
compensation pursuant to Section 3.1 that is payable for services rendered
through the effective date of termination, shall constitute the sole obligation
of Employer payable with respect to the termination of Employee as provided in
this Section.
6.7 Change of Control. In the event that (i) Employee is terminated
without Cause within 60 days following a Change of Control Transaction, and (ii)
within ten days of such termination Employee agrees in writing to waive any
rights to any severance or other benefits to which Employee may otherwise be
entitled under this Agreement, then Employee shall not be subject to the
covenant not to compete set forth in Section 5.2. For purposes of this
Agreement, a "Change of Control Transaction" shall mean any of the following:
6.7.1 Mergers, Consolidations, Etc.. The completion of any merger
or consolidation of the Company with any other organization if, immediately
following the merger or consolidation, those persons or entities who were
shareholders of the Company immediately before the transaction control less that
50% of the voting power in the surviving organization.
6.7.2 Sale of Stock. The sale or other transfer of the
outstanding shares of stock of the Company in one transaction or a series of
related transactions with the result that, immediately after the transaction(s),
those persons or entities who were shareholders of the Company immediately
before the transaction(s) control less than 50% of the voting power in the
Company or in the entity purchasing the Company's shares; provided, however,
that a Change of Control shall be deemed not to have occurred if the reduction
in voting power is attributable to a public or private offering of the
Employer's securities wherein no single investor or group of affiliated
investors acquires sufficient voting power to control the Board of Directors of
Employer.
6.7.3 Sale of Assets. The sale or other disposition by the
Company of all or substantially all of its assets if followed as soon as is
practicable by the liquidation and dissolution of the Company.
6.8 Right of Offset. In the event that, following the termination of
Employee's employment by Employer for any reason, Employee becomes engaged with
another business in any capacity, 100% of compensation of any kind (including
deferred compensation and compensation assigned to an entity or individual other
than Employee) received from or earned with respect to such other business
during the Contract Term or any survival period, shall be subtracted from any
amounts paid to Employee pursuant to Section
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6.6. In the event of any violation by Employee of any provision of Sections 5.1,
5.2 and 5.3, Employer may subtract Employer's damages from any amounts paid to
Employee pursuant to Section 6.6.
7 Board Representation.
Concurrent with and as a condition precedent to the execution of this
Agreement, Employee shall have entered into a voting agreement with certain
shareholders of Employer relating to Employee's election to the Board of
Directors of Employer during the Contract Term.
8 Miscellaneous.
8.1 Assignment, Successors. Employer may freely assign its rights and
obligations under this Agreement to a successor of Employer's business, without
the prior written consent of Employee. This Agreement shall be binding upon and
inure to the benefit of Employee and Employee's estate and Employer and any
assignee of or successor to Employer.
8.2 Severability. If any term or provision of this Agreement is held
to be invalid or unenforceable by any court of competent jurisdiction for any
reason whatsoever, then (i) the remaining terms and provisions of this Agreement
shall remain in full force and effect, and (ii) the invalid or unenforceable
term or provision shall be deemed replaced by a term or provision that is valid
and enforceable but that, subject to the requirement of validity and
enforceability, comes as close and possible to expressing the intention of the
invalid or unenforceable term or provision.
8.3 Amendment and Waiver. This Agreement shall not be altered, amended
or modified except by written instrument executed by Employer and Employee. A
waiver of any term, covenant, agreement or condition contained in this Agreement
shall not be deemed a waiver of any other term, covenant, agreement or
condition, and any waiver of any other term, covenant, agreement or condition,
and any waiver of any default in any such term, covenant, agreement or condition
shall not be deemed a waiver of any later default thereof or of any other term,
covenant, agreement or condition.
8.4 Notices. All notices and other communications hereunder shall be
in writing and either hand delivered or delivered by overnight courier or first
class registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Employer: JAY JACOBS, INC.
1530 Fifth Avenue
Seattle, WA 98101
Attn: Board of Directors/Compensation Committee
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If to Employee: Rex Loren Steffey
c/o Jay Jacobs, Inc.
1530 Fifth Avenue
Seattle, WA 98101
Any party may from time to time designate a new address by notice given in
accordance with this Section. Notice and communications shall be effective when
actually received by the addressee.
8.5 Applicable Law; Venue. The provisions of this Agreement shall be
interpreted and construed in accordance with the laws of the State of
Washington, without regard to its choice of law principles. The exclusive venue
for any action or proceeding to interpret or enforce this Agreement shall lie
with the Superior Court of King County, Washington.
8.6 Arbitration; Attorneys' Fees. Any dispute arising under this
Agreement shall be settled exclusively by arbitration under the Northwest Region
Expedited Commercial Arbitration Rules of the American Arbitration Association
then in effect. The parties agree that the arbitration shall be at the location
of the Company's principal office or at such other place as is mutually agreed.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction. Nevertheless, the parties hereby agree that a restraining order
and/or an injunction may issue against a violation of this Agreement. If any
party is successful in any arbitration, suit, or proceeding brought or
instituted by it to enforce this Agreement or on account of any damages
sustained by it by reason of the violation by another party of this Agreement,
the prevailing party shall be paid its reasonable attorneys' fees by the
nonprevailing party.
8.7 Effect on Other Agreements. This Agreement shall supersede all
prior agreements, promises, and representations regarding employment by Employer
and severance or other payments contingent upon termination of employment.
8.8 Counterpart Originals. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
8.9 Entire Agreement. This Agreement forms the entire agreement
between the parties hereto with respect to any severance payment and with
respect to the subject matter contained in this Agreement.
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REX LOREN STEFFEY EMPLOYMENT AGREEMENT SIGNATURE PAGE
Executed as of the date first written above.
Employee Employer
JAY JACOBS, INC.
/s/ REX LOREN STEFFEY
- ----------------------------------- By: /s/ WILLIAM L. LAWRENCE, JR.
Rex Loren Steffey ------------------------------------
Name: William L. Lawrence, Jr.
Title: Vice President and CFO
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Exhibit F
EMPLOYMENT AGREEMENT
This Employment Agreement, dated as of December 5, 1997 (this "Agreement"),
is entered into by and between Jay Jacobs, Inc., a Washington corporation
("Employer"), and William L. Lawrence, Jr. ("Employee").
In consideration of the mutual covenants contained in this Agreement and
other good and valuable consideration, and with knowledge that each party
intends to rely hereon, Employer and Employee hereby agree as follows:
1 Employment; Duties.
1.1 Employment. Employer hereby employs Employee as Executive Vice
President and Chief Financial Officer of Employer, and Employee accepts such
employment, upon the terms and conditions of this Agreement.
1.2 Duties. Employee shall hold the office of Executive Vice President
and Chief Financial Officer of Employer and shall perform those duties
customarily performed by an Executive Vice President and Chief Financial Officer
of a corporation comparable to Employer. Employee shall report to the President,
Chief Executive Officer and to the Board of Directors of Employer, which may,
from time to time, prescribe such modifications or additions to Employee's
duties as it may in good faith determine. During Employee's employment, Employee
agrees to devote his best efforts, expertise and full attention and working time
to the business and affairs of Employer. Employee's devotion of reasonable
periods of time to personal purposes, outside business activities, or charitable
activities shall not be deemed a breach of this Agreement, if such purposes or
activities do not violate any other provision of this Agreement or materially
interfere with the services Employee is required to render to or on behalf of
Employer.
2 Term of Agreement.
The term of this Agreement (the "Contract Term") shall begin on the date
hereof and shall continue through the fifth anniversary of such date, unless
such employment is earlier terminated as set forth below.
3 Compensation.
3.1 Base Salary. For services rendered by Employee under this
Agreement, Employer agrees to pay to Employee, and Employee agrees to accept, an
annual base salary ("Base Salary") of $175,000 from the date hereof through the
first full fiscal year of Employer completed during the Contract Term.
Commencing with
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Employer's second full fiscal year during the Contract Base Salary shall
increase in proportion to the percentage increase in the Consumer Price Index
("CPI") between the date hereof and the commencement of such second fiscal year.
Each year thereafter, Base Salary shall increase in proportion to the percentage
increase in the CPI between the commencement of such year and the commencement
of the prior fiscal year. Employer shall pay Employee's Base Salary in
installments not less frequently than monthly, less all amounts required by law
to be withheld, deducted or collected, in accordance with Employer's normal
payroll policies for management-level employees, as such policies may be changed
from time to time. For purposes of this Agreement, CPI shall be the Consumer
Price Index (C.P.I.-U), Seattle-Tacoma, All Items Index (base
year/1982-1984=100) as published by the United States Bureau of Labor
Statistics.
3.2 Bonus. Employee shall be eligible for an annual bonus ("Bonus")
targeted at a maximum of 45% of Employee's Base Salary. Within 60 days of the
date hereof and 30 days of each anniversary hereof during the Contract Term,
Employee and the Compensation Committee of the Board of Directors of Employer
shall agree on performance goals for the coming fiscal year on which Employee's
bonus will be based, including (i) financial performance goals relating to
Employer's business as a whole, and (ii) performance goals specific to the
performance of Employee. Employer and Employee shall memorialize the agreed upon
performance goals. In the event Employee and the Compensation Committee of the
Board of Directors is unable to agree on performance goals within the specified
time, a final determination of performance goals shall be decided by a vote of
the full Board of Directors.
3.3 Signing Incentive. As incentive for and in further consideration
of Employee's execution of this Agreement, and in particular Employee's
agreement to the covenants included in Section 5 hereof, and except as otherwise
provided herein, Employer shall issue to Employee (i) a number of options
("Rollover Options") equal to, and with vesting dates identical to, existing
Employer stock options issued to Employee; and (ii) additional options ("New
Options") to purchase 788,016 shares of Employer's Common Stock. The Rollover
Options and the New Options shall be granted under Employer's 1998 Stock
Incentive Plan (the "Plan") dated December 3, 1997 and shall be subject to
approval of the Plan by Employer's shareholders at the next annual meeting of
the shareholders of Employer the ("Meeting"). Employee agrees that (i) all of
Employee's existing options to purchase stock of Employer, whether vested or
unvested, to the extent not exercised before the Meeting, and (ii) any Rollover
Options issued under the Plan as provided in this Section 3.3 in respect of
existing options exercised prior to the Meeting shall, upon approval of the Plan
by the shareholders of Employer, be canceled. Options issued to Employee
pursuant to this Section 3.3 shall be exercisable for $0.13 per share, subject
to adjustment as provided in the Plan and the option agreements issued
thereunder. New Options shall vest immediately upon approval of the Plan by
Employer's shareholders. In the event of a termination of Employee's employment
by Employer pursuant to Section 6.4 hereof, all options held by Employee at the
time of such termination shall immediately vest.
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3.4 Fiscal 1998 Bonus. In recognition of Employee's service to
Employer during fiscal year 1998, Employer agrees to pay Employee a cash bonus
of $60,000 upon execution of this Agreement.
4 Benefits.
Employer agrees to include Employee in any applicable benefit programs
which Employer provides to management generally (the "Benefits"), including,
without limitation, disability insurance coverage which will compensate Employee
for not less than 60% of Employee's Base Salary at the time of such disability
for a period not shorter than the remainder of the Contract Term. In no event
shall benefits available to Employee be less than those available to Employee
immediately prior to the date hereof.
5 Restrictive Covenants.
5.1 Protected Information.
5.1.1 Covenant. Either during or after expiration of the Contract
Term, Employee shall not, directly or indirectly, divulge, furnish or make
accessible to any person, firm, corporation, association or other entity, or use
in any manner, any Protected Information (as defined below), or cause any
Protected Information to enter the public domain, except as may be required in
the regular course of Employee's employment by Employer.
5.1.2 Access to Protected Information. Employer has advised
Employee and Employee has acknowledged that it is the policy of Employer to
maintain as secret and confidential all Protected Information, and that
Protected Information has been and will be developed at substantial cost and
effort to Employer. Employee acknowledges that he will acquire Protected
Information with respect to Employer, which information is a valuable, special,
and unique asset of Employer's business and operations, and that disclosure of
such Protected Information would cause irreparable damage to Employer.
5.1.3 Employee-Created Protected Information. Employee agrees to
promptly disclose to Employer all Protected Information developed in whole or in
part by Employee during his employment with Employer and which relates to
Employer's business. Such Protected Information is, and shall remain, the
exclusive property of Employer. All writings created during Employee's
employment with Employer (excluding writings unrelated to Employer's business)
are considered to be "works-for-hire" for the benefit of Employer, and Employer
shall own all rights in such writings. Washington law requires the following
notice to be given to Employee:
This Agreement does not require Employee to assign to Employer any
invention by Employee for which no equipment, supplies, facility or trade
secret information of
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Employer was used and which was developed entirely on Employee's own time
unless the invention related (i) directly to Employer's business, or (ii)
to Employer's actual or demonstrably anticipated research or development,
or (iii) the development results from any work performed by Employee for
Employer.
5.1.4 Return of Confidential Records. All forms of information
and all physical property made or compiled by Employee prior to or during the
Contract Term containing or relating in any way to Protected Information shall
be Employer's exclusive property. All such materials and any copies thereof
shall be held by Employee in trust solely for the benefit of Employer and shall
be delivered to Employer upon expiration of the Contract Term, or at any other
time upon Employer's request.
5.1.5 Protected Information. "Protected Information" means trade
secrets, confidential and propriety business information of Employer, any
information of Employer other than information which has entered the public
domain (unless Employee caused such information to enter the public domain), and
all valuable and unique information, techniques, and strategies acquired,
developed or used by Employer relating to its business, operations, employees,
customers and suppliers, which give Employer a competitive advantage over those
who do not know the information, techniques and strategies and which are
protected by Employer from unauthorized disclosure, including but not limited
to, product designs, store location analyses, customer lists (including
potential customers), sources of supply, processes, plans, materials, pricing
information, internal memoranda, marketing plans, internal policies, and
products and services which may be developed from time to time by Employer and
its agents or employees.
5.2 Non-Competition.
5.2.1 Covenant. Employee agrees that, during the term of
Employee's employment by Employer and for a period of two years after the
termination of Employee's employment by Employer (whether by expiration of the
Contract Term or otherwise), he will not (i) directly or indirectly, in any
capacity, engage or participate in, or become employed by or render advisory or
consulting or other services in connection with, any Prohibited Business, as
defined below, or (ii) make any financial investment, whether in the form of
equity or debt, or own any interest, directly or indirectly, in any Prohibited
Business.
5.2.2 Exceptions.
5.2.3.1 Nothing in this Section 5.2 shall restrict Employee
from making any investment in any company whose stock is listed on a national
securities exchange or actively traded in the over-the-counter market; provided
that (i) such investment does not give Employee the right or ability to control
or influence the policy decisions of any Prohibited Business, and (ii) such
investment does not create a conflict of interest between Employee's duties
hereunder and Employee's interest in such investment.
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5.2.3.2 Anything in this Section 5.2 to the contrary
notwithstanding, at any time after the termination of Employee's employment by
Employer, Employee may engage in consulting activities in connection a
Prohibited Business, provided that: (i) Employee's consulting activities shall
at all times be project-specific and not of a general managerial nature; (ii)
Employee shall not act as an officer or manager of any Prohibited Business; and
(iii) with respect to any single Prohibited Business or affiliated group of
Prohibited Businesses, (a) Employee shall engage in such consulting activities
for no more than ten hours each month, and (b) Employee shall not receive
compensation in excess of $5,000 in any one month. This exception shall be null
and void in the event of any breach of the terms of this Agreement by Employee.
5.2.3 Prohibited Business. "Prohibited Business" means any entity
that is engaged in the business of Fashion Retailing and whose activities or
products are directly or indirectly competitive with those of Employer. For
purposes of this Agreement "Fashion Retailing" shall mean the retail marketing
and sales of men's and women's apparel and fashion accessories, including both
casual and formal attire.
5.3 Disclosure of Business Opportunities. Employee agrees promptly and
fully to disclose to Employer, and not to divert to his own use or benefit or
the use or benefit of others, any business opportunities involving any existing
or prospective line of business, supplier, product or activity of Employer, or
any business opportunities that otherwise should be afforded to Employer.
5.4 Survival of Undertakings and Injunctive Relief.
5.4.1 Survival. Except as otherwise specifically provided herein,
the provisions of Sections 5.1, 5.2 and 5.3 shall survive the expiration of the
Contract Term, irrespective of the reasons therefor. In the event of any such
violation of Sections 5.1, 5.2 or 5.3, Employee further agrees that the time
periods set forth in such sections shall be extended by the period of such
violation.
5.4.2 Injunctive Relief. Employee acknowledges and agrees that
the restrictions imposed upon him by Sections 5.1, 5.2 and 5.3 and the purposes
of such restrictions are reasonable and are designed to protect the Protected
Information and the continued success of Employer without unduly restricting
Employee's future employment by others. Furthermore, Employee acknowledges that,
in view of the Protected Information which Employee has or will acquire or has
or will have access to, and in view of the necessity of the restrictions
contained in Sections 5.1, 5.2 and 5.3, any violation of any provision of
Sections 5.1, 5.2 and 5.3 hereof would cause irreparable injury to Employer with
respect to the resulting disruption in its operations. By reason of the
foregoing, Employee consents and agrees that if Employee violates any of the
provisions of Sections 5.1, 5.2 or 5.3, Employer shall be entitled, in addition
to any other remedies that it may have, including money damages, to an
injunction to be issued by a court of competent jurisdiction, restraining
Employee from committing or continuing any violation of such sections of this
Agreement.
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5.5 References to Employer. All references to Employer in this Section
5 shall be deemed to include any subsidiary, parent, successor in interest, or
other affiliate of Employer.
6 Termination.
6.1 Termination of Employment. Employee's employment may be terminated
at any time during the Contract Term by mutual agreement of the parties, or as
otherwise provided in this Section 6.
6.2 Termination for Cause. Employer may terminate Employee's
employment without notice at any time for Cause. For purposes of this Agreement,
the term "Cause" shall mean any of the following: (i) Employee's continued
failure or refusal to perform his duties and obligations under this Agreement
following written notice from Employer specifying the factors or events
constituting such failure or refusal; (ii) any material breach by Employee of
any term or provision of this Agreement following written notice of such breach
from Employer; (iii) any act or action of Employee during the Contract Term
involving fraud, dishonesty or unethical conduct relating to Employer or
Employer's business; (iv) Employee's use of alcohol or drugs in violation of
Employer's then-current policy; (v) Employee's conviction of any felony; or (vi)
Employee's inability to perform the essential functions of his position, with or
without reasonable accommodation, by virtue of any physical or mental
incapacity. Upon termination for Cause, Employee shall not be entitled to
payment of any compensation other than Base Salary, Bonus and accrued benefits
under this Agreement earned up to the date of such termination.
6.3 Death. In the event of Employee's death while he is employed by
Employer pursuant to this Agreement, Employer shall, in addition to paying to
the estate of Employee any unpaid Base Salary and Bonus earned through the last
day on which he performed services for Employer, pay to Employee's estate an
amount equal to one year of Base Salary at the same intervals and in the same
amounts as Employer's payments of Base Salary to Employee.
6.4 Termination without Cause. Employer may terminate Employee's
employment without notice at any time without Cause.
6.5 Termination by Employee for Diminution of Duties. Employee may
terminate his employment upon 30 days prior written notice to Employer for Good
Reason. For purposes of this Agreement, "Good Reason" shall mean the reduction
by Employer of Employee's title or duties so that Employee no longer serves as
Executive Vice President and Chief Financial Officer, reporting to the
President, Chief Executive Officer and Board of Directors of Employer, and
performing services and duties assigned to him by such parties; provided,
however, that the exercise by the Board of Directors of the Employer of its
authority with respect to the oversight and management of the Employer shall be
conclusively deemed not to constitute Good Reason.
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6.6 Severance Obligations. In the event of any termination pursuant to
Sections 6.4 or 6.5, Employee shall be entitled to receive from Employer an
amount (the "Severance Amount") equal to the sum of two years' Base Salary. The
Severance Amount shall be payable at the same intervals and in the same amounts
as Employer's payments of Base Salary. In addition, Employer shall, to the
extent permitted by law, continue for a period of two years to provide those
Benefits to which Employee was entitled at the time of termination of Employee's
employment. To the extent Employer is prevented from continuing Employee's
Benefits, Employer shall pay Employee an amount sufficient to replace such
Benefits. Any amount payable pursuant to this Section, together with any
compensation pursuant to Section 3.1 that is payable for services rendered
through the effective date of termination, shall constitute the sole obligation
of Employer payable with respect to the termination of Employee as provided in
this Section.
6.7 Change of Control. In the event that (i) Employee is terminated
without Cause within 60 days following a Change of Control Transaction, and (ii)
within ten days of such termination Employee agrees in writing to waive any
rights to any severance or other benefits to which Employee may otherwise be
entitled under this Agreement, then Employee shall not be subject to the
covenant not to compete set forth in Section 5.2. For purposes of this
Agreement, a "Change of Control Transaction" shall mean any of the following:
6.7.1 Mergers, Consolidations, Etc.. The completion of any merger
or consolidation of the Company with any other organization if, immediately
following the merger or consolidation, those persons or entities who were
shareholders of the Company immediately before the transaction control less that
50% of the voting power in the surviving organization.
6.7.2 Sale of Stock. The sale or other transfer of the
outstanding shares of stock of the Company in one transaction or a series of
related transactions with the result that, immediately after the transaction(s),
those persons or entities who were shareholders of the Company immediately
before the transaction(s) control less than 50% of the voting power in the
Company or in the entity purchasing the Company's shares; provided, however,
that a Change of Control shall be deemed not to have occurred if the reduction
in voting power is attributable to a public or private offering of the
Employer's securities wherein no single investor or group of affiliated
investors acquires sufficient voting power to control the Board of Directors of
Employer.
6.7.3 Sale of Assets. The sale or other disposition by the
Company of all or substantially all of its assets if followed as soon as is
practicable by the liquidation and dissolution of the Company.
6.8 Right of Offset. In the event that, following the termination of
Employee's employment by Employer for any reason, Employee becomes engaged with
another business in any capacity, 100% of compensation of any kind (including
deferred compensation and compensation assigned to an entity or individual other
than Employee) received from or earned with respect to such other business
during the Contract Term or any survival period, shall be subtracted from any
amounts paid to Employee pursuant to Section
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6.6. In the event of any violation by Employee of any provision of Sections 5.1,
5.2 and 5.3, Employer may subtract Employer's damages from any amounts paid to
Employee pursuant to Section 6.6.
7 Board Representation.
Concurrent with and as a condition precedent to the execution of this
Agreement, Employee shall have entered into a voting agreement with certain
shareholders of Employer relating to Employee's election to the Board of
Directors of Employer during the Contract Term.
8 Miscellaneous.
8.1 Assignment, Successors. Employer may freely assign its rights and
obligations under this Agreement to a successor of Employer's business, without
the prior written consent of Employee. This Agreement shall be binding upon and
inure to the benefit of Employee and Employee's estate and Employer and any
assignee of or successor to Employer.
8.2 Severability. If any term or provision of this Agreement is held
to be invalid or unenforceable by any court of competent jurisdiction for any
reason whatsoever, then (i) the remaining terms and provisions of this Agreement
shall remain in full force and effect, and (ii) the invalid or unenforceable
term or provision shall be deemed replaced by a term or provision that is valid
and enforceable but that, subject to the requirement of validity and
enforceability, comes as close and possible to expressing the intention of the
invalid or unenforceable term or provision.
8.3 Amendment and Waiver. This Agreement shall not be altered, amended
or modified except by written instrument executed by Employer and Employee. A
waiver of any term, covenant, agreement or condition contained in this Agreement
shall not be deemed a waiver of any other term, covenant, agreement or
condition, and any waiver of any other term, covenant, agreement or condition,
and any waiver of any default in any such term, covenant, agreement or condition
shall not be deemed a waiver of any later default thereof or of any other term,
covenant, agreement or condition.
8.4 Notices. All notices and other communications hereunder shall be
in writing and either hand delivered or delivered by overnight courier or first
class registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Employer: JAY JACOBS, INC.
1530 Fifth Avenue
Seattle, WA 98101
Attn: Board of Directors/Compensation Committee
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If to Employee: William L. Lawrence, Jr.
c/o Jay Jacobs, Inc.
1530 Fifth Avenue
Seattle, WA 98101
Any party may from time to time designate a new address by notice given in
accordance with this Section. Notice and communications shall be effective when
actually received by the addressee.
8.5 Applicable Law; Venue. The provisions of this Agreement shall be
interpreted and construed in accordance with the laws of the State of
Washington, without regard to its choice of law principles. The exclusive venue
for any action or proceeding to interpret or enforce this Agreement shall lie
with the Superior Court of King County, Washington.
8.6 Arbitration; Attorneys' Fees. Any dispute arising under this
Agreement shall be settled exclusively by arbitration under the Northwest Region
Expedited Commercial Arbitration Rules of the American Arbitration Association
then in effect. The parties agree that the arbitration shall be at the location
of the Company's principal office or at such other place as is mutually agreed.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction. Nevertheless, the parties hereby agree that a restraining order
and/or an injunction may issue against a violation of this Agreement. If any
party is successful in any arbitration, suit, or proceeding brought or
instituted by it to enforce this Agreement or on account of any damages
sustained by it by reason of the violation by another party of this Agreement,
the prevailing party shall be paid its reasonable attorneys' fees by the
nonprevailing party.
8.7 Effect on Other Agreements. This Agreement shall supersede all
prior agreements, promises, and representations regarding employment by Employer
and severance or other payments contingent upon termination of employment.
8.8 Counterpart Originals. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
8.9 Entire Agreement. This Agreement forms the entire agreement
between the parties hereto with respect to any severance payment and with
respect to the subject matter contained in this Agreement.
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WILLIAM L. LAWRENCE, JR. EMPLOYMENT AGREEMENT SIGNATURE PAGE
Executed as of the date first written above.
Employee Employer
JAY JACOBS, INC.
/s/ WILLIAM L. LAWRENCE, JR.
- ----------------------------------- By: /s/ REX LOREN STEFFEY
William L. Lawrence, Jr. ------------------------------------
Name: Rex Loren Steffey
Title: President and CEO
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Exhibit G
JAY JACOBS, INC.
1998 STOCK INCENTIVE PLAN
1. Purpose. The purpose of this 1998 Stock Incentive Plan (the "Plan") is
to enable Jay Jacobs, Inc. (the "Company") to attract and retain the services of
(1) selected employees, officers and directors of the Company or of any
subsidiary of the Company and (2) selected nonemployee consultants and advisors
to the Company.
2. Shares Subject to the Plan. Subject to adjustment as provided below and
in paragraph 13, the shares to be offered under the Plan shall consist of Common
Stock of the Company, and the total number of shares of Common Stock that may be
issued under the Plan shall not exceed 17,342,761 shares. The shares issued
under the Plan may be authorized and unissued shares or reacquired shares. If an
option, stock appreciation right or performance unit granted under the Plan
expires, terminates or is cancelled, the unissued shares subject to such option,
stock appreciation right or performance unit shall again be available under the
Plan. If shares sold or awarded as a bonus under the Plan are forfeited to the
Company or repurchased by the Company, the number of shares forfeited or
repurchased shall again be available under the Plan.
3. Effective Date and Duration of Plan.
(a) Effective Date. The Plan shall become effective when adopted by
the Board of Directors; provided, however, that prior to shareholder approval of
the Plan, any awards shall be subject to and conditioned on approval of the Plan
by a majority of the votes cast at a shareholders meeting at which a quorum is
present. Options, stock appreciation rights and performance units may be granted
and shares may be awarded as bonuses or sold under the Plan at any time after
the effective date and before termination of the Plan.
(b) Duration. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
such shares have lapsed. The Board of Directors may suspend or terminate the
Plan at any time except with respect to options, performance units and shares
subject to restrictions then outstanding under the Plan. Termination shall not
affect any outstanding options, any right of the Company to repurchase shares or
the forfeitability of shares issued under the Plan.
4. Administration. The Plan shall be administered by a committee of the
Board of Directors of the Company (the "Committee"), which shall determine and
designate from time to time the individuals to whom awards shall be made, the
amount of the awards, and the other terms and conditions of the awards. Subject
to the provisions of the Plan, the Committee may from time to time adopt and
amend rules and regulations relating to administration of the Plan, advance the
lapse of any waiting period, accelerate any exercise date, waive or modify any
restriction applicable to shares (except those restrictions imposed by law) and
make all other
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determinations in the judgment of the Committee necessary or desirable for the
administration of the Plan. The interpretation and construction of the
provisions of the Plan and related agreements by the Committee shall be final
and conclusive. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any related agreement in the
manner and to the extent it shall deem expedient to carry the Plan into effect,
and it shall be the sole and final judge of such expediency.
5. Types of Awards; Eligibility. The Committee may, from time to time, take
the following actions, separately or in combination, under the Plan: (i) grant
Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), as provided in paragraphs 6(a) and 6(b); (ii)
grant options other than Incentive Stock Options ("Non-Statutory Stock Options")
as provided in paragraphs 6(a) and 6(c); (iii) award stock bonuses as provided
in paragraph 7; (iv) sell shares subject to restrictions as provided in
paragraph 8; (v) grant stock appreciation rights as provided in paragraph 9;
(vi) grant cash bonus rights as provided in paragraph 10; (vii) grant
performance units as provided in paragraph 11 and (viii) grant foreign qualified
awards as provided in paragraph 12. Any such awards may be made to employees,
including employees who are officers or directors, and to other individuals
described in paragraph 1 who the Committee believes have made or will make an
important contribution to the Company or its subsidiaries; provided, however,
that only employees of the Company shall be eligible to receive Incentive Stock
Options under the Plan. The Committee shall select the individuals to whom
awards shall be made and shall specify the action taken with respect to each
individual to whom an award is made. At the discretion of the Committee, an
individual may be given an election to surrender an award in exchange for the
grant of a new award. No employee may be granted options or stock appreciation
rights under the Plan for more than 5,000,000 shares of Common Stock in any
calendar year.
6. Option Grants.
(a) General Rules Relating to Options.
(i) Terms of Grant. The Committee may grant options under the
Plan. With respect to each option grant, the Committee shall determine the
number of shares subject to the option, the option price, the period of the
option, the time or times at which the option may be exercised and whether the
option is an Incentive Stock Option or a Non-Statutory Stock Option. At the time
of the grant of an option or at any time thereafter, the Committee may provide
that an optionee who exercised an option with Common Stock of the Company shall
automatically receive a new option to purchase additional shares equal to the
number of shares surrendered and may specify the terms and conditions of such
new options.
(ii) Exercise of Options. Except as provided in paragraph
6(a)(iv) or as determined by the Committee, no option granted under the Plan may
be exercised unless at the time of such exercise the optionee is employed by or
in the service of the Company or any
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subsidiary of the Company and shall have been so employed or provided such
service continuously since the date such option was granted. Absence on leave or
on account of illness or disability under rules established by the Committee
shall not, however, be deemed an interruption of employment or service for this
purpose. Unless otherwise determined by the Committee, vesting of options shall
not continue during an absence on leave (including an extended illness) or on
account of disability. Except as provided in paragraphs 6(a)(iv) and 13, options
granted under the Plan may be exercised from time to time over the period stated
in each option in such amounts and at such times as shall be prescribed by the
Committee, provided that options shall not be exercised for fractional shares.
Unless otherwise determined by the Committee, if the optionee does not exercise
an option in any one year with respect to the full number of shares to which the
optionee is entitled in that year, the optionee's rights shall be cumulative and
the optionee may purchase those shares in any subsequent year during the term of
the option.
(iii) Nontransferability. Except as provided below, each stock
option granted under the Plan by its terms shall be nonassignable and
nontransferable by the optionee, either voluntarily or by operation of law, and
each option by its terms shall be exercisable during the optionee's lifetime
only by the optionee. A stock option may be transferred by will or by the laws
of descent and distribution of the state or country of the optionee's domicile
at the time of death. A Non-Statutory Stock Option shall also be transferable
pursuant to a qualified domestic relations order as defined under the Code or
Title I of the Employee Retirement Income Security Act. The Committee may, in
its discretion, authorize all or a portion of a Non- Statutory Stock Option to
be on terms which permit transfer by the optionee to (A) the spouse, children or
grandchildren of the optionee, including stepchildren and adopted children
("Immediate Family Members"), (B) a trust or trusts for the exclusive benefit of
Immediate Family Members, or (C) a partnership or limited liability company in
which Immediate Family Members are the only partners or members, provided that
(X) there may be no consideration for any transfer, (Y) the stock option
agreement pursuant to which the options are granted or an amendment thereto must
expressly provide for transferability in a manner consistent with this
paragraph, and (Z) subsequent transfers of transferred options shall be
prohibited except by will or by the laws of descent and distribution. Following
any transfer, options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that for
purposes of paragraphs 6(a)(v) and 13 the term "optionee" shall be deemed to
refer to the transferee. The continued employment requirement of paragraph
6(a)(ii) and the events of termination of employment of paragraph 6(a)(iv) shall
continue to be applied with respect to the original optionee, and following the
termination of employment of the original optionee the options shall be
exercisable by the transferee only to the extent, and for the periods specified,
and all other references to employment, termination of employment, life or death
of the optionee, shall continue to be applied with respect to the original
optionee.
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(iv) Termination of Employment or Service.
(A) General Rule. Unless otherwise determined by the
Committee, in the event the employment or service of the optionee with the
Company or a subsidiary terminates for any reason other than because of physical
disability, death or retirement as provided in subparagraphs 6(a)(iv)(B), (C)
and (D), the option may be exercised at any time prior to the expiration date of
the option or the expiration of 30 days after the date of such termination,
whichever is the shorter period, but only if and to the extent the optionee was
entitled to exercise the option at the date of such termination.
(B) Termination Because of Total Disability. Unless
otherwise determined by the Committee, in the event of the termination of
employment or service because of total disability, the option may be exercised
at any time prior to the expiration date of the option or the expiration of 12
months after the date of such termination, whichever is the shorter period, but
only if and to the extent the optionee was entitled to exercise the option at
the date of such termination. The term "total disability" means a mental or
physical impairment which is expected to result in death or which has lasted or
is expected to last for a continuous period of 12 months or more and which
causes the optionee to be unable, in the opinion of the Company and two
independent physicians, to perform his or her duties as an employee, director,
officer or consultant of the Company and to be engaged in any substantial
gainful activity. Total disability shall be deemed to have occurred on the first
day after the Company and the two independent physicians have furnished their
opinion of total disability to the Company.
(C) Termination Because of Death. Unless otherwise
determined by the Committee, in the event of the death of an optionee while
employed by or providing service to the Company or a subsidiary, the option may
be exercised at any time prior to the expiration date of the option or the
expiration of 12 months after the date of such death, whichever is the shorter
period, but only if and to the extent the optionee was entitled to exercise the
option at the date of such termination and only by the person or persons to whom
such optionee's rights under the option shall pass by the optionee's will or by
the laws of descent and distribution of the state or country of domicile at the
time of death.
(D) Termination Because of Retirement. Unless otherwise
determined by the Committee, in the event of the termination of employment or
service because of (1) normal retirement after reaching age 65, (2) early
retirement after reaching age 55 and completing 10 years of service, or (3)
early retirement after completing 30 years of service without regard to age, the
option may be exercised at any time prior to the expiration date of the option
or the expiration of 12 months after the date of such termination, whichever is
the shorter period, but only if and to the extent the optionee was entitled to
exercise the option at the date of such termination.
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(E) Amendment of Exercise Period Applicable to Termination.
The Committee, at the time of grant or at any time thereafter, may extend the
30-day and 12-month exercise periods any length of time not later than the
original expiration date of the option, and may increase the portion of an
option that is exercisable, subject to such terms and conditions as the
Committee may determine.
(F) Failure to Exercise Option. To the extent that the
option of any deceased optionee or of any optionee whose employment or service
terminates is not exercised within the applicable period, all further rights to
purchase shares pursuant to such option shall cease and terminate.
(v) Purchase of Shares. Unless the Committee determines
otherwise, shares may be acquired pursuant to an option granted under the Plan
only upon receipt by the Company of notice in writing from the optionee of the
optionee's intention to exercise, specifying the number of shares as to which
the optionee desires to exercise the option and the date on which the optionee
desires to complete the transaction, and if required in order to comply with the
Securities Act of 1933, as amended, containing a representation that it is the
optionee's present intention to acquire the shares for investment and not with a
view to distribution. Unless the Committee determines otherwise, on or before
the date specified for completion of the purchase of shares pursuant to an
option, the optionee must have paid the Company the full purchase price of such
shares in cash (including, with the consent of the Committee, cash that may be
the proceeds of a loan from the Company) or, with the consent of the Committee,
in whole or in part, in Common Stock of the Company valued at fair market value,
restricted stock, performance units or other contingent awards denominated in
either stock or cash, deferred compensation credits, promissory notes and other
forms of consideration. The fair market value of Common Stock provided in
payment of the purchase price shall be the closing price of the Common Stock as
reported in The Wall Street Journal on the trading day preceding the date the
option is exercised, or such other reported value of the Common Stock as shall
be specified by the Committee. No shares shall be issued until full payment
therefor has been made. With the consent of the Committee, an optionee may
request the Company to apply automatically the shares to be received upon the
exercise of a portion of a stock option (even though stock certificates have not
yet been issued) to satisfy the purchase price for additional portions of the
option. Each optionee who has exercised an option shall immediately upon
notification of the amount due, if any, pay to the Company in cash amounts
necessary to satisfy any applicable federal, state and local tax withholding
requirements. If additional withholding is or becomes required beyond any amount
deposited before delivery of the certificates, the optionee shall pay such
amount to the Company on demand. If the optionee fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable by the
Company to the optionee, including salary, subject to applicable law. With the
consent of the Committee an optionee may satisfy this obligation, in whole or in
part, by having the Company withhold from the shares to be issued upon the
exercise that number of shares that would satisfy the withholding amount due or
by delivering to the Company Common Stock to
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satisfy the withholding amount. Upon the exercise of an option, the number of
shares reserved for issuance under the Plan shall be reduced by the number of
shares issued upon exercise of the option.
(b) Incentive Stock Options. Incentive Stock Options shall be subject
to the following additional terms and conditions:
(i) Limitation on Amount of Grants. No employee may be granted
Incentive Stock Options under the Plan if the aggregate fair market value, on
the date of grant, of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by that employee during any calendar
year under the Plan and under any other incentive stock option plan (within the
meaning of Section 422 of the Code) of the Company or any parent or subsidiary
of the Company exceeds $100,000.
(ii) Limitations on Grants to 10 Percent Shareholders. An
Incentive Stock Option may be granted under the Plan to an employee possessing
more than 10 percent of the total combined voting power of all classes of stock
of the Company or of any parent or subsidiary of the Company only if the option
price is at least 110 percent of the fair market value of the Common Stock
subject to the option on the date it is granted, as described in paragraph
6(b)(iv), and the option by its terms is not exercisable after the expiration of
five years from the date it is granted.
(iii) Duration of Options. Subject to paragraphs 6(a)(ii) and
6(b)(ii), Incentive Stock Options granted under the Plan shall continue in
effect for the period fixed by the Committee, except that no Incentive Stock
Option shall be exercisable after the expiration of 10 years from the date it is
granted.
(iv) Option Price. The option price per share shall be determined
by the Committee at the time of grant. Except as provided in paragraph 6(b)(ii),
the option price shall not be less than 100 percent of the fair market value of
the Common Stock covered by the Incentive Stock Option at the date the option is
granted. The fair market value shall be deemed to be the closing price of the
Common Stock as reported in The Wall Street Journal on the day preceding the
date the option is granted, or if there has been no sale on that date, on the
last preceding date on which a sale occurred, or such other value of the Common
Stock as shall be specified by the Committee.
(v) Limitation on Time of Grant. No Incentive Stock Option shall
be granted on or after the tenth anniversary of the last action by the Board of
Directors approving an increase in the number of shares available for issuance
under the Plan, which action was subsequently approved within 12 months by the
shareholders.
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(vi) Conversion of Incentive Stock Options. The Committee may at
any time without the consent of the optionee convert an Incentive Stock Option
to a Non-Statutory Stock Option.
(c) Non-Statutory Stock Options. Non-Statutory Stock Options shall be
subject to the following additional terms and conditions:
(i) Option Price. The option price for Non-Statutory Stock
Options shall be determined by the Committee at the time of grant and may be any
amount determined by the Committee.
(ii) Duration of Options. Non-Statutory Stock Options granted
under the Plan shall continue in effect for the period fixed by the Committee.
7. Stock Bonuses. The Committee may award shares under the Plan as stock
bonuses. Shares awarded as a bonus shall be subject to the terms, conditions,
and restrictions determined by the Committee. The restrictions may include
restrictions concerning transfer ability and forfeiture of the shares awarded,
together with such other restrictions as may be determined by the Committee. The
Committee may require the recipient to sign an agreement as a condition of the
award, but may not require the recipient to pay any monetary consideration other
than amounts necessary to satisfy tax withholding requirements. The agreement
may contain any terms, conditions, restrictions, representations and warranties
required by the Committee. The certificates representing the shares awarded
shall bear any legends required by the Committee. The Company may require any
recipient of a stock bonus to pay to the Company in cash upon demand amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements. If the recipient fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to the recipient,
including salary or fees for services, subject to applicable law. With the
consent of the Committee, a recipient may deliver Common Stock to the Company to
satisfy this withholding obligation. Upon the issuance of a stock bonus, the
number of shares reserved for issuance under the Plan shall be reduced by the
number of shares issued.
8. Restricted Stock. The Committee may issue shares under the Plan for such
consideration (including promissory notes and services) as determined by the
Committee. Shares issued under the Plan shall be subject to the terms,
conditions and restrictions determined by the Committee. The restrictions may
include restrictions concerning transferability, repurchase by the Company and
forfeiture of the shares issued, together with such other restrictions as may be
determined by the Committee. All Common Stock issued pursuant to this paragraph
8 shall be subject to a purchase agreement, which shall be executed by the
Company and the prospective recipient of the shares prior to the delivery of
certificates representing such shares to the recipient. The purchase agreement
may contain any terms, conditions, restrictions, representations and warranties
required by the Committee. The certificates representing the
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shares shall bear any legends required by the Committee. The Company may require
any purchaser of restricted stock to pay to the Company in cash upon demand
amounts necessary to satisfy any applicable federal, state or local tax
withholding requirements. If the purchaser fails to pay the amount demanded, the
Company may withhold that amount from other amounts payable by the Company to
the purchaser, including salary, subject to applicable law. With the consent of
the Committee, a purchaser may deliver Common Stock to the Company to satisfy
this withholding obligation. Upon the issuance of restricted stock, the number
of shares reserved for issuance under the Plan shall be reduced by the number of
shares issued.
9. Stock Appreciation Rights.
(a) Grant. Stock appreciation rights may be granted under the Plan by
the Committee, subject to such rules, terms, and conditions as the Committee
prescribes.
(b) Exercise.
(i) Each stock appreciation right shall entitle the holder, upon
exercise, to receive from the Company in exchange therefor an amount equal in
value to the excess of the fair market value on the date of exercise of one
share of Common Stock of the Company over its fair market value on the date of
grant (or, in the case of a stock appreciation right granted in connection with
an option, the excess of the fair market value of one share of Common Stock of
the Company over the option price per share under the option to which the stock
appreciation right relates), multiplied by the number of shares covered by the
stock appreciation right or the option, or portion thereof, that is surrendered.
Payment by the Company upon exercise of a stock appreciation right may be made
in Common Stock valued at fair market value, in cash, or partly in Common Stock
and partly in cash, all as determined by the Committee.
(ii) A stock appreciation right shall be exercisable only at the
time or times established by the Committee. If a stock appreciation right is
granted in connection with an option, the following rules shall apply: (1) the
stock appreciation right shall be exercisable only to the extent and on the same
conditions that the related option could be exercised; (2) upon exercise of the
stock appreciation right, the option or portion thereof to which the stock
appreciation right relates terminates; and (3) upon exercise of the option, the
related stock appreciation right or portion thereof terminates.
(iii) The Committee may withdraw any stock appreciation right
granted under the Plan at any time and may impose any conditions upon the
exercise of a stock appreciation right or adopt rules and regulations from time
to time affecting the rights of holders of stock appreciation rights. Such rules
and regulations may govern the right to exercise stock appreciation rights
granted prior to adoption or amendment of such rules and regulations as well as
stock appreciation rights granted thereafter.
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(iv) For purposes of this paragraph 9, the fair market value of
the Common Stock shall be the closing price of the Common Stock as reported in
The Wall Street Journal, or such other reported value of the Common Stock as
shall be specified by the Committee, on the trading day preceding the date the
stock appreciation right is exercised.
(v) No fractional shares shall be issued upon exercise of a stock
appreciation right. In lieu thereof, cash may be paid in an amount equal to the
value of the fraction or, if the Committee shall determine, the number of shares
may be rounded downward to the next whole share.
(vi) Each stock appreciation right granted in connection with an
Incentive Stock Option and, unless otherwise determined by the Board of
Directors, each other stock appreciation right granted under the Plan by its
terms shall be nonassignable and nontransferable by the holder, either
voluntarily or by operation of law, except by will or by the laws of descent and
distribution of the state or country of the holder's domicile at the time of
death, and each stock appreciation right by its terms shall be exercisable
during the holder's lifetime only by the holder; provided, however, that a stock
appreciation right not granted in connection with an Incentive Stock Option
shall also be transferable pursuant to a qualified domestic relations order as
defined under the Code or Title I of the Employee Retirement Income Security
Act.
(vii) Each participant who has exercised a stock appreciation
right shall, upon notification of the amount due, pay to the Company in cash
amounts necessary to satisfy any applicable federal, state and local tax
withholding requirements. If the participant fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the Company
to the participant including salary, subject to applicable law. With the consent
of the Committee a participant may satisfy this obligation, in whole or in part,
by having the Company withhold from any shares to be issued upon the exercise
that number of shares that would satisfy the withholding amount due or by
delivering Common Stock to the Company to satisfy the withholding amount.
(viii) Upon the exercise of a stock appreciation right for
shares, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued. Cash payments of stock appreciation
rights shall not reduce the number of shares of Common Stock reserved for
issuance under the Plan.
10. Cash Bonus Rights.
(a) Grant. The Committee may grant cash bonus rights under the Plan in
connection with (i) options granted or previously granted, (ii) stock
appreciation rights granted or previously granted, (iii) stock bonuses awarded
or previously awarded and (iv) shares sold or previously sold under the Plan.
Cash bonus rights will be subject to rules, terms and
9
<PAGE>
conditions as the Committee may prescribe. Unless otherwise determined by the
Committee, each cash bonus right granted under the Plan by its terms shall be
nonassignable and nontransferable by the holder, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the holder's domicile at the time of death or pursuant
to a qualified domestic relations order as defined under the Code or Title I of
the Employee Retirement Income Security Act. The payment of a cash bonus shall
not reduce the number of shares of Common Stock reserved for issuance under the
Plan.
(b) Cash Bonus Rights in Connection With Options. A cash bonus right
granted in connection with an option will entitle an optionee to a cash bonus
when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right related to the option) in whole or in
part. If an optionee purchases shares upon exercise of an option and does not
exercise a related stock appreciation right, the amount of the bonus shall be
determined by multiplying the excess of the total fair market value of the
shares to be acquired upon the exercise over the total option price for the
shares by the applicable bonus percentage. If the optionee exercises a related
stock appreciation right in connection with the termination of an option, the
amount of the bonus shall be determined by multiplying the total fair market
value of the shares and cash received pursuant to the exercise of the stock
appreciation right by the applicable bonus percentage. The bonus percentage
applicable to a bonus right shall be determined from time to time by the
Committee but shall in no event exceed 75 percent.
(c) Cash Bonus Rights in Connection With Stock Bonus. A cash bonus
right granted in connection with a stock bonus will entitle the recipient to a
cash bonus payable when the stock bonus is awarded or restrictions, if any, to
which the stock is subject lapse. If bonus stock awarded is subject to
restrictions and is repurchased by the Company or forfeited by the holder, the
cash bonus right granted in connection with the stock bonus shall terminate and
may not be exercised. The amount and timing of payment of a cash bonus shall be
determined by the Committee.
(d) Cash Bonus Rights in Connection With Stock Purchases. A cash bonus
right granted in connection with the purchase of stock pursuant to paragraph 8
will entitle the recipient to a cash bonus when the shares are purchased or
restrictions, if any, to which the stock is subject lapse. Any cash bonus right
granted in connection with shares purchased pursuant to paragraph 8 shall
terminate and may not be exercised in the event the shares are repurchased by
the Company or forfeited by the holder pursuant to applicable restrictions. The
amount and timing of payment of a cash bonus shall be determined by the
Committee.
(e) Taxes. The Company shall withhold from any cash bonus paid
pursuant to paragraph 10 the amount necessary to satisfy any applicable federal,
state and local withholding requirements.
10
<PAGE>
11. Performance Units. The Committee may grant performance units consisting
of monetary units which may be earned in whole or in part if the Company
achieves certain goals established by the Committee over a designated period of
time, but not in any event more than 10 years. The goals established by the
Committee may include earnings per share, return on shareholders' equity, return
on invested capital, and such other goals as may be established by the
Committee. In the event that the minimum performance goal established by the
Committee is not achieved at the conclusion of a period, no payment shall be
made to the participants. In the event the maximum corporate goal is achieved,
100 percent of the monetary value of the performance units shall be paid to or
vested in the participants. Partial achievement of the maximum goal may result
in a payment or vesting corresponding to the degree of achievement as determined
by the Committee. Payment of an award earned may be in cash or in Common Stock
or in a combination of both, and may be made when earned, or vested and
deferred, as the Committee determines. Deferred awards shall earn interest on
the terms and at a rate determined by the Committee. Unless otherwise determined
by the Committee, each performance unit granted under the Plan by its terms
shall be nonassignable and nontransferable by the holder, either voluntarily or
by operation of law, except by will or by the laws of descent and distribution
of the state or country of the holder's domicile at the time of death or
pursuant to a qualified domestic relations order as defined under the Code or
Title I of the Employee Retirement Income Security Act. Each participant who has
been awarded a performance unit shall, upon notification of the amount due, pay
to the Company in cash amounts necessary to satisfy any applicable federal,
state and local tax withholding requirements. If the participant fails to pay
the amount demanded, the Company may withhold that amount from other amounts
payable by the Company to the participant, including salary or fees for
services, subject to applicable law. With the consent of the Committee a
participant may satisfy this obligation, in whole or in part, by having the
Company withhold from any shares to be issued that number of shares that would
satisfy the withholding amount due or by delivering Common Stock to the Company
to satisfy the withholding amount. The payment of a performance unit in cash
shall not reduce the number of shares of Common Stock reserved for issuance
under the Plan. The number of shares reserved for issuance under the Plan shall
be reduced by the number of shares issued upon payment of an award.
12. Foreign Qualified Grants. Awards under the Plan may be granted to such
officers and employees of the Company and its subsidiaries and such other
persons described in paragraph 1 residing in foreign jurisdictions as the
Committee may determine from time to time. The Committee may adopt such
supplements to the Plan as may be necessary to comply with the applicable laws
of such foreign jurisdictions and to afford participants favorable treatment
under such laws; provided, however, that no award shall be granted under any
such supplement with terms which are more beneficial to the participants than
the terms permitted by the Plan.
13. Changes in Capital Structure. If the outstanding Common Stock of the
Company is hereafter increased or decreased or changed into or exchanged for a
different number or kind of shares or other securities of the Company or of
another corporation by reason of any
11
<PAGE>
reorganization, merger, consolidation, plan of exchange, recapitalization,
reclassification, stock split-up, combination of shares or dividend payable in
shares, appropriate adjustment shall be made by the Committee in the number and
kind of shares available for awards under the Plan. In addition, the Committee
shall make appropriate adjustment in the number and kind of shares as to which
outstanding options and stock appreciation rights, or portions thereof then
unexercised, shall be exercisable, so that the optionee's proportionate interest
before and after the occurrence of the event is maintained. Notwithstanding the
foregoing, the Committee shall have no obligation to effect any adjustment that
would or might result in the issuance of fractional shares, and any fractional
shares resulting from any adjustment may be disregarded or provided for in any
manner determined by the Committee. Any such adjustments made by the Committee
shall be conclusive. In the event of dissolution of the Company or a merger,
consolidation or plan of exchange affecting the Company, in lieu of providing
for options and stock appreciation rights as provided above in this paragraph 13
or in lieu of having the options and stock appreciation rights continue
unchanged, the Committee may, in its sole discretion, provide a 30-day period
prior to such event during which optionees shall have the right to exercise
options and stock appreciation rights in whole or in part without any limitation
on exercisability and upon the expiration of which 30-day period all unexercised
options and stock appreciation rights shall immediately terminate.
14. Corporate Mergers, Acquisitions, etc. The Committee may also grant
options, stock appreciation rights, performance units, stock bonuses and cash
bonuses and issue restricted stock under the Plan having terms, conditions and
provisions that vary from those specified in this Plan provided that any such
awards are granted in substitution for, or in connection with the assumption of,
existing options, stock appreciation rights, stock bonuses, cash bonuses,
restricted stock and performance units granted, awarded or issued by another
corporation and assumed or otherwise agreed to be provided for by the Company
pursuant to or by reason of a transaction involving a corporate merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation to which the Company or a subsidiary is a party.
15. Amendment of Plan. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as provided in paragraphs 6(a)(iv), 9 and 13, however, no
change in an award already granted shall be made without the written consent of
the holder of such award.
16. Approvals. The obligations of the Company under the Plan are subject to
the approval of state and federal authorities or agencies with jurisdiction in
the matter. The Company will use its best efforts to take steps required by
state or federal law or applicable regulations, including rules and regulations
of the Securities and Exchange Commission and any stock exchange on which the
Company's shares may then be listed, in connection with the grants under the
Plan. The foregoing notwithstanding, the Company shall not be obligated to issue
or
12
<PAGE>
deliver Common Stock under the Plan if such issuance or delivery would violate
applicable state or federal securities laws.
17. Employment and Service Rights. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary by whom such employee is
employed to terminate such employee's employment at any time, for any reason,
with or without cause, or to decrease such employee's compensation or benefits,
or (ii) confer upon any person engaged by the Company any right to be retained
or employed by the Company or to the continuation, extension, renewal, or
modification of any compensation, contract, or arrangement with or by the
Company.
18. Rights as a Shareholder. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Common Stock until the
date of issue to the recipient of a stock certificate for such shares. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.
EFFECTIVE DATE: December 3, 1997.
AMENDED:
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Exhibit H
Issuance of Options Under Management Option Plan
1. Rex Loren Steffey - 1,083,522
2. William L. Lawrence, Jr. - 788,012
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") is made as of December 5, 1997, by
and among Cahill, Warnock Strategic Partners Fund, L.P. ("Cahill"), T. Rowe
Price Recovery Fund II, L.P. ("TRP"), Strategic Associates, L.P. ("Strategic"),
and Michael D. Sullivan ("Sullivan")(Cahill, TRP, Strategic and Sullivan are
sometimes collectively referred to herein as "Investors"), and Rex Loren Steffey
("Steffey") and William L. Lawrence, Jr. ("Lawrence")(Steffey and Lawrence are
sometimes collectively referred to herein as the "Executives").
RECITALS
A. The Investors own, in the aggregate, 46,000 shares of Series A Preferred
Stock and 25,000 shares of Series B Preferred Stock of Jay Jacobs, Inc., a
Washington corporation (the "Company") constituting a majority of the votes
entitled to be cast in any election of the shareholders of the Company.
B. Steffey owns 96,500 shares of the Company's Common Stock constituting
96,500 votes entitled to be cast in any election of the shareholders of the
Company, and Lawrence does not currently own any shares of the Company's Common
Stock.
C. Concurrent with the execution of this Agreement, Steffey and Lawrence
are each entering into a separate Employment Agreement with the Company,
pursuant to which each of Steffey and Lawrence are to be elected to the Board of
Directors of the Company.
D. The Investors and the Executives desire to enter into an agreement
pursuant to which they agree to exercise their right to cast votes in any
election of the shareholders of the Company (their "Votes") in the manner and
for the purpose specified herein.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Exercise of Votes. The Investors and the Executives shall exercise all
Votes as to which they have voting power, pursuant to the provisions of this
Agreement.
2. Election of Directors. In elections of directors of the Company, the
Investors and the Executives shall vote for the following candidates, which the
Investors and the Executives shall take all necessary steps to nominate:
-1-
<PAGE>
(a) Steffey;
(b) Lawrence; and
(c) Five candidates designated by the Investors.
3. Termination. With respect to Steffey, this Agreement shall terminate in
its entirety upon the expiration or earlier termination of that certain
Employment Agreement between Steffey and the Company dated December 5, 1997.
With respect to Lawrence, this Agreement shall terminate in its entirety upon
the expiration or earlier termination of that certain Employment Agreement
between Lawrence and the Company dated December 5, 1997.
4. Miscellaneous.
4.1 No Conflicts. The parties hereto represent that they are not
parties to and do not know of any other agreements that conflict with any of the
provisions of this Agreement.
4.2 Successors. The provisions of this Agreement shall inure to the
benefit of and shall be binding upon the successors and assigns of the parties
hereto, including any successors in interest to or transferees or assignees of
any voting securities, the voting of which is covered by this Agreement.
4.3 Counterparts. This Agreement may be executed in more than one
counterpart, each of which shall constitute an original of this Agreement but
all of which, when taken together, shall constitute one and the same instrument.
4.4 Modification. This Agreement shall not be subject to modification
or amendment in any respect, except by an instrument in writing signed by all of
the parties hereto.
4.5 Applicable Law. This Agreement shall for all purposes be governed
by and construed in accordance with the laws of the State of Washington, without
giving effect to principles of conflict of laws.
4.6 Notices. All notices, demands or other communications desired or
required to be given by any party to any other party hereto shall be in writing
and shall be delivered (a) in person or (b) by registered or certified mail,
return receipt requested, postage prepaid, addressed as follows, or such other
addresses and to the attention of such other individuals as any Investor or
either Executive shall have designated in writing to the other parties:
-2-
<PAGE>
If to the Investors: c/o Cahill, Warnock & Company, LLC
One South Street, Suite 2150
Baltimore, MD 21202
Attn: Edward L. Cahill
With a copy to: T. Rowe Price Associates
100 East Pratt Street, 7th Floor
Baltimore, MD 21202
Attn: Kim Golden
If to Steffey: c/o Jay Jacobs, Inc.
1530 Fifth Avenue
Seattle, WA 98101
If to Lawrence c/o Jay Jacobs, Inc.
1530 Fifth Avenue
Seattle, WA 98101
4.7 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provisions shall be excluded from
this Agreement and the balance of this Agreement shall be interpreted as if such
provisions were so excluded and shall be enforceable in accordance with its
terms.
4.8 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with respect to the subject
matter hereof and supersedes all prior agreements with respect to the subject
matter hereof.
-3-
<PAGE>
VOTING AGREEMENT SIGNATURE PAGE
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day first above written.
CAHILL, WARNOCK STRATEGIC PARTNERS
FUND, L.P.
By: Cahill, Warnock Strategic Partners, L.P., its
general partner
By: /s/ EDWARD L. CAHILL
----------------------------------------------
Edward L. Cahill, a general partner
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Company, LLC, its
general partner
By: /s/ EDWARD L. CAHILL
----------------------------------------------
Edward L. Cahill, a managing member
T. ROWE PRICE RECOVERY FUND II, L.P.
By: T. Rowe Price Recovery Fund II Associates,
LLC, its general partner
By: /s/ KIM Z. GOLDEN
----------------------------------------------
Kim Z. Golden, its managing director
/s/ MICHAEL D. SULLIVAN
-------------------------------------------------
MICHAEL D. SULLIVAN
/s/ REX LOREN STEFFEY
-------------------------------------------------
REX LOREN STEFFEY
/s/ WILLIAM L. LAWRENCE, JR.
-------------------------------------------------
WILLIAM L. LAWRENCE, JR.
-4-
VOTING AGREEMENT
The undersigned, in consideration of the willingness of T. Rowe Price
Recovery Fund II, L.P. ("TRP") to invest in Jay Jacobs, Inc. ("JJI"), agree as
follows, effective as of December 5, 1997:
At any time at which TRP continues to own not less than 50% of each of the
Series A Preferred Stock and Series B Preferred Stock of JJI purchased by it on
December 5, 1997, each of the undersigned will vote all of its voting stock of
JJI and will take such other action as it may lawfully take to cause one nominee
of TRP to serve as a director of JJI.
CAHILL, WARNOCK STRATEGIC
PARTNERS FUND, L.P.
By: Cahill, Warnock Srategic Partners, L.P.
its general partner
By: /s/ EDWARD L. CAHILL
-------------------------------------
Edward L. Cahill, a general partner
STRATEGIC ASSOCIATES, L.P.
By: Cahill, Warnock & Company, LLC
its general partner
By: /s/ EDWARD L. CAHILL
-------------------------------------
Edward L. Cahill, a managing member
/s/ MICHAEL D. SULLIVAN
- ------------------------------------
MICHAEL D. SULLIVAN
MODIFICATION OF LEASES
This Modification of Leases ("Modification") is made by and between O'Shea
Building Company Seattle LLC, a Washington limited liability company
("Landlord") and Jay Jacobs, Inc., a Washington corporation ("Tenant") as of
this 1st day of December 1997.
BACKGROUND
A. WHEREAS, Tenant and the predecessor-in-interest of Landlord entered into
certain leases ("Leases") covering certain premises more specifically defined
therein ("Premises"), which Premises include space on the basement, first floor,
mezzanine, second floor, third floor, and fourth floor of the O'Shea Building,
located at 5th and Pine in Seattle, Washington, which building ("Building") is
situated on Lots 1 and 4, Block 18, AA. Denny's Third Addition to the City of
Seattle, State of Washington. Such Leases include the Leases listed on Exhibit A
attached hereto, including all amendments, modifications and extensions thereof,
and
B. WHEREAS, Landlord and Tenant further desire to modify the Leases as more
fully described herein and to memorialize Landlord's consent to certain
transactions more fully described below,
AGREEMENT
THEREFORE, Landlord and Tenant agree as follows:
1. Notwithstanding any other provisions of the Leases, from and after
January 1, 1998, through and including January 31, 2000, minimum rent payable
for the Premises in the Building shall be as follows:
1.1 For the period commencing on January 1, 1998 and extending through
December 31, 1998, annual minimum rental shall equal $275,000, which amount
shall be payable monthly by the first date of each month in the amount of
$22,916.67.
1.2 For the period commencing on January 1, 1999 and extending through
January 31, 2000, annual minimum rental shall equal $300,000, which amount
shall be payable monthly by the first day of each month in the amount of
$25,000. This minimum rent remains only one component of the rent to be
paid by Tenant. By signing this Modification, Tenant acknowledges its
liability for percentage rent, Excess Rental, and all other costs,
expenses, taxes and fees as set forth in the Leases and other agreements
described in Exhibit A hereto. The minimum rental provided in this Section
1 shall not be subject to any increases.
2. Notwithstanding any other provision of the Leases:
2.1 Percentage rent payable by Tenant for the period commencing
January 1, 1998 and ending on December 31, 1998, shall equal three percent
(3%) of gross sales made from the Premises during such period in excess of
$1,500,000, which percentage rent shall be paid at such time, by such
procedures and at such place as otherwise provided in the Leases.
2.2 Percentage rent payable by Tenant for the period commencing
January 1, 1999 and ending on January 31,
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<PAGE>
2000, shall equal three percent (3%) of gross sales made from the Premises
during such period in excess of $1,500,000, which percentage rent shall be
payable at such time, by such procedures and at such place as otherwise
provided in the Leases.
2.3 The percentage rent due under the Leases described in Exhibit A
for the calendar year 1997 is unaffected by this Modification, and remains
due and payable by Tenant at the time and at the place as set forth in said
Leases.
3.
3.1 Tenant has informed Landlord that (a) Tenant is in the process of
exploring options for an equity infusion and, at the date hereof, Tenant
proposes to obtain substantial additional equity from one or more
affiliates of Cahill, Warnock and Company, LLC and/or possibly other
accredited or institutional investors ("Purchasers"); (b) by virtue of such
a proposed equity investment, it is anticipated that a change of ownership
of or power to vote the majority of the outstanding voting stock of the
Tenant will occur and/or a change of control of the Tenant will occur,
which changes may occur immediately or in the future; (c) Purchasers
propose to purchase from Tenant $4.6 million of Series A Preferred Stock
and $2.5 million of Series B convertible Preferred Stock ("Contemplated
Transaction"); (d) the Contemplated Transaction may be composed of one or
more separate phases; (e) the Post Confirmation Creditors Committee and Mr.
Jay Jacobs acting for himself and as trustee of the Rose Jacobs
Testamentary Trust entered into that certain April 15, 1997 Letter
Agreement (a copy of which is attached hereto as EXHIBIT B) to which Tenant
consented and agreed (in part) as more fully described therein ("Letter
Agreement"); (f) the period described in Paragraph 1(b) of the Letter
Agreement has been extended by the PCC through the date hereof. The
Contemplated Transaction and the Letter Agreement, and the reasonable and
necessary implementation thereof, shall be referred to as the "Consent
Transactions."
3.2 In reliance upon the truthfulness and accuracy of the above
representations made by Tenant, Landlord consents to the Consent
Transactions.
3.3 Notwithstanding any other provision of the Leases, so long as the
ground floor of the Building is used as part of the retail chain that is
presently conducted under the trade name "Jay Jacobs" (or any substitute
trade name used for substantially all of the then-existing stores in the
chain presently conducted under the trade name "Jay Jacobs"), and so long
as the business is conducted in substantially the same manner as presently
conducted by "Jay Jacobs," Tenant shall not be obligated to obtain the
consent of Landlord for any assignment, other transfer, change of
ownership, or power to vote any of the outstanding shares of Tenant, or
change of control of the Tenant; provided, however, in the event that
Tenant shall be merged into another existing chain and conducted under the
trade name thereof, or in the event that Tenant's ownership or control
changes, is assigned or otherwise transferred and Tenant commences to
conduct business in a manner substantially different than as presently
conducted by "Jay Jacobs," Tenant shall be obligated to comply with the
terms and provisions of the Leases with respect to any assignment, or
change of ownership, or power to vote a majority of the outstanding shares
of
2
<PAGE>
Tenant in connection therewith. By way of illustration only, in the event
that a majority of shares of Jay Jacobs, Inc. are hereafter sold to a
person or entity not related to the Contemplated Transaction or the Letter
Agreement, but the business conducted in and on the ground floor of the
Building shall continue to be conducted under the trade name "Jay Jacobs"
(or such other trade name as employed solely by substantially all of the
other then-existing stores presently operated under the trade name "Jay
Jacobs"), no consent of the Landlord shall be required. By way of
illustration only, in the event that a chain presently operating under the
trade name "ABCD Stores" shall acquire Tenant and shall change the trade
name of the business conducted in and on the ground floor of the Building
to ABCD Stores, such transaction shall not fall within the provisions of
this paragraph and shall be subject to the provisions of the Leases
concerning assignment, change of ownership, or power to vote a majority of
outstanding shares of Tenant.
3.4 Notwithstanding any provision of the Leases, transfer of shares
pursuant to the public trade thereof shall not be prohibited or require
Landlord's consent.
3.5 Notwithstanding any other provisions in the Leases, in the event
that Tenant shall assign or sublet some or all of the Premises at a rental
in excess of the rental (including minimum rent and percentage rent
provided herein) payable under the Leases (as modified), the Excess Rental
received by Tenant shall be paid by Tenant to Landlord within ten (10) days
of the date on which such rent is due under the terms of any such sublease.
For purpose of the preceding sentence, the term "Excess Rental" shall
include rental payable to Tenant pursuant to such assignment or sublease in
excess of the rental payable under the Leases.
3.6 Tenant acknowledges that it presently is party to subleases for
some of the Premises with Robert Bayley Construction and Holmes Co. Tenant
agrees that these two subleases will not be renewed upon the expiration
thereof without Landlord's written consent. Rent credits received by Tenant
under these two subleases shall not constitute Excess Rental.
4. Landlord has agreed to waive any radius restrictions in the Leases and,
as a result, such restrictions, including (without limitation) paragraph 39 of
the April 16, 1965 Lease (as amended), are hereby deleted.
5. Notwithstanding any other provision of the Leases, Tenant's obligation
to continuously operate in the Premises shall be limited to the conduct of
business on the ground floor of the O'Shea Building during reasonable business
hours, except for holidays, closures due to casualty or condemnation, and
closing in accordance with applicable law or other bona fide force majeure
events that are not within the reasonable control of the Tenant. In addition,
Tenant will make reasonable and good faith efforts to re-commence operations on
the mezzanine level of the Building by the month of June 1998. Tenant will, in
good faith, consider and evaluate use of some or all of the basement level
retail space in the Building for retail sale and displays by the month of June
1998.
6. Tenant acknowledges and agrees that Landlord has neither interfered with
nor otherwise acted impermissibly in connection with the Consent Transactions.
Tenant hereby discharges and releases the Landlord from all claims, liabilities,
damages,
3
<PAGE>
obligations, controversies, charges, accounting, suits, actions, causes of
action, rights, demands, costs, losses, debts and expenses (including attorneys
fees and costs), past, present or future, known or unknown, latent or patent,
arising out of, or in connection [with] any claim that Landlord interfered with
the Consent Transactions, or any aspect thereof. Tenant hereby agrees to
indemnify, defend and hold Landlord harmless from and against all claims,
liabilities, damages, obligations, controversies, charges, accountings, suits,
actions, causes of action, rights, demands, costs, losses, debts and expenses
(including attorneys fees and costs), past, present or future, known or unknown,
latent or patent, arising out of or in connection with any claim that Landlord
interfered with the Consent Transactions, or any aspect thereof.
7. Tenant and Landlord acknowledge and agree that the Leases are in full
force and effect.
8. Landlord waives any alleged breach or default identified in its Amended
10-Day Notice to Perform Lease or Vacate pursuant to RCW 59.12 attached hereto
as EXHIBIT C. So long as Tenant pays and performs its obligations under the
aforesaid Leases, as described in Exhibit A and as modified by this
Modification, Landlord shall not be entitled to raise insolvency, bankruptcy,
appointment of a receiver, assignor or other liquidating officer as breach or
default of the Leases. Landlord waives any alleged breach or default identified
in the Landlord's Notice to Quit dated October 24, 1997 (EXHIBIT D).
9. Landlord has informed Tenant that Landlord intends to remodel and/or
re-lease the Premises at the expiration of the Leases. In order to accommodate
Landlord's re-leasing and/or remodeling plans, Tenant agrees to allow Landlord,
upon reasonable notice and at reasonable times, access to the Premises relating
to re-leasing or remodeling so long as such access does not interfere with the
use of and operations in the Premises by Tenant. Landlord may also place on or
about the Premises any ordinary "for sale" or "for lease" signs of a size and
type customary in the downtown Seattle area, during the last 12 months of the
term, so long as such signs are not placed on windows or doors. As used herein,
"reasonable notice" means at least 24 hours oral or written notice, and
"reasonable times" means between 10:00 a.m. and 6:00 p.m., or such other times
as agreed upon by Landlord and Tenant. The parties agree that nothing herein or
in the leases affects Landlord's sole right, at any time, to commence marketing
the Premises for a lease or leases to be effective upon the termination of
Tenant's tenancy.
10. This Modification shall be effective and binding upon the undersigned
parties and their successors on December 1, 1997. This Modification shall remain
valid and be unaffected whether or not Tenant receives the equity infusion
described in Section 3.1 above or whether or not Tenant receives any other
financing or financial support.
11. The Leases (as modified) shall terminate on January 31, 2000. Tenant
agrees to vacate the Premises at or before 6:00 p.m. on January 31, 2000.
12. Except, as expressly provided herein, the Leases remain unmodified,
except as previously modified.
O'SHEA BUILDING COMPANY SEATTLE LLC,
a Washington limited liability company
4
<PAGE>
By /s/ MARTHA H. KEARNS
------------------------------------------
Its
-----------------------------------------
and
By /s/ ROBERT E. HAYDEN
------------------------------------------
Its
-----------------------------------------
JAY JACOBS, INC.,
a Washington corporation
By /s/ WILLIAM L. LAWRENCE, JR.
------------------------------------------
Its Vice President and CFO
-----------------------------------------
5
<PAGE>
EXHIBIT A
PREMISES DOCUMENT DATE
First floor, basement, mezzanine Lease 4/16/65
First floor, basement, mezzanine Modification 4/16/65
First floor, basement, mezzanine Extension 1/2/76
First floor, basement, mezzanine Modification 2/4/80
First floor, basement, mezzanine Modification 8/18/83
First floor, basement, mezzanine Modification 5/1/89
Second floor Lease 1/25/80
Second floor Modification 2/7/80
Second floor Extension 1/15/81
Second floor Modification 5/1/89
Third floor Lease 12/31/75
Third floor Modification 2/7/80
Third floor Modification 5/1/89
Fourth floor Lease 12/23/74
Fourth floor Extension 12/31/75
Fourth floor Modification 2/7/80
Fourth floor Modification 5/1/89
6
<PAGE>
CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT
State of California )
)
County of San Francisco )
On December 4, 1997, before me, G. Delucchi, personally appeared Robert E.
Hayden and Martha H. Kearns, personally known to me to be the persons whose
names are subscribed to the within instrument and acknowledged to me that they
executed the same in their authorized capacities, and that by their signatures
on the instrument the persons, or the entity upon behalf of which the persons
acted, executed the instrument.
WITNESS my hand and official seal.
Signature: /s/ G. Delucchi
-----------------------------
DESCRIPTION OF ATTACHED DOCUMENT
Title or Type of Document: Modification of Leases
7
SEATTLE--(BUSINESS WIRE)--Dec. 5, 1997--Jay Jacobs, Inc. (BB:JAYJ) today
announced that it has closed the financing transaction led by Cahill, Warnock &
Company, LLC and affiliates ("Cahill"), for a recapitalization of the company.
The investment group including Cahill, T. Rowe Price Recovery Fund II, L.P., and
Michael D. Sullivan, former CEO of Merry-Go-Round Enterprises, Inc., has
provided equity financing in the amount of $ 7,100,000.
The recapitalization of the company provides for the following elements:
- -- Issuance of $ 4,600,000 of Series A Preferred Stock and $ 2,500,000 of Series
B Preferred Stock, which will rank senior to all classes of Preferred and Common
Stock of Jay Jacobs, Inc. The Series B Preferred Stock is convertible into
Common Stock representing 86.25% of the Common Stock outstanding following
conversion of the Series B Preferred Stock.
- -- The payment of $1,500,000 in cash and the issuance of $1,000,000 of the
company's common stock as payments in full for the approximately $2,500,000 owed
to pre-bankruptcy creditors. The bankruptcy court approved this modification to
the company's plan of reorganization on December 1, 1997.
The new Board of Directors will include Rex Steffey, CEO and President of Jay
Jacobs; William L. Lawrence Jr., Executive Vice-President and Chief Financial
Officer of Jay Jacobs; Ed Cahill, principal of Cahill; Kim Golden, Managing
Director of T. Rowe Price Recovery Fund II, L.P.; and Michael D. Sullivan.
"We are very pleased to have these investors as equity partners in the company,"
said Rex Steffey, President and CEO. "This transaction dramatically improves the
balance sheet and puts us on solid footing for new store expansion and increased
working capital for existing operations."
Mr. Steffey went on to state, "I would like to thank the outgoing board of
directors which include Paul Buxbaum, of Buxbaum, Ginsberg & Associates; Robert
Bartlett, of Bartlett, Joseph & Associates; William Nandor, of Nandor and
Associates; and Mr. Jay Jacobs, founder of the company, for their support of our
management team and their efforts in bringing this transaction to a successful
conclusion."
The Seattle law firm of Vandeberg, Johnson & Gandara represented the company in
the recapitalization. Chanen, Painter & Company, Ltd., a Seattle based
investment banking firm, was the company's financial advisor on its
recapitalization efforts and has provided a fairness opinion relating to this
transaction.
Jay Jacobs is a Seattle-based specialty apparel retailer selling to men and
women, operating 114 stores located in 19 states.
<PAGE>
This press release contains certain forward-looking statements within the
meaning of Section 27E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those anticipated in the
forward-looking statements as a result of a variety of factors including, but
not limited to, the failure of the proposed recapitalization to close or a
material modification thereof.
CONTACT: Jay Jacobs Inc.
Bill Lawrence, 206/622-5400 extension 217
THE HON. THOMAS T. GLOVER
Chapter 11
Hearing Location: Room 416, Seattle
Hearing Date: December 1, 1997
Hearing Time: 11:00 a.m.
UNITED STATES BANKRUPTCY COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE
In re ) No. 94-03993
)
JAY JACOBS, INC., ) ORDER RE-OPENING CASE,
) MODIFYING TREATMENT OF CLASS 3
Debtor. ) (GENERAL UNSECURED) CLAIMS
) UNDER PLAN, AND RE-CLOSING CASE
)
- --------------------------------- )
THIS MATTER came before the Court on the motion (the "Motion") of Jay
Jacobs, Inc. ("JJI"), the reorganized debtor herein, to re-open this case,
modify its Second Amended Plan of Reorganization (the "Plan"), and thereafter
immediately re-close this case.
FINDINGS
The Court, having reviewed the records and files herein, including the
Motion, the Notice thereof (together with the attachments thereto, the
"Notice"), the evidence of service of the Notice, the proposed modification of
the Plan (the "Plan Modification"), the views of the Postconfirmation Creditors
Committee ("PCC"), any objections or other responses to the Motion and any
replies thereto, and JJI's Report of Balloting and Confirmation Memorandum, and
being duly apprised in the premises, finds and concludes as follows:
ORDER RE-OPENING CASE, MODIFYING
TREATMENT OF CLASS 3 (GENERAL UNSECURED)
CLAIMS UNDER PLAN, AND RE-CLOSING CASE - 1
<PAGE>
1. The Motion and the Plan Modification do not adversely affect any party
in interest in this case or alter the treatment of any class of claims or
interests under the Plan other than allowed Class 3 claims against JJI, as
defined in the Plan ("Claims").
2. JJI has given adequate notice of the Motion to the holders of all Claims
("Creditors"), to the U.S. Trustee and to the Securities and Exchange
Commission.
3. The Notice contains adequate information with respect to the Plan
Modification.
4. The Plan Modification has been accepted by at least two-thirds in amount
and more than one-half in number of the Claims held by Creditors that have
accepted or rejected the Plan Modification.
5. In the opinion of its management, JJI does not have the ability to make
the January 1997 payments due Creditors under the Plan at this time or in the
foreseeable future, absent an infusion of additional equity capital.
6. In order to improve its financial condition, avoid the filing of a
second bankruptcy case, and fulfill its obligations under the Plan, JJI proposes
to sell $6.5 million of preferred stock to one or more affiliates of Cahill,
Warnock & Company LLC and possibly other accredited or institutional investors
(the "Investment"). It is a material condition precedent to the closing of the
Investment that the Court confirm the Plan Modification or that JJI otherwise
obtain the consent of at least 95% in aggregate amount of the Claims to the
economic terms of the Plan Modification.
7. The PCC has recommended that Creditors accept the Plan Modification and
has joined JJI's request that the Court confirm the Plan Modification.
8. The Plan Modification has been proposed in good faith and satisfies the
other conditions of Section 1129 of the Bankruptcy Code, except that the Plan as
modified by the Plan Modification will not be feasible and should not be
confirmed unless the Investment is closed within a reasonable time.
ORDER RE-OPENING CASE, MODIFYING
TREATMENT OF CLASS 3 (GENERAL UNSECURED)
CLAIMS UNDER PLAN, AND RE-CLOSING CASE - 2
<PAGE>
9. No just cause has been shown why the Court should not re-open this case,
confirm the Plan as modified by the Plan Modification, and re-close this case,
subject to the closing of the Investment.
ORDER
Based on the foregoing findings and conclusions, the Court HEREBY ORDERS as
follows:
1. The Motion is granted, subject to the closing of the Investment. If for
any reason the Investment has not closed by 11:59 p.m. on December 31, 1997,
this Order shall be null and void and have no force or effect. Promptly
following closing of the Investment, JJI is directed to mail to all Creditors
and file with the Court a Notice of Effectiveness of Plan Modification.
2. Upon receipt of JJI's Notice of Effectiveness of Plan Modification and
payment of the fee specified by 28 U.S.C. ss. 1930(a)(3) (and any other
applicable fee), the Clerk of the Court is directed pursuant to Section 350(b)
of the Bankruptcy Code to re-open this case.
3. Upon the re-opening of this case pursuant to JJI's Notice of
Effectiveness of Plan Modification (but not otherwise), the Plan shall
immediately, without further action by the Court or any party, be modified to
delete the material indicated in Exhibit A hereto and insert in its place the
material set forth in Exhibit B hereto and the Plan as so modified by the Plan
Modification shall be confirmed pursuant to Sections 1127, 1129 and 105 of the
Bankruptcy Code.
4. Immediately following the re-opening of this case pursuant to JJI's
Notice of Effectiveness of Plan Modification, the Clerk of the Court is directed
pursuant to Section 350(a) of the Bankruptcy Code to re-close this case.
ORDER RE-OPENING CASE, MODIFYING
TREATMENT OF CLASS 3 (GENERAL UNSECURED)
CLAIMS UNDER PLAN, AND RE-CLOSING CASE - 3
<PAGE>
5. If this case is reopened, JJI is directed timely to pay to the United
States Trustee in accordance with its guidelines a quarterly fee for the
calendar quarter in which the case is reopened.
6. Nothing contained in this Motion shall be construed to create or admit
the existence of any rights of any Creditor not expressly set forth in the Plan
or Notes.
7. This case may be reopened in the future upon application of JJI, the
PCC, the U.S. Trustee or any other party in interest to resolve any disputes or
issues relating to the Plan, the Plan as modified by the Plan Modification, or
JJI's other Chapter 11 obligations, and/or upon application by JJI and/or the
PCC to request a status conference or consideration of any other or further plan
modification.
DATED this 1st day of December, 1997.
/s/ THOMAS T. GLOVER
----------------------------------
UNITED STATES BANKRUPTCY JUDGE
Presented by:
BOGLE & GATES P.L.L.C.
By /s/ MARK CHARLES PABEN
---------------------------------------
Mark Charles Paben, WSBA #17710
Attorneys for Jay Jacobs, Inc.
ORDER RE-OPENING CASE, MODIFYING
TREATMENT OF CLASS 3 (GENERAL UNSECURED)
CLAIMS UNDER PLAN, AND RE-CLOSING CASE - 4
<PAGE>
EXHIBIT A
b. 1997 30% Payment. Except for holders of Allowed Class 3 Claims
electing for the treatment set forth in Article IV(B) (Class 3)(c) immediately
below, on January 2, 1997, each holder of an Allowed Class 3 Claim shall receive
one final payment from the Reorganized Debtor in the amount of 30% of its
Allowed Class 3 Claim, without interest. Upon satisfaction of this 1997 30%
payment, the subject Class 3 Claim shall be deemed satisfied in full. HOLDERS OF
ALLOWED CLASS 3 CLAIMS ELECTING THE 1997 15% PAYMENT AND THE NOTE DESCRIBED
BELOW WILL NOT RECEIVE THIS 1997 30% PAYMENT.
c. Right to Elect of 1997 15% Payment and Note. In lieu of the payment
specified in Article IV(B) (Class 3)(b) immediately above, holders of Allowed
Class 3 Claims shall have the right to elect the payments set forth in this
subsection (c). If a holder of an Allowed Class 3 Claim elects to exercise the
right to receive payment as set forth in this subsection (c), such holder must
notify the Reorganized Debtor in writing (as described below) on or before July
15, 1996 of such exercise, and thereafter shall receive the following in full
satisfaction of its Allowed Class 3 Claim, in addition to the 1996 30% payment
set forth in Article IV(B) (Class 3)(a) above:
-1-
<PAGE>
(1) 1997 15% Payment. On January 2, 1997, such electing holder of
an Allowed Class 3 Claim shall receive a second payment under the Plan in the
amount of 15% of its Allowed Class 3 Claim, without interest. SUCH ELECTING
HOLDERS WILL NOT RECEIVE THE 1997 30% PAYMENT DESCRIBED IN ARTICLE III(B) (CLASS
3)(b) IMMEDIATELY ABOVE.
(2) Note(s). Additionally, upon exercise of such right of
election, each such electing holder of an Allowed Class 3 Claim shall receive a
promissory note (the "Note"), with a principal sum equal to the amount of 42% of
its Allowed Class 3 Claim. A copy of the Note is attached hereto as Exhibit A,
and the terms and conditions of the Note are incorporated herein by reference. A
summary of the key provisions of the Note follows:
Principal Amount: 42% of Allowed Class 3 Claim (the "Principal
Amount").
Interest Rate: 9.5% per annum, commencing February 1, 1997.
Interest Payments: Due when principal payments are due and payable.
Interest on Late Payments: Due when principal payments are due and
payable.
-2-
<PAGE>
Principal Payments: 26.2% of Principal Amount due January 2, 1998;
24.6% of Principal Amount due January 2, 1999; 24.6% of Principal Amount due
January 2, 2000; 24.6% of Principal Amount due January 2, 2001.
Maturity: January 2, 2001.
Excess Cash Flow Payments: Additionally, non-cumulative Excess Cash
Flow Payments (as therein defined), if any, shall be due and payable on the 15th
of June in calendar years 1999, 2000, and 2001 based on such holder's Pro Rata
Share (as therein defined) of 30%, 40%, and 50% of Excess Cash Flow over
Targeted EBITDA (as therein defined) for the prior fiscal year ended January
1999, January 2000, and January 2001, respectively, as provided in the Note;
provided, however, that amounts payable as Excess Cash Flow shall not exceed the
difference between 100% of the holder's Allowed Class 3 Claim, less the net
present value (using a 12% discount rate) of all cash paid or payable with
respect to such Allowed Class 3 Claim, whether under the Note or the Plan.
Prepayment: Prepayment of principal and accrued interest is permitted
without penalty. The Note shall be deemed paid in full upon payment of all
principal and accrued interest, and if so prepaid, any obligation to make
payments of Excess Cash Flow with respect to any fiscal year ending after the
date when such prepayment is made shall cease.
-3-
<PAGE>
CREDITORS SHOULD CAREFULLY READ AND REVIEW THE ATTACHED NOTE. IF ANY
INCONSISTENCY EXISTS BETWEEN THE FOREGOING SUMMARY AND THE NOTE, THE NOTE
SUPERSEDES THE SUMMARY, AND THE TERMS AND CONDITIONS OF THE NOTE ARE
CONTROLLING.
(3) Notice of Exercise Requirements. Written notice of the
election by a holder of an Allowed Class 3 Claim to exercise the right to
receive the 1997 15% payment and the Note shall either be made by (a) certified
letter, (b) hand delivery, or (c) next day delivery service, in all three cases,
to Jay Jacobs, Inc. (Attn: William L. Lawrence, Jr.), 1530 Fifth Avenue,
Seattle, WA 98101. If sent by certified mail, the election notice must be
postmarked no later than July 15, 1996. If hand-delivered or sent by next day
delivery service, the notice of election must be received by the Company during
regular business hours no later than July 15, 1996.
STRICT COMPLIANCE WITH THE FOREGOING NOTICE OF EXERCISE PROCEDURES IS
REQUIRED. FAILURE TO PROVIDE NOTICE OF EXERCISE OF THE RIGHT DESCRIBED ABOVE IN
A TIMELY FASHION WILL RESULT IN SATISFACTION OF A CLASS 3 CLAIMANT'S CLAIM IN
THE MANNER DESCRIBED IN ARTICLE IV(B) (CLASS 3)(b).
-4-
<PAGE>
(4) Reporting Requirements. For the fiscal years ending 1997,
1998, 1999, 2000, and 2001, the Reorganized Debtor shall provide each holder of
a Note with audited consolidated financial statements certified by independent
public accountants. Additionally6, for the fiscal years ending 1999, 2000, and
2001, the Reorganized Debtor shall furnish each holder of a Note with a
comprehensive analysis of Excess Cash Flow for that fiscal year.
d. Subordination Provisions. The cash incentive compensation payments
due to Rex Loren Steffy and William L. Lawrence, Jr. under their employment
contracts (see Sections III(O)(1) and III(O)(2) of the Disclosure Statement,
respectively) shall (a) be subordinate to the payments due and payable with
respect to Allowed Class 3 Claims in that calendar year have been paid, so that,
for example, the cash inventive payments due (i) after the conclusion of fiscal
year 1996 shall not be paid unless all Allowed Class 3 Claims payments due on
January 2, 1996 have been made, (ii) after the conclusion of fiscal year 1997
shall not be paid unless all Allowed Class 3 Claims payments due on January 2,
1997 have been made, and (iii) after the conclusion of remaining fiscal years
shall not be paid unless all payments due that calendar year under the Note(s)
have been made.
-5-
<PAGE>
EXHIBIT B
b. Final Consideration. As soon as practicable after the
closing of the purchase (the "Investment") by one or more affiliates of Cahill,
Warnock & Company LLC and possibly other accredited or institutional investors
(collectively, "Purchasers") from the Reorganized Debtor of $6.5 million of
preferred stock, each holder of an Allowed Class 3 Claim (including those who
previously elected to receive Notes) shall receive from the Reorganized Debtor
its Pro Rata share of (1) $1.5 million cash (the "Cash Consideration") and (2)
$1 million of Common Stock (the "Creditors' Common Stock", and together with the
Cash Consideration, the "Final Consideration").
The Cash Consideration will be reduced dollar-for-dollar by the
amount, if any, by which the legal fees and expenses of the PCC in connection
with the Investment and reimbursable by the Reorganized Debtor under Article
V(K) hereof exceed $20,000 (or $25,000 if the PCC's counsel personally attends
the hearing relating hereto). The Cash Consideration also will include the
amounts paid by the Reorganized Debtor to the PCC since October 1, 1997 for the
ratable benefit of Class 3 Claimants or will be reduced by a credit for such
amounts as the PCC may itself distribute or cause to be distributed to such
Claimants.
For purposes of determining the number of shares of Creditors' Common
Stock to be distributed hereunder, the Creditors' Common Stock will be valued at
the average closing price of the Common Stock on the 30 trading days prior to
the closing date of the Investment, as recorded by Bloomberg. If no closing
price for the Common Stock is recorded by Bloomberg for any of such trading
days, then in each such case the closing price of the Common Stock on the last
preceding trading day on which a closing price is recorded by Bloomberg shall be
used as the closing price for such day.
NEITHER THE REORGANIZED DEBTOR, THE PCC, NOR PURCHASERS MAKES ANY
REPRESENTATION OR WARRANTY CONCERNING THE MARKET VALUE OF THE CREDITORS' COMMON
STOCK. THE MARKET VALUE OF THE CREDITORS' COMMON STOCK MAY BE GREATER OR LESS
THAN $1 MILLION ON THE DATE OF ITS ISSUE, AND WILL DEPEND, AMONG OTHER THINGS,
ON THE MARKET REACTION TO THE INVESTMENT, THE FUTURE RESULTS OF THE REORGANIZED
DEBTOR, AND MARKET CONDITIONS GENERALLY.
Pursuant to ss.1145(a) of the Code, the issuance of the Creditors'
Common Stock hereunder to Class 3 Claimants is exempt from the requirements of
Section 5 of the Securities Act of 1933, as amended, and any state or local law
requiring registration for offer or sale of a security. The underwriters of any
publicly offered securities of the Reorganized Debtor may, however, at one or
more times in the future, impose reasonable lockups of the Creditors' Common
Stock held by Class 3 Claimants at such time. All Class 3 Claimants
<PAGE>
shall be deemed hereby to have consented to such lockups, and shall not be
required to execute any instrument or agreement in order to be bound by such
lockups.
ALL CLASS 3 CLAIMANTS WILL RECEIVE THE SAME FINAL CONSIDERATION
HEREUNDER, REGARDLESS OF WHETHER THEY PREVIOUSLY ELECTED TO RECEIVE NOTES UNDER
THIS PLAN, AND ALL NOTES ISSUED HEREUNDER SHALL BE DEEMED CANCELED AND NULL AND
VOID. THE REORGANIZED DEBTOR MAY REQUIRE SURRENDER OF ANY NOTE ISSUED TO A
CLAIMANT AS A CONDITION TO THE DISTRIBUTION OF THE FINAL CONSIDERATION TO SUCH
CLAIMANT.
Upon the distribution of the Final Consideration in accordance with
the terms hereof, the PCC shall disband and cease to exist, and Class 3
Claimants shall have no right, directly or indirectly, to enforce the covenants
contained in Article XII hereof, or to assert any of the Events of Default
described in Article XIII hereof. Notwithstanding the foregoing, nothing
contained herein shall preclude any Class 3 Claimant from enforcing its right to
receive its Final Consideration.
The procedures described in Article V(J)(1) hereof for the handling of
unclaimed funds shall also apply to unclaimed shares of Creditors' Common Stock
insofar as the shares of Creditors' Common Stock issued to a Claimant shall be
canceled if (and only if) and at such time as the funds relating to a Claimant's
Cash Consideration are returned to the Reorganized Debtor pursuant to Article
V(J)(1) hereof.
The provisions of this Article IV(B)(Class 3)(b) shall supersede all
inconsistent terms of this Plan. All other provisions of this Plan shall be
construed so far as possible and reformed to the extent necessary to give
reasonable effect to the terms of the provisions of this Article IV(B)(Class
3)(b).
THE HON. THOMAS T. GLOVER
Chapter 11
UNITED STATES BANKRUPTCY COURT
WESTERN DISTRICT OF WASHINGTON
AT SEATTLE
In re ) No. 94-03993
)
JAY JACOBS, INC., ) NOTICE OF EFFECTIVENESS
) OF PLAN MODIFICATION
Debtor. )
)
- ---------------------------------- )
TO: Clerk of the United States Bankruptcy Court
AND TO: All Holders of Record of Allowed Class 3 Claims
AND TO: Office of the U.S. Trustee
PLEASE TAKE NOTICE that Cahill, Warnock & Company LLC and certain other
accredited or institutional investors ("Purchasers") and Jay Jacobs, Inc.
("JJI") closed the purchase and sale, respectively of $7.1 million of JJI
preferred stock (the "Investment") on December 5, 1997. This Notice has been
filed with the Clerk of the Court and mailed to all Creditors pursuant to the
Bankruptcy Court's Order Re-Opening Case, Modifying Treatment of Class 3
(General Unsecured) Claims under Plan, and Re-Closing Case entered herein on
December 1, 1997 (the "Order") and Fed. R. Bankr. P. 2002(f)(7).
Pursuant to the Order, upon its receipt of this Notice and payment of the
fee specified by 28 U.S.C. ss. 1930(a)(3) (and any other applicable fee), the
Clerk of the Court is directed
NOTICE OF EFFECTIVENESS
OF PLAN MODIFICATION - 1
<PAGE>
pursuant to Section 350(b) of the Bankruptcy Code to re-open this case. Upon the
re-opening of this case pursuant to this Notice, and without further action by
the Court or any party, the Order provides that the modification to JJI's Second
Amended Plan of Reorganization (the "Plan") confirmed by the Order shall
immediately be modified as set forth therein.
The sole purpose of the modification to the Plan is to provide for the
payment of $1.5 million in cash and $1 million in JJI common stock in lieu of
the $2.5 million cash payment due on account of allowed Class 3 claims against
JJI ("Claims") in January 1997. The modification is binding on all holders of
Claims ("Creditors"), notwithstanding the elections of certain Creditors to
receive promissory notes in lieu of half of the January 1997 cash payment. The
full text of the modification to the Plan is attached to the Order and is
available from the Clerk of the Court.
Immediately following the re-opening of this case pursuant to this Notice,
the Clerk of the Court is directed pursuant to Section 350(a) of the Bankruptcy
Code to re-close this case.
JJI will timely pay to the United States Trustee in accordance with its
guidelines a quarterly fee for the calendar quarter in which the case is
reopened.
This case may be reopened in the future upon application of JJI, the
Postconfirmation Creditors Committee (the "PCC"), the U.S. Trustee or any other
party in interest to resolve any disputes or issues relating to the Plan or
JJI's other Chapter 11 obligations, and/or upon application by JJI and/or the
PCC to request a status conference or consideration of any other or further plan
modification.
DATED this 5th day of December, 1997.
BOGLE & GATES P.L.L.C.
By /s/ MARK CHARLES PABEN
------------------------------------------
Mark Charles Paben, WSBA #17710
Attorneys for Jay Jacobs, Inc.
NOTICE OF EFFECTIVENESS
OF PLAN MODIFICATION - 2
