UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ....... to ..........
Commission file number 0-15934
JAY JACOBS, INC.
(Exact name of registrant as specified in its charter)
Washington 91-0698077
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1530 Fifth Avenue, Seattle, Washington 98101 (Address of
principal executive offices) (Zip code)
(206) 622-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock: 544,323 shares, as of May 2, 1998.
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
JAY JACOBS, INC. AND SUBSIDIARY
Balance Sheet
(In thousands)
(Unaudited)
May 2, Jan. 31,
1998 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,406 $ 1,567
Accounts receivable 536 336
Inventories 12,151 9,532
Prepaid expenses 524 562
-------- --------
Total current assets 14,617 11,997
-------- --------
Property and equipment, net 4,419 4,409
-------- --------
Total Assets $ 19,036 $ 16,406
-------- --------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 3,197 $ 2,074
Accrued payroll 334 162
Accrued reorganization expenses 397 400
Other accrued expenses 1,080 988
Line of credit 7,563 5,687
Subordinated debt 2,000 0
Accrued interest subordinated debt 47 0
-------- --------
Total current liabilities 14,618 9,311
-------- --------
Deferred rental credits 171 171
Federal income tax refund reserve 1,980 1,980
-------- --------
Total liabilities 16,769 11,462
-------- --------
Series A preferred stock -- 46,000 shares issued and
outstanding - mandatorily redeemable 3,854 3,874
Shareholders' equity:
Series B preferred stock - 25,000 shares issued
and outstanding 2,072 2,072
Common stock 544,323 shares issued and
outstanding 16,104 13,257
Unrecognized stock compensation expense (2,126) 0
Retained deficit (17,637) (14,259)
-------- --------
Total shareholders' equity (1,587) 1,070
-------- --------
Total liabilities and shareholders' equity 19,036 16,406
-------- --------
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
JAY JACOBS, INC. AND SUBSIDIARY
Consolidated Statement of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
May 2, 1998 May 3, 1997
<S> <C> <C>
Net Sales $ 12,691 $ 13,466
--------- ---------
Operating costs and expenses:
Cost of sales, buying and occupancy costs 10,447 11,052
Selling, general and administrative expenses 4,157 3,884
Interest expense 234 127
Option compensation expense 671 0
--------- ---------
15,509 15,063
--------- ---------
Loss before extraordinary item (2,818) (1,597)
Extraordinary charge
Debt extinguishment 522 0
--------- ---------
Net loss $ (3,340) $(1,597)
--------- ---------
Basic earnings per share:
Loss before extraordinary item $ (5.56) $(3.91)
Extraordinary charge (0.96) 0
--------- ---------
Net loss $ (6.52) $(3.91)
--------- ---------
Weighted average number of shares outstanding 544,000 408,000
(See Note 2 - Earnings (loss) per share - for per share calculations)
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
JAY JACOBS, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
May 2, 1998 May 3, 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,340) (1,597)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 281 286
Option compensation expense 671 0
Change in deferred rental credits 0 24
Change in assets and liabilities:
Accounts receivable (200) (455)
Inventories (2,619) (1,446)
Prepaid expenses 38 (48)
Accounts payable 1,123 1,216
Accrued payroll 172 206
Accrued interest 47 0
Other accrued expenses 92 484
Accrued reorganization expenses (3) (95)
Federal income tax refund reserve 0 (25)
Net cash used for operations (3,738) (1,450)
Cash flows from (to) investing activities:
Net increase in property and equipment (251) (22)
Net cash to investing activities (251) (22)
Cash flows from (to) financing activities:
Net borrowing from line of credit 1,876 1,263
Proceeds from options exercised 10 0
Proceeds from subordinated debt 2,000 0
Preferred stock dividend (58) 0
Net cash from financing activities 3,828 1,263
Net decrease in cash and cash equivalents (161) (209)
Cash and cash equivalents - beginning of period 1,567 249
Cash and cash equivalents - end of period 1,406 40
</TABLE>
Page 4
<PAGE>
JAY JACOBS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1. Financial Presentation
The attached condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
As a result, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes that the
disclosures made are adequate to make the information not misleading and that
the information furnished reflects all material adjustments which are, in the
opinion of management, necessary to present fairly its results for the interim
periods reported and that all such adjustments are of a normal recurring nature.
The consolidated financial statements should be read in conjunction with the
financial statements and related notes included in the Company's Form 10-K/A
filed with the Securities and Exchange Commission on May 14, 1998. Certain prior
year amounts have been reclassified to conform to current year's presentation.
Results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year.
The Company's fiscal year ends on the Saturday closest to January 31st of each
year. The current fiscal year ends on January 30, 1999. Each fiscal quarter
contains 13 weeks.
Note 2. Earnings (Loss) Per Share
Basic earnings (loss) per share is based on the weighted average number of
common shares outstanding during the period as adjusted to take into account the
effect of outstanding options to purchase common stock unless the effect of
including such options is anti-dilutive. The weighted average number of common
shares and equivalents outstanding were 544,000 and 408,000 for the quarters
ended May 2, 1998 and May 3, 1997, respectively. All common shares and
equivalents have been adjusted for the reverse stock split noted below.
On March 24, 1998, the shareholders of the Company approved a 1-for-15 reverse
stock split and the Company's new stock option plan. Both items were approved by
the majority of the holders of both classes of the Company's stock. The reverse
stock split was effective on April 3, 1998. As such, all share and per share
amounts presented in the financial statements and related notes thereto have
been retroactively restated to reflect this stock split.
The following represents the reconciliation of numerators and denominators used
to calculate the basic and diluted earnings per share for all periods presented:
<TABLE>
<CAPTION>
Quarter ended Quarter ended
May 2, 1998 May 3, 1997
<S> <C> <C>
Loss before extraordinary item $ (2,818) $ (1,597)
Less: Accretion of Series A Preferred
Stock to redemption value (38) 0
Less: Series A Preferred Stock dividends (129) 0
Less: Series B Preferred Stock dividends (40) 0
-------- --------
Loss available to common shareholders (3,025) (1,597)
Extraordinary charge
Debt extinguishment (522) 0
-------- --------
Total loss available to common shareholders $ (3,547) $ (1,597)
-------- --------
Weighted average shares (basic and diluted) 544 408
-------- --------
Basic and diluted earnings per share:
Loss before extraordinary item $ (5.56) $ (3.91)
Extraordinary gain (0.96) 0
-------- --------
Net loss $ (6.52) $ (3.91)
-------- --------
</TABLE>
The discounts on the increasing rate Series A and Series B preferred stock are
equivalent to a prepayment of dividends by the Company, and accordingly are
being amortized using the effective interest method over the period until
January 1, 2003, when the dividend rates increase to 20%. For purposes of
calculating earnings per share, the current period amortization of these
discounts has been added to the stated dividends for the period.
Page 5
<PAGE>
Note 3. Option Plan
During March 1998, the shareholders approved a new non-qualified stock option
plan for the benefit of senior management and associates. The plan reserved
1,094,467 shares for issuance at the discretion of the compensation committee of
the board of directors. The options under the new plan generally vest over five
years and expire ten years from the date of grant. In addition, the shares
outstanding under the Company's previous plans were rolled over into the new
plan and all options were priced at an exercise price of $1.95 per share.
Generally Accepted Accounting Principles require that compensation expense be
recorded for the difference between the exercise price and the fair value of the
shares, as defined, on the date of grant. This non-cash compensation expense is
charged to operations 20% (the initial vesting percentage) as of the date of
plan approval with the balance charged to operations ratably using a straight
line method, subject to the vesting provisions of the plan. During the first
quarter of fiscal 1999, option related compensation expense of $671,000 was
charged to operations.
Note 4. Subordinated Debt
On March 11, 1998 the Company closed on a financing transaction with two members
of its investor group, Cahill, Warnock & Company, L.L.C., and T. Rowe Price
Recovery Fund II, L.P. The financing transaction provided for subordinated debt
in the amount of $2,000,000. The subordinated debt agreement provides for
interest at the rate of 14% per annum payable June 30, 1998 and December 31,
1998, and warrants to purchase 2% of the Company, on a fully diluted basis. The
subordinated debt matures on December 31, 1998.
Note 5. Federal Income Tax Refund Reserve
During fiscal 1997, the Company filed a refund claim with the Internal Revenue
Service (the "IRS") resulting from the carry back of certain expenses of its
bankruptcy proceeding. The tentative refund of approximately $2,355,000, which
is net of fees and expenses, was received in October 1996. The tentative refund
is subject to audit by the IRS, which is currently in process. Should the IRS
ultimately determine that the carry back of some or all of the expenses was
inappropriate, the Company may be called upon to repay a portion of the
tentative refund, with interest. A reserve of $1,980,000 was established in the
Company's financial statements related to the tentative refund.
Page 6
<PAGE>
Note 6. Subsequent Events
On June 2, 1998 the Company entered into a new credit facility with FINOVA
Capital Corporation ("FINOVA") for a credit facility in the amount of
$15,000,000. The new credit facility provides for borrowing and letters of
credit based on a formula the aggregate of which cannot exceed the lesser of
100% of the net appraised value of eligible inventory, as defined, and
outstanding letters of credit, or $15,000,000. Letters of credit are limited to
a maximum of $5,000,000. A first lien is granted to FINOVA on all the Company's
assets. The Company must maintain a scheduled minimum earnings before interest,
taxes, depreciation and amortization and a senior debt coverage ratio, and may
not declare or pay dividends or other distributions on account of any equity
interest in the Company, until payment or satisfaction in full of liabilities
under the FINOVA line of credit and termination of the financing agreement.
Excluded under certain circumstances are dividends to be paid on Series A and
Series B preferred stock. Interest is charged at FINOVA's prime rate plus .5%.
The Company is charged normal audit fees, letter of credit fee of 1% per annum
on the aggregate undrawn face amount of letters of credit outstanding, and a
commitment fee of $150,000. As a condition of closing this facility, the Company
repaid the previous General Eelectric Capital Corporation ("GECC") facility and
incurred a $338,000 termination fee. This cost, together with remaining
unamortized financing costs related to the closing of the GECC facility of
$184,000, are reflected as an extraordinary charge for debt extinguishment
during the first quarter of fiscal 1999.
In April 1998 a letter of intent was signed with SPS Payment Systems ("SPS") to
provide the Company with a private label credit card. SPS will provide third
party services for developing, managing and marketing the Company's private
label credit card program. SPS will purchase credit sales on a non-recourse
basis. The Company is responsible for marketing the program in conjunction with
SPS and for a service fee based on a percentage of credit sales. The private
label credit program was launched in May 1998.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Forward Looking Statements
The information in this Report may contain "forward looking statements" within
the meaning of Section 27 A of the Securities Act of 1933, as amended, and
Section 21 E of the Securities Act of 1934, as amended. Such forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties related to the Company's operations. These risks and uncertainties
include, but are not limited to, matters discussed in Item 5 B 1 "Risk Factors"
from the Company's Report on Form 8-K, filed December 15, 1997.
General
All references herein to fiscal 1999 and fiscal 1998 relate to the twelve months
ending January 30, 1999 and the twelve months ended January 31, 1998,
respectively. References to the first quarter of fiscal 1999 and fiscal 1998
relate to the three months ended May 2, 1998 and May 3, 1997, respectively.
Overview and Recent Developments
Jay Jacobs, Inc. ("Jay Jacobs" or the "Company") was incorporated in 1941 and
operates a chain of mall-based specialty apparel stores offering contemporary
men's and women's clothing and accessories at reasonable prices. At the date of
this report the Company operates 105 stores in 19 states. The greatest
concentration of stores is in the Pacific Northwest and Alaska.
Page 7
<PAGE>
In March 1998 the Company closed on a financing transaction with two members of
its investor group, Cahill, Warnock & Company, L.L.C., and T. Rowe Price
Recovery Fund II, L.P. The financing transaction provided for subordinated debt
in the amount of $2,000,000 (See Note 4 - Subordinated Debt).
On May 1, 1998, the Company signed a commitment letter with a new commercial
lender, which would increase its credit facility from $10,000,000 to
$15,000,000. The facility provides for the ability to finance eligible inventory
and to facilitate the issuance of letters of credit. The new facility was closed
on June 2, 1998, subsequent to the end of the first quarter of fiscal 1999 (See
Note 6 - Subsequent Events). The Company had $7,563,000 of short term notes
outstanding at the end of the first quarter of fiscal 1999, representing
advances under its facility with its former commercial lender. As a condition of
closing the new facility, the Company repaid the GECC facility and incurred
$338,000 in termination fees. This cost, together with remaining unamortized
financing costs related to the closing of the GECC facility of $184,000, was
expensed during the first quarter of fiscal 1999.
The Company expects to utilize the additional capacity provided by the new
credit facility along with the new subordinated debt provided by its investor
group to fund its business plan for fiscal 1999, which includes opening at least
25 new stores during fiscal 1999.
During the first quarter of fiscal 1999, the shareholders approved a 1-for-15
reverse stock split and the Company's 1998 Stock Incentive Plan (the "Plan").
The reverse stock split was effective on April 3, 1998. In order to more closely
align the interests of management and employees to those of the shareholders,
the board of directors approved the issuance of 932,000 non-qualified stock
options on March 24, 1998 to employees at an exercise price of $1.95 per share.
Twenty percent of the non-qualified stock options vested immediately and the
balance vest over a five-year period. The Company will incur option related
compensation expense amounting to the difference between the exercise price and
the market price on the date of grant. During the first quarter of fiscal 1999
the Company recorded option of its common stock related compensation expense of
$671,000 (See Note 3 - Option Plan). The Company will record a charge of
$112,000 in each of the next 19 quarters, which represents the straight line
amortization of option related compensation expense over the vesting period of
the stock options. The charges during the first quarter of fiscal 1999, as well
as future quarters, represent non-cash expense.
The Company is planning to increase the net store count during the year,
reversing a three-year trend where the store count has declined significantly,
as a result of the closure of unprofitable stores. Management plans to open 25
new stores in fiscal 1999. The increase in store count should result in
increased sales and operating income. The capital requirements will also
increase as a result of the new store openings and are estimated at $1,500,000
for fiscal 1999.
As a result of the fundamental changes instituted by management, including the
new financing and increased credit facility put in place during the first
quarter of fiscal 1999, management believes that the Company is well positioned
to be a successful competitor in its market. While management believes that it
will continue to be required to manage cash carefully, it believes that the
recent financings will enable it to fully implement its business plan, open new
stores, and improve operating efficiency in the future.
As a result of the financing described above, the Company expects that the
increase in interest expense reflected in the results for the first quarter of
fiscal 1999 will continue in future quarters. In addition, dividend obligations
on the preferred stock, as well as the convertibility of the Series B preferred
stock, will affect earnings per share of common stock in future periods.
Page 8
<PAGE>
Seasonality
Historically, the Company's operations have been seasonal, with highest-sales
and net income occurring in the fourth fiscal quarter, reflecting increased
demand during the year-end holiday selling season and, to a lesser extent, the
third quarter, reflecting increased demand during the Fall selling season. The
Company has generally recognized net losses during its first and second fiscal
quarters.
Results of Operations
The following table sets forth, for the periods indicated, certain consolidated
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Percentage of net sales
Three Months Ended
May 2, 1998 May 3, 1997
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales, buying and occupancy costs 82.3% 82.1%
Selling, general and administrative expenses 32.8% 28.8%
Interest expense 1.8% 1.0%
Option compensation expense 5.3% 0
Loss before extraordinary items (22.2%) (11.9%)
Extraordinary charge
Debt extinguishment 4.1% 0
Net loss (26.3%) (11.9%)
</TABLE>
Quarter ended May 2, 1998 compared to quarter ended May 3, 1997.
Net sales decreased by $775,000 (or 6 %), in the quarter ended May 2, 1998 as
compared to the same period a year earlier. This decrease was primarily a result
of operating 15 less stores at the beginning of the first quarter of fiscal 1999
than at the beginning of the same quarter last year, and accounted for a sales
decline of approximately $1,642,000. This decline was partially offset by a
comparable store sales increase of 5%. Comparable store sales increased
primarily as a result of the increasing acceptance by its customers of the new
merchandise concept implemented in the Fall of 1995. During the first quarter of
fiscal 1999 the Company opened two stores, closed eight stores and relocated
thirteen stores for a total of 102 stores in operation at the end of the
quarter.
Cost of sales, buying and occupancy costs increased by .2% as a percentage of
sales. This increase was primarily due to decreased leverage on fixed occupancy
and buying costs as a result of operating 15 fewer stores during the quarter.
Cost of sales related to merchandise was unchanged compared to the same quarter
last year.
Selling, general and administrative expenses increased by 4.0% as a percentage
of sales, primarily as a result of decreased leverage on fixed expenses as a
result of the planned decrease in store count. In addition, the increase in the
percentage of sales can be attributed to an increase in marketing expense during
the later portion of the quarter and increased payroll costs relating to
increased staffing of key positions in the buying and selling areas of the
business required in support of planned expansion of the business. The Company
has instituted a direct mail campaign for existing stores and tested direct mail
for new and relocated stores that are designed to increase awareness by its
target market. The Company believes that the additional expenses related to
marketing will provide benefits in future quarters.
Page 9
<PAGE>
The Company recorded option related compensation expense of $671,000 or 5.3% of
sales related to the issuance of 932,000 non-qualified stock options on March
24,1998. Generally Accepted Accounting Principles require that compensation
expense be recorded for the difference between the exercise price and the fair
value of the shares, as defined, on the date of grant. This non-cash
compensation expense is charged to operations 20% (the initial vesting
percentage) as of the date of plan approval with the balance charged to
operations ratably using a straight line method, subject to the vesting
provisions of the plan. During the first quarter of fiscal 1999, option related
compensation expense of $671,000 was charged to operations (See Note 3 - Option
Plan).
Interest expense as a percent of sales was 1.8% in the first quarter of fiscal
1999 compared to 1.0% of sales in the first quarter of fiscal 1998. This
increase resulted from greater availability and borrowings under the line of
credit (See - Liquidity and Capital Resources) and interest incurred under the
subordinated debt transaction closed in March 1998.
The Company incurred an extraordinary charge related to the extinguishment of
debt of the former GECC facility in the amount of $522,000. The charge includes
termination fees of $338,000 and the write-off of remaining unamortized
financing costs of $184,000 related to the previous GECC line of credit.
The Company had a loss before the extraordinary charge of $2,818,000 for the
first quarter of fiscal 1999 or $5.56 per share compared to a loss of $1,597,000
in the first quarter of fiscal 1998 or $3.91 per share. The decline in sales
related to store closings during the first quarter of 1999, option related
compensation expense and increased costs related to expansion of the business
accounted for the increased loss for the first quarter of fiscal 1999.
The Company incurred a loss of $3,340,000 (or $6.52 per share) after the
extraordinary charge of $522,000 (or $0.96 per share) related to the
extinguishment of debt.
Liquidity and Capital Resources
General
The Company's principal needs for liquidity are to finance the purchase of
merchandise inventories, to fund operations and to fund the Company's expansion
plan.
During the first quarter of fiscal 1999, the Company's primary source of
liquidity was from borrowings under its $10,000,000 secured line of credit with
GECC.
Net cash used for operations for the first three months of fiscal 1999 was
$3,738,000. This use of cash resulted primarily from an increase in inventory
($2,619,000) and from the operating loss during the first three months of fiscal
1998 ($2,388,000, net of non-cash expenses), partially offset by the increase in
accounts payable ($1,123,000). Property and equipment expenditures for the first
three months of fiscal 1998 were $251,000.
The Company had a working capital deficit of $1,000 at May 2, 1998 compared to a
working capital deficit of $4,297,000 at May 3, 1997. The working capital
deficit decreased $4,296,000 primarily due to the investment in the Company of
$5,900,000 (net) which occurred in December 1997.
Page 10
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Subsequent Events
Jay Jacobs replaced the former credit facility with GECC, entered into on August
29, 1997, with a new $15,000,000 facility with FINOVA on June 2, 1998. The new
credit facility provides for borrowing and letters of credit based on a formula
the aggregate of which cannot exceed the lessor of 100% of the net appraised
value of eligible inventory, as defined, and outstanding letters of credit, or
$15,000,000. Letters of credit are limited to a maximum of $5,000,000. A first
lien is granted to FINOVA on all the Company's assets. The Company must maintain
a scheduled minimum earnings before interest, taxes, depreciation and
amortization and a senior debt coverage ratio, and may not declare or pay
dividends or other distributions on account of any equity interest in the
Company, until payment or satisfaction in full of liabilities under the FINOVA
line of credit and termination of the financing agreement. Excluded under
certain circumstances are dividends to be paid on Series A and Series B
preferred stock. Interest is charged at FINOVA's prime rate plus .5%. The
Company is charged, normal audit fees, letter of credit fee of 1% per annum on
the aggregate undrawn face amount of letters of credit outstanding, and a
commitment fee of $150,000.
The Company is currently planning to open at least 25 stores and relocate 10
stores during fiscal 1999. In addition, the Company is researching alternatives
to its existing management information system and expects to incur capital
expenditures to replace existing systems during fiscal 1999. The estimated
capital expense during fiscal 1999 is $1,500,000. These forward-looking
statements will be influenced by the Company's financial position and the number
of advantageous mall store locations that become available.
At May 2, 1998 the Company had $1,406,000 in cash and cash equivalents. The
Company had drawn $7,563,000 and had approximately $252,000 of potential
availability under its GECC line of credit based on its borrowing base formula.
In the opinion of management, the net proceeds of the Subordinated Debt
transaction along with increased availability under the new credit facility with
FINOVA and anticipated cash flow from operations are adequate to enable the
Company to accomplish its plans for fiscal 1999.
Depending on the ultimate success of its business strategy, the Company may
continue to incur future losses, which could negatively affect working capital,
the extension of credit by the Company's suppliers, the Company's ability to
maintain compliance with its debt covenants, and the ability to raise additional
capital as required in the future.
Page 11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On March 11, 1998, the Company issued warrants to purchase 111,880 shares of
Common Stock for $0.15 per share, subject to adjustment in certain events, as a
part of a subordinated debt financing provided by the two principal members of
the Company's investor group. (See Note 4 to Financial Statements) The number of
shares and price per share stated above have been adjusted to reflect the
1-for-15 reverse stock split effective March 24, 1998. (See Note 2 to Financial
Statements.) The warrants are exercisable until they expire on March 10, 2003.
The warrants were issued and sold in reliance on an exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended. Appropriate
representations were obtained from the investors and appropriate legends placed
on the warrant certificates as required for an exemption under Section 4(2).
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Pursuant to due notice, a Special Meeting of Shareholders of Jay Jacobs, Inc.
was held on March 24, 1998 at the Company's corporate offices. The purpose of
the special meeting was to approve the Company's 1998 Stock Incentive Plan, as
provided to shareholders as Appendix A to the Notice of the meeting; and to
approve an Amendment to the Company's Amended and Restated Articles of
Incorporation in order to effect a 1-for-15 reverse stock split of the common
stock of the Company. Both items were approved by a majority of the
shareholders. The votes were as follows:
<TABLE>
<CAPTION>
Item For Against Abstaining Broker non-votes
<S> <C> <C> <C> <C>
1998 Stock Incentive Plan 4,992,186 325,327 34,981 1,617,461
1-for-15 Reverse Stock Split 6,676,768 264,169 29,018 0
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-13112, declared effective May 19, 1987 (the
"Form S-1"))
3.2 Articles of Amendment to the Registrant's Restated Articles of
Incorporation 3.3 Bylaws (Incorporated by reference to Exhibit 3.3
to the Form S-1)
4.1 Form of Warrant (Incorporated by reference to Exhibit 6 to the
Schedule 13D Amendment No. 1 filed on behalf of Cahill, Warnock
Strategic Partners Fund, Strategic Associates, L.P., Cahill
Warnock Strategic Partners, L.P., Cahill, Warnock & Co., LLC,
Edward L. Cahill and David L. Warnock on March 23, 1998 (the
"Schedule 13D"))
4.2 Form of Debenture
Page 12
<PAGE>
4.3 Registration Rights Agreement (Incorporated by reference to
Exhibit 5 to the Schedule 13D)
10.1 Subordinated Debenture Agreement (Incorporated by reference to
Exhibit 4.4 to the Company's Form 8-K filed on December 15, 1997
(the "Form 8-K"))
10.2 GECC Loan and Security Agreement (Incorporated by reference to
Exhibit 10.2 to the Form 8-K)
10.3 First amendment to GECC Loan and Security agreement 10.4 Second
amendment to GECC Loan and Security agreement (Incorporated by
reference to Exhibit 10.3 to the Form 8-K)
19. Reference is made to the Form 10K/A as filed by Registrant on
May 14, 1998
27. Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
JAY JACOBS, INC.
June 16, 1998
- -------
/s/ William L. Lawrence, Jr.
Executive Vice President, Chief Financial Officer and
Treasurer (Principal Financial and Accounting Officer)
Page 13
ARTICLES OF AMENDMENT
OF ARTICLES OF INCORPORATION
CONTAINING
THE STATEMENT OF RIGHTS AND PREFERENCES
OF THE
SERIES C CONVERTIBLE PREFERRED STOCK OF
JAY JACOBS, INC.
These Articles of Amendment containing the Statement of Rights and
Preferences of the Series C Convertible Preferred Stock (the "Series C Preferred
Stock") of Jay Jacobs, Inc., a Washington corporation (the "Corporation") are
herein executed by the Corporation, pursuant to the provisions of RCW
23B.06.020, as follows:
1. The name of the Corporation is Jay Jacobs, Inc.
2. A copy of the resolution of the Board of Directors of the Corporation
amending the Articles of Incorporation of the Corporation to establish and
designate the rights and preferences of the Series C Preferred Stock of the
Corporation is attached hereto as Attachment A and is incorporated herein by
this reference.
3. The date of the adoption of the amending resolution by the Board of
Directors of the Corporation was March ____, 1998.
5. The amending resolution was duly adopted by the Board of Directors of
the Corporation in accordance with the provisions of RCW 23B.06.020 and
Shareholder action was not required.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment in an official and authorized capacity under penalty of perjury this
_____th day of March, 1998.
JAY JACOBS, INC.
-----------------------------------------
By: William L. Lawrence, Jr.
Its: Executive Vice President and
Chief Financial Officer
<PAGE>
ATTACHMENT A
RESOLVED, that, pursuant to Article II of the Corporation's Articles of
Incorporation, the Board of Directors hereby establishes a series of the
Corporation's Preferred Stock consisting of 20,000 shares, $0.01 par value, to
be designated as Series C Preferred Stock, and approves and adopts the Statement
of Rights and Preferences of Series C Preferred Stock of Jay Jacobs, Inc.,
attached as Exhibit D;
RESOLVED, that the officers of the Corporation are hereby authorized to prepare,
execute and deliver to the Secretary of State of the State of Washington for
filing, Articles of Amendment to the Articles of Incorporation of the
Corporation effecting the adoption of the Statement of Rights and Preferences of
the Series C Preferred Stock; and
RESOLVED, that the officers of the Corporation be and each hereby is authorized
to take any and all action and do any and all things as may be deemed by any of
them to be necessary or advisable to effectuate the establishment and
designation of the Series C Preferred Stock, such determination to be
conclusively evidenced by such officer's carrying out of such action.
<PAGE>
Exhibit A
Statement of Rights and Preferences
of
Series C Preferred Stock
of
Jay Jacobs, Inc.
1. Series C Stock. An aggregate of 20,000 shares of Preferred Stock are
hereby designated as Series C Convertible Preferred Stock, $.01 par value (the
"Series C Preferred Stock"). The rights, preferences, privileges and limitations
granted to and imposed on the Series C Preferred Stock are as set forth below:
1.1 Cumulative Dividends. Dividends on the Series C 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 1.1, at the
rate of $8.00 per share per annum commencing December 3, 1999 and until December
31, 2002. Thereafter, dividends on the Series C 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 (as defined below) 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 C Preferred
Stock, and (ii) from and after the effective date of such Restructuring Event,
dividends on the Series C 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 C Preferred Stock shall occur
regardless of whether or not the Corporation shall have funds legally available
for the payment of dividends.
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 majority 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.
In no event, so long as any Series C 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
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<PAGE>
Series C Preferred Stock together with the 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 C Preferred Stock for
all past dividend periods shall have been paid in full and any arrearage in the
redemption of the Series C Preferred Stock shall have been made good.
1.2 Redemption.
a. Right or Obligation to Redeem Series C Preferred Stock.
(a) If on or before the date of any redemption pursuant to
this Section 1.2a(a), all of the Series A Preferred Stock of the Corporation
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 1.2a(a), upon not less than 30 days prior notice to
each holder of Series C Preferred Stock, redeem (in the manner and with the
effect provided in this Section 1.2) all or any of the outstanding shares of
Series C 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 1.2a(a), the Company shall obtain the written consent
of the holders of not less than a majority of the Series C Preferred Stock then
outstanding.
(b) Any date on which the Corporation elects to redeem
Series C Preferred Stock hereunder is herein called a "Series C 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 C
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 C
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 C Preferred Stock that have not been the subject of a valid conversion
notice, then, notwithstanding that any certificate for shares of Series C
Preferred Stock to be redeemed shall not have been surrendered for cancellation,
after the close of business on such Series C 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 C 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 C Redemption Date, without interest.
2
<PAGE>
c. Shares to Be Redeemed. In case of the redemption, for any
reason, of only a part of the outstanding shares of Series C Preferred Stock
required to be redeemed on a Series C Redemption Date, all shares of Series C
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
C 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 C
Preferred Stock actually being redeemed on such Series C Redemption Date, and
the denominator shall be the aggregate number of shares of Series C Preferred
Stock required to be redeemed on such Series C Redemption Date.
d. Redeemed or Otherwise Acquired Shares to Be Retired. Any
shares of the Series C 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 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 C Preferred Stock, pari passu together with holders of Series A Preferred
Stock and the 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 C 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, Series B Preferred
Stock, and Series C Preferred Stock of the Corporation shall be insufficient to
permit payment to the holders of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock of the amount dis tributable 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 and Series C Preferred Stock. Upon any such liquidation, dissolution or
winding up of the Corporation, after the holders of the Series A Preferred
Stock, Series B Preferred Stock and Series C Pre ferred 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 C
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
3
<PAGE>
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.
a. Voting in the Election of Directors; Constitution of
Committees of the Board of Directors. While any shares of Series C 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, the Series C 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, together with the Series C 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 together with the Series C Preferred Stock, voting together as a class
separate from the Common Stock , shall be entitled to elect not less than three
directors and the remaining four directors shall be elected by the Series B
Preferred Stock, the Series C 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, the Series C 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 together with the Series C 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 C 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 together
with the Series C Preferred Stock, voting together as a class separate from the
Common Stock.
b. Voting, Generally. Except as otherwise provided by law and the
Articles of Incorporation, as amended, the holders of Series C 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, the
Series B Preferred Stock and the Series C Preferred Stock vote as a single
class, (i) the holders of Series C Preferred Stock shall have one vote for each
full share of Common Stock into which their shares of Series C Preferred Stock
are convertible on the record date for the vote, and (ii) the holders of Common
Stock shall have one vote per share. In any vote on which the Series B Preferred
Stock and the Series C Preferred Stock vote as a single class, the holders of
Series C Preferred Stock shall have one vote per share.
1.5 Restrictions. At any time when shares of Series C Preferred Stock
are outstanding, except where the vote or written consent of the holders of a
greater number of
4
<PAGE>
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:
a. The Corporation will not, without the written consent of a
majority of the then outstanding Series C Preferred Stock together with the
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 C 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 C Preferred Stock (i) increase the
authorized amount of the Series C Preferred Stock or create or authorize any
obligations or securities convertible into shares of Series C 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 C Preferred Stock.
1.6 Preemptive Rights. No holder of the Series C 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.
1.7 Conversion.
a. Right to Convert.
(a) Subject to the terms and conditions of this Section 1.7,
the holder of any share or shares of Series C Preferred Stock shall have the
right, at its option at any time, to convert any such shares of Series C
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 C 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 C 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 C Preferred Stock are surrendered for conversion.
Provided, however, that if, at the time of any conversion pursuant to this
Section 1.7, there is not available sufficient authorized and unissued and
5
<PAGE>
unreserved Common Stock of the Corporation for the Corporation to issue Common
Stock upon such conversion, the Series C Preferred Stock shall be convertible
into such number of fully paid and nonassessable whole shares of Preferred Stock
(the "Common Equivalent Stock") as is obtained by multiplying the number of
shares of Series C Preferred Stock so to be converted by $100.00, and dividing
the result by the conversion price of $4.414 per share or by the conversion
price as last adjusted and in effect at the date any share or shares of Series C
Preferred Stock are surrendered for conversion (such price of conversion of the
Series C Preferred Stock into shares of Common Stock or Common Equivalent Stock,
as the case may be, being referred to herein as the "Series C Conversion
Price"). The Common Equivalent Stock shall be designated by the Board of
Directors of the Corporation and shall (i) be convertible into shares of Common
Stock at a rate of 100 shares of Common Stock for each share of Common
Equivalent Stock, (ii) shall be convertible into Common Stock by the
Corporation, provided the Corporation has sufficient authorized and unissued and
unreserved Common Stock therefor, and (iii) shall, with respect to voting,
dividends, liquidation and all other matters, participate in common with the
Common Stock on an as converted basis. (such price, or such price as last
adjusted, being referred to herein as the "Series C Conversion Price") The
rights of conversion contained in this Section 1.7 shall be exercised by the
holder of shares of Series C Preferred Stock by giving written notice that such
holder elects to convert a stated number of shares of Series C Preferred Stock
into Common Stock or Common Equivalent 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 agency of the Corporation as the
Corporation may designate by notice in writing to the holder or holders of the
Series C 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 or Common
Equivalent 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 C 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 C
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 C 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 C Conversion Price then in effect.
(c) Upon any conversion of Series C Preferred Stock, all
accrued and unpaid dividends thereon shall become immediately due and payable,
provided, however, that, any holder of Series C Preferred Stock may elect to
convert any or all such
6
<PAGE>
accrued and unpaid dividends to Common Stock at the Series C Conversion Price
then in effect or to Common Equivalent Stock, as the case may be.
b. Issuance of Certificates; Time Conversion Effected. Promptly
after the receipt of the written notice referred to in Section 1.7a(a) and
surrender of the certificate or certificates for the share or shares of Series C
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 or Common Equivalent Stock issuable upon the conversion of such share or
shares of Series C Preferred Stock. To the extent permitted by law, such
conversion shall be deemed to have been effected, and the Series C Conversion
Price shall be determined, as of the close of business on (i) in the case of a
conversion pursuant to Section 1.7a(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 1.7a(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 C Preferred Stock shall cease, and the person or persons in
whose name or names any certificate or certificates for shares of Common Stock
or Common Equivalent 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 C Preferred Stock
into Common Stock or Common Equivalent Stock, 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 C Preferred
Stock represented by the certificate or certificates surrendered pursuant to
Section 1.7a 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 C 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 or Common Equivalent Stock would, except for the provisions of
the first sentence of this Section 1.7c, be deliverable upon any such
conversion, the Corporation, in lieu of delivering the fractional share thereof,
shall pay to the holder surrendering the Series C 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 1.7e hereof, if and whenever the Corporation shall issue or
sell, or is, in accordance with Sections 1.7d(a) through 1.7d(f), deemed to have
issued or sold, any shares of its Common Stock for a consideration per share
less than the Series C Conversion Price in effect immediately prior to the time
of such issue or sale, then, forthwith upon such issue or sale, the Series C
Conversion Price shall be determined by dividing (i) an amount
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<PAGE>
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
and Series C Preferred Stock) multiplied by the then existing Series C
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 and Series C Preferred Stock).
No adjustment of the Series C 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 1.7d, the following Sections 1.7d(a) to
1.7d(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
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 C 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
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<PAGE>
provided in Section 1.7d(c), no adjustment of the Series C 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 C 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 1.7d(c) below, no
adjustment of the Series C 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 C Conversion
Price have been or are to be made pursuant to other provisions of this
Section 1.7d no further adjustment of the Series C 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 1.7d(a),
(B) the additional consideration, if any, payable upon the conversion or
exchange of any Convertible Securities referred to in Section 1.7d(a) or
1.7d(b) or (C) the rate at which any Convertible Securities referred to in
Section 1.7d(a) or 1.7d(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 C
Conversion Price in effect at the time of such event shall, as re quired,
forthwith be readjusted to such Series C 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 C Conversion Price then in effect hereunder shall,
as required, forthwith be increased to the Series C Conversion Price which
would
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<PAGE>
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
1.7d(a) or the rate at which any Convertible Securities referred to in
Section 1.7d(a) or 1.7d(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 C
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 C 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 C 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 1.7f hereof.
(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
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<PAGE>
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 C 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 or Series C 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 C 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 C 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, 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 together with the Series C Preferred Stock) shall be
made whereby each holder of a share or shares of Series C 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 C 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 C Conversion Price) shall thereafter be applicable,
as nearly practicable, in rela tion to any shares of stock, securities or assets
thereafter deliverable upon the exercise of
11
<PAGE>
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 C 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 C 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 C 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 together with the Series C
Preferred Stock at the time outstanding), executed and mailed or delivered to
each holder of shares of Series C 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 C 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 C Preferred Stock at the address of such holder as
shown on the books of the Corporation, which notice shall state the Series C
Conversion Price resulting from such 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;
12
<PAGE>
(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 C
Preferred Stock pursuant to Section 1.7a(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 C
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 C Preferred Stock pursuant to
Section 1.7a (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.
j. Stock to Be Reserved. The Corporation will at all times
reserve and keep available out of its authorized Common Stock or Preferred Stock
or its treasury shares, solely for the purpose of issue upon the conversion of
the Series C Preferred Stock as herein provided, such number of shares of Common
Stock or Common Equivalent Stock as shall then be issuable upon the conversion
of all outstanding shares of Series C 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 C 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 C Conversion Price if the total number of shares of
Common Stock issued and issuable after such action upon conversion of the Series
C Preferred Stock would exceed the
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<PAGE>
total number of shares of Common Stock then authorized by the Corporation's
Articles of Incorporation.
k. No Reissuance of Series C Preferred Stock. Shares of Series C
Preferred Stock that are converted into shares of Common Stock or Common
Equivalent Stock as provided herein shall not be reissued.
l. Issue Tax. The issuance of certificates for shares of Common
Stock or Common Equivalent Stock upon conversion of the Series C 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 C 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 C Preferred Stock or of any
shares of Common Stock or Common Equivalent Stock issued or issuable upon the
conversion of any shares of Series C Preferred Stock in any manner which
interferes with the timely conversion of such Series C Preferred Stock.
14
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER APPLICABLE STATE SECURITIES LAWS. THIS DEBENTURE
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS DEBENTURE UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO JAY JACOBS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED OR
UNLESS SOLD PURSUANT TO THE PROVISIONS OF RULE 144 OF THE ACT.
THIS DEBENTURE AND THE INDEBTEDNESS EVIDENCED HEREBY IS SUBORDINATED IN THE
MANNER AND TO THE EXTENT SET FORTH IN A SUBORDINATION AGREEMENT (THE
"SUBORDINATION AGREEMENT"), DATED AS OF MARCH 11, 1998, BY THE PAYEE OF THIS
DEBENTURE IN FAVOR OF GENERAL ELECTRIC CAPITAL CORPORATION (THE "LENDER") TO ALL
INDEBTEDNESS (INCLUDING INTEREST) AT ANY TIME OWED BY THE MAKER OF THIS
DEBENTURE TO LENDER, AND EACH HOLDER OF THIS DEBENTURE, BY ITS ACCEPTANCE
HEREOF, SHALL BE BOUND BY THE SUBORDINATION AGREEMENT.
[FORM OF]
JAY JACOBS, INC.
14% Subordinated Convertible Debenture due December 31, 1998
[$_________] March 11, 1998
FOR VALUE RECEIVED, JAY JACOBS, INC., a Washington corporation (the
"Company"), hereby promises to pay to [PURCHASER'S NAME] (the "Purchaser"), or
permitted assigns (the Purchaser or its registered assign(s), as applicable, is
referred to herein as the "Holder"), the principal amount of [AMOUNT IN WORDS
($_________)] on December 31, 1998, and to pay interest on the unpaid principal
amount hereof, from the date hereof until paid in full, at the annual rate of
fourteen percent (14%). Interest shall be computed on the basis of a 360 day
year and the actual number of days elapsed. Accrued and unpaid interest shall be
due and payable semiannually in arrears on June 30 and December 31 of each year
from the date hereof until the entire principal amount is paid. All amounts due
and owing hereunder shall be payable in lawful money of the United States of
America, in immediately available funds, at the principal office of the Holder
or at such other place as the Holder may designate from time to time in writing
to the Company. Any payment on this Debenture coming due on a Saturday, a Sunday
or a day which is a legal holiday in the place at which a payment is to be made
hereunder shall be made on the next succeeding day which is a business day in
such place, and any such extension of the time of payment shall be included in
the computation of interest hereunder.
<PAGE>
This Debenture is issued pursuant and subject to and is entitled to the benefits
of a certain Debenture Purchase Agreement dated as of March 11, 1998 between the
Company and the Purchaser and other parties named therein (the "Debenture
Purchase Agreement"). Capitalized words not defined herein shall have the
meaning set forth in the Debenture Purchase Agreement
Subject to the terms of the Debenture Purchase Agreement (including, but
not limited to, the subordination provisions thereof), upon the occurrence or
existence of an Event of Default (as defined in the Debenture Purchase
Agreement) the Holder may, by notice to the Company, declare the entire unpaid
principal amount of this Debenture, all interest accrued and unpaid hereon, and
all other amounts payable to the Holder hereunder or under the Debenture
Purchase Agreement to be forthwith due and payable, whereupon this Debenture,
all such accrued interest and all such amounts shall become and be forthwith due
and payable, and in addition thereto, and not in substitution therefor, the
Holder shall be entitled to exercise any one or more of the rights and remedies
provided by applicable law. Failure to exercise any right or remedy under this
Debenture or available under applicable law shall not constitute a waiver of
such option or such other remedies or of the right to exercise any of the same
in the event of any subsequent Event of Default. The Company and all makers,
sureties, guarantors, endorsers and other persons assuming obligations pursuant
to this Debenture hereby waive presentment, protest, demand, notice of dishonor
and all other notices and all defenses and pleas on the grounds of any extension
or extension of the time of payments or the due dates hereof, in whole or in
part, before or after maturity, with or without notice. No renewal or extension
of this Debenture, no release of any obligor and no delay in enforcement of this
Debenture or in exercising any right or power hereunder shall affect the
liability of any obligor hereunder. The pleading of any statute of limitations
as a defense to any demand against any obligor is expressly waived.
1. Warrant. As part of the consideration for the loan evidenced by this
Debenture, the Company has authorized and issued a Warrant (the "Warrant"), to
Purchaser. The Warrant shall be exercisable at any time from the date hereof and
on or before the date of the fifth anniversary hereof (the "Exercise Period"),
regardless of whether this Debenture has been redeemed. The Warrant and this
Debenture are not attached and may be assigned separately.
2. Prepayment of Debenture.
(a) Voluntary Prepayment. The Company may not prepay or redeem all or
part of the Debenture prior to maturity hereof, without the prior written
consent of the Holder of the Debenture.
(b) Mandatory Prepayment. Unless agreed to in writing by the Holder,
the Company shall be required to prepay:
(i) In the event that the Company consummates a registered
underwritten public offering covering the offer and sale of Common
Stock for the account of the Company in which net proceeds to the
Company of the public
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<PAGE>
offering equals or exceeds $5 million (a "Public Offering"), then the
Company must apply, at the request of the Holder, the proceeds of such
Public Offering (to the extent available after payment of all Senior
Indebtedness (as defined in Section 12(e) below) to prepay the unpaid
principal amount and outstanding interest of this Debenture;
(ii) Upon an Event of Default, subject to Section 5 herein;
(iii) Upon a Change of Control (as defined below) of the Company,
in which case the Holder shall have the right, at is sole discretion,
to require the Company to repurchase the Debenture upon ten (10)
business days' prior written notice at a price equal to 105% of the
principal amount of the Debenture plus any unpaid interest thereon.
The Company shall provide the Holder with written notice within two
(2) business days of a Change of Control. For purposes of this Section
only, "Change of Control" means any event or series of events by which
(A) any Person or group obtains a majority (by voting or otherwise) of
the securities of the Company ordinarily having the right to vote in
the election of directors; (B) during any two year period, individuals
who at the beginning of any such two year period constituted the Board
of Directors of the Company (together with any new directors whose
election by such Board or whose nomination for election by the
stockholders of the Company was approved by a vote of the majority of
the directors then still in office who were either directors at the
beginning of such period or whose election, recommendation, or
nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of the
Company then in office; (C) the merger, consolidation, reorganization,
recapitalization, dissolution or liquidation of the Company if as a
result the current stockholders no longer own more than 50% of the
voting securities of the Company; (D) any sale, lease, exchange or
other transfer of all, or substantially all, of the assets of the
Company; or (E) the adoption of a plan leading to the liquidation or
dissolution of the Company; or
(iv) Upon the issuance of any subordinated indebtedness by the
Company, other than the Debentures ("New Subordinated Debt").
3. No Impairment. The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, or any other similar voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Debenture, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder against impairment due to such event. Without
limiting the generality of the foregoing, the Company (a) will not increase the
par value of any shares of stock receivable on exercise of this Debenture above
the Exercise Price then in effect, (b) will take all action that may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock, free from all taxes,
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<PAGE>
liens and charges with respect to the issue thereof, on the exercise of this
Debenture from time to time and (c) will not consolidate with or merge into any
other person or permit any such person to consolidate with or merge into the
Company, unless such other person (or, in the case of a merger or consolidation
in which the Company is the surviving entity, the person issuing the securities
involved in such merger or consolidation) shall expressly assume in writing and
will be bound by all the terms of this Debenture.
4. Notices of Record Date, etc. In the event the Company (a) takes a record
of the holders of any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend on, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or (b)
consolidates or merges into, or transfers all or substantially all of its assets
to, another corporation, or (c) dissolves or liquidates (the events described in
the foregoing clauses (b) and (c) being hereinafter referred to as a
"Fundamental Change"), then and in each such event the Company will mail or
cause to be mailed to the registered Holder of this Debenture a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right, (ii) the date on which any such
Fundamental Change is to be effected, and the time, if any to be fixed, as of
which the holders of record of Common Stock shall be entitled to exchange their
shares of Common Stock for securities or other property, if any, deliverable on
any Fundamental Change and (iii) the amount and character of any stock or other
securities, or rights or options with respect thereto, proposed to be issued or
granted, the date of such proposed issue or grant and the persons or class of
persons to whom such proposed issue or grant is to be offered or made. Such
notice shall also state that the action in question or the record date is
subject to the effectiveness of a registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), or a favorable vote of
stockholders, if either is required. Such notice shall be mailed at least 20
days prior to the date specified in such notice on which any such action is to
be taken or 20 days prior to the record date therefor, whichever is earlier.
5. Holder's Rights upon an Event of Default. Upon an Event of Default
(including without limitation failure to pay principal and interest), as more
fully set forth in the Debenture Purchase Agreement, the Holder, at its
discretion, shall have the right to:
(a) demand payment in full of the principal amount of this Debenture
and all unpaid interest hereon;
(b) extend the term of the Debenture subject to receiving additional
warrants (the "Additional Warrants") to purchase Common Stock or Common
Stock Equivalent Shares equal to such Holder's Pro Rata Interest (as set
forth on Exhibit A to the Debenture Purchase Agreement) in an aggregate of
three percent (3%) of the Common Stock or Common Stock Equivalent Shares on
a fully diluted basis; in such case the terms of the Additional Warrants
shall be substantially similar to those of the Warrants, including without
limitation a term of five years and an exercise price of $.01 per share of
Common Stock or $1.00 per Common Stock Equivalent Share;
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<PAGE>
(c) convert the principal amount of this Debenture, or any portion
thereof, into the number of fully paid and non-assessable shares of Series
C Convertible Preferred Stock, par value $.01 per share, with the rights
and preferences set forth in Exhibit E of the Debenture Purchase Agreement,
of the Company determined by dividing the principal amount so converted by
the purchase price of $100 per share (the "Conversion Shares"); or
(d) enter into such other written agreement with the Company upon
terms and conditions mutually agreeable to the parties thereto.
The Company will at all times reserve and keep available, solely for issuance
and delivery on the exercise of this Debenture pursuant to this Section, all
shares of Series C Convertible Preferred Stock from time to time issuable upon
such exercise and such shares of Common Stock or Common Stock Equivalent Shares
issuable upon exercise of the Additional Warrants and/or conversion of the
Conversion Shares.
6. Manner of Conversion.
(a) In order to exercise the conversion right described in Section 5
above, the Holder shall surrender this Debenture to the Company at the
address of the Company set forth in the Debenture Purchase Agreement (or at
such other address as the Company, in accordance with the Debenture
Purchase Agreement, shall specify in writing to the Holder), accompanied by
written notice (the "Conversion Notice") to the Company stating that the
Holder elects to convert this Debenture.
(b) As soon as practicable after any such conversion, and in any event
within ten (10) business days thereafter, the Company, at its expense
(including the payment by it of any applicable issue or stamp taxes), will
cause to be issued in the name of and delivered to the Holder, or as the
Holder (upon payment by such holder of any applicable transfer taxes) may
direct, a certificate or certificates for the number of fully paid and
nonassessable shares of Conversion Shares to which the Holder shall be
entitled on such conversion, in such denominations as may be requested by
the Holder. Concurrently with the issuance of such shares, the Company
shall (i) pay all unpaid interest which accrued prior to the date of the
Conversion Notice with respect to the portion of the principal amount of
this Debenture then being converted, and (ii) cause to be issued in the
name of and delivered to the Holder, or as the Holder may direct, a
Debenture of like tenor in lieu of this Debenture for the principal amount
not converted.
(c) Each certificate for Conversion Shares initially issued upon
conversion of this Debenture, unless at the time of conversion of such
Conversion Shares are registered under the Act, shall bear the following
legend (and any additional legend required by any securities exchange upon
which such Conversion Shares may, at the time of such exercise, be listed)
on the face thereof:
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<PAGE>
"These securities have not been registered under the Securities Act of
1933, as amended, or under any state securities laws and may be offered,
sold or transferred only if registered pursuant to the provisions of such
laws, or if in the opinion of counsel satisfactory to the Company, an
exemption from such registration is available."
7. Transfer. Subject to applicable federal and state securities laws, the
transfer of this Debenture and all rights hereunder, in whole or in part, is
registrable at the office or agency of the Company by the Holder hereof in
person or by his duly authorized attorney, upon surrender of this Debenture
properly endorsed, provided that this Debenture (and any rights of the Holder
hereunder) is non-transferable except to a person or entity controlled by, or
under common control with, the Holder. Each taker and holder of this Debenture,
by taking or holding the same, consents and agrees that this Debenture, when
endorsed in blank, shall be deemed negotiable, and that the Holder hereof, when
this Debenture shall have been so endorsed, may be treated by the Company and
all other persons dealing with this Debenture as the absolute owner and holder
hereof for any purpose and as the person entitled to exercise the rights
represented by this Debenture, or to the registration of transfer hereof on the
books of the Company; and until due presentment for registration of transfer on
such books the Company may treat the registered holder hereof as the owner and
holder for all purposes, and the Company shall not be affected by notice to the
contrary.
8. Register. The Company shall maintain, at the principal office of the
Company (or such other office as it may designate by notice to the Holder
hereof), a register for the Debenture, in which the Company shall record the
name and address of the person in whose name a Debenture has been issued, as
well as the name and address of each transferee and each prior owner of such
Debenture.
9. Replacement. On receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Debenture and, in
the case of any such loss, theft or destruction of this Debenture, on delivery
of an indemnity agreement or security reasonably satisfactory in form and amount
to the Company or, in the case of any such mutilation, on surrender and
cancellation of such Debenture, the Company at its expense will execute and
deliver, in lieu thereof, a new Debenture of like tenor; provided, however, if a
Debenture held by Holder its nominee or any of its partners, principals,
officers or directors is lost, stolen or destroyed, the affidavit of a general
partner or any principal or corporate officer of Holder setting forth the
circumstances with respect to such loss, theft or destruction shall be delivered
to the Company and shall be accepted as satisfactory evidence thereof, and no
indemnity bond or other security shall be required as a condition to the
execution and delivery by the company of a new Debenture in replacement of such
lost, stolen or destroyed Debenture.
10. Remedies. The Company stipulates that the remedies at law of the Holder
of this Debenture in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Debenture are not and will not be adequate, and that such terms may be
specifically enforced pursuant to a decree for the specific performance of
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<PAGE>
any agreement contained herein or by an injunction against a violation of any of
the terms hereof or otherwise.
11. No Sinking Fund; Payment Unsecured. No sinking fund or similar
provision shall be required to fund payment of principal or interest under this
Debenture. Payment of principal and interest on this Debenture is unsecured.
12. Subordination.
(a) Subordination to Senior Indebtedness. The payment of the principal
of and interest on this Debenture is hereby expressly made subject to the
terms and conditions contained in that certain Subordination Agreement,
dated as of March 11, 1998, by and between each of the Purchasers and
General Electric Capital Corporation.
(b) Ranking with respect to other Subordinated Indebtedness. This
Debentures shall rank pari passu with all other Subordinated Indebtedness
of the Company. "Subordinated Indebtedness" means any indebtedness of the
Company, whether outstanding on the date hereof or incurred, assumed or
guaranteed by the Company, which is subordinated in right of payment or in
rights upon liquidation to Senior Indebtedness.
13. Notices. All notices, demands, requests, or other communications which
may be or are required to be given, served, or sent pursuant to this Debenture
shall be given, served and sent in accordance with the provisions of the
Debenture Purchase Agreement.
14. Miscellaneous. This Debenture and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. Any amendment, modification or addition to this Debenture is subject
to the provisions governing same in the Debenture Purchase Agreement. This
Debenture shall be construed and enforced in accordance with and governed by the
laws of the State of Delaware (excluding the choice of law rules thereof). The
headings in this Debenture are for purposes of reference only, and shall not
limit or otherwise affect any of the terms hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforceability of any other provision.
[Balance of Page Left Blank Intentionally -- Signature Page Follows]
- 7 -
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Debenture to be
duly executed on its behalf as of the date first hereinabove set forth.
JAY JACOBS, INC.
By: _____________________________________
Name: Rex L. Steffey
Title: President and Chief Executive
Officer
- 8 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the Registrant's
unaudited consolidated financial statements as of and for the quarter ended May
2, 1998, and is qualified in its entirety by reference to such financial
statements and the notes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> MAY-02-1998
<CASH> 1,406
<SECURITIES> 0
<RECEIVABLES> 536
<ALLOWANCES> 0
<INVENTORY> 12,151
<CURRENT-ASSETS> 14,617
<PP&E> 26,048
<DEPRECIATION> 21,896
<TOTAL-ASSETS> 19,036
<CURRENT-LIABILITIES> 14,618
<BONDS> 0
3,854
2,072
<COMMON> 16,104
<OTHER-SE> (17,637)
<TOTAL-LIABILITY-AND-EQUITY> 19,036
<SALES> 12,691
<TOTAL-REVENUES> 12,691
<CGS> 10,447
<TOTAL-COSTS> 15,275
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 234
<INCOME-PRETAX> (2,818)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,818)
<DISCONTINUED> 0
<EXTRAORDINARY> (522)
<CHANGES> 0
<NET-INCOME> (3,340)
<EPS-PRIMARY> (6.52)
<EPS-DILUTED> 0
</TABLE>
