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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
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/X/ Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
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FRESH CHOICE, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
_
(2) Form, Schedule or Registration Statement No.:
_
(3) Filing Party:
_
(4) Date Filed:
_
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August ___, 1996
Dear Stockholder:
This year's Annual Meeting of Stockholders will be held on the 28th day
of August, 1996 at 2:00 p.m. local time, at the Hyatt Rickeys, 4219 El Camino
Real, Palo Alto, California. You are cordially invited to attend.
The Notice of Annual Meeting of Stockholders and a Proxy Statement,
which describe the formal business to be conducted at the meeting, follow this
letter. A copy of the Company's Annual Report is also enclosed.
After reading the Proxy Statement, please promptly mark, sign, and
return the enclosed proxy in the postage-prepaid envelope to ensure that your
shares will be represented. Your shares cannot be voted unless you date, sign,
and return the enclosed proxy or attend the annual meeting in person. Regardless
of the number of shares you own, your careful consideration of, and voting upon,
the matters before our stockholders are important. SINCE A NON-VOTE IS COUNTED
AS A VOTE AGAINST THE PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF
INCORPORATION AND, AS A RESULT, IN EFFECT MAY ALSO INDIRECTLY BE COUNTED AS A
VOTE "AGAINST" THE PROPOSED INVESTMENT OF $5.5 MILLION BY CRESCENT REAL ESTATE
EQUITIES LIMITED PARTNERSHIP ("CRESCENT") WHICH IS CONTINGENT UPON SUCH
AMENDMENT, IT IS VITAL THAT YOU SIGN AND MAIL THE PROXY CARD.
While the Board of Directors believes that the proposals are in the
best interests of Fresh Choice and recommends that you vote for all of the
proposals at the Annual Meeting, the approval of the investment proposal may
have certain adverse effects that stockholders should consider. These
considerations include the consequences of Crescent's potential special voting
rights with respect to certain corporate transactions, the potential ability of
Crescent to determine composition of a majority of the Board of Directors and
the possibility that the Crescent investment and the various rights Crescent
will or may receive might hinder the sale of Fresh Choice to a buyer other than
Crescent. You should review the enclosed Proxy Statement fully in this regard,
but we believe you will conclude, as we have, that the importance of this
transaction to Fresh Choice outweighs these concerns.
The Board of Directors and Management look forward to seeing you at the
annual meeting.
Very truly yours,
Charles A. Lynch
Chairman of the Board
Robert Ferngren
President and Chief Executive Officer
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FRESH CHOICE
2901 TASMAN DRIVE, SUITE 109
SANTA CLARA, CA 95054
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 28, 1996
Dear Stockholder:
You are invited to attend the Annual Meeting of the Stockholders of
Fresh Choice, Inc. (the "Company"), which will be held on August 28, 1996, at
2:00 p.m. at the Hyatt Rickeys, 4219 El Camino Real, Palo Alto, California 94306
for the following purposes:
1. To consider and vote upon a proposal to issue and sell to
Crescent Real Estate Equities Limited Partnership ("Crescent")
1,187,906 shares of Series B Non-Voting Participating
Convertible Preferred Stock (the "Series B Preferred Stock")
at a price per share of $4.63 and the grant of an option to
Crescent to purchase 593,953 shares of Series C Non-Voting
Participating Convertible Preferred Stock (the "Series C
Preferred Stock") at an exercise price of $6.00 per share,
including (i) the terms of the related Stock Purchase
Agreement for an aggregate purchase price of five million five
hundred thousand four dollars ($5,500,004), and (ii) the
filing of certificates of designation specifying the rights,
preferences and privileges relating to the Series A Voting
Participating Convertible Preferred Stock (the "Series A
Preferred Stock"), the Series B Preferred Stock and the Series
C Preferred Stock and providing for other changes negotiated
in connection with the stock issuance and option grant to
Crescent.
2. To amend the Company's Restated Certificate of Incorporation
to increase the number of shares of Preferred Stock
authorized to be issued to three million five hundred
thousand (3,500,000) from two hundred fifty thousand
(250,000).
3. To amend the Company's Restated Certificate of Incorporation
to increase the number of shares of Common Stock authorized to
be issued to fifteen million (15,000,000) from seven million
five hundred thousand (7,500,000).
The effectiveness of Proposals 1 and 2 are each contingent upon the
approval of the other, and both Proposals 1 and 2 are contingent upon the
approval of Proposal 3. No action will be taken by the Company on Proposals 1 or
2 unless all three Proposals are approved. Therefore, a vote against Proposal 3
will have the effect of a vote against Proposals 1 and 2.
4. To elect one (1) Class I director to hold office for a
three-year term and until his successor is elected and
qualified.
5. To consider and vote upon a proposal to amend the Company's
1988 Stock Option Plan, as previously amended (the "Option
Plan"), to increase the number of shares authorized for
issuance thereunder from 800,000 shares to 1,500,000 shares.
6. To consider and vote upon a proposal to ratify the appointment
of Deloitte & Touche LLP as the Company's independent
accountants for the fiscal year ending December 29, 1996.
7. To transact such other business as may properly come before
the meeting.
Stockholders of record at the close of business on July 3, 1996 are
entitled to notice of and to vote at this meeting and any adjournments thereof.
For ten days prior to the meeting, a complete list of the
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stockholders entitled to vote at the meeting will be available for examination
by any stockholder for any purpose relating to the meeting during ordinary
business hours at the concierge's desk at the Hyatt Rickeys, 4219 El Camino
Real, Palo Alto, California 94306.
By order of the Board of
Directors,
JOAN M. MILLER
Secretary
Santa Clara, California
August ____, 1996
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IMPORTANT: PLEASE FILL IN, DATE, SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY CARD
IN THE ACCOMPANYING POSTAGE-PREPAID ENVELOPE TO ENSURE THAT YOUR SHARES ARE
REPRESENTED AT THE MEETING. IF YOU ATTEND THE MEETING, YOU MAY CHOOSE TO VOTE IN
PERSON EVEN IF YOU HAVE PREVIOUSLY SENT IN YOUR PROXY CARD.
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TABLE OF CONTENTS
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INTRODUCTION.................................................................................. 1
GENERAL INFORMATION........................................................................... 2
Annual Report........................................................................ 2
Voting Securities.................................................................... 2
Cost and Method of Soliciting Proxies................................................ 2
Voting of Proxies.................................................................... 2
SUMMARY ..................................................................................... 3
The Investment Proposal.............................................................. 3
Background of and Reasons for the Investment Proposal; Recent Developments........... 4
Board of Directors' Recommendations.................................................. 4
Certain Risks........................................................................ 5
Special Consent Rights...................................................... 5
Composition of the Company's Board of Directors Following the Sale.......... 5
Diminished Ability to Sell the Company...................................... 6
No Standstill Agreement..................................................... 6
Management Entrenchment..................................................... 6
Special Consent Rights............................................................... 6
Composition of the Board of Directors................................................ 6
Conversion of Convertible Preferred Stock............................................ 6
Registration Rights.................................................................. 6
Closing Conditions and Termination................................................... 6
Annual Fees and Expenses............................................................. 6
Increase In Authorized Common and Preferred Stock.................................... 7
Capitalisation....................................................................... 8
Outstanding Securities and Voting Rights; Votes Required............................. 8
PROPOSAL 1.................................................................................... 9
INVESTMENT PROPOSAL........................................................................... 9
Introduction......................................................................... 9
Background of and Reasons for the Investment Proposal................................ 9
Board of Directors' Recommendations; Vote Required................................... 11
Use of Proceeds...................................................................... 12
Certain Risks........................................................................ 12
Special Consent Rights...................................................... 12
Composition of the Company's Board of Directors Following the Sale.......... 13
No Standstill Agreement..................................................... 14
Diminished Ability to Sell the Company...................................... 14
Registrations and Effect of Stock Sales by Crescent......................... 14
SUMMARY OF STOCK PURCHASE AGREEMENT........................................................... 15
Representations and Warranties....................................................... 15
Covenants of the Company and Crescent................................................ 15
Closing Conditions................................................................... 16
Annual Fees and Expenses............................................................. 16
Termination.......................................................................... 17
Registration Rights.................................................................. 17
Preferred Stock; Certificates of Designation......................................... 17
Series A Preferred Stock.................................................... 18
Series B Preferred Stock.................................................... 20
Series C Preferred Stock.................................................... 20
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Financial Information................................................................ 21
Anti-Takeover Provisions and Effect of Investment Proposal........................... 21
Blank Check Preferred Stock................................................. 21
Special Consent Rights...................................................... 21
Management Entrenchment..................................................... 21
Delaware Section 203........................................................ 22
INFORMATION CONCERNING CRESCENT............................................................... 22
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION.......................................... 22
PROPOSAL 2.................................................................................... 22
AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION AND INCREASE IN AUTHORIZED
PREFERRED STOCK...................................................................... 23
General ............................................................................ 23
Authorized Preferred Stock........................................................... 23
Vote Required and Board of Directors' Recommendation................................. 23
PROPOSAL 3.................................................................................... 23
AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION AND INCREASE IN AUTHORIZED
COMMON STOCK......................................................................... 22
General ............................................................................ 22
Authorized Common Stock.............................................................. 22
Vote Required and Board of Directors' Recommendation................................. 23
PROPOSAL 4.................................................................................... 23
ELECTION OF DIRECTORS......................................................................... 23
PROPOSAL 5.................................................................................... 27
PROPOSAL TO AMEND 1988 STOCK OPTION PLAN...................................................... 27
Summary of the Provisions of the Option Plan, as Amended............................. 28
Summary of Federal Income Tax Consequences of Option Plan............................ 30
Incentive Stock Options..................................................... 30
Nonqualified Stock Options.................................................. 31
Vote Required and Board of Directors' Recommendation................................. 31
Changes to Benefit Plans............................................................. 31
1988 Stock Option Plan...................................................... 31
NEW PLAN BENEFITS............................................................................. 31
PROPOSAL 6.................................................................................... 32
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS........................................ 32
INFORMATION CONCERNING THE COMPANY............................................................ 33
Stock Ownership of Certain Beneficial Owners and Management.......................... 33
Executive Compensation and Other Matters............................................. 34
Compensation of Directors............................................................ 39
Compliance with Section 16(a) of the Securities Exchange Act of 1934................. 39
Change in Control and Severance Arrangements......................................... 39
Compensation Committee Interlocks and Insider Participation.......................... 40
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION....................................... 42
Deductibility of Executive Compensation.............................................. 43
COMPARISON OF STOCKHOLDER RETURN.............................................................. 44
Price Range of Common Stock.......................................................... 46
SELECTED FINANCIAL INFORMATION................................................................ 47
STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING.................................. 48
TRANSACTION OF OTHER BUSINESS................................................................. 48
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE............................................. 48
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PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
FRESH CHOICE, INC.
2901 TASMAN DRIVE, SUITE 109
SANTA CLARA, CALIFORNIA 95054
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors (the "Board of Directors") of Fresh Choice, Inc., a
Delaware corporation (the "Company"), of proxies to be voted at the Meeting in
Palo Alto, California on August 28, 1996 and any adjournment thereof, for the
purposes set forth in the accompanying Notice of Annual Meeting. Included in
this Proxy Statement is a proposal regarding the proposed purchase by Crescent
Real Estate Equities Limited Partnership ("Crescent") of 1,187,906 shares of
Series B Non-Voting Participating Convertible Preferred Stock (the "Series B
Preferred Stock") for $5,500,004, together with a three-year option to acquire
an additional 593,953 shares of Series C Non-Voting Participating Convertible
Preferred Stock (the "Option Shares") at an exercise price of $6.00, and the
related Stock Purchase Agreement and filing of Certificates of Designation on
the terms and conditions set forth in this Proxy Statement (collectively, the
"Investment Proposal"). All of such shares, including the Option Shares, will be
immediately convertible into Common Stock of the Company. The Series B Preferred
Stock and the Option Shares will be referred to collectively as the Securities.
The price per share of the Series B Non-Voting Participating Convertible
Preferred Stock to be issued at the initial closing is $4.63, the exercise price
of the Option Shares is $6.00 per share, and the closing sale price of the
Company's Common Stock on July 17, 1996 was $6.875. If the transaction is
approved and completed, based on the shares outstanding as of June 30, 1996,
Crescent will beneficially hold approximately 17% of the Company's outstanding
stock (on an as converted to Common Stock basis) (approximately 24% when
including shares held by Richard Rainwater, an affiliate of Crescent (the
"Rainwater Shares")), approximately 25% when including the Option Shares, and
approximately 31% when including the Rainwater Shares and the Option Shares, and
upon conversion pursuant to the Certificates of Designation would have certain
voting and other rights which would give Crescent effective veto power over
certain significant actions by the Company.
Enclosed with this Proxy Statement is a notice of the Meeting, together
with a proxy for your signature if you are unable to attend. The approximate
date on which this Proxy Statement and the accompanying form of proxy will first
be sent to the Company's stockholders is August ____, 1996. FAILURE TO RETURN A
PROPERLY EXECUTED AND DATED PROXY CARD OR TO VOTE IN PERSON AT THE MEETING WILL
HAVE THE EFFECT OF A DIRECT VOTE AGAINST THE PROPOSALS TO AMEND THE COMPANY'S
CERTIFICATE OF INCORPORATION AND THEREFORE AN INDIRECT VOTE AGAINST THE
INVESTMENT PROPOSAL, WHICH IS CONTINGENT UPON THE APPROVAL OF THE PROPOSALS TO
AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION.
At the Meeting, stockholders will be asked to vote upon the Investment
Proposal, as well as two related amendments to the Company's Certificate of
Incorporation to create the Series B and Series C Preferred Stock and to
increase the authorized number of shares of Common Stock, the election of a
Class I director, the amendment of the Company's 1988 Stock Option Plan and the
ratification of the Company's independent accountants. The effectiveness of
the Investment Proposal is contingent upon the approval of the amendments of
the Company's Certificate of Incorporation, and no action will be taken by the
Company on the Investment Proposal unless all three of such matters are
approved. Therefore, a vote against the approval of the amendment of the
Company's Certificate of Incorporation will have the effect of a vote against
the Investment Proposal. Approval of the Proposals to amend the Company's
Certificate of Incorporation requires the affirmative vote of a majority of
all shares entitled to vote thereon; election of the Class I director will be
by a plurality of the shares voted, and approval of all other Proposals,
including the Investment Proposal, requires the affirmative vote of a majority
of all shares present and entitled to vote at the Meeting. As of June 30, 1996,
management and directors of the Company held approximately
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52,816 shares of Common Stock, representing approximately 1% of all shares
outstanding, and also held rights to acquire approximately 481,110 additional
shares. See "INFORMATION CONCERNING THE COMPANY -- Stock Ownership of Certain
Beneficial Owners and Management."
Holders of a majority of the outstanding stock of the Company must be
present in person or by proxy in order to establish a quorum for conducting
business at the Meeting. Proxies marked "abstain" will be counted as present for
purposes of establishing a quorum. If any other matters are properly presented
to the Meeting for consideration (such as consideration of a motion to adjourn
the Meeting to another time or place (including, without limitation, for the
purpose of soliciting additional proxies)), the persons named in the proxy and
acting thereunder will have discretion to vote on such matters in accordance
with their best judgment. As of the date hereof, the Board of Directors knows of
no such other matters.
GENERAL INFORMATION
Annual Report. An annual report for the fiscal year ended December 31,
1995, is enclosed with this Proxy Statement.
Voting Securities. Only stockholders of record as of the close of
business on July 3, 1996 will be entitled to vote at the meeting and
any adjournment thereof. As of that date, there were shares of Common
Stock of the Company, par value $0.001 per share, issued and outstanding.
Stockholders may vote in person or by proxy. Each holder of shares of Common
Stock is entitled to one (1) vote for each share of stock held on the proposals
presented in this Proxy Statement. The Company's bylaws provide that a majority
of all of the shares of the stock entitled to vote, whether present in person or
represented by proxy, shall constitute a quorum for the transaction of business
at the meeting.
Cost and Method of Soliciting Proxies. The cost of soliciting proxies
will be borne by the Company. In addition to soliciting stockholders by mail
through its regular employees, the Company will request banks, brokers and other
custodians, nominees and fiduciaries to solicit their customers who have stock
of the Company registered in the names of such persons and will reimburse such
banks, brokers and other custodians, nominees and fiduciaries for their
reasonable, out-of-pocket costs. The Company may use the services of its
officers, directors and others to solicit proxies, personally or by telephone,
without additional compensation. The Company has also engaged the services of
McKenzie Partners, a proxy solicitor, to whom it will pay a fee, which it
reasonably expects will be not more than $7,500, and reimburse out-of-pocket
expenses.
Voting of Proxies. All valid proxies received prior to the meeting will
be voted. Shares of the Company's Common Stock represented by properly executed
proxies received prior to or at the Meeting, unless such proxies have been
revoked, will be voted in accordance with the instructions indicated in the
proxies. If a proxy is properly executed, but contains no instructions as to the
voting of the shares represented thereby, such shares will be voted FOR each of
the proposals. Any proxy given pursuant to this solicitation or otherwise may be
revoked by the person giving it any time before it is voted by delivering to the
Secretary of the Company at 2901 Tasman Drive, Suite 109, Santa Clara,
California, 95054, on or before the business day prior to the Meeting or at the
Meeting itself a written notice of revocation bearing a date later than that of
the proxy or a later-dated proxy relating to the same shares, or by attending
the Meeting and voting in person.
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SUMMARY
The following is a brief summary of the more detailed information
contained in this Proxy Statement with respect to the Investment Proposal (the
"Summary"). This Summary is not intended to be complete and is qualified in its
entirety by the more detailed information contained elsewhere in this Proxy
Statement, the Appendices to this Proxy Statement and other documents referred
to in this Proxy Statement. Terms used but not defined in this Summary have the
meanings ascribed to them elsewhere in this Proxy Statement and terms defined in
this Summary have the same meanings when used elsewhere in this Proxy Statement.
Cross references in this Summary are to the captions of sections of this Proxy
Statement unless otherwise indicated.
Stockholders are urged to read this Proxy Statement and the Appendices
in their entirety.
THE INVESTMENT PROPOSAL
The stockholders of the Company will be asked at the Meeting to
consider and act upon the Investment Proposal, which, among other things,
contemplates the issuance and sale to Crescent of 1,187,906 shares of Series B
Non-Voting Participating Convertible Preferred Stock (the "Series B Preferred
Stock") at a per-share price of $4.63, for an aggregate purchase price of
$5,500,004 (the "Sale"). Such shares of Series B Preferred Stock, which will be
transferable, will represent approximately 17% of the outstanding stock of the
Company (on an as converted to Common Stock basis) following the sale
(approximately 24% when including Rainwater Shares, approximately 25% when
including the Option Shares as described below, and approximately 31% when
including the Rainwater Shares and the Option Shares). The Board of Directors
unanimously approved the execution and delivery by the Company of the Stock
Purchase Agreement which provides for the transactions and acts collectively
constituting the Investment Proposal. See "SUMMARY OF STOCK PURCHASE AGREEMENT."
The Stock Purchase Agreement also provides Crescent a three-year option (the
"Option") to purchase up to 593,953 shares of Series C Non-Voting Participating
Convertible Preferred Stock at an exercise price of $6.00 per share (the
"Grant"). Collectively the Series B Preferred Stock and the Option shall
sometimes be referred to hereafter as the "Securities," and the Sale and the
Grant and all the transactions contemplated thereby shall sometimes be referred
to as the "Investment Proposal." The Investment Proposal further provides that
the Company will file the Certificates of Designation in substantially the form
attached as Appendices II, III and IV to this Proxy Statement to create the
Series A, Series B and Series C Participating Convertible Preferred Stock
(collectively, the "Convertible Preferred Stock") and establish the special
rights associated with such stock. See "PREFERRED STOCK; CERTIFICATES OF
DESIGNATION." Because the Sale and the Grant together may involve the issuance
of Fresh Choice Common Stock in excess of 20% of the currently outstanding stock
of the Company, the National Association of Securities Dealers, Inc. (the
"NASD") requires that the Company obtain an affirmative vote for the Investment
Proposal of the holders of a majority of the shares of Common Stock present. The
Board of Directors is therefore submitting to the stockholders for approval the
Investment Proposal, and unless the required majority approvals of the
Investment Proposal and the related proposals to amend the Certificate of
Incorporation (see discussion below) are obtained, the Investment Proposal will
not be consummated. As of the date of this Proxy Statement, the Board of
Directors anticipates consummating the Investment Proposal as soon as
practicable after the Annual Meeting, assuming satisfaction or waiver of all
conditions to closing. See "SUMMARY OF STOCK PURCHASE AGREEMENT -- Closing
Conditions."
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BACKGROUND OF AND REASONS FOR THE INVESTMENT PROPOSAL; RECENT DEVELOPMENTS
The Company has recently experienced reduced sales as well as losses
of $1.3 million, $1.6 million, $0.2 million, $24.7 million (including a $23.9
million restructuring charge) and $0.9 million, in the quarters ended March 19,
1995, June 11, 1995, September 3, 1995, December 31, 1995, and March 24, 1996,
respectively, although the Company reported a net profit of $0.1 million in the
quarter ended June 30, 1996. Since the second quarter of 1995, the Company has
substantially suspended its expansion plans, which are a necessary element of
the Company's growth, and in December 1995, the Company adopted and began
implementing a restructuring plan in an effort to address these losses.
A number of the Company's competitors have substantially greater cash
reserves than the Company. Accordingly, the Board of Directors determined that
the Company would be vulnerable to competitive pressures and would be unable to
resume its expansion plan without additional cash resources. In mid-1995 the
Company began to explore alternatives to strengthen its long-term financial
position and maximize stockholder value, including the restructuring plan, which
it adopted, and the issuance of additional equity or other securities. After
exploration of alternatives, the Board of Directors determined that as of the
time the Company entered into the Stock Purchase Agreement, the Investment
Proposal provided the Company with the best opportunity to obtain the financing
necessary to resume expansion on the best available terms. Since the date the
Board approved the transaction, Fresh Choice's financial outlook has not changed
significantly with regard to its ability to resume expansion, even though the
Company was slightly profitable during the last quarter. Accordingly, the
Company would require financing to resume expansion. Based on the efforts of the
Company to obtain financing in recent months, management believes that, in the
event the Investment Proposal is not approved, or the Sale is not closed, better
alternative financing may or may not be available on at least as advantageous
terms as the Investment Proposal. If the Investment Proposal is not approved,
however, expansion plans would be deferred until alternative financing is
obtained and there can be no assurance that such alternative financing will be
available at all or on at least as advantageous terms. If financing is not
obtained, the Board of Directors currently believes the Company will not be able
to resume its expansion program in the foreseeable future.
BOARD OF DIRECTORS' RECOMMENDATIONS
The Board of Directors has reviewed and considered the terms and
conditions of the Investment Proposal and believes that the Investment Proposal
is fair to, and is advisable and in the best interests of, the Company and its
stockholders and has unanimously approved the Investment Proposal and
unanimously recommends that stockholders vote "for" approval of the Investment
Proposal.
The Board of Directors, in recommending stockholder approval of the
Investment Proposal, considered a number of factors, including (a) the increase
in the Company's cash reserves that will result from the consummation of the
Investment Proposal and the prospect that, as a result of this equity infusion,
the Company would be able to compete more effectively with its competitors,
better withstand unforeseen adverse events, improve its access to sources of
capital, and resume its expansion program more quickly than may otherwise be
possible; (b) the Board of Directors' belief that the negative conditions may
continue in the near future, or longer, without a cash infusion to fund growth,
and could jeopardize the Company's ability to survive; (c) the terms of the
Stock Purchase Agreement including certain terms which give the investor veto
rights over certain corporate actions (see "INVESTMENT PROPOSAL -- Certain
Risks"); and (d) the alternatives to the Investment Proposal and the likelihood
of such alternatives, including alternative public or private financing and/or a
sale of the Company. See "INVESTMENT PROPOSAL -- Board of Directors'
Recommendations; Vote Required." The Board believes that the terms of the
Securities pursuant to the Investment Proposal constituted the best possible
terms that the Company could have received at the time the Company entered the
Stock Purchase Agreement in a sale of securities to a non-affiliated entity.
Stockholders should consider, in conjunction with this recommendation,
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that there may be certain anti-takeover and management entrenchment effects of
the Investment Proposal, as well as certain other consequences that could
adversely affect the interests of stockholders other than Crescent. See
"INVESTMENT PROPOSAL -- Certain Risks."
In reaching its recommendation, the Board of Directors' primary
consideration was obtaining substantial additional equity or other financing for
expansion of the Company in a timely manner, on the best possible terms. The
Board of Directors believed that substantial additional equity or other
financing was necessary, because without such financing, the Company could not
continue to compete effectively with better-financed competitors. The Board took
into account that the Company could incur additional losses before its
performance improved and its expansion and growth plans could be resumed on
an internally financed basis. In particular, the Board believed that the
Company's long-term financial health depended upon its continuing to increase
its presence in California and to expand to other markets, and that without
additional external capital, it would not be able to resume its expansion
program in the near-term. The Board concluded that the Investment Proposal
provided, for the amount of financing, the best terms available at the time the
Stock Purchase Agreement was entered into. Accordingly, the Board concluded
that the Investment Proposal was the best alternative to improve the Company's
financial prospects.
While consummation of the Investment Proposal would permit the Company
to withstand further losses in the near-term while beginning to resume
expansion, the Board recognized that the Company must also improve sales and
continue to control expenses to return to profitability. In December 1995, the
Company adopted and began implementing a restructuring plan designed to improve
the Company's performance. While the Board is actively implementing the
restructuring plan, there can be no assurance that this plan will enable the
Company to maintain or improve profitability. The Board of Directors is
continuing to review operations and the effects of the restructuring plan to
determine the nature and scope of any further action that may be required.
Furthermore, even if the Investment Proposal is consummated and expenses are
controlled, there can be no assurance that the Company will be able to maintain
or improve profitability.
CERTAIN RISKS
While the Board of Directors is of the opinion that the Investment
Proposal is in the best interests of the Company and its stockholders, the
approval of the Investment Proposal may have certain adverse effects which
stockholders should consider, including adverse effects upon stockholders other
than Crescent. These considerations are summarized below. See "INVESTMENT
PROPOSAL -- Certain Risks."
As provided in the Certificates of Designation, the holders of Series B
and Series C Preferred Stock have no conversion rights to the extent that
immediately after the conversion of such shares into Series A Preferred Stock or
Common Stock of the Company, Crescent Real Estate Equities, Inc. ("Crescent
Corporation"), a Maryland corporation organized as a real estate investment
trust ("REIT"), of which Crescent is a majority-owned subsidiary, or its
successors, would be treated as owning more than 10% of the voting securities of
the Company (the "Conversion Limitation"). This limitation was imposed in an
effort to ensure that Crescent Corporation would be able to maintain its status
as a REIT. Any exercise or purported exercise of any conversion rights in
violation of the Conversion Limitation in the Certificates of Designation would
be void.
Special Consent Rights. As a result of the special voting rights of the
Series A Preferred Stock, a majority of the holders of all shares of Series A
Preferred Stock (collectively, the "Series A Holders") issued upon conversion of
one or more shares of Series B Preferred Stock (each a "Conversion"), could have
effective veto power over certain significant actions by the Company including
certain sales of assets, certain amendments to the certificate of incorporation
or bylaws, issuances of securities and any merger, acquisition or sale of
substantially all or all of the assets of the Company, but only if at least the
greater of (i) an aggregate of 593,953 shares of Series A,
5
<PAGE> 13
Series B and Series C Preferred Stock, or (ii) 50% of the aggregate number of
shares of Series A, Series B and Series C Preferred Stock issued on or after the
dates of filing of the Certificates of Designation (the "Requisite Shares") are
outstanding.
Composition of the Company's Board of Directors Following the Sale. If
and whenever the Company is unable to achieve certain earnings targets for 1996,
1997 or 1998 set forth in the Series A Preferred Stock Certificate of
Designation, after Conversion the Series A Holders holding a majority of any
Series A Preferred Stock will have the right to elect a majority of the Board of
Directors, so long as the Requisite Shares are outstanding.
Diminished Ability to Sell the Company. As a result of the special
consent rights of the Series A Preferred Stock, after Conversion the Series A
Holders holding a majority of any Series A Preferred Stock could prevent a third
party from acquiring the Company without its consent so long as it holds the
Requisite Shares. In addition, due to Crescent's large equity interest, it may
be difficult or even impossible for a third party to acquire the Company without
the consent of Crescent, although Crescent itself may not hold more than 10% of
the voting securities of the Company in order to maintain its status as a real
estate investment trust (a "REIT"). Accordingly, approval of the Investment
Proposal could hinder any future sale of the Company to a buyer other than
Crescent.
No Standstill Agreement. The Stock Purchase Agreement does not provide
a limit on future acquisition of shares of the Company by Crescent; Crescent may
therefore increase its equity position through the purchase of additional Common
Stock, intensifying the effects related to its large equity interest as set
forth in this Proxy Statement; however, in order to maintain its status as a
REIT, Crescent cannot hold more than 10% of the outstanding voting securities
of the Company.
Management Entrenchment. Crescent's right to acquire ownership through
the Investment Proposal of at least approximately 24% (including the shares
issuable upon exercise of the Option) of the Common Stock of the Company could
make it difficult for third parties to cause a change in management of the
Company, possibly leading to entrenchment of current management or other
management selected by Crescent; however, in order to maintain its status as a
REIT, Crescent cannot hold more than 10% of the outstanding voting securities
of the Company.
SPECIAL CONSENT RIGHTS
Under the Series A Certificate of Designation, once any Series B
Preferred Stock are converted to Series A Preferred Stock, the Series A Holders
holding a majority of the Series A Preferred Stock would have an approval right
over any merger, acquisition or sale of all or substantially all of the assets
of the Company. These rights remain in effect as long as the Requisite Shares
and any shares of Series A Preferred Stock are outstanding, regardless of who
holds the Series A Preferred Stock. See "PREFERRED STOCK; CERTIFICATES OF
DESIGNATION -- Series A Preferred Stock."
COMPOSITION OF THE BOARD OF DIRECTORS
If Series B Preferred Stock has been or is converted to Series A
Preferred Stock and the Company is in a period in which it has failed to meet
certain earnings targets for 1996, 1997 or 1998 or defaults on any covenants
of other financing agreements, the Series A Holders holding a majority of the
Series A Preferred Stock would be entitled to elect a majority of the Board of
Directors, so long as the Requisite Shares are outstanding, unless the Company
cures such default. See "INVESTMENT PROPOSAL -- Certain Risks -- Composition of
the Company's Board of Directors Following the Sale."
6
<PAGE> 14
CONVERSION OF CONVERTIBLE PREFERRED STOCK
Subject to the Conversion Limitation, each share of Series B Preferred
Stock converts, at the option of the holder, into either one share of Series A
Preferred Stock or one share of Common Stock (subject to adjustment upon the
occurrence of certain events such as dividends on the Common Stock payable in
Common Stock, stock splits and reverse stock splits and reorganizations and
mergers). Each share of Series A Preferred Stock and, subject to the Conversion
Limitation, each share of Series C Preferred Stock converts, at the option of
the holder, into one share of Common Stock, subject to the same adjustments as
the Common Stock obtained upon conversion of the Series B Preferred Stock. If
the Company meets certain per-share price tests, the Series A Preferred Stock is
subject to mandatory conversion to Common Stock and after such mandatory
conversion, no shares of Series B Preferred Stock would be convertible into
Series A Preferred Stock. See "PREFERRED STOCK; CERTIFICATES OF DESIGNATION."
REGISTRATION RIGHTS
Holders of at least 50% of the Securities issued to Crescent or the
shares issued upon conversion of such Securities can require, no more than
twice, that the Company use its best efforts to register shares of Common Stock
issued upon conversion of the Securities at the Company's expense. In addition,
Crescent has certain piggyback rights. See "SUMMARY OF STOCK PURCHASE AGREEMENT
- -- Registration Rights."
CLOSING CONDITIONS AND TERMINATION
The transaction is subject to various conditions, including the
approval of the Company's stockholders. In particular, Crescent is not required
to close the transaction if there has been a material adverse change in the
Company's business or if the representations and warranties are untrue as of the
closing date in a way which has or is likely to have a material adverse effect
on the Company. See "SUMMARY OF STOCK PURCHASE AGREEMENT -- Closing Conditions."
The Stock Purchase Agreement may be terminated by mutual consent, or by
either party if not consummated prior to August 31, 1996, or if prohibited or
enjoined by a final, non-appealable order, decree, ruling or other action. See
"SUMMARY OF STOCK PURCHASE AGREEMENT -- Termination."
ANNUAL FEES AND EXPENSES
The Company must reimburse Crescent for up to $75,000 of Crescent's
out-of-pocket expenses incurred in connection with the contemplated
transactions, and must pay Crescent an initial financing fee of $75,000.
Further, so long as Crescent holds the Requisite Shares and does not have
a representative on the Board of Directors, the Company must also pay Crescent
an annual fee of $50,000 and reimburse Crescent for all reasonably incurred
out-of-pocket expenses (including legal fees) incurred in monitoring the
investment in the Convertible Preferred Stock. See "SUMMARY OF STOCK PURCHASE
AGREEMENT -- Annual Fees and Expenses."
INCREASES IN AUTHORIZED COMMON AND PREFERRED STOCK
The Stockholders will be asked at the meeting to consider and act upon
related proposals to increase the Company's authorized capital stock to 15
million shares of Common Stock and 3.5 million shares of Preferred Stock.
Approval of these two proposals are conditions of the Investment Proposal, but
if the proposal to increase the authorized Common Stock is approved, it will
become effective whether or not the Investment Proposal is approved in order to
meet the Company's general business needs. The proposal to increase the
Convertible Preferred Stock will only become effective if the Investment
Proposal is approved.
7
<PAGE> 15
CAPITALIZATION
Set forth below is the consolidated capitalization of the Company and
its subsidiaries as of June 16, 1996 which is derived from the unaudited
condensed consolidated financial statements of the Company, and the pro forma
capitalization of the Company and its subsidiaries as of that date, as adjusted
to give effect to the Sale as if the Sale had occurred on such date and the
Option had been exercised as of that date. The unaudited condensed consolidated
financial statements of the Company for the twelve and twenty-four weeks ended
June 16, 1996 can be obtained at the principal office of the Company at 2901
Tasman Drive, Suite 109, Santa Clara, California. See "INVESTMENT PROPOSAL --
Financial Information" and "INFORMATION CONCERNING THE COMPANY -- Selected
Financial Information."
<TABLE>
<CAPTION>
Adjusted
for
Adjusted for Series B &
Series B Series C
Preferred Preferred
Actual Stock Stock
-------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Long-term debt and capital lease obligations due
after one year $ 150 $ 150 $ 150
------------------------------------------------
Preferred stock, $0.01 par value,
2,000,000 shares authorized;
Shares outstanding:
Series B 1,187,906 -- 5,500 5,500
Series C 593,953 -- -- 3,564
Common stock, $0.01 par value,
15,000,000 shares authorized;
5,582,449 shares outstanding 42,019 41,819 41,769
Accumulated deficit (20,099) (20,099) (20,099)
------------------------------------------------
Total stockholders' equity 21,920 27,220 30,734
------------------------------------------------
Total capitalization $ 22,070 $ 27,370 $ 30,884
================================================
</TABLE>
OUTSTANDING SECURITIES AND VOTING RIGHTS; VOTES REQUIRED
Stockholders of record at the close of business on July 3, 1996 are
entitled to vote at the Meeting. On July 3, 1996 the Company had outstanding
5,645,807, shares of Common Stock. At the Meeting each share of Common Stock is
entitled to one vote.
Under the Company's Certificate of Incorporation and Delaware law, the
affirmative vote of the holders of at least a majority of the outstanding voting
stock of the Company is required to increase the authorized number of shares of
Common Stock and Preferred Stock. ABSTENTIONS AND BROKER NON-VOTES WILL HAVE
THE SAME EFFECT AS A NEGATIVE VOTE ON THESE TWO PROPOSALS. Approval of each of
the other Proposals, including the Investment Proposal, require the approval of
a majority of the outstanding shares of Common Stock voting at the Meeting.
NEITHER ABSTENTIONS NOR BROKER NON-VOTES WILL HAVE ANY EFFECT ON SUCH PROPOSALS.
8
<PAGE> 16
PROPOSAL 1
----------
INVESTMENT PROPOSAL
THE INVESTMENT PROPOSAL IS SUMMARIZED BELOW. THIS SUMMARY DOES NOT PURPORT TO BE
COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE STOCK PURCHASE
AGREEMENT, ATTACHED AS APPENDIX I; THE RESTATED CERTIFICATES OF DESIGNATION FOR
THE SERIES A, SERIES B AND SERIES C PREFERRED STOCK, SUBSTANTIALLY IN THE FORM
ATTACHED HERETO AS APPENDICES II, III AND IV, RESPECTIVELY; AND THE REGISTRATION
RIGHTS AGREEMENT, SUBSTANTIALLY IN THE FORM ATTACHED HERETO AS APPENDIX V, EACH
OF WHICH IS INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS ARE URGED TO READ THE
APPENDICES TO THIS PROXY STATEMENT IN THEIR ENTIRETY.
INTRODUCTION
The stockholders of the Company will be asked at the Meeting to
consider and act upon the Investment Proposal, which, among other things,
contemplates the issuance and sale to Crescent Real Estate Equities Limited
Partnership and its successors and assigns (collectively, "Crescent") of
1,187,906 shares of Series B Non-Voting Participating Convertible Preferred
Stock (the "Series B Preferred Stock") at a price of $4.63 per share or an
aggregate purchase price of $5,500,004 (the "Sale") and the grant to Crescent of
a three-year option (the "Option") to purchase up to 593,953 shares of Series C
Non-Voting Participating Convertible Preferred Stock at an exercise price of
$6.00 per share (the "Grant"). The Series B Preferred Stock and the Option shall
sometimes be collectively referred to hereafter as the "Securities," and the
Sale and the Grant and all the transactions contemplated thereby shall sometimes
be collectively referred to as the "Investment Proposal." For purposes of
effecting the Investment Proposal, the Board of Directors approved the execution
and delivery by the Company of the Stock Purchase Agreement, which provides for
the transactions and acts collectively constituting the Investment Proposal.
See "SUMMARY OF STOCK PURCHASE AGREEMENT." The Investment Proposal also provides
that the Company will file the Certificates of Designation in substantially the
form attached hereto as Appendices II, III and IV to create three (3) series of
Convertible Preferred Stock. See "PREFERRED STOCK; CERTIFICATES OF DESIGNATION."
In addition, in order to consummate the transactions contemplated by the
Investment Proposal, the Company must amend its Certificate of Incorporation to
increase its authorized Common Stock and Preferred Stock, and must file the
Certificates of Designations to create the Series A, Series B and Series C
Preferred Stock. See "AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION AND
INCREASE IN AUTHORIZED COMMON STOCK" and "AMENDMENT OF RESTATED CERTIFICATE OF
INCORPORATION AND INCREASE IN AUTHORIZED PREFERRED STOCK." As of the date of
this Proxy Statement, the Board of Directors anticipates consummating the
Investment Proposal as soon as practicable after the Annual Meeting, assuming
satisfaction or waiver of all conditions to closing. See "SUMMARY OF STOCK
PURCHASE AGREEMENT -- Closing Conditions."
BACKGROUND OF AND REASONS FOR THE INVESTMENT PROPOSAL
The Company operates casual, upscale restaurants that feature an
extensive selection of healthy, high-quality, freshly-made specialty and
traditional salads, hot pasta dishes, soups, bakery goods and desserts, offered
in a self-serve format. After opening its first restaurant in 1986, Fresh Choice
expanded steadily, its early growth driven by favorable financial returns on a
per restaurant basis. The Company operated 22 restaurants at the time of its
initial public offering in December 1992. With $12,719,000 in net proceeds from
its initial public offering and an additional $19,609,000 in net proceeds from a
follow-on offering in July 1993, the Company accelerated its growth, opening 14
new restaurants in 1993 (including its first two restaurants outside of
California), 15 new restaurants in 1994 (including seven restaurants outside of
California), and seven restaurants in 1995 (of which two were located outside of
California).
9
<PAGE> 17
During this expansion period, the Company opened a number of locations
which have not reached anticipated sales levels and opened a greater percentage
of restaurants in freestanding buildings as a result of the Company's efforts to
locate restaurant sites in more prominent areas. The increase in freestanding
units and other refinements and the expansion of the Company's restaurant
configuration and decor resulted in an increase in the Company's initial cash
investment in new units. At the same time, the Company experienced unanticipated
declines in sales at its restaurants, resulting in part from increased
competition in the casual/family dining sector and greater than expected
cannibalization of its existing restaurants.
The Company's profitability began to decline in the second half of
1994, and the Company reported its first operating loss in the fourth quarter of
1994. The Company reported additional operating losses for each quarter of 1995
and the first quarter of 1996, and reported a slight operating profit for the
second quarter of 1996.
In the second quarter of 1995, the Company suspended its expansion
plans and, in December 1995, after a thorough analysis of the sales potential
and operating economics of every restaurant in the chain, the Company announced
a $23.9 million restructuring plan. The plan called for closing as many as ten
of the Company's restaurants and for a partial write-down of assets to estimated
fair value in other restaurants. To date, the Company has closed six
restaurants pursuant to the restructuring plan: two in Dallas, Texas and one
in each of Federal Way, Washington; San Francisco, California; Los Angeles,
California; and Menlo Park, California.
The Company recorded a $23,932,000 restructuring charge in connection
with the plan which consisted of three parts: (1) an $18,671,000 non-cash
impairment charge of which $8,318,000 related to a write-down of assets to fair
market value at seven restaurants identified for closure and $10,353,000 related
to a write-down of assets to fair market value at 13 other restaurants, (2) a
$4,655,000 charge for estimated cash costs associated with restaurant closures
and settlement of lease obligations, and (3) a $606,000 charge for other costs,
both cash and non-cash, primarily for consulting and other professional services
rendered in connection with the Company's restructuring.
In December 1995, as part of its restructuring plan, the Company
entered into a $5 million bank line of credit agreement that expires in November
1996. The Company entered into the line of credit to provide for its near-term
capital requirements for closing restaurants and other general corporate
purposes. Borrowings bear interest at the prime rate (8.5% at December 31, 1995)
plus 2%. The initial $2 million available under the line is collateralized by
the Company's personal property, and subsequent advances of the remaining $3
million are to be collateralized by executed leasehold interests in certain
Company restaurants. In connection with the line of credit, the Company issued a
warrant for up to 75,000 shares of the Company's Common Stock at an exercise
price of $6.80 per share. The warrant expires in November 2000. The first 37,500
shares under the warrant are exercisable immediately, and the remaining shares
are exercisable if the Company borrows in excess of the first $2 million
available under the line of credit agreement.
The Company has considered various alternatives in order to raise
capital to resume its expansion, including additional borrowings and the
possible issuance of debt or additional equity or other securities in the
private and public markets. In mid-1995 and in early 1996, the Company conducted
discussions with several possible investors and held discussions with a
placement agent in connection with possible private financings and its ongoing
exploration of strategic alternatives, although the Company's efforts only
located a limited number of such opportunities. The preliminary discussions
relating to other equity opportunities included pricing terms similar to those
contained in the Investment Proposal. The Board concluded that, on balance, an
equity sale was the best available alternative and that the Investment Proposal
offered the best possible terms that the Company could receive in a sale to a
non-affiliated entity.
10
<PAGE> 18
The Company's first contact with Crescent was in May 1995, when it
initiated discussions and negotiations with Crescent regarding certain possible
"sale-leaseback" real estate transactions, which were not consummated, involving
some of the Company's restaurant sites and buildings. In such a sale-leaseback
transaction, the Company would sell a restaurant site or building that it owned
to a buyer and enter into a long-term lease of the site from the purchaser; such
a transaction would provide the Company with immediate cash flow from the sale.
Richard Rainwater, an existing 9% stockholder of the Company, is the Chairman of
the Board of Crescent Real Estate Equities, Inc., a corporation which indirectly
holds approximately 80% of the limited partnership interest and approximately 1%
of the general partnership interest in Crescent, and he holds a significant
equity interest in such corporation. See "INFORMATION CONCERNING CRESCENT."
Although Mr. Rainwater was aware of the course of the Investment Proposal
negotiations with Crescent, he did not actively participate in the negotiations.
In connection with its December 1995 restructuring and the related evaluation of
alternatives for additional financing, in January 1996, the Company contacted
Crescent, which had expressed an interest in investing in the Company during the
sale-leaseback discussions. Between February 9 and March 14, the Company and
representatives of Mr. Rainwater and Crescent engaged in extensive negotiation
of a letter of intent, which was entered into on March 14, 1996, subject to
approval by the Company's Board of Directors. Basic terms of the transaction
were agreed to in the letter of intent, based on the then-current trading price
of the Company's Common Stock. Prior to the Board meeting, the parties began
negotiating the definitive acquisition agreements. The provisions regarding
voting rights, financial performance covenants, price and number of shares to be
purchased were the primary focus of these negotiations. The Company's Board of
Directors held a regularly-scheduled meeting on April 11, 1996, at which
management proposed approval of the terms of the transaction. At this meeting,
the Board focused on the adequacy of the financial terms of the transaction as
set forth in the letter of intent, as well as on a detailed discussion of the
first draft of the Stock Purchase Agreement; the consequences, particularly as
to future alternatives for the Company, of such terms; the negotiations leading
up to the proposed terms; alternative provisions that could be pursued; and
alternatives to the Investment Proposal that could be pursued. At this meeting,
the terms of the transaction were approved, subject to negotiation of
satisfactory definitive agreements. After the Board meeting, at the Board's
request, management was able to negotiate to limit the covenants that would
allow Crescent to elect a majority of the Board of Directors after Conversion
and to provide a cure provision in certain events if the Company did not meet
the financial covenants. In addition, Crescent determined to make a passive
investment in the Company, which resulted in a change to the structure of the
transaction to an acquisition of non-voting Series B Preferred Stock unless it
was converted at the holder's option into voting Series A Preferred Stock (which
is subject to certain mandatory conversion provisions), with a three-year option
to acquire non-voting Series C Preferred Stock, although all of the Convertible
Preferred Stock could be converted into Common Stock.
From April 15 through April 26, representatives of the Company and
Crescent met in person and by telephone to negotiate the definitive terms of the
Stock Purchase Agreement. Upon execution of the definitive Stock Purchase
Agreement on April 26, 1996, the terms were publicly disclosed by the Company.
The Company and Crescent do not have any affiliations, other than that
Mr. Rainwater, a private investor and an affiliate of Crescent, currently holds
approximately 9% of the Common Stock of the Company. Crescent may transfer the
Convertible Preferred Stock in compliance with applicable securities laws,
except that it may not transfer the Series A or Series B Preferred Stock to any
competitor of the Company without its express written consent. The Company has
been informed by Crescent that Crescent has no current intent to exercise the
Option or convert any of the Convertible Preferred Stock to Series A Preferred
Stock or Common Stock. Crescent has also informed the Company that it is more
likely to exercise the Option and convert the Option Shares and the Convertible
Preferred Stock to Common Stock if the exercise price of the Option or
conversion price of the Convertible Preferred Stock is significantly below the
current fair market value of the Common Stock, and that it is more likely to
convert the Series B Preferred Stock to Series A Preferred Stock if the Company
is unable to achieve certain earnings targets for 1996,
11
<PAGE> 19
1997 or 1998 set forth in the Series A Preferred Stock Certificate of
Designation. See "INVESTMENT PROPOSAL" and "PREFERRED STOCK; CERTIFICATES OF
DESIGNATION."
BOARD OF DIRECTORS' RECOMMENDATIONS; VOTE REQUIRED
The Board of Directors has reviewed and considered the terms and
conditions of the Investment Proposal and believes that the Investment Proposal
is fair to, and is advisable and in the best interests of, the Company and its
stockholders and has unanimously approved the Investment Proposal and
unanimously recommends that stockholders vote "for" approval of the Investment
Proposal.
The Board of Directors, in recommending stockholder approval of the
Investment Proposal, considered a number of factors, including (a) the increase
in the Company's cash reserves that will result from the consummation of the
Crescent Transaction and the prospect that, as a result of this equity infusion,
the Company would be able to compete more effectively with its competitors,
better withstand unforeseen adverse events, improve its access to sources of
capital and resume its expansion program more quickly than may otherwise be
possible, (b) the Board of Director's belief that the negative conditions may
continue in the future, or longer, without a cash infusion to fund growth, (c)
the terms of the Stock Purchase Agreement, including certain terms which give
the investor veto rights over certain corporate actions (see "INVESTMENT
PROPOSAL -- Certain Risks") and (d) the alternatives to the Investment Proposal
and the likelihood of such alternatives, including alternative public or private
equity or debt financing and/or a sale of the Company.
In reaching its recommendation, the Board of Directors' primary
consideration was obtaining substantial additional equity or other financing for
expansion of the Company in a timely manner, on the best possible terms. The
Board of Directors believed that substantial additional equity or other
financing was necessary because without such financing, the Company could not
continue to compete effectively with better-financed competitors. The Board took
into account that the Company could incur additional losses before its
performance improved and its growth plans could be resumed on an internally
financed basis. In particular, the Board believed that the Company's long-term
financial health depended upon its continuing to increase its presence in
California and to expand to markets outside California, and that without
additional external capital, it would not be able to resume its expansion
program in the near term. The Board concluded that the Investment Proposal
provided, for the amount of financing, the best terms available at the time the
Company entered into the Stock Purchase Agreement. Accordingly, the Board
concluded that the Investment Proposal was the best alternative to improve
the Company's financial prospects.
While conclusion of the Investment Proposal would permit the Company
to withstand further losses in the near-term while beginning to resume its
expansion, the Board recognized that the Company must also improve sales and
continue to reduce and to control expenses to return to profitability. In
December 1995, the Company adopted and began implementing a restructuring plan
designed to improve the Company's performance. The Board of Directors is
continuing to review operations to determine the nature and scope of any further
action that may be required. Furthermore, even if the Investment Proposal and
the effects of the restructuring plan are consummated and expenses are
controlled, there can be no assurance that the Company will be able to maintain
or improve profitability.
THE BOARD OF DIRECTORS BELIEVES THAT THE INVESTMENT PROPOSAL IS FAIR
TO, AND IS ADVISABLE AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS
STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED THE INVESTMENT PROPOSAL AND
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY VOTE "FOR" APPROVAL
OF THE INVESTMENT PROPOSAL.
The Board of Directors reserves its right, pursuant to the Stock
Purchase Agreement, to amend the provisions of the Stock Purchase Agreement in
all respects before or after approval of the Investment Proposal by the
Company's stockholders. However, the Board of Directors will not
12
<PAGE> 20
amend the Stock Purchase Agreement in any material respect without stockholder
approval, and, in particular, will not increase the number of shares to be
issued or decrease the price per share without such approval. In addition, the
Board of Directors reserves the right to terminate the Stock Purchase Agreement
in accordance with its terms notwithstanding stockholder approval thereof.
The affirmative vote of a majority of the votes cast at the Annual
Meeting of Stockholders, at which a quorum representing a majority of all
outstanding shares of Common Stock of the Company is present, either in person
or by proxy, is required for approval of this proposal. Abstentions and broker
non-votes will each be counted as present for purposes of determining the
presence of a quorum. Neither abstentions nor broker non-votes will have any
effect on the outcome of the vote on the Investment Proposal.
USE OF PROCEEDS
The net proceeds from the Investment Proposal are estimated to be
$5.250 million after deduction of the Company's estimated expenses, Crescent's
reimbursable expenses incurred in connection with the transaction (up to
$75,000) and the initial financing fee of $75,000 payable to Crescent. The
Company expects to use the net proceeds for working capital and other general
corporate purposes, as provided in its business plan, including future
expansion, remodeling the Company's restaurants, installing a point-of-sale
system and upgrading the Company's information systems. Although the Company
has not designated precise amounts of the net proceeds for specific purposes
and expects that the funds generated from operations will contribute to meeting
the Company's capital needs, the Company believes that it may use between $1.0
million and $2.0 million on remodeling the Company's restaurants, between $1.0
million and $2.0 million on computer hardware and software and the remaining
funds, together with funds generated from operations, on expansion. Until so
utilized, the net proceeds will be invested in income-producing securities.
Pursuant to the Company's policy and bank line of credit, these securities must
be investment grade or better with a duration of less than one year. For
example, permitted securities include instruments such as U.S. government
treasury bills, commercial paper or certificates of deposit that comply with
the Company's investment criteria.
CERTAIN RISKS
While the Board of Directors is of the opinion that the Investment
Proposal is fair to, and is advisable and in the best interests of, the Company
and its stockholders, stockholders should consider the following possible
effects in evaluating the Investment Proposal.
Special Consent Rights. Under the provisions of the Series A
Certificate, after Conversion for so long as the Requisite Shares are
outstanding, Series A Holders holding a majority of any Series A Preferred Stock
would have effective veto power over certain significant actions by the Company,
including certain issuances of securities and any merger, consolidation or sale
of all or substantially all of the assets of the Company. These rights generally
remain in effect until conversion of a significant number of shares of
Convertible Preferred Stock into Common Stock through voluntary conversion or
upon the Company's achieving certain per-share price milestones which make the
Series A Preferred Stock mandatorily convertible and prevent future Conversions.
Given such rights, if the Requisite Shares are outstanding and any Series B
Preferred Stock is converted to Series A Preferred Stock, the holders of a
majority of the Series A Preferred Stock may effectively veto transactions
desired by a majority of the Board of Directors or a majority of the Company's
stockholders. On certain matters, such holder may have interests that diverge
from or even conflict with those of the Company. Crescent may transfer the
Series A Preferred Stock in compliance with applicable securities laws, except
that it may not transfer the Series B Preferred Stock, or the Series A Preferred
Stock into which it converts, to any competitor of the Company without its
express written consent. See "PREFERRED STOCK; CERTIFICATES OF DESIGNATION --
Special Consent Rights."
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<PAGE> 21
Composition of the Company's Board of Directors Following the Sale.
Under the Certificates of Designation to be filed with the Delaware Secretary of
State, during the period of any "Event of Non-Compliance" (as defined below) so
long as the Requisite Shares remain outstanding after Conversion of any shares
of Series B Preferred Stock, the Series A Holders holding a majority of the
Series A Preferred Stock would be entitled to elect a majority of the Board of
Directors. As used in the Certificates of Designation an "Event of
Non-Compliance" means either (i) the Company's failure to attain a level of net
income before all amounts properly recorded for interest, taxes, depreciation
and amortization ("EBITDA") of $1,500,000 in fiscal year 1996, $3,500,000 in
fiscal year 1997, or $5,500,000 in fiscal year 1998 or (ii) the Company's
monetary default or a material non-monetary default, or both, under any material
bond, note or other evidence of indebtedness, provided that such default is not
cured or waived by the indebted party. If the Board of Directors of the Company
shall unanimously and specifically authorize and approve any act or activity of
the Company the result of which will be to reduce the Company's EBITDA for any
EBITDA Period, and such reduction in the EBITDA is unanimously and specifically
authorized and approved by the Board of Directors, the EBITDA Target or Targets,
as the case may be, shall be deemed to be automatically reduced to the dollar
amount equal to the amount calculated by multiplying the Company's new, revised
budgeted EBITDA by a fraction, the numerator of which is the original EBITDA
Target specified for the applicable EBITDA Period in (i) of this paragraph and
the denominator of which is the originally budgeted EBITDA for such EBITDA
Period as such originally budgeted EBITDA is set forth in the business plan of
the Company as of April 26, 1996.
In the event the Company's EBITDA for any EBITDA Period shall be an
amount less than the EBITDA Target for such EBITDA Period, but shall be an
amount equal to or greater than the product obtained by multiplying (i) the
EBITDA Target for such EBITDA Period by (ii) .95 (the EBITDA Target less such
amount being hereinafter called the "Shortfall"), then, in such event, the
failure of the Company to earn an amount equal to or greater than the EBITDA
Target for such EBITDA Period shall be deemed to have been cured if, for the
first quarter of the Company's fiscal year next following the EBITDA Period
during which the Company shall fail to have earned the EBITDA Target, the
Company shall have earned the sum of (x) the Shortfall, plus (y) the First
Quarter Projected EBITDA (as hereinafter defined). As used in the Certificates
of Designation, the term "First Quarter Projected EBITDA" shall mean either (i)
the amount determined by multiplying the Company's budgeted EBITDA for the
applicable quarter by a fraction, the numerator of which is the EBITDA Target
for the EBITDA Period in which the quarter falls and the denominator of which is
the Company's budgeted EBITDA for such EBITDA Period, or (ii) if the Company's
budgeted EBITDA for the applicable quarter shall be a loss, then the Company's
budgeted loss for such quarter, whichever of (i) or (ii) is less. For purposes
hereof, the references to budgeted amounts refer to the budgets of the Company
duly approved by the Company's Board of Directors in the ordinary course of
business and consistent with past practice.
After Conversion, the right of the Series A Holders to elect a majority
of the Board of Directors would continue until all Events of Non-Compliance were
either cured or waived. If and whenever an Event of Non-Compliance occurs, and
for so long as an Event of Non-Compliance continues, if any shares of Series A
Preferred Stock and the Requisite Shares are outstanding, the number of
Directors then constituting the whole Board of Directors would be automatically
increased to create such number of vacancies as are necessary so that such
vacancies constitute a majority of the whole Board of Directors, and the Series
A Holders would be entitled to elect the additional Directors necessary to fill
such newly created vacancies. See "INVESTMENT PROPOSAL -- Certain Risks --
Composition of the Company's Board of Directors Following the Sale."
No Standstill Agreement. The Stock Purchase Agreement does not provide
a limit on future acquisition of shares of the Company by Crescent. Crescent may
therefore increase its equity position through the purchase of additional Common
Stock, intensifying the effects related to its large equity interest as set
forth in this Proxy Statement; however, in order to maintain its status as a
REIT, Crescent cannot hold more than 10% of the outstanding voting securities
of the Company.
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Diminished Ability to Sell the Company. As a result of the special
consent rights of the Series A Preferred Stock, after Conversion the Series A
Holders holding a majority of the Series A Preferred Stock could prevent a third
party from acquiring the Company without its consent, so long as the Requisite
Shares remained outstanding. In addition, holders of each of the Series A,
Series B and Series C Preferred Stock will have certain approval rights under
Delaware law to vote as a class on any corporate changes which would adversely
affect such class(es). Finally, due to Crescent's large equity interest, it may
be difficult or even impossible for a third party to acquire the Company without
the consent of Crescent, although Crescent may not hold more than 10% of the
outstanding voting securities of the Company and maintain its status as a REIT.
Accordingly, approval of the Investment Proposal could hinder any future sale of
the Company to a buyer other than Crescent. However, the Board of Directors
believes consummation of the Investment Proposal will enable the Company to
survive the current negative business environment and will enhance the long-term
value of the Common Stock, although there can be no assurance that it will have
this result. In addition to the possible effects of Crescent's voting rights and
the organization of the Board of Directors in the context of a sale of the
Company, certain existing features of the Restated Certificate of Incorporation
(including the right to issue additional preferred stock without stockholder
approval), in conjunction with Delaware law, may already have the effect of
deterring a sale of the Company without the approval of the Company's Board of
Directors. See "SUMMARY OF STOCK PURCHASE AGREEMENT -- Anti-Takeover Provisions
and Effect of Investment Proposal." The Board of Directors has determined that
the opportunity provided by the Investment Proposal outweighs the restrictions
and limitations imposed by the provisions described above and that a financing
such as that provided by the Sale is necessary to the Company's ability to
compete effectively.
Registrations and Effect of Stock Sales by Crescent. No more than
twice, holders of the Securities have the right to cause the shares of Common
Stock issued or issuable upon conversion of the Securities to be registered for
resale from time to time. Any resale of a substantial number of shares,
particularly by a significant stockholder, could at least temporarily depress
the market for the Company's stock.
SUMMARY OF STOCK PURCHASE AGREEMENT
The following summary of certain material terms of the Stock Purchase
Agreement is qualified in its entirety by reference to the provisions of the
Stock Purchase Agreement and the exhibits thereto, which are incorporated by
reference herein and attached hereto as Appendix I through Appendix V,
respectively, to this Proxy Statement.
REPRESENTATIONS AND WARRANTIES
The Stock Purchase Agreement contains certain representations and
warranties of the parties. The Company has made representations and warranties
regarding, among other things, its organization, good standing and
qualification, authority relative to the Stock Purchase Agreement and
Registration Rights Agreement (the "Transaction Documents"), capitalization,
subsidiaries and other investments, absence of conflicts with organizational
documents or obligations of the Company, books and records, litigation, absence
of material adverse changes, tax returns and payments, employee benefit plans,
labor matters, brokerage fees and finders fees, material contracts, title to
assets, insurance, intellectual property, licenses, validity of the securities
issued pursuant to the Investment Proposal, the absence of undisclosed
liabilities, receivables, business plan and the absence of misstatements and
omissions in such representations and warranties and certain filings with the
Securities and Exchange Commission.
Crescent has made representations and warranties regarding its
organization, good standing and qualification, authority relative to the
Transaction Documents, absence of conflicts with organizational documents or
obligations, required approvals, the status of the Convertible Preferred Stock
under securities laws, ownership of the Company's stock and brokerage fees,
finder's fees,
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compensation or other consideration payable in connection with the transactions
contemplated by the Stock Purchase Agreement.
COVENANTS OF THE COMPANY AND CRESCENT
The Company has agreed to certain covenants in connection with the
conduct of its business between the signing of the Stock Purchase Agreement and
the closing of Crescent's initial investment, including conducting its business
in substantially the same manner as conducted before entering into the Stock
Purchase Agreement, not permitting any changes which would have a material
adverse effect on the Company's business and not performing any acts which would
require the consent of Crescent pursuant to its special consent rights contained
in the Certificates of Designation. In addition, the Company has agreed to allow
Crescent or its representatives access to its books and records, including
certain documents filed with the Securities and Exchange Commission. The Company
has also agreed to (i) hold a meeting of stockholders to vote on the Investment
Proposal, (ii) file the Certificates of Designation with the Delaware Secretary
of State, (iii) indemnify any members of the Board of Directors elected by the
holders of the Series A Preferred Stock including maintaining directors and
officers liability insurance of more than $5,000,000 for each such Director and
(iv) use the proceeds of the Investment Proposal as provided in the Company's
business plan, including future expansion, remodeling its restaurants,
installing a point-of-sale system, upgrading its information systems and general
working capital.
The Company and Crescent have jointly agreed to (i) cooperate with each
other in taking the appropriate actions necessary to consummate the Crescent
Transaction, including the issuance of any press releases and/or any filings
with agencies or exchanges and (ii) enter into the Registration Rights
Agreement. Crescent also has agreed not to transfer the Series B Preferred
Stock, or the shares of Series A Preferred Stock into which the Series B
Preferred Stock converts, to any competitor of the Company without its express
written consent.
CLOSING CONDITIONS
The obligation of the Company to issue and sell the Securities on the
Closing Date is subject to the satisfaction on or before the Closing of certain
conditions, including (a) no order, injunction or action which prohibits the
consummation of the Investment Proposal is pending or threatened; (b) receipt
of all consents, authorizations, orders and approvals required in connection
with the Investment Proposal; (c) receipt of all necessary stockholder
approvals; (d) receipt of a certificate from the secretary of Crescent
certifying as to the officers of Crescent and the validity of the resolutions
authorizing and approving the Investment Proposal; and (e) receipt of a
certificate from the president or vice-president of Crescent certifying that
Crescent has performed its covenants and agreements required to be performed by
the Stock Purchase Agreement and that the representations and warranties of
Crescent contained in the Stock Purchase Agreement are true and correct in all
material respects.
The obligation of Crescent to purchase the Securities is subject to the
satisfaction of the following conditions: (a) no order, injunction or action
which prohibits the consummation of the Investment Proposal is pending or
threatened; (b) receipt of all consents, authorizations, orders and approvals
required in connection with the Investment Proposal; (c) receipt of the
Company's business plan and strategic plan, each of which shall be satisfactory
in all respects to Crescent; (d) receipt by the Company of all necessary
stockholder approvals; (e) the filing of the Certificates of Designation with
the Secretary of State of Delaware; (f) delivery by the Company to Crescent of a
certificate from the Secretary of State of Delaware certifying that the Company
is duly incorporated, has a legal corporate existence and is in good standing in
the State of Delaware; (g) receipt of a certificate from the secretary of the
Company certifying as to the officers of the Company and the validity of the
resolutions authorizing and approving the Investment Proposal and the
Certificate of Incorporation and Bylaws; (h) receipt of a certificate from the
president or vice-president of the Company certifying that the Company has
performed its covenants and agreements required to be performed by the Stock
Purchase Agreement and that the
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representations and warranties of the Company contained in the Stock Purchase
Agreement are true and correct in all material respects; (i) no change in the
financial condition, business, operations or prospects of the Company and any of
its subsidiaries, taken as a whole, which would have or would be reasonably
likely to have a material adverse effect on the Company; (j) execution and
delivery by the Company of the Registration Rights Agreement; and (k) receipt of
such other documents, instruments and certificates reasonably requested.
ANNUAL FEES AND EXPENSES
The Stock Purchase Agreement provides that all fees and expenses up to
$75,000 incurred by Crescent in connection with the Crescent Transaction and the
transactions contemplated thereby, whether or not consummated, are to be
reimbursed by the Company.
The Stock Purchase Agreement also provides that the Company shall pay
Crescent an initial fee of $75,000 and, so long as Crescent owns the Requisite
Shares and does not have a representative on the Board of Directors, the Company
shall pay Crescent an annual fee of $50,000, payable quarterly in arrears, and
shall reimburse Crescent for all reasonably incurred out-of-pocket expenses
(including legal fees) incurred in monitoring the investment in the Convertible
Preferred Stock.
TERMINATION
The Stock Purchase Agreement may be terminated at any time prior to the
closing by the mutual consent of Crescent and the Company. In addition, the
Stock Purchase Agreement may be terminated by either party if (a) the Closing
has not occurred by August 31, 1996; (b) a court, agency or commission has
issued an order, decree or ruling or taken other action permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by the Stock
Purchase Agreement and such order, decree, ruling or other action is final and
non-appealable; (c) the other party has not satisfied a closing condition and
such condition has not been waived; or (d) the other party has materially
breached its covenants contained in the Stock Purchase Agreement and has not
cured such breach within 30 days after written notification of the breach.
In the event of termination, any further obligation on the part of any
party will terminate, other than the initial fee described above under "SUMMARY
OF STOCK PURCHASE AGREEMENT -- Annual Fees and Expenses."
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement to be signed upon the
closing of the Sale, holders of at least 50% of shares of Common Stock issued or
issuable pursuant to the conversion of the Convertible Preferred Stock can
require, no more than twice, that the Company use its best efforts to register
the shares of Common Stock issued or issuable upon conversion of the Convertible
Preferred Stock for sale in an offering; provided, however, that any such
registration may be deferred by the Company for a period of not more than ninety
(90) days if the Company determines that proceeding with such registration would
be seriously detrimental to the Company. The Company may include any other
shares of Common Stock in such registration as long the inclusion of such shares
will not limit the number of shares held by Crescent and/or its successors and
assigns (collectively, "Holders") to be included in a registration pursuant to
the Registration Rights Agreement.
In addition, if at any time the Company proposes to register any of its
securities under the Securities Act of 1933, as amended (the "Securities Act")
either for its own account or for the account of any stockholder (other than a
registration relating solely to employee benefit plans, or a corporate
reorganization or other transaction under Rule 145 of the Securities Act, or a
registration on any registration form that does not permit secondary sales), it
must use its best efforts to include, at a Holder's request, any of such
Holder's shares of Common Stock in the registration
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statement. In connection with a firm commitment underwritten offering of shares
to be issued by the Company, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be sold, the
shares of Common Stock entitled to be included in the registration and
underwriting shall be allocated first to the Company for securities being sold
on its own account, next to the Holder(s), and finally to all others. In
addition, the Company is not required to include any Holder's shares in a firm
commitment underwritten offering unless such shares are to be included in the
underwriting on the same terms and conditions as the other shares of Common
Stock being sold under such registration.
PREFERRED STOCK; CERTIFICATES OF DESIGNATION
To issue or reserve for issuance any shares of a series of Preferred
Stock, the Company must file a certificate of designation specifying the rights,
preferences and privileges of such series. In order to create the three series
of Convertible Preferred Stock contemplated by the Investment Proposal, Company
must file a certificate of designation (each, a "Certificate of Designation")
with respect to each of the Series A Voting Participating Convertible Preferred
Stock (the "Series A Preferred Stock"), Series B Non-Voting Participating
Convertible Preferred Stock (the "Series B Preferred Stock") and Series C
Non-Voting Participating Convertible Preferred Stock (the "Series C Preferred
Stock"; collectively, the Series A Preferred Stock, the Series B Preferred
Stock and the Series C Preferred Stock are referred to herein as the
"Convertible Preferred Stock").
Certain provisions of the Certificates of Designation for the Series A
Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock are
summarized below. The following summary does not purport to be complete or to
give effect to provisions of statutory or common law. The summary is qualified
in its entirety by reference to the Certificates of Designation attached as
Appendices II, III and IV hereto.
Series A Preferred Stock. The Series A Preferred Stock is issuable upon
conversion of the Series B Preferred Stock to be issued in the Investment
Proposal. 1,187,906 shares of Series A Preferred Stock, par value $0.001 per
share, are authorized under the Certificate of Designation for the Series A
Preferred Stock. The Board of Directors may increase or decrease (but not below
the number of shares outstanding or reserved for issuance) the number of
authorized shares of Series A Preferred Stock.
Holders of Series A Preferred Stock may convert their shares into
Common Stock at their option at any time. In addition, the Company may require
the conversion of the outstanding shares of Series A Preferred Stock into Common
Stock if (i) either (A) the average closing price of the Company's Common Stock
for 120 consecutive trading days is at least $15 per share, or (B) the Company
has consummated a public offering of its Common Stock, at a price of at least
$15 per share, as a result of which the total number of shares of the Company's
stock outstanding is increased by 25%, and (ii) the Company has in effect a
registration statement for the shares of Common Stock into which the Series A
Preferred Stock are convertible, and such registration statement remains in
effect until all such shares are sold.
Each share of Series A Preferred Stock is initially convertible into
one share of Common Stock, but such conversion ratio will be adjusted in certain
circumstances, including if and when the Company combines, reclassifies,
consolidates, subdivides or splits the Common Stock, or issues dividends payable
in Common Stock with respect to the Common Stock; however, in order to maintain
its status as a REIT, Crescent may not convert any shares of Convertible
Preferred Stock, if such conversion would cause Crescent to hold more than 10%
of the outstanding voting securities of the Company. In certain circumstances,
including the consummation of a merger or the sale of substantially all of the
assets of the Company, holders of Series A Preferred Stock will be entitled to
receive the consideration paid to a holder of the number of shares of Common
Stock into which such shares of Series A Preferred Stock held are convertible.
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The Company must reserve a sufficient number of authorized but unissued
shares of its Common Stock to effect the conversion of all of the outstanding
shares of Series A Preferred Stock, and if the number of shares of authorized
but unissued shares of its Common Stock is insufficient for such reservation,
the Company must take certain steps to increase its authorized shares of Common
Stock.
Holders of Series A Preferred Stock are entitled to vote, voting
together with the holders of Common Stock as a single class, on all matters
submitted to a vote of the stockholders. Each holder of Series A Preferred Stock
is entitled to the number of votes equal to the number of shares of Common Stock
into which the shares of Series A Preferred Stock held are then convertible.
In addition, so long as the greater of (i) 593,953 shares of Series A,
Series B and Series C Preferred Stock, taken together, or (ii) 50% of the total
shares of Series A, Series B and Series C Preferred Stock issued on or after the
date of the filing of the Certificates of Designation (the "Requisite Shares")
remain outstanding, the holders of Series A Preferred Stock have additional
voting rights with respect to various actions taken by the Company and with
respect to the election of directors. In addition to voting with the shares of
Common Stock, the holders of Series A Preferred Stock will also vote, as a
separate class, on certain amendments of the Company's Restated Certificate of
Incorporation or bylaws; the creation or increase in authorized number of shares
of classes of stock with equal or greater liquidation or dividend rights;
mergers or consolidations; any increase in the size of the Board of Directors
above seven directors; certain fundamental change transactions of the Company;
material deviations from the Company's operating or capital budgets; material
changes in the Company's operating strategy; any acquisitions or repurchases of
any securities of the Company; and the Company's incurrence of certain debts or
amendments to instruments governing existing debts.
As to the election of directors, so long as shares of the Requisite
Shares are outstanding and certain defaults occur (each, an "Event of
Non-Compliance"), the number of directors of the Company will automatically be
increased so that a majority of the positions are vacant and the holders of the
Series A Preferred Stock, whether or not Crescent is such a holder, voting
separately and in addition to any other required vote, will be entitled to elect
the directors to fill such vacancies. The default circumstances in which the
Board of Directors will be increased are if and when (i) the Company's
consolidated net income, before reserving of all amounts for interest, taxes,
depreciation and amortization, is not equal to, unless the Board of Directors
has approved a change, at least $1,500,000 for fiscal year 1996, $3,500,000 for
fiscal year 1997, and $5,500,000 for fiscal year 1998 (each, an "EBITDA
Target"); (ii) the Company fails to give notice as required under the Series A
Preferred Stock Certificate of Designation of a permitted adjustment under the
Certificate of Designation to such an EBITDA Target; or (iii) the Company is in
monetary default or a material non-monetary default under any material bond,
note or other evidence of indebtedness of the Company or under any indenture or
other instrument under which any evidence of indebtedness has been issued or is
governed, and such default has not been cured or waived. If the Board of
Directors of the Company shall unanimously and specifically authorize and
approve any act or activity of the Company, the result of which will be to
reduce the Company's EBITDA for any EBITDA Period, and such reduction in the
EBITDA is unanimously and specifically authorized and approved by the Board of
Directors, the EBITDA Target or Targets, as the case may be, shall be deemed to
be automatically reduced to the dollar amount equal to the amount calculated by
multiplying the Company's new, revised budgeted EBITDA by a fraction, the
numerator of which is the original EBITDA Target specified for the applicable
EBITDA Period in the (i) of this paragraph, and the denominator of which is the
originally budgeted EBITDA for such EBITDA Period as such originally budgeted
EBITDA is set forth in the business plan of the Company as of April 26, 1996.
In the event the Company's EBITDA for any EBITDA Period shall be an
amount less that the EBITDA Target for such EBITDA Period, but shall be an
amount equal to or greater than the product obtained by multiplying (i) the
EBITDA Target for such EBITDA Period by (ii) .95 (the EBITDA Target less such
amount being hereinafter called the "Shortfall"), then, in such event, the
failure of the Company to earn an amount equal to or greater than the EBITDA
Target for such EBITDA Period
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<PAGE> 28
shall be deemed to have been cured if, for the first quarter of the Company's
fiscal year next following the EBITDA Period during which the Company shall fail
to have earned the EBITDA Target, the Company shall have earned the sum of (x)
the Shortfall, plus (y) the First Quarter Projected EBITDA (as hereinafter
defined). As used in the Certificates of Designation, the term "First Quarter
Projected EBITDA" shall mean either (i) the amount determined by multiplying the
Company's budgeted EBITDA for the applicable quarter by a fraction, the
numerator of which is the EBITDA Target for the EBITDA Period in which the
quarter falls, and the denominator of which is the Company's budgeted EBITDA for
such EBITDA Period, or (ii) if the Company's budgeted EBITDA for the applicable
quarter shall be a loss, then the Company's budgeted loss for such quarter,
whichever of (i) or (ii) is less. For the purposes hereof, the references to
budgeted amounts refer to the budgets of the Company duly approved by the
Company's Board of Directors in the ordinary course of business and consistent
with past practice.
With respect to dividends, the Series A Preferred Stock is junior to
the Series B Preferred Stock and Series C Preferred Stock, but senior to the
Common Stock. No cash dividends or other distributions may be paid on any junior
stock unless a dividend has been declared and set aside with respect to the
Series A Preferred Stock. The per-share amount of the Series A Preferred Stock
dividend must be equal to the amount that the holder thereof would be entitled
to receive as dividends if such shares of Series A Preferred Stock were
converted into Common Stock. In addition, holders of Series A Preferred Stock
will be entitled to participate in any dividends that are paid on any junior
stock.
With respect to liquidation preference, the Series A Preferred Stock is
junior to the Series B Preferred Stock and Series C Preferred Stock, but senior
to the Common Stock. Upon liquidation of the Company, the holders of Series A
Preferred Stock will be entitled to receive $4.63 per share plus, after an Event
of Non-Compliance, cumulated preferential cash dividends at a rate of $0.56
annually per share. In addition, upon any merger, consolidation, or sale of
substantially all of the assets of the Company, the holders of Series A
Preferred Stock will be entitled to such cumulative preferential dividends prior
to the consummation of such transaction.
Series B Preferred Stock. The Series B Certificate of Designation
authorizes 1,187,906 shares of Series B Preferred Stock, par value $0.001 per
share, all of which will be issued in the Investment Proposal. The Board of
Directors may increase or decrease (but not below the number of shares
outstanding or reserved for issuances) the number of shares authorized. With the
exception of voting rights, liquidation preference, and conversion rights, the
rights, preferences and privileges of the Series B Preferred Stock are identical
to those of the Series A Preferred Stock described above.
Except as required by law, holders of Series B Preferred Stock have no
voting rights. With respect to dividends, the Series B Preferred Stock is
junior to the Series C Preferred Stock, but senior to the Series A Preferred
Stock and Common Stock. No cash dividends or other distributions may be paid on
any junior stock unless a dividend has been declared and set aside with respect
to the Series B Preferred Stock. The per-share amount of the Series B Preferred
Stock dividend must be equal to the amount that the holder thereof would be
entitled to receive as dividends if such shares of Series B Preferred Stock
were converted into Common Stock. In addition, holders of Series B Preferred
Stock will be entitled to participate in any dividends that are paid on Common
Stock.
As to liquidation preference, the Series B Preferred Stock is senior
to the Series A Preferred Stock and Common Stock, but junior to the Series C
Preferred Stock. Upon liquidation of the Company, the holders of Series B
Preferred Stock will be entitled to receive $4.63 per share plus, after an
Event of Non-Compliance, cumulated preferential cash dividends at a rate of
$0.56 annually per share. In addition, upon any merger, consolidation, or sale
of substantially all of the assets of the Company, the holders of Series B
Preferred Stock will be entitled to such cumulative preferential dividends
prior to the consummation of such transaction. Each share of Series B
Preferred Stock is convertible, at the option of the holder and subject to the
Conversion Limitation,
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into (i) one share of Series A Preferred Stock, at any time up to and including
the date on which the Series A Preferred Stock becomes mandatorily convertible
into Common Stock, or (ii) one share of Common Stock at any time (in each case
subject to adjustments to the conversion rate for stock splits, stock dividends
and similar events).
Series C Preferred Stock. The 593,953 shares of Series C Preferred
Stock, par value $0.001, authorized for issuance under the Series C Preferred
Stock Certificate of Designation are subject to the option to be granted to
Crescent in the Investment Proposal. The Board of Directors may increase or
decrease (but not below the number of shares outstanding or reserved for
issuances) the number of shares authorized. With the exception of voting rights,
liquidation preference, amount of dividends, and conversion rights, the rights,
privileges and preferences of the Series C Preferred Stock are identical to
those of the Series A Preferred Stock described above.
Except as required by law, holders of the Series C Preferred Stock have
no voting rights. The Series C Preferred Stock is senior to the Series A
Preferred Stock, the Series B Preferred Stock and the Common Stock. No cash
dividends or other distributions may be paid on any junior stock unless a
dividend has been declared and set aside with respect to the Series C Preferred
Stock. The per-share amount of the Series C Preferred Stock dividend must be
equal to the amount that the holder thereof would be entitled to receive as
dividends if such shares of Series C Preferred Stock were converted into Common
Stock. In addition, holders of Series C Preferred Stock will be entitled to
participate in any dividends that are paid on Common Stock.
Upon liquidation of the Company, the holders of Series C Preferred
Stock will be entitled to receive $6.00 per share plus, after an Event of
Non-Compliance, cumulated preferential cash dividends at a rate of $0.72
annually per share. In addition, upon any merger, consolidation, or sale of
substantially all of the assets of the Company, the holders of Series C
Preferred Stock will be entitled to such cumulative preferential dividends
prior to the consummation of such transaction. Each share of Series C Preferred
Stock is convertible, at any time and at the option of the holder, subject to
the Conversion Limitation, into one share of Common Stock, with adjustments to
the conversion rate in the same circumstances as apply to the conversion rate
for the Series A and Series B Preferred Stock.
FINANCIAL INFORMATION
THE COMPANY'S 1995 ANNUAL REPORT AND THE COMPANY'S QUARTERLY REPORT ON
FORM 10-Q FOR THE FISCAL QUARTER ENDED JUNE 16, 1996, EACH OF WHICH ACCOMPANIES
THIS PROXY STATEMENT, INCLUDE THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF
THE COMPANY AND THE RELATED NOTES THERETO, WHICH ARE INCORPORATED INTO THIS
PROXY STATEMENT BY REFERENCE. Additional copies of the financial information can
be obtained at the principal office of the Company at 2901 Tasman Drive, Suite
109, Santa Clara, California. See "SELECTED FINANCIAL INFORMATION."
ANTI-TAKEOVER PROVISIONS AND EFFECT OF INVESTMENT PROPOSAL
Certain provisions of the Company's Certificate of Incorporation and
Bylaws could have the effect of delaying, deferring, or preventing a change in
control of the Company. Such provisions may have the effect of depriving
stockholders of the opportunity to receive a premium for their shares. These
provisions include, among others, a classified Board of Directors, authorization
for stockholders to act only at annual or special meetings, a requirement that
stockholders give advance notice of director nominations and proposals for
action, and the exclusive right of the Board to establish the size of the Board
and to fill vacancies. In addition, the provisions described below may have a
similar effect. The shares acquired by Crescent as part of the Investment
Proposal will be exempt from certain of these anti-takeover provisions, as
described below.
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<PAGE> 30
Blank Check Preferred Stock. In addition, the Company's Certificate of
Incorporation currently authorizes the issuance by the Company's Board of
Directors, without the necessity of further notice or authorization by
stockholders, of two hundred fifty thousand (250,000) shares of preferred stock
(of which all such shares were unissued), and if the Proposal to amend the
Company's Restated Certificate of Incorporation to increase the authorized
preferred stock is approved, 3.5 million shares of preferred stock will be
authorized (of which 2,969,765 shares will be issued or reserved as Series A,
Series B or Series C Preferred Stock, as part of the Investment Proposal). The
remaining preferred stock may be issued from time to time in one or more
series, and may have such voting powers, preferences and relative rights,
designations, qualifications, and limitations as the Board of Directors may
fix by resolution at the time of issuance. The remaining preferred stock could
be used to deter or discourage an unsolicited attempt by another person or
entity to acquire control of the Company. Such stock could be issued, for
example, with voting or conversion privileges intended to make an acquisition
of the Company more difficult or more costly. The Company has no present
intention to issue such stock to deter such a takeover bid. See "PREFERRED
STOCK; CERTIFICATES OF DESIGNATION" and "AMENDMENT OF RESTATED CERTIFICATE OF
INCORPORATION AND INCREASE IN AUTHORIZED CAPITAL STOCK."
Special Consent Rights. In addition, the consummation of the Investment
Proposal may diminish the ability of current stockholders to sell the Company
without the concurrence of Crescent. See "INVESTMENT PROPOSAL -- Certain Risks."
Management Entrenchment. Assuming Conversion, the fact that Crescent
owns the Securities could make it more difficult for a third party to cause a
change in management of the Company, which could possibly lead to entrenchment
of current or future management or could have the effect of making the Company
less attractive to a potential acquiror. See "INFORMATION CONCERNING THE
COMPANY -- Change in Control and Severance Arrangements."
Delaware Section 203. Section 203 of the GCL limits business
combinations (as therein defined) between corporations and interested persons
(as therein defined, which would include Crescent with respect to the Company
following the Sale). However, the statute exempts business combinations with
interested stockholders who became such in a transaction approved by the Board
of Directors. Accordingly, this statute will not apply to the shares of stock
acquired by Crescent pursuant to the Investment Proposal.
INFORMATION CONCERNING CRESCENT
Crescent Real Estate Equities, Inc. ("Crescent Corporation") is a
publicly traded, fully integrated real estate company, organized as a REIT,
which owns a portfolio of properties located primarily in 16 metropolitan
submarkets and consisting of 33 office properties, 3 full-service hotel
properties, 2 retail properties, 1 destination health and fitness resort and
debt and non-voting equity interests in 3 residential development corporations.
Crescent Corporation was formed as a Maryland corporation in February 1994. In
May 1994, Crescent Corporation issued 16,047,392 shares of common stock to
public and private investors in an initial public offering and contributed the
net offering proceeds to the purchaser under the Investment Proposal, Crescent,
through Crescent Real Estate Equities, Ltd. ("CREE, Ltd.") and CRE Limited
Partner, Inc. ("CLP, Inc."), both of which are wholly-owned subsidiaries of
Crescent Corporation, in consideration of which CREE, Ltd. received a 1% general
partnership interest and CLP, Inc. received a 70.3% limited partnership interest
in Crescent. Crescent Corporation owns its assets and carries on its operations
and other activities relating to its properties directly through Crescent and
certain of its other subsidiaries and indirectly through three residential
development corporations. Because of Crescent's experience and presence in the
commercial real estate industry, Crescent's investment in the Company may create
certain business synergies for the Company such as added expertise in
identifying future restaurant sites and therefore enhance Crescent's investment.
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<PAGE> 31
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast at the Annual
Meeting of Stockholders, at which a quorum representing a majority of all
outstanding shares of Common Stock of the Company is present, either in person
or by proxy, is required for approval of this proposal. Absentions and broker
non-votes each will be counted as present for purposes of determining the
presence of a quorum. Neither abstentions nor broker non-votes will have any
effect on the outcome of the vote. Approval of both Proposal 2, "AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION AND INCREASE IN AUTHORIZED PREFERRED
STOCK," and Proposal 3, "AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION AND
INCREASE IN AUTHORIZED COMMON STOCK," are also required for approval of this
proposal.
THE BOARD OF DIRECTORS BELIEVES THAT THE INVESTMENT PROPOSAL IS FAIR
TO, AND IS ADVISABLE AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS
STOCKHOLDERS AND HAS UNANIMOUSLY APPROVED THE INVESTMENT PROPOSAL AND
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY VOTE "FOR"
APPROVAL OF THE INVESTMENT PROPOSAL.
PROPOSAL 2
----------
AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION
AND INCREASE IN AUTHORIZED PREFERRED STOCK
GENERAL
The Company's Restated Certificate of Incorporation currently
authorizes the issuance of up to two hundred fifty thousand (250,000) shares of
Preferred Stock. The Board of Directors proposes that the Restated Certificate
of Incorporation be amended to increase the number of shares of Preferred Stock
authorized to three million five hundred thousand (3,500,000).
AUTHORIZED PREFERRED STOCK
As of June 30, 1996, no shares of Preferred Stock were issued or
outstanding. The Board of Directors believes that the Company needs to increase
the authorized number of shares of Preferred Stock in order to consummate the
Investment Proposal, and to have flexibility to raise capital in the future by
selling shares of its Preferred Stock. An aggregate of 2,969,765 shares of the
Preferred Stock will be designated as Series A, Series B or Series C Preferred
Stock and issued or reserved for issuance as part of the Investment Proposal.
The remaining 530,235 shares will be blank check preferred stock.
The amendments to the Restated Certificate of Incorporation in
Proposals 2 and 3 and the consummation of the Investment Proposal would increase
the authorized number of shares of all classes of stock of the Company from
7,750,000 to 18,500,000 shares. The authorized number of shares of Preferred
Stock would increase from 250,000 to 3,500,000 shares. The increase in the
number of shares of Preferred Stock would serve principally to permit the
creation of the Series A, Series B and Series C Preferred Stock and to therefore
permit the consummation of the Investment Proposal. This amendment is therefore
contingent upon approval of the Investment Proposal and the proposal to increase
the Company's authorized Common Stock.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the outstanding shares of the
Company's Common Stock is required for approval of the proposal to amend the
Restated Certificate of Incorporation to increase the authorized Preferred
Stock. Abstentions and broker non-votes will each be counted as present for
purposes of determining the presence of a quorum. Abstentions and broker
non-votes will each have the same effect as a negative vote. Approval of this
proposal is contingent on the
23
<PAGE> 32
approval of both Proposal 1, "INVESTMENT PROPOSAL," and Proposal 3, "AMENDMENT
OF RESTATED CERTIFICATE OF INCORPORATION AND INCREASE IN AUTHORIZED COMMON
STOCK."
The Board believes that the proposed amendment to the Restated
Certificate of Incorporation is in the best interests of the Company and the
stockholders for the reasons stated above. THEREFORE, THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSAL TO AMEND THE
COMPANY'S RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF PREFERRED STOCK.
PROPOSAL 3
----------
AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION AND
INCREASE IN AUTHORIZED COMMON STOCK
GENERAL
The Company's Restated Certificate of Incorporation currently
authorizes the issuance of up to seven million five hundred thousand (7,500,000)
shares of Common Stock. The Board of Directors proposes that the Restated
Certificate of Incorporation be amended to increase the number of shares of
Common Stock authorized to fifteen million (15,000,000).
AUTHORIZED COMMON STOCK
As of June 30, 1996, approximately 5,635,103 shares of the Company's
Common Stock were outstanding, approximately 589,931 shares of the Company's
Common Stock were reserved for issuance upon the exercise of outstanding
options, an additional 198,928 were reserved for future issuance pursuant to the
Company's stock option and stock purchase plans, and approximately 175,000
shares of the Company's Common Stock were reserved for issuance upon the
exercise of outstanding warrants. The Board of Directors believes that the
Company needs to increase the authorized number of shares of Common Stock in
order to consummate the Investment Proposal, to issue options to attract and
motivate employees, and to have flexibility to raise capital in the future by
selling shares of its Common Stock. As set forth elsewhere in this Proxy
Statement, the Company plans to increase the share reserve under its Second
Amended and Restated Stock Option Plan (the "Option Plan") by 700,000 shares,
and to enter into the Investment Proposal, subject to stockholder approval.
Accordingly, if the amendment to the Option Plan and/or the Investment Proposal
are approved, some of the shares by which the Company's authorized Common
Stock will be increased will be issued or reserved for issuance in the
amendment to the Option Plan and the consummation of the Investment Proposal,
as the case may be.
The amendments to the Restated Certificate of Incorporation in
Proposals 2 and 3 and the consummation of the Investment Proposal would
increase the authorized number of shares of all classes of stock of the
Company from 7,750,000 to 18,500,000 shares. The authorized number of shares
of Common Stock would increase from 7,500,000 to 15,000,000 shares. The
increase in the number of shares of Common Stock would make available shares of
Common Stock for the conversion of the Preferred Stock into Common Stock, as
contemplated by the Investment Proposal, as well as making available shares for
issuance upon exercise of options granted after the proposed increase in the
share reserve under the Option Plan. See "PROPOSAL TO AMEND 1988 STOCK OPTION
PLAN"; "INFORMATION CONCERNING THE COMPANY -- Executive Compensation and Other
Matters."
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<PAGE> 33
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the outstanding shares of the
Company's Common Stock entitled to vote at the Annual Meeting of Shareholders,
at which a quorum is present and voting either in person or by proxy, is
required for approval of the proposal to amend the Restated Certificate of
Incorporation to increase the authorized Common Stock. Abstentions and broker
non-votes will each be counted as present for purposes of determining the
presence of a quorum. Abstentions and broker non-votes will each have the same
effect as a negative vote. Approval of this proposal is not contingent upon the
approval of any other proposal.
The Board believes that the proposed amendment to the Restated
Certificate of Incorporation is in the best interests of the Company and the
stockholders for the reasons stated above. THEREFORE, THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSAL TO AMEND THE
COMPANY'S RESTATED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK.
PROPOSAL 4
----------
ELECTION OF DIRECTORS
The Company has a classified board of directors, consisting of three
classes of directors. At each Annual Meeting of Stockholders, directors of the
class are elected to serve three-year terms to succeed those directors whose
terms expire on the date of such Annual Meeting. Prior to April 11, 1996, the
Company's Board of Directors consisted of two Class II and Class III directors
and one Class I director, resulting in a five-member Board of Directors. On
April 11, 1996, the Board of Directors temporarily increased the size of the
Board to seven members by increasing the number of Class III directors to three,
and elected Vern O. Curtis to fill the then-existing Class I vacancy, and M.
Michael Casey to fill the newly-created Class III position. Effective as of the
1996 Annual Meeting of Stockholders, the size of the Company's Board of
Directors will automatically be decreased to five members, with two directors in
Class II and Class III and one director in Class I.
The Board currently consists of Wallace R. Hawley and Vern O. Curtis,
the two Class I directors whose terms expire at the Annual Meeting of
Stockholders in 1996; Carl R. Hays and Charles A. Lynch, the two Class II
directors whose terms expire in 1997; and Robert Ferngren, M. Michael Casey and
Byron K. Adams, the three Class III directors whose terms expire in 1998.
Mr. Hawley's term as a Class I director expires immediately prior to
the date of the 1996 Annual Meeting of Stockholders, and Mr. Hawley is not
standing for re-election because of other commitments. Mr. Adams has determined
that he will resign as a Class III director as of immediately prior to the 1996
Annual Meeting, also because of other commitments.
The Board of Directors' nominee for election at the Annual Meeting of
Stockholders to Class I of the Board of Directors is Vern O. Curtis. If elected,
the nominee will serve as a director until the Company's Annual Meeting of
Stockholders in 1999, and until his successor is elected and qualified. If the
nominee declines to serve or becomes unavailable for any reason, or if a vacancy
occurs before the election (although management knows of no reason to anticipate
that this will occur), the proxies may be voted for such substitute nominee as
management may designate.
If a quorum is present and voting, the nominee for Class I director
receiving the highest number of votes will be elected as Class I director.
Abstentions and shares held by brokers that are present but not voted, because
the brokers were prohibited from exercising discretionary authority (i.e.,
"broker non-votes"), will be counted as present for purposes of determining
whether a quorum is present.
25
<PAGE> 34
The table below sets forth for the directors who will serve after the
1996 Annual Meeting of Stockholders, including the Class I nominee to be elected
at this meeting, certain information with respect to age and background as of
May 30, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY DIRECTOR SINCE
- ------------------- ------- ------------------------------ ------------------
Class I Director and Nominee to be elected at the 1996 Annual Meeting of Stockholders:
<S> <C> <C> <C>
Vern O. Curtis 62 Director 1996
Class II Directors whose terms expire at the 1997 Annual Meeting of Stockholders:
Carl R. Hays 58 Director 1989
Charles A. Lynch 68 Chairman of the Board of the 1989
Company since March 1995 and
Director
Class III Directors whose terms expire at the 1998 Annual Meeting of Stockholders:
M. Michael Casey 50 Director 1996
Robert Ferngren 41 President, Chief 1995
Executive Officer,
and Director
</TABLE>
Mr. Curtis has served as a director of the Company since April 1996.
Since June 1991, Mr. Curtis has been self-employed as an investor. During this
time Mr. Curtis devoted three years, between June 1992 and June 1995, to
full-time service for the Church of Jesus Christ of Latter-Day Saints. From
August 1988 to June 1991, Mr. Curtis was Dean of the School of Business and
Economics of Chapman College, a liberal arts college in Orange, California. From
1968 to January 1987, Mr. Curtis served in various executive positions with
Denny's, Inc., a diversified restaurant company of over 1,900 units, including
serving as President and Chief Executive Officer from 1980 to 1987 and Chairman
of the Board from 1985 to 1987. He currently serves on the Board of Directors of
PIMCO Funds, a group of 18 mutual funds that manages approximately $15 billion,
primarily in fixed income securities; PIMCO Commercial Mortgage Security Trust,
Inc., a closed-end fund specializing in investment in commercial mortgage backed
securities; and a group of 13 Real Estate Investment Trusts, each listed on the
American Stock Exchange, which are affiliated with Storage Properties, Inc., the
largest developer, manager and operator of mini-warehouses in the United States.
Mr. Hays has served as a Director of the Company since March 1989. Mr.
Hays currently is a franchisee of Outback Steakhouse in Northern California.
From November 1989 to January 1993, Mr. Hays was the Chief Operating Officer of
Al Copeland Enterprises, the parent company of Popeye's Famous Fried Chicken and
Church's Fried Chicken. From March 1988 to November 1989, Mr. Hays served as a
consultant to Al Copeland Enterprises. From July 1986 to March 1988, Mr. Hays
was the President of Florentine Pasta Shops, a restaurant chain. Mr. Hays is
also a Director of JB's Restaurant, Inc., a restaurant chain.
Mr. Lynch was elected Chairman of the Board in March 1995 and has
served as a Director of the Company since April 1989. Mr. Lynch also served as
the Chief Executive Officer of the Company from May 1995 to November 1995. Since
July 1989, Mr. Lynch has also served as the Chairman of Market Value Partners
Company, an investment firm. From July 1988 to June 1989, he was the President
and Chief Executive Officer of Levolor Corporation, a manufacturer of window
coverings. From September 1986 to June 1988, he was the Chairman and Chief
Executive Officer of DHL Airways, Inc., a provider of express courier service.
From 1978 to 1986, Mr. Lynch was the Chairman of the Board and Chief Executive
Officer of Saga Corporation, a diversified restaurant and food services company.
Mr. Lynch is also a Director of Nordstrom, Inc., Pacific Mutual Insurance
Companies, and PST Vans.
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<PAGE> 35
Mr. Casey has been a Director of the Company since April 1996. Mr.
Casey is currently Senior Vice President and Chief Financial Officer of
Starbucks Corporation. From December 1986 to July 1995 Mr. Casey was Executive
Vice President and Chief Financial Officer of Family Restaurants, Inc., the
owner and operator of several restaurant chains, including Coco's, Carrow's, El
Torito, Chi-Chi's, and Casa Gallardo. He also served from March 1988 to March
1993 as President and Chief Executive Officer of El Torito Restaurants, Inc.,
and from 1986 to 1993 as a Director of Family Restaurants, Inc. Prior to 1986
Mr. Casey was a Vice President of W.R. Grace & Co., and Deputy Group Executive
of its restaurant group.
Mr. Ferngren was elected President and Chief Executive Officer of the
Company in November 1995 and a Director of the Company in December 1995. From
June 1993 until November 1995 he was President and Chief Executive Officer of
America's Clubhouse Grill, Inc., a sports theme restaurant. From 1981 until
1993, Mr. Ferngren was employed by Bennigan's Restaurants, a restaurant chain,
where he last served as President.
During the fiscal year ended December 31, 1995, the Board held 10
meetings. No director serving on the Board in fiscal year 1995 attended fewer
than 75% of the aggregate of such meetings of the Board and of any Committee of
the Board on which he served.
The Company does not have a standing Nominating Committee, but does
have an Audit and Finance Committee and a Compensation Committee.
The Audit and Finance Committee's function is to review, with the
Company's independent auditors and management, the results of the examination of
the Company's financial statements by the independent auditors and the
independent auditors' opinion. The Audit and Finance Committee also approves all
professional services performed by the independent auditors, recommends the
retention of the independent auditors to the Board, subject to ratification by
the stockholders, and periodically reviews the Company's accounting policies and
internal accounting and financial controls. At the commencement of fiscal 1995,
the members of the Audit and Finance Committee were Messrs. Hawley and Hays. Mr.
Adams joined the Audit and Finance Committee in March 1995. Mr. Hawley has
resigned from the Audit and Finance Committee effective at the end of his term
as a director immediately prior to the 1996 Annual Meeting, and Mr. Adams has
also resigned from the Audit and Finance Committee effective immediately prior
to the 1996 Annual Meeting. Messrs. Casey and Curtis joined the Audit and
Finance Committee, and Mr. Casey was elected Chairman effective upon the 1996
Annual Meeting of Stockholders. The Audit and Finance Committee held one meeting
during the fiscal year ended December 31, 1995.
The Compensation Committee's function is to review and recommend
executive compensation, including officer salary levels, incentive compensation
programs, and stock option grants. At the commencement of fiscal 1995, the
members of the Compensation Committee were Messrs. Adams, Hawley, Hays and
Lynch. Mr. Lynch resigned from the Compensation Committee in March 1995 when he
was elected Chairman of the Board. Mr. Hawley has resigned from the Compensation
Committee effective at the end of his term as a director immediately prior to
the 1996 Annual Meeting, and Mr. Adams has also resigned from the Compensation
Committee effective immediately prior to the 1996 Annual Meeting. Messrs. Casey
and Curtis joined the Compensation Committee, and Mr. Curtis was elected
Chairman of the Compensation Committee effective upon the 1996 Annual Meeting of
Stockholders. The Compensation Committee held two meetings during the fiscal
year ended December 31, 1995. For additional information concerning the
Compensation Committee, see "INFORMATION CONCERNING THE COMPANY -- Compensation
Committee Interlocks and Insider Participation" and "COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION."
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<PAGE> 36
PROPOSAL 5
----------
PROPOSAL TO AMEND 1988 STOCK OPTION PLAN
In February 1989 the Board of Directors adopted, and in November 1989
the stockholders of the Company approved, the 1988 Stock Option Plan. Amendments
to the 1988 Stock Option Plan have been adopted by the Board of Directors and
approved by the stockholders of the Company from time to time. The 1988 Stock
Option Plan, as amended, is referred to as the "Option Plan." The Option Plan
provides for the granting of options to purchase the Common Stock of the Company
to eligible full-time employees (including officers) and directors of the
Company or certain parent or subsidiary corporations of the Company (a
"Participating Company"), or to individuals who are rendering services as
consultants or other independent contractors to a Participating Company. As of
April 30, 1996, a total of 129,278 shares of Common Stock remained available for
option grants under the Option Plan out of a total authorized share reserve of
800,000 such shares. On March 18, 1996, the Board of Directors adopted an
amendment to the Option Plan, subject to stockholder approval, to increase the
maximum aggregate number of shares that may be issued under the Option Plan from
800,000 shares to 1,500,000 shares. This amendment will enable the Company to
continue to grant options to eligible employees, directors and consultants under
the terms and conditions of the Option Plan.
Prior to its amendment, the Option Plan provided for an initial
automatic grant to each new, eligible nonemployee director of an option to
purchase shares of a share of the Company's Common Stock in an amount equal to
$100,000 divided by the fair market value of the Company's Common Stock, and
annual automatic grants of options to each eligible nonemployee director in an
amount equal to $50,000 divided by the fair market value of a share of the
Company's Common Stock. On March 18, 1996, the Board of Directors amended the
Option Plan to further limit the total number of shares to be granted
automatically to eligible nonemployee directors pursuant to the above-described
formula to a number of shares equal to $100,000 divided by the fair market value
of a share of the Company's Common Stock, up to a maximum of 10,000 shares, for
the initial grant, and an amount equal to $50,000 divided by the fair market
value of a share of the Company's Common Stock, up to a maximum of 3,000 shares,
for each annual grant. This amendment limiting the number of options granted to
the Company's eligible nonemployee directors is intended to avoid undue dilution
of the stockholders' interests in the Company when the price of the Company's
Common Stock is relatively low.
The Board of Directors believes that approval of the amendment to
increase the maximum aggregate number of shares issuable under the Option Plan
is in the best interests of the Company and its stockholders because the
availability of an adequate number of shares reserved for issuance under the
Option Plan and the ability to grant stock options are important factors in the
Company's ability to attract and retain key employees, directors and consultants
who are expected to be important contributors to the Company's success, and to
align their interests with those of the stockholders through the direct benefit
employees, directors and consultants will receive as a result of improved stock
performance.
SUMMARY OF THE PROVISIONS OF THE OPTION PLAN, AS AMENDED
The following summary of the Option Plan, including the proposed
amendments, is qualified in its entirety by the specific language of the Option
Plan, a copy of which is available to any stockholder upon request.
IN GENERAL
The Option Plan is administered by the Board of Directors and/or by a
duly-appointed committee of the Board having such powers as specified by the
Board (hereinafter referred to collectively as the "Board"). All options must
be granted, if at all, by February 28, 1999. All full-time employees (including
officers), eligible directors, consultants and other
28
<PAGE> 37
independent contractors of the Company or any present or future parent and/or
subsidiary corporations of the Company, are eligible to participate in the
Option Plan. As of April 30, 1996, approximately 216 employees, directors and
consultants were eligible to participate in the Option Plan.
Options granted under the Option Plan may be either incentive stock
options as defined in section 422 of the Code or nonqualified stock options. As
amended by the Board on March 18, 1996, subject to stockholder approval, a
maximum of 1,500,000 (subject to adjustment in the event of stock dividends,
stock splits, reverse stock splits, recapitalizations, combinations,
reclassifications, or like changes in the capital structure of the Company) of
the authorized but unissued or treasury shares of Common Stock of the Company
may be issued under the Option Plan. In order to qualify compensation realized
with respect to options granted under the Option Plan as "performance-based
compensation" within the meaning of section 162(m) of the Code, the Option Plan
provides that, subject to adjustment for changes in the capital structure of
the Company, no person may be granted within any fiscal year options which in
the aggregate are for the purchase of more than 100,000 shares.
During the lifetime of the optionee, an option may be exercised only
by the optionee. An option may not be transferred or assigned, except by will
or the laws of descent and distribution.
The Board may terminate or amend the Option Plan or outstanding
options at any time, but without stockholder approval, the Board may not amend
the Option Plan to increase the total number of shares of Common Stock reserved
for issuance pursuant to the Option Plan or change the class of persons
eligible to receive options under the Option Plan. In general, no amendment may
adversely affect any then-outstanding option without the optionee's consent.
GRANTS TO EMPLOYEES, DIRECTORS WHO ARE ALSO EMPLOYEES AND
CONSULTANTS
The Board, in its sole discretion, may choose which employees,
including directors who are also employees, and consultants will be granted
options under the Option Plan. The exercise price of any nonqualified stock
option granted under the Option Plan may not be less than 85% of the fair
market value of a share of the Common Stock of the Company on the date of
grant, while the exercise price of any incentive stock option granted under the
Option Plan may not be less than 100% of the fair market value of a share of
the Common Stock of the Company on the date of grant. In addition, the Option
Plan provides that any incentive stock option granted to a person who owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company (a "Ten Percent Owner") must have an exercise
price not less than 110% of the fair market value of a share of the Common
Stock of the Company on the date of grant.
Options granted under the Option Plan may be exercised by payment of
the exercise price (1) in cash, by check, or cash equivalent, (2) by tender to
the Company of shares of the Common Stock of the Company which have a value, as
determined by the Board, not less than the aggregate exercise price of the
option being exercised, (3) by the optionee's recourse promissory note for no
more than 95% of the aggregate exercise price and cash for the balance, (4) by
the assignment of the proceeds of a sale of some or all of the shares being
acquired upon the exercise of an option, or (5) by any combination of the above.
Subject to the terms of the Option Plan, the Board is authorized to set
the time or times within which each option granted under the Option Plan will be
exercisable or the event or events upon the occurrence of which all or a portion
of each option will be exercisable and the term of each option. Options granted
under the Option Plan generally become vested and exercisable as to 20% of the
option on the "initial vesting date" and as to 1/60 of the option for each
calendar month of service following the "initial vesting date," so long as the
optionee remains in continuous employment with a Participating Company. The
"initial vesting date" is either (1) the date one year after the date of option
grant or (2) if the option is granted within six months of an optionee's
29
<PAGE> 38
commencement of employment, the date one year after commencement of employment.
All incentive stock options must be exercised, if at all, not later than 10
years after the date the option is granted, provided that all nonqualified stock
options must be exercised, if at all, not later than 10 years and one month
after the date the option is granted, provided that an incentive stock option
granted to a Ten Percent Owner must be exercised, if at all, not later than 5
years after the date the option is granted.
In the event of a Transfer of Control (as defined in the Option Plan),
the Board may, in its sole discretion, arrange with the acquiring or successor
corporation to assume the Company's rights and obligations under the outstanding
options or substitute an option for such corporation's stock for such
outstanding options. Any options which are neither assumed or substituted for
nor exercised will terminate as of the date of the Transfer of Control.
GRANTS TO ELIGIBLE NONEMPLOYEE DIRECTORS
Only members of the Board who are not employees of the Company
and who are not individuals who perform services, whether as an employee,
partner, principal, sole proprietor, director, trustee, independent contractor
or consultant for any entity which owns more than 5% of the total combined
voting power of all classes of stock of the Company are eligible to receive
Options ("Director Options"), as described below. No member of the Board who is
not an employee may receive options under the Option Plan except Director
Options. Director Options are granted automatically under the terms of the
Option Plan and are intended to qualify as "formula awards" within the meaning
of Rule 16b-3 under the Securities Exchange Act of 1934. The Board has no
authority or discretion to select the nonemployee directors who will receive
Director Options, to set the exercise price of, the number of shares subject to,
or the duration of Director Options, or to determine the time at which Director
Options will be granted.
As amended, the Option Plan provides for an initial grant to a new,
eligible nonemployee director for the number of shares of Common Stock equal to
$100,000 divided by the fair market value of a share of Common Stock on the date
of the option grant, rounded to the nearest whole share, but not to exceed
10,000 shares. Each eligible nonemployee director is also entitled under the
Option Plan, as amended, to an annual grant for the number of shares of the
Company's Common Stock equal to $50,000 divided by the fair market value of a
share of the Company's Common Stock on the date of the option grant, rounded to
the nearest whole share, but not to exceed 3,000 shares. The number of shares of
Common Stock subject to the first annual grant to an eligible nonemployee
director who has not served as a director of the Company for the full
twelve-month period preceding the date of grant of that option is pro rated to
reflect the actual period of time during that year actually served as a
director, rounded to the nearest whole share.
The initial grant to an eligible nonemployee director who has not
previously received an option under the Option Plan occurs on the date that such
individual becomes an eligible nonemployee director. Annual grants are made
automatically to all those eligible nonemployee directors continuing to serve as
directors on the date of the Company's meeting of the Board in the month of
December, or, if no meeting of the Board is held in the month of December, on
December 15.
Director Options may only be nonqualified stock options, and all
Director Options must have an exercise price equal to 100% of the fair market
value of a share of the Company's Common Stock on the date of grant. Shares of
Common Stock acquired upon the exercise of Director Options may be purchased
with (1) cash, a check, or cash equivalent, (2) shares of the Company's Common
Stock with a value not less than the option exercise price, (3) the assignment
of proceeds from the immediate sale of the shares acquired upon exercise of the
option or (4) a combination of the foregoing.
30
<PAGE> 39
Director Options vest and become exercisable in installments of 20% one
year after the date of grant and 1/60 for each complete calendar month
thereafter, provided that the individual continues to serve as a director
continuously from the date of the option's grant until the relevant vesting
date. Director Options are exercisable to the extent vested for a period of 10
years from the date of grant, subject to earlier termination in the event that
the individual ceases to serve as a member of the Board or a Transfer of Control
(as defined in the Option Plan) occurs with respect to the Company. Upon a
Transfer of Control, Director Options automatically become fully vested.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF OPTION PLAN
The following summary is intended only as a general guide as to the
United States federal income tax consequences under current law with respect to
participation in the Option Plan, and does not attempt to describe all possible
federal or other tax consequences of such participation. Furthermore, the tax
consequences of options are complex and subject to change, and a taxpayer's
particular situation may be such that some variation of the described rules is
applicable.
Incentive Stock Options. Options designated as incentive stock options
are intended to fall within the provisions of section 422 of the Code. An
optionee recognizes no taxable income as the result of the grant or exercise of
such an option.
For optionees who do not dispose of their shares within two years
following the date the option was granted or within one year following the
transfer of the shares upon exercise of the option, the gain on sale of the
shares (which is the difference between the sale price and the purchase price of
the shares) will be taxed as long-term capital gain. If an optionee satisfies
such holding periods upon a sale of the shares, the Company will not be entitled
to any deduction for federal income tax purposes. If an optionee disposes of
shares within two years after the date of grant or within one year from the date
of exercise (a "disqualifying disposition"), the lesser of (i) the difference
between the option exercise price and the fair market value of the shares on the
determination date of the option (see discussion under "Nonqualified Stock
Options" below) or (ii) the gain realized on the disposition will be taxed as
ordinary income at the time of disposition. Any additional gain and any loss
will constitute a capital gain or loss. A capital gain or loss will be long-term
if the optionee's holding period is more than 12 months. Any ordinary income
recognized by the optionee upon the disposition of the shares should be
deductible by the Company for federal income tax purposes, except to the extent
such deduction is limited by applicable provisions of the Code or the
regulations thereunder.
The difference between the option exercise price and the fair market
value of the shares on the determination date of an incentive stock option (see
discussion under "Nonqualified Stock Options" below) is an adjustment in
computing the optionee's alternative minimum taxable income, and may be subject
to an alternative minimum tax, which is paid if such tax exceeds the regular tax
for the year. Special rules may apply with respect to certain subsequent sales
of the shares in a disqualifying disposition, certain basis adjustments for
purposes of computing the alternative minimum taxable income on a subsequent
sale of the shares, and certain tax credits which may arise with respect to
optionees subject to the alternative minimum tax.
Nonqualified Stock Options. Nonqualified stock options have no special
tax status. An optionee generally recognizes no taxable income as the result of
the grant of such an option. Upon exercise of a nonqualified stock option, the
optionee normally recognizes ordinary income equal to the excess (if any) of the
fair market value of the shares on the determination date (as defined below)
over the purchase price of the shares. If the optionee is an employee, such
ordinary income generally is subject to withholding of income and employment
taxes. The "determination date" is the date on which the option is exercised
unless the shares are not vested, in which case the determination date is the
date on which the shares vest. If the determination date is after the exercise
date, the optionee may elect, pursuant to section 83(b) of the Code, to have the
exercise date be the determination date by filing an election with the Internal
Revenue Service not later than 30 days after the date the option is exercised.
Upon the sale of shares acquired by the exercise of
31
<PAGE> 40
a nonqualified stock option, any gain or loss, based on the difference between
the sale price and the fair market value on the determination date, will be
taxed as capital gain or loss. A capital gain or loss will be long-term if the
optionee's holding period is more than 12 months from the determination date. No
tax deduction is available to the Company with respect to the grant of a
nonqualified stock option, or the sale of the stock acquired pursuant to the
exercise of a nonqualified stock option. The Company should be entitled to a
deduction equal to the amount of ordinary income recognized by the optionee as a
result of the exercise of a nonqualified stock option or the vesting of shares,
except to the extent such deduction is limited by applicable provisions of the
Code or the regulations thereunder.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes present or represented
by proxy and entitled to vote at the Annual Meeting of Stockholders, at which a
quorum representing a majority of all outstanding shares of Common Stock of the
Company is present, either in person or by proxy, is required for approval of
this proposal. Abstentions and broker non-votes will each be counted as present
for purposes of determining the presence of a quorum. Abstentions will have the
same effect as a negative vote. Broker non-votes, on the other hand, will have
no effect on the outcome of the vote.
The Board believes that the proposed amendment to the Option Plan to
increase the maximum aggregate number of the Company's shares for which options
may be granted under the Option Plan from 800,000 shares to 1,500,000 shares is
in the best interests of the Company and the stockholders for the reasons stated
above. THEREFORE, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
APPROVAL OF THE INCREASE IN SHARE RESERVE OF THE OPTION PLAN FROM 800,000 SHARES
TO 1,500,000 SHARES.
CHANGES TO BENEFIT PLANS
1988 Stock Option Plan. The Board of Directors has amended the 1988
Stock Option Plan (the "Option Plan"), subject to stockholder approval, to
increase the maximum aggregate number of the Company's shares that may be issued
under the Option Plan from 800,000 shares of common stock to 1,500,000 shares.
The Board also amended the Option Plan to limit the maximum number of shares
granted to nonemployee directors. No option grants have been made under the
Option Plan following these amendments, except for options for a total of 20,000
shares granted to two newly-appointed directors in April 1996.
The New Plan Benefits Table sets forth grants of stock options received
under the Option Plan during the fiscal year ended December 31, 1995 by (1) the
persons listed in the Summary Compensation Table; (2) all current executive
officers as a group; (3) all current directors who are not executive officers as
a group; and (4) all non-executive officer employees as a group. The number of
shares and exercise prices for Director Options are based on the fair market
value of the Company's Common Stock on the date of their automatic grant as
provided in the Option Plan. Other grants under the Option Plan are made at the
discretion of the Board of Directors. Accordingly, future grants under the
Option Plan are not yet determinable.
32
<PAGE> 41
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
FRESH CHOICE, INC.
SECOND AMENDED AND RESTATED
1988 STOCK OPTION PLAN
----------------------------------------------
EXERCISE PRICE NUMBER OF
NAME AND POSITION (PER SHARE) SHARES
- ------------------------------ ------------------------ -------------------
<S> <C> <C>
Robert Ferngren $6.875 100,000(1)
President and Chief Executive
Officer
Charles A. Lynch $6.25 100,000
Chairman of the Board and
Former Chief Executive Officer
David A. Anderson $6.75 5,000
Vice President and Chief
Financial Officer
Michael G. Althouse $6.75 5,000
Vice President and General
Counsel
Executive Group (3 persons)(2) $6.875 205,000
Non-Executive Director Group $6.875 21,819(4)
(5 persons)(3)
Non-Executive Officer $6.25-
Employee Group $10.375 418,897
Former Officer:
Martin T. Culver -- 0(5)
President, Chief Executive
Officer and Chairman of the
Board
</TABLE>
- -------------------------
1 Does not include option grants to purchase an aggregate of 120,000
shares of common stock granted outside of the Option Plan.
2 Number of persons does not include Mr. Althouse, who ceased to be an
executive officer of the Company on March 1, 1996.
3 Includes Messrs. Curtis and Casey, who did not become directors until
April 1996 and received no option grants in fiscal 1995.
4 Represents grants to Mr. Hawley, Mr. Hays and Mr. Adams under the
provisions of the Option Plan provisions providing for automatic grants
to eligible non-employee directors. See "INFORMATION CONCERNING THE
COMPANY -- Compensation of Directors."
5 Mr. Culver ceased to be an executive officer of the Company in May
1995, and therefore did not receive any option grants in fiscal year
1995.
33
<PAGE> 42
PROPOSAL 6
----------
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of the Company selected, and by the affirmative
vote of a majority of the votes cast at the Annual Meeting of Stockholders held
on May 23, 1995 the stockholders approved Deloitte & Touche LLP as independent
accountants to audit the financial statements of the Company for the fiscal year
1995. No event described in paragraph (a)(1)(v) of Item 304 of Regulation S-K
has occurred within the Company's fiscal year ended December 31, 1995.
The Board of Directors of the Company has selected Deloitte & Touche
LLP as independent accountants to audit the financial statements of the Company
for the fiscal year ending December 29, 1996. A representative of Deloitte &
Touche LLP is expected to be present at the Annual Meeting with the opportunity
to make a statement if the representative desires to do so, and is expected to
be available to respond to appropriate questions.
The affirmative vote of a majority of the votes cast at the Annual
Meeting of Stockholders, at which a quorum representing a majority of all
outstanding shares of Common Stock of the Company is present and voting, either
in person or by proxy, is required for approval of this proposal. Abstentions
and broker non-votes will each be counted as present for purposes of determining
the presence of a quorum, but will not be counted as having been voted on the
proposal. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS
FOR THE FISCAL YEAR ENDING DECEMBER 29, 1996.
34
<PAGE> 43
INFORMATION CONCERNING THE COMPANY
EXECUTIVE COMPENSATION
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of April 30, 1996, with
respect to the beneficial ownership of the Company's Common Stock by (i) all
persons known by the Company to be the beneficial owners of more than 5% of the
outstanding Common Stock of the Company; (ii) each director and director-nominee
of the Company; (iii) the executive officers named in the Summary Compensation
Table; and (iv) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNERS SHARES OWNED(1)
- ----------------------------------------------- -------------------------------
NUMBER OF PERCENTAGE
SHARES OF CLASS
----------- ------------
<S> <C> <C>
Rosewood Venture Capital, Inc............................. 507,431 9.00%
100 Crescent Court, Suite 1700
Dallas, TX 75201
Richard E. Rainwater...................................... 496,400 8.81%
777 Main Street, Suite 2700
Fort Worth, TX 76102
T. Rowe Price Associates, Inc............................. 430,000 7.63%
100 East Pratt Street
Baltimore, MD 21202
Byron K. Adams, Jr........................................ 43,597(2) *
M. Michael Casey.......................................... 0 *
Vern O. Curtis............................................ 0 *
Robert Ferngren........................................... 0 *
Wallace R. Hawley......................................... 24,926(3) *
Carl R. Hays.............................................. 10,075(4) *
Charles A. Lynch.......................................... 35,701(5) *
David A. Anderson......................................... 10,499(6) *
Michael G. Althouse....................................... 0(7) *
Executive officers and directors as a group (9 persons)... 124,798(8) 2.21%
Former Officer:
Martin T. Culver.......................................... 169,100(9) 3.00%
</TABLE>
- ----------------------------
* Less than 1%
1 Except as indicated in the footnotes to this table, the persons named
in the table have sole voting and dispositive power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
community property laws, where applicable.
35
<PAGE> 44
2 Includes 3,534 shares subject to stock options exercisable within 60
days of April 30, 1996. Does not include any shares beneficially owned
by Rosewood Venture Capital, Inc. As of April 1, 1994, Mr. Adams
advised the Company that he was no longer a principal or employee of
Rosewood Venture Capital, Inc.
3 Includes 10,356 shares held as trustee for the Hawley Revocable Living
Trust 7/30/92, and 14,570 shares subject to stock options exercisable
within sixty days of April 30, 1996.
4 Includes 9,065 shares subject to stock options exercisable within sixty
days of April 30, 1996.
5 Includes 34,324 shares subject to stock options exercisable within
sixty days of April 30, 1996.
6 Represents 10,499 shares subject to stock options exercisable within
sixty days of April 30, 1996.
7 Mr. Althouse ceased to be an executive officer of the Company on March
1, 1996, and all of his unexercised options were canceled on March 31,
1996.
8 Includes an aggregate of 71,982 shares subject to stock options held by
all executive officers and directors as a group exercisable within
sixty days of April 30, 1996.
9 Includes 400 shares held by Mr. Culver as custodian for two minors.
However, Mr. Culver disclaims beneficial ownership of such 400 shares.
Mr. Culver ceased to be an executive officer of the Company on May 15,
1995.
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth information concerning the annual and
long-term compensation of the Chief Executive Officer of the Company and the
three other most highly-compensated executive officers of the Company as of
December 31, 1995 whose total salary and incentive compensation for the fiscal
year ended December 31, 1995 exceeded $100,000 for services in all capacities to
the Company; also set forth is information regarding a former Chief Executive
Officer of the Company who served during fiscal 1995. The following table also
sets forth the total salary and incentive compensation for each of such
executive officers for the fiscal years ended December 25, 1994 and December 26,
1993.
36
<PAGE> 45
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------------------- -----------------
Awards All
Other ----------------- Other
Annual Options Compen-
Name and Principal Position Year Salary(1) Compensation (Shares) sation
- --------------------------- ---- ------------- ---------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Robert Ferngren 1995 $26,442(2) $1,367(3) 220,000 $13(4)
President and Chief 1994 -- -- -- --
Executive Officer 1993 -- -- -- --
Charles A. Lynch 1995 $182,694(5) $7,612(6) 100,000 $840(4)
Chairman of the Board and 1994 -- -- 4,969 $4,000(7)
Former Chief Executive 1993 -- -- 4,042 $3,000(7)
Officer
David A. Anderson 1995 $185,000 -- 5,000 $174(4)
Vice President and Chief 1994 $51,942(8) -- 30,000 $30(4)
Financial Officer 1993 -- -- -- --
Michael G. Althouse 1995 $150,000(9) -- 5,000 $174(4)
Vice President and General 1994 $147,115(10) -- 10,000 $174(4)
Counsel 1993 -- -- -- --
Former Officer:
Martin T. Culver 1995 $144,215(11) $9,500(12) 0 $300,047(13)
President, Chief 1994 $238,461 $16,000(14) 20,000 $102(4)
Executive Officer and 1993 $232,000 $19,200(15) 45,000 --
Chairman of the Board
</TABLE>
- ---------------------
1 No bonuses were paid to any of the named officers during fiscal years
1993, 1994 and 1995.
2 Mr. Ferngren joined the Company as President and Chief Executive
Officer in November 1995.
3 Includes $250 in telephone allowance and $1,117 in car allowance.
4 Reflects premium payments for group life insurance paid for by the
Company on behalf of each employee with a base salary in excess of
$50,000 ("Premium Payments") in stated fiscal year.
5 Mr. Lynch, who has been a director of the Company since 1989, joined
the Company as its Chairman of the Board in March 1995 and became Chief
Executive Officer in May 1995. He served as Chief Executive Officer
until the Company hired Mr. Ferngren in November 1995, and continues to
serve as Chairman of the Board.
6 Includes $3,370 in telephone allowance and $4,242 in car allowance.
7 Reflects amount paid for services rendered as a director in stated
fiscal year.
8 Mr. Anderson joined the Company as Vice President and Chief Financial
Officer in September 1994.
9 Mr. Althouse ceased to be an executive officer of the Company in March
1996.
10 Mr. Althouse joined the Company as Vice President and General Counsel
in January 1994.
37
<PAGE> 46
11 Mr. Culver ceased to be an executive officer of the Company on May 15,
1995.
12 Includes $2,700 in telephone allowance and $6,800 in auto allowance.
13 Includes $300,000 in severance pay and $47 in Premium Payments.
14 Includes $4,300 in telephone allowance and $11,700 in auto allowance.
15 Reflects combined telephone and auto allowance.
The following table provides the specified information concerning
grants of options to purchase the Company's Common Stock made during the year
ended December 31, 1995 to the persons named in the Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS IN FISCAL 1995 OPTION TERM(1)
- ------------------------------------------------------------------------- ------------------------
% OF TOTAL
OPTIONS
GRANTED TO EXERCISE
EMPLOYEES OR BASE
OPTIONS IN FISCAL PRICE EXPIRATION
NAME GRANTED(#)(2) YEAR ($/SH)(3) DATE 5% ($) 10% ($)
- ------------------- ------------- ---------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert Ferngren 165,000(4) 39.40% $6.875 12/14/05 $712,800 $1,808,400
55,000(5) 13.13% $6.875 12/14/05 $237,600 $602,800
Charles A. Lynch 74,300(6) 17.74% $6.25 4/17/05 $291,999 $740,028
25,700(7) 6.14% $6.25 4/17/05 $101,001 $255,972
David A. Anderson 5,000 1.19% $6.75 9/19/05 $21,250 $53,800
Michael G. Althouse 5,000 1.19% $6.75 9/19/05 $21,250 $53,800
Former Officer:
Martin T. Culver 0 0.00% -- -- -- --
</TABLE>
- ----------------------
1 Potential gains are net of exercise price, but before taxes associated
with exercise. These amounts represent certain assumed rates of
appreciation only, based on the Securities and Exchange Commission
rules. Actual gains, if any, on a stock option exercise depends on the
future performance of the Common Stock, overall market conditions, and
the optionholder's continued employment through the vesting period. The
amounts reflected in this table may not necessarily be achieved. One
share of stock purchased in 1995 at $6.25 would yield profits of $3.93
per share at 5% appreciation over ten years, or $9.96 per share at 10%
appreciation over the same period. One share of stock purchased in 1995
at $6.75 would yield profits of $4.25 per share at 5% appreciation over
ten years, or $10.76 per share at 10% appreciation over the same
period. One share of stock purchased
38
<PAGE> 47
in 1995 at $6.875 would yield profits of $4.32 per share at 5%
appreciation over ten years, or $10.96 per share at 10% appreciation
over the same period.
2 Options granted during fiscal 1995 generally vest and become
exercisable 20% one year from the date of grant, and 1/60 per month for
each complete calendar month of continuous employment thereafter. See
also footnotes 4, 5, and 6, and "INFORMATION CONCERNING THE COMPANY --
Change in Control and Severance Arrangements."
3 All options were granted at market value on the date of grant.
4 Includes option to purchase 65,000 shares granted outside the Option
Plan, with the same terms and provisions as options granted under the
Option Plan.
5 Option granted outside the Option Plan vests and becomes exercisable in
one installment five years from December 15, 1995, the date of grant,
but otherwise contains the same terms and provisions as options granted
under the Option Plan.
6 18,575 shares are immediately exercisable as of April 17, 1995, the
date of grant, and the remaining 55,725 will vest and become
exercisable 1/60 per month beginning May 17, 1996; provided, however,
that if the Company attains certain levels of profitability, the
vesting of up to all of the remaining unvested shares may accelerate.
7 6,425 shares are immediately exercisable as of April 17, 1995, the date
of grant, and the remaining 19,275 shares will vest and become
exercisable 1/60 per month beginning May 17, 1996; provided, however,
that if the Company attains certain levels of profitability, the
vesting of up to all of the remaining unvested shares may accelerate.
39
<PAGE> 48
The following table provides the specified information concerning
exercises of options to purchase the Company's Common Stock in the fiscal year
ended December 31, 1995, and unexercised options held as of December 31, 1995 by
the persons named in the Summary Compensation Table:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES(1)
- ------------------------------------------------------------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT DECEMBER 31, MONEY OPTIONS AT
1995 DECEMBER 31, 1995(1,2,3)
--------------------------- ----------------------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- --------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert Ferngren 0 -- 0 220,000 -- 0
Charles A. Lynch(4) 0 -- 30,683 81,741 $11,142 $362
David A. Anderson(5) 0 -- 7,498 27,502 0 0
Michael G. Althouse(6) 0 -- 10,000 5,000 0 0
Former Officer:
Martin T. Culver 6,522 $48,404 0 0 -- --
</TABLE>
- ----------------
1 Company stock option grants generally vest over five years and are
exercisable only to the extent vested. Prior to March 1994, stock
option grants were generally immediately exercisable, subject to the
right of the Company to repurchase at the optionee's original purchase
price unvested shares held upon termination of service, and became
vested over five years.
2 Values are net of exercise price.
3 Based on the 1995 year-end market price per share of $6.25 on December
29, 1995, the last trading date prior to the end of the Company's
fiscal year.
4 As of December 31, 1995, 30,683 shares subject to Mr. Lynch's stock
options were exercisable and the remaining 81,741 were unexercisable.
5 None of Mr. Anderson's shares have value in excess of their exercise
price, based on the December 31, 1995 closing price of $6.25.
6 As of December 31, 1995, 10,000 shares subject to Mr. Althouse's stock
options were exercisable (6,167 shares of which were subject to
repurchase by the Company) and the remaining 5,000 shares were
unexercisable. None of Mr. Althouse's shares have value in excess of
their exercise price, based on the December 31, 1995 closing price of
$6.25.
40
<PAGE> 49
COMPENSATION OF DIRECTORS
Each nonemployee director of the Company receives $750 cash
compensation for each meeting of the Board of Directors that he attends. Each
nonemployee director who is a member of a committee of the Board of Directors
receives $500 cash compensation for attendance at each committee meeting. Each
nonemployee director serving as a chairperson of a committee of the Board of
Directors receives $1,000 cash compensation for such service during a fiscal
year. The directors of the Company are reimbursed for expenses incurred in
connection with attendance at Board of Directors or committee meetings.
During fiscal 1993, the Company adopted, and the stockholders approved,
an amendment to the Company's 1988 Stock Option Plan (the "Option Plan") to
permit initial and annual automatic stock option grants ("Director Options") to
certain nonemployee directors. In December 1995, each of the three eligible
nonemployee directors (Messrs. Adams, Hawley, and Hays) received an annual
option grant for 7,273 shares of the Company's common stock (an amount equal to
$50,000 divided by the fair market value of a share of the Company's common
stock on the date of the option grant, rounded to the nearest whole share). In
1996, the Board of Directors amended the Option Plan to limit the number of
shares subject to the option initially granted to eligible nonemployee directors
upon joining the Board to a number of shares with an aggregate fair market value
of $100,000, up to a maximum of 10,000 shares, and the number of shares subject
to the option granted annually to eligible nonemployee directors to a number of
shares with an aggregate fair market value of $50,000, up to a maximum of 3,000
shares. See "PROPOSAL TO AMEND 1988 STOCK OPTION PLAN."
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who beneficially own more
than 10% of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
("SEC"). SEC regulations also require that such persons furnish the Company with
copies of all Section 16(a) forms.
Based solely on the Company's review of such forms furnished to the
Company and written representations from certain reporting persons, the Company
believes that all filing requirements applicable to the Company's executive
officers, directors, and more than 10% stockholders were complied with, except
that three statements of changes in beneficial ownership for J. Bradford Wells,
a former officer of the Company, reporting an aggregate of seven transactions,
were not timely filed.
CHANGE IN CONTROL AND SEVERANCE ARRANGEMENTS
After Conversion and subject to the Conversion Limitation during an
Event of Non-Compliance the Series A Holders would have the right to elect a
majority of the Board. See "INVESTMENT PROPOSAL -- Certain Risks -- Composition
of the Company's Board of Directors Following the Sale."
On or about November 9, 1995, the Company provided Robert Ferngren with
an employment offer letter appointing him President and Chief Executive
Officer; the offer letter was amended on July 29, 1996 to clarify certain
terms. The offer letter provides that if the Company terminates Mr. Ferngren's
employment without cause within the first two years of his employment, Mr.
Ferngren would receive severance pay equal to two years' salary at the
then-current rate, which is currently $275,000. In the event of such termination
without cause by the Company after the first two years, Mr. Ferngren would be
entitled to severance pay equal to one year's salary at the then-current rate.
"Cause" is defined as (a) the willful and intentional failure substantially to
perform his duties (other than because of physical or mental incapacity), (b)
the commission of an illegal act in connection with his reemployment, or (c)
the commission of any act
41
<PAGE> 50
which falls outside the ordinary course of his responsibilities and which
exposes the Company to a significant level of undue liability. A determination
of "cause" requires the affirmative vote of at least two-thirds of all members
of the Board of Directors. In the event of a change in control of the Company,
Mr. Ferngren's options to purchase the Company's Common Stock would become
immediately vested and exercisable, and if he were terminated by the acquiring
company, he would also be entitled to the above-described severance payments.
Under the terms of the Offer Letter, "Change in Control" means an ownership
change in which the stockholders of the Company before such ownership change do
not retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Company. The Investment Proposal is not a
change in control under Mr. Ferngren's agreement.
On or about May 15, 1995, the Company and Martin T. Culver, the
Company's then President and Chief Executive Officer, entered into a severance
agreement, which provided that his last day of employment would be May 15, 1995
and that he would receive a severance amount equal to one year of his current
salary, or $300,000.
On or about February 7, 1996, the Company entered into an agreement
with Michael G. Althouse, the Company's then-Vice President and General Counsel,
which provided that his last day of employment would be March 1, 1996, and that
he would be paid severance payments totalling $78,750, payable in installments,
with the last installment to be paid on August 29, 1996.
Effective July 18, 1996, the Company entered into Severance Agreements
with each of its vice presidents and Charles A. Lynch, its Chairman of the
Board. These severance agreements provide that in the event of a layoff or a
"Change in Control," the executive would be entitled to receive severance pay of
nine months' continued salary for the vice presidents and 18 months' continued
salary for Mr. Lynch. Under the terms of these severance agreements, "Change in
Control" means an ownership change in which the stockholders of the Company
before such ownership change do not retain, directly or indirectly, at least a
majority of the beneficial interest in the voting stock of the Company. The
Investment Proposal is not a change in control for purposes of these severance
agreements.
The Company's 1988 Stock Option Plan, as amended (the "Option Plan"),
provides that, with respect to options other than options granted to
non-employee directors ("Director Options"), in the event of certain mergers,
sale of assets, sale or exchange by the stockholders of their shares, or a
liquidation or dissolution of the Company, in which the stockholders do not
retain at least a majority of the voting stock of the Company or its successor
(a "Transfer of Control"), the Board of Directors may arrange with the
surviving, continuing, successor, or purchasing corporation, as the case may be
(the "Acquiring Corporation"), to either assume the Company's rights and
obligations under stock options outstanding under the Option Plan (the
"Options"), or substitute options for the Acquiring Corporation's stock for such
outstanding Options. Any Options which are neither assumed or substituted for by
the Acquiring Corporation nor exercised as of the date of the Transfer of
Control will terminate effective as of the date of the Transfer of Control.
All shares subject to Director Options will become 100% vested and
exercisable in the event of a Transfer of Control. Any Director Option not
exercised as of the date of a Transfer of Control or assumed or substituted for
by the Acquiring Corporation will terminate as of such date. The Investment
Proposal is not a Transfer of Control under the Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Byron K. Adams, Jr., Wallace R. Hawley, Carl R. Hays, and Charles A.
Lynch served as members of the Board of Directors' Compensation Committee at the
commencement of the year ended December 31, 1995. Mr. Lynch resigned from the
Compensation Committee upon his election as Chairman of the Board in March 1995.
The Compensation Committee granted salary adjustments, incentive compensation
and stock options to executive officers in the fiscal year 1995, as ratified by
the Board of Directors. Martin T. Culver, who served as the Company's
42
<PAGE> 51
Chairman of the Board until March 1995 and Chief Executive Officer until May
1995, was an employee of the Company and a member of the Board of Directors. Mr.
Lynch became an employee of the Company upon his election as Chairman of the
Board in March 1995; he continues to serve on the Board of Directors, although
he resigned from the Compensation Committee at that time. Mr. Ferngren became
President and Chief Executive Officer of the Company in November 1995 and a
member of the Board of Directors in December 1995. None of Messrs. Culver, Lynch
and Ferngren participated in determinations of their respective salaries,
bonuses, or option grants.
43
<PAGE> 52
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors at the
commencement of the 1995 fiscal year was constituted of the four nonemployee
directors of the Company, Messrs. Adams, Hawley, Hays, and Lynch. Mr. Lynch
resigned from the Compensation Committee upon his election as Chairman of the
Board in March 1995. The Compensation Committee is responsible for setting and
administering the policies governing compensation of the executive officers of
the Company, including cash compensation and stock ownership programs. The goals
of the Company's compensation policy are to attract and retain executive
officers who contribute to the overall success of the Company, by offering
compensation which is competitive in the restaurant industry for companies of
the Company's size, to motivate executives to achieve the Company's business
objectives, and to reward them for their achievements. The Company generally
uses salary, incentive compensation, and stock options to meet these goals. Mr.
Lynch became Chief Executive Officer upon Martin Culver's resignation in May
1995 and served until November 1995, when the Company completed its search for a
new Chief Executive Officer and Robert Ferngren became Chief Executive Officer.
For fiscal year 1995, salaries were set by the Compensation Committee
for each executive officer, including each Chief Executive Officer, within the
range of salary for similar positions in other companies of similar size in
Fresh Choice's industry, based on a number of available published surveys,
which do not specifically identify companies, obtained by the Company's Human
Resources Department and by outside consultants retained by the Company, as
adjusted for the Company's projected revenue levels and regional salary
differences. The approximately 20 comparison companies are all multi-location
restaurant companies and are publicly traded companies. Salaries were generally
targeted at the median of salaries among comparable companies, although the
salaries are also adjusted based on each officer's experience, tenure, and
prior performance. Considering these factors, the Compensation Committee
determined to raise Mr. Culver's salary in view of the increasing demands on
the Chief Executive Officer due to the Company's continued growth plans at that
time. In determining the compensation to offer Mr. Lynch as Chairman of the
Board, the Compensation Committee evaluated Mr. Lynch's expected contributions
as Chairman, including the increased responsibilities of developing and
implementing a restructuring plan for the Company. Mr. Lynch's compensation was
not increased when he assumed the additional role of Chief Executive Officer.
The Company recruited a new Chief Executive Officer, Robert Ferngren, in
November 1995. The Committee based Mr. Ferngren's salary on the ranges
suggested by the above surveys and on negotiations with Mr. Ferngren to induce
him to join the Company. The Chief Executive Officers' salaries for fiscal 1995
were in approximately the lower half of the applicable range of salaries for
chief executive officers in similar-sized companies in the restaurant industry.
In preparing the performance graph for this Proxy Statement, the
Company has selected The University of Chicago Graduate School of Business
Center for Research in Security Prices Index for Nasdaq Retail Eating and
Drinking Places Stocks ("Nasdaq RE&D") as its peer group. The companies that
the Company included in its stratified salary surveys are not necessarily those
included in the indices, as such companies may not be competitive with the
Company for executive talent or may not be publicly traded on the Nasdaq
National Market. However, approximately 16 of the 17 salary comparison
companies that trade on the Nasdaq National Market are included in this peer
group.
No incentive compensation plan was adopted for fiscal 1995 and, because
of the financial condition of the Company, incentive compensation was paid to
only one executive officer, who received a small bonus in connection with her
promotion.
44
<PAGE> 53
The Company believes that employee equity ownership provides executive
officers with significant additional motivation to maximize value for the
Company's stockholders. Because the stock options are granted at the prevailing
market price, the stock options will only have value if the Company's stock
price increases over the exercise price. Therefore, the Committee believes that
stock options will serve to align the interests of executive officers closely
with other stockholders because of the direct benefit executive officers receive
through improved stock performance.
In fiscal 1995, the Compensation Committee recommended to the Board of
Directors, and the Board of Directors approved, stock option grants to certain
of the executive officers, including each of the two new Chief Executive
Officers, both under the Company's Option Plan and outside the Option Plan.
Grants in 1995 were recommended on the basis of the achievement of clearly-
defined objectives, and in each case the size of each grant was based upon the
relative seniority and responsibilities of each executive officer, historical
and expected contributions of each executive officer to the Company, and
previous stock option grants. The Committee considered it crucial to provide
equity incentives to Mr. Lynch as he developed and implemented the restructuring
plan for the Company. The Committee therefore granted Mr. Lynch an option to
purchase 100,000 shares that vests over a five-year period, with vesting of
portions of the grant to accelerate upon the Company's achievement of certain
levels of profitability. When hiring Mr. Ferngren, the Committee considered it
important to provide him with long-term incentives. The Committee therefore
granted Mr. Ferngren three options to purchase an aggregate of 220,000 shares.
Two options, one for 100,000 shares under the Option Plan and the other for
65,000 shares outside the Option Plan, vest over the Company's normal five-year
vesting schedule. The third option, for 55,000 shares granted outside the Option
Plan, vests in one installment on the fifth anniversary of the grant.
Options were granted with exercise prices equal to the fair market
value per share of Common Stock on the date of the grant, as determined by the
Board of Directors. In order to encourage executive officers to remain in the
Company's employ, stock option grants generally vest over five years. Options
granted in fiscal 1995 vest over a five-year period, except for the
above-described grants to Mr. Ferngren and Mr. Lynch. All options granted by the
Company are exercisable only to the extent vested.
In July 1996, the Compensation Committee considered methods to
encourage senior management to maximize stockholder value in case of a "Transfer
of Control." The Compensation Committee determined that agreements with
severance provisions triggered under certain circumstances following a
"Transfer of Control" would encourage management to remain with the Company
during the negotiation of a merger, providing both the strongest possible
negotiating team and strong management to make a successful transition, and
would allow management to negotiate the terms of a merger without being
distracted by concerns over the possible loss of their employment. In addition,
the Committee determined to include provisions triggered by a layoff of the
executive to enhance the likelihood of retaining key officers, even during
periods when the Company's financial condition is not improving or is
worsening. Accordingly, the Compensation Committee authorized the Company to
enter into employment agreements with severance provisions with each of its
vice presidents and Charles M. Lynch, its Chairman of the Board. See "EXECUTIVE
COMPENSATION AND OTHER MATTERS -- Change in Control and Severance
Arrangements."
Due to negotiations to retain him and the above reason, Mr. Ferngren's
offer letter, as amended, contains provisions for severance payments in the
event he is terminated not for cause or after a "change in control." See
"EXECUTIVE COMPENSATION AND OTHER MATTERS -- Change in Control and Severance
Arrangements."
45
<PAGE> 54
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Effective January 1, 1994, the Internal Revenue Code (the "Code") was
amended to impose a limit under section 162(m) on the amount of compensation
which may be deducted by a publicly-held corporation with respect to the
corporation's chief executive officer and its four other most highly-compensated
offers, set at $1,000,000 per executive per year. Exemptions from this
deductibility limit are provided for certain types of "performance-based
compensation," including compensation related to stock option plans meeting
certain criteria. In order to permit compensation under the Company's 1988 Stock
Option Plan (the "Option Plan") to qualify for this exemption, the Board of
Directors concluded that it would be advisable to establish certain restrictions
on the granting of options under the Option Plan. These restrictions were
approved at the 1994 Annual Meeting of Stockholders. The Compensation Committee
does not believe that other components of the Company's compensation will be
likely in the aggregate to exceed $1,000,000 for any executive officer in any
year in the foreseeable future, and therefore concluded that no further action
with respect to qualifying its executive compensation for deductibility of such
compensation was necessary at this time. The policy of the Committee is to
qualify executive compensation for deductibility under the applicable tax laws
as practicable. In the future, the Committee will continue to evaluate the
advisability of qualifying the deductibility of such compensation in the future.
COMPENSATION COMMITTEE
Byron K. Adams, Jr.
Wallace R. Hawley
Carl R. Hays
46
<PAGE> 55
COMPARISON OF STOCKHOLDER RETURN
Set forth below is a line graph comparing the annual percentage change
in the cumulative total return on the Company's Common Stock with the cumulative
total return of The University of Chicago Graduate School of Business Center for
Research in Security Prices ("CRSP") Index for the Nasdaq Stock Market (U.S.
Companies) ("Nasdaq US") and the CRSP Index for Nasdaq Retail Eating and
Drinking Places Stocks ("Nasdaq RE&D") for the period commencing on December 8,
1992(1) and ending on December 31, 1995(2).
47
<PAGE> 56
COMPARISON OF CUMULATIVE TOTAL RETURN FROM DECEMBER 8, 1992
THROUGH DECEMBER 31, 1995(3):
FRESH CHOICE, INC., CRSP INDEX FOR NASDAQ STOCK
MARKET (U.S. COMPANIES) AND CRSP INDEX FOR
NASDAQ RETAIL EATING AND DRINKING PLACES STOCKS
[CHART]
<TABLE>
<CAPTION>
Dec. 8, 1992 Dec. 24, 1992 Dec. 23, 1993 Dec. 23, 1994 Dec. 31, 1995
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Fresh Choice $100.00 $180.77 $200.00 $ 75.00 $ 48.08
Nasdaq US $100.00 $ 99.79 $113.52 $112.30 $160.98
Nasdaq RE&D $100.00 $ 97.64 $100.56 $100.56 $ 90.67
</TABLE>
1 The Company's initial public offering commenced on December 9, 1992.
For purposes of this presentation, the Company has assumed that its
initial offering price of $13.00 would have been the closing sales
price on December 8, 1992, the day prior to commencement of trading.
2 The last trading days in each of fiscal 1992, 1993, 1994 and 1995 were
December 24, December 23, December 23 and December 29, respectively.
3 Assumes that $100.00 was invested on December 8, 1992 in the Company's
Common Stock at the Company's initial offering price of $13.00 and at
the closing sales price for each index on that date and that all
dividends were reinvested. No dividends have been declared on the
Company's Common Stock. Stockholder returns over the indicated period
should not be considered indicative of future stockholder returns.
48
<PAGE> 57
PRICE RANGE OF COMMON STOCK
The following table sets forth, for the periods indicated, the range of
high and low closing sales prices of the common stock on the Nasdaq National
Market.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C> <C> <C>
1994
First Quarter................................. $32.50 $24.75
Second Quarter................................ 32.25 22.50
Third Quarter................................. 25.25 19.00
Fourth Quarter................................ 23.50 9.00
1995
First Quarter................................. $12.50 $ 7.00
Second Quarter................................ 11.75 5.125
Third Quarter................................. 11.75 6.00
Fourth Quarter................................ 8.25 6.00
1996
First Quarter................................. $6.625 $ 5.50
Second Quarter ............................... 8.625 6.00
Third Quarter through August 1, 1996 ......... 7.875 --
Closing Price on:
February 29, 1996(1).......................... $ 5.75
March 13, 1996(2)............................. 6.00
April 29, 1996(3)............................. 7.375
April 30, 1996(4)............................. 8.00
August 1, 1996................................ 6.875
</TABLE>
- ------------------
1 The trading day ten trading days prior to the execution of the letter
of intent of a possible investment by Crescent (and the first day of
the period determining the price of the Series B Stock).
2 The day before the Company and Crescent signed the letter of intent
(and the last day of the price determination period).
3 The day the Company and Crescent publicly announced the signing of the
Stock Purchase Agreement.
4 The day after the Company and Crescent publicly announced the signing
of the Stock Purchase Agreement.
49
<PAGE> 58
The Company has not paid cash dividends on its common stock, and
presently intends to continue this policy in order to retain its earnings for
the development of the Company's business. In addition, the Company's current
bank line of credit prohibits the payment of dividends.
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Twelve Weeks Ended
--------------------------------------------------------------
June 16, June 11, March 24, March 19,
1996 1995 1996 1995
--------------------------------------------------------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Net sales $18,793 $19,175 $18,061 $16,934
Operating income (loss) 158 (2,298) (795) (2,145)
Net income (loss) 95 (1,562) (866) (1,284)
Net income per common
and equivalent share 0.02 (0.28) (0.16) (0.23)
Total assets 34,574 59,882 36,241 57,144
Working capital (deficiency) (9,152) (8,912) (9,582) (1,918)
Long-term debt and capital
lease obligations, including
current portion 378 813 496 907
Stockholders' equity $21,920 $46,688 $21,431 $48,122
Number of restaurants
open at end of period 53 57 54 53
</TABLE>
For further selected financial information, see the Company's 1995 Annual
Report.
50
<PAGE> 59
STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING
Proposals of stockholders intended to be presented at the next Annual
Meeting of the Stockholders of the Company must be received by the Company at
its offices at 2901 Tasman Drive, Suite 109, Santa Clara, California 95054, no
later than March 15, 1997, and must satisfy the conditions established by the
Securities and Exchange Commission for stockholder proposals in order to be
included in the Company's proxy statement for that meeting.
TRANSACTION OF OTHER BUSINESS
At the date of this Proxy Statement, the only business which the Board
of Directors intends to present or knows that others will present at the meeting
is as set forth above. If any other matter or matters are properly brought
before the meeting, or any adjournment thereof, it is the intention of the
persons named in the accompanying form of proxy to vote the proxy on such
matters in accordance with their best judgment.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities and Exchange
Act of 1934 (the "Exchange Act") are incorporated herein by reference: (1) the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, as filed with the Commission on April 1, 1996; (2) the amendment on Form
10-K/A to the Company's Annual Report, as filed with the Securities and Exchange
Commission on April 29, 1996; (3) the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 24, 1996, as filed with the Securities
and Exchange Commission on May 8, 1996; and (4) the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 16, 1996. All documents filed by
the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Proxy Statement and prior to the Meeting shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such documents. Any statement incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Proxy Statement.
The Company will provide without charge to each person to whom this
Proxy Statement is delivered, upon written or oral request, a copy of any or all
of the foregoing documents incorporated by reference in this Proxy Statement
(other than any exhibits thereto). Requests for such documents should be
directed to Fresh Choice, Inc., 2901 Tasman Drive, Suite 109, Santa Clara,
California 95054, Attn: Chief Financial Officer, (408) 986-8661.
By Order of the Board of Directors
JOAN M. MILLER
Secretary
August ___, 1996
52
<PAGE> 60
APPENDIX I
SIGNATURE COPY
- --------------------------------------------------------------------------------
PREFERRED STOCK PURCHASE AGREEMENT
BY AND BETWEEN
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND
FRESH CHOICE, INC.
-------------------------------
DATED AS OF APRIL 26, 1996
-------------------------------
- --------------------------------------------------------------------------------
<PAGE> 61
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE 1
<S> <C> <C>
PURCHASE AND SALE OF SHARES
Section 1.1. Purchase and Sale of Shares...................................................... 1
Section 1.2. Purchase Price................................................................... 1
ARTICLE 2
THE CLOSING
Section 2.1. The Closing...................................................................... 2
ARTICLE 3
OPTION
Section 3.1. Grant of Option.................................................................. 2
Section 3.2. Exercise of Option............................................................... 2
Section 3.3. Exercise Price................................................................... 3
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
Section 4.1. Representations and Warranties of the Company.................................... 3
4.1.1. Existence; Good Standing; Corporate Authority; Compliance
with Law......................................................................... 3
4.1.2. Authorization, Validity and Effect of Agreements................................. 3
4.1.3. Capitalization................................................................... 4
4.1.4. Subsidiaries..................................................................... 4
4.1.5. Other Interests.................................................................. 5
4.1.6. No Violation..................................................................... 5
4.1.7. Books and Records................................................................ 6
4.1.8. SEC Documents.................................................................... 6
</TABLE>
-i-
<PAGE> 62
<TABLE>
<CAPTION>
<S> <C> <C>
4.1.9. Litigation....................................................................... 6
4.1.10. Absence of Certain Changes....................................................... 6
4.1.11. Tax Returns...................................................................... 8
4.1.12. Employee Benefit Plans........................................................... 8
4.1.13. Labor Matters.................................................................... 9
4.1.14. No Brokers....................................................................... 9
4.1.15. Agreements....................................................................... 9
4.1.16. Title to Assets.................................................................. 10
4.1.17. Insurance........................................................................ 10
4.1.18. Environmental Matters............................................................ 11
4.1.19. Intellectual Property............................................................ 11
4.1.20. Licenses......................................................................... 11
4.1.21. Preferred Stock to be Delivered to Purchaser..................................... 11
4.1.22. Disclosure....................................................................... 12
4.1.23. No Undisclosed Liabilities....................................................... 12
4.1.24. Receivables...................................................................... 12
4.1.25. Business Plan.................................................................... 12
Section 4.2. Representations and Warranties of Purchaser...................................... 12
4.2.1. Existence; Good Standing......................................................... 12
4.2.2. Authorization, Validity and Effect of Agreements................................. 12
4.2.3. No Violation..................................................................... 13
4.2.4. No Brokers....................................................................... 13
4.2.5. Investment Intent................................................................ 13
ARTICLE 5
COVENANTS
Section 5.1. Fees............................................................................. 14
Section 5.2. Expenses......................................................................... 14
Section 5.3. Conduct of Business.............................................................. 15
Section 5.4. Other Action..................................................................... 15
Section 5.5. Inspection of Records............................................................ 15
Section 5.6. Publicity........................................................................ 15
Section 5.7. Meeting of Stockholders.......................................................... 16
Section 5.9. Quarterly, Annual and Special Reports............................................ 16
Section 5.10. Use of Proceeds.................................................................. 16
Section 5.11. Continuation of Indemnification; Insurance....................................... 16
Section 5.12. Registration Rights.............................................................. 17
Section 5.13. No Transfer to a Competitor...................................................... 17
</TABLE>
-ii-
<PAGE> 63
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 6
CONDITIONS
Section 6.1. Conditions to Each Party's Obligation to Close................................... 17
Section 6.2. Conditions to Obligation of the Company to Close................................. 18
Section 6.3. Conditions to Obligation of Purchaser to Close................................... 18
ARTICLE 7
TERMINATION
Section 7.1. Termination by Mutual Consent.................................................... 20
Section 7.2. Termination by Either Purchaser or the Company................................... 20
Section 7.3. Termination by the Company....................................................... 20
Section 7.4. Termination by Purchaser......................................................... 20
Section 7.5. Effect of Termination............................................................ 20
ARTICLE 8
DEFINITIONS AND CONSTRUCTION
Section 8.1. Definition of Certain Terms...................................................... 21
Section 8.2. Rules of Construction............................................................ 26
ARTICLE 9
GENERAL PROVISIONS
Section 9.1. Survival of Representations and Warranties....................................... 26
Section 9.2. Severability..................................................................... 27
Section 9.3. Notices.......................................................................... 27
Section 9.4. Headings......................................................................... 28
Section 9.5. Entire Agreement................................................................. 28
Section 9.6. Counterparts..................................................................... 28
Section 9.7. Governing Law, Etc............................................................... 29
Section 9.8. Binding Effect................................................................... 29
Section 9.9. Assignment....................................................................... 29
Section 9.10. No Third Party Beneficiaries..................................................... 29
Section 9.11. Amendment; Waivers, Etc.......................................................... 29
</TABLE>
-iii-
<PAGE> 64
APPENDIX LIST
Appendix II - Form of Certificate of Designation for Series A
Appendix III - Form of Certificate of Designation for Series B
Appendix IV - Form of Certificate of Designation for Series C
Appendix V - Form of Registration Rights Agreement
-iv-
<PAGE> 65
PREFERRED STOCK PURCHASE AGREEMENT
This PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is dated as
of April 26, 1996, and is being entered into by and between CRESCENT REAL ESTATE
EQUITIES LIMITED PARTNERSHIP, a Delaware limited partnership ("Purchaser"), and
FRESH CHOICE, INC., a Delaware corporation (the "Company").
RECITALS
A. The Company desires to issue and sell to Purchaser, and Purchaser
desires to purchase from the Company, 1,187,906 the Company's Preferred Stock,
par value $0.001 per share (the "Preferred Stock"), Series B Non-Voting
Participating Convertible Preferred Stock (the "Series B Preferred Stock"), upon
the terms and subject to the conditions hereinafter set forth. The Series B
Preferred Stock is convertible, at the option of the holder thereof, into shares
of Preferred Stock, Series A Voting Participating Convertible Preferred Stock
(the "Series A Preferred Stock").
B. The Company desires to grant Purchaser an option to purchase up to
593,953 shares of Preferred Stock, Series C Participating Non-Voting Convertible
Preferred Stock (the "Series C Preferred Stock"), upon the terms and subject to
the conditions hereof.
C. Unless the context indicates otherwise, each capitalized term used
herein is defined in Section 8.1.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
representations, warranties, covenants and agreements contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE 1
PURCHASE AND SALE OF SHARES
SECTION 1.1. PURCHASE AND SALE OF SHARES. On the basis of the
representations and warranties herein contained and subject to the terms and
conditions hereof, the Company agrees to issue, sell and deliver to Purchaser,
and Purchaser agrees to purchase from the Company, at the Closing, 1,187,906
shares of Series B Preferred Stock (the "Shares").
SECTION 1.2. PURCHASE PRICE. In consideration of the issuance and sale
by the Company of the Shares, and in full and complete payment therefor, on the
Closing Date, Purchaser shall pay the Company an aggregate purchase price (the
"Purchase Price") equal to the product of (i) $4.63 and (ii) 1,187,906, i.e.,
$5,500,004.78. The Purchase Price shall be paid to the Company in currently
available funds by federal funds wire transfer on the Closing Date.
I-1
<PAGE> 66
ARTICLE 2
THE CLOSING
SECTION 2.1. THE CLOSING. Subject to the terms and conditions of this
Agreement, the closing of the transactions contemplated hereby (the "Closing")
shall take place at the offices of Cooley Godward Castro Huddleson & Tatum, Five
Palo Alto Square, 3000 El Camino Real, Palo Alto, California 94306-2155, at
10:00 a.m., local time, on the later of (a) the Stockholder Meeting Date, or (b)
the date which is three Business Days after the satisfaction or waiver of all
conditions to the consummation of the transactions contemplated hereby, or at
such other time, date or place as the Company and Purchaser may agree. The date
on which the Closing occurs is referred to herein as the "Closing Date". At the
Closing, the Company will issue and transfer to Purchaser good and valid title
in and to the Shares, free and clear of all Liens, by delivering to Purchaser a
certificate or certificates representing the Shares, in genuine and unaltered
form. At the Closing, there shall also be delivered to Purchaser and the Company
the other Transaction Documents, certificates and other instruments to be
delivered under Article 6.
ARTICLE 3
OPTION
SECTION 3.1. GRANT OF OPTION. The Company hereby grants to Purchaser an
irrevocable option (the "Option") to purchase up to 593,953 shares (the "Option
Shares") of Series C Preferred Stock, in the manner and at the purchase price
set forth below.
SECTION 3.2. EXERCISE OF OPTION. The Option may be exercised by
Purchaser, in whole or in part, at any time or from time to time, after the
Closing Date and prior to the third anniversary of the Closing Date. If
Purchaser desires to exercise the Option, Purchaser shall send a written notice
to the Company specifying the number of Option Shares it will purchase and a
date (not earlier than seven nor later than 14 Business Days from the date such
notice is given) for the closing of such purchase (the "Option Closing"). The
Option Closing shall take place (a) at the offices of Cooley Godward Castro
Huddleson & Tatum, Five Palo Alto Square, 3000 El Camino Real, Palo Alto,
California 94306-2155, at 10:00 o'clock a.m. local time on the date specified in
such notice or (b) at such other place and time as the Company and Purchaser may
agree. At each Option Closing, the Company will issue and transfer to Purchaser
good and valid title in and to the Option Shares being purchased, free and clear
of all Liens, by delivering to Purchaser a certificate or certificates
representing the Option Shares being purchased, in genuine and unaltered form,
and certificates similar to those certificates that the Company is required to
deliver to Purchaser under Section 6.3.
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SECTION 3.3. EXERCISE PRICE. In consideration of the issuance and sale
by the Company of the Option Shares, and in full and complete payment therefor,
at each Option Closing, Purchaser shall pay an aggregate price equal to the
product of (i) $6.00 multiplied by (ii) the number of Option Shares being
purchased.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
SECTION 4.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as
set forth in the disclosure letter delivered at or prior to the execution hereof
to Purchaser (the "Disclosure Letter"), the Company represents and warrants to
Purchaser, as of the date of this Agreement, as follows:
4.1.1. EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH
LAW. The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of State of Delaware. The Company is duly licensed
or qualified to do business as a foreign corporation and is in good standing
under the laws of those jurisdictions specified in Section 4.1.1 of the
Disclosure Letter, which are the only jurisdictions in which the character of
the properties owned, used or leased by it therein or in which the transaction
of its business makes such qualification necessary, except where the failure
to be so qualified would not have a material adverse effect on the business,
results of operations or financial or other condition or prospects of the
Company and its Subsidiaries taken as a whole (a "Company Material Adverse
Effect"). The Company has all requisite corporate power and authority to own,
operate and lease its properties and carry on its business as now conducted.
The Company represents and warrants that its principal line of business is the
operation of casual upscale restaurants, operating under the name "Fresh
Choice." The name of each director and officer of the Company on the date
hereof, and the position with the Company held by each, are listed in Section
4.1.1 of the Disclosure Letter. Each of the Company's Subsidiaries is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation, has the corporate power and
authority to own its properties and to carry on its business as it is now
being conducted, and is duly qualified to do business and is in good standing
in those jurisdictions in which the ownership of its property or the conduct
of its business requires such qualification, except where the failure to be so
qualified would not have a Company Material Adverse Effect. Neither the
Company nor any of its Subsidiaries has received any notice that it is in
violation of any order, writ, judgment, decree, injunction or similar
pronouncement (each, an "Order"), of any court, governmental authority or
arbitration board or tribunal, or any law, statute, ordinance, governmental
rule or regulation (each, a "Law") to which the Company or any of its
Subsidiaries or any of their respective properties or assets is subject. The
copies of the Company's Certificate of Incorporation and Bylaws previously
delivered to Purchaser are true and correct and are the Certificate of
Incorporation and the Bylaws as in effect on the date hereof.
4.1.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. The Company
has the requisite corporate power and authority to execute and deliver this
Agreement and the Registration Rights
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Agreement (collectively, the "Transaction Documents"), and, subject to
stockholder approval of an amendment to its certificate of incorporation, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby, including, without limitation, to
issue, sell and transfer the Shares and to consummate the transactions
contemplated hereby. The execution and delivery by the Company of this Agreement
and the other Transaction Documents and the performance and consummation by the
Company of the transactions contemplated hereby and thereby have been duly and
validly authorized by all requisite corporate action on the part of the Company
other than the necessary approval of its stockholders. Subject to stockholder
approval, this Agreement has been duly and validly executed and delivered by the
Company and constitutes, and the other Transaction Documents (when executed and
delivered pursuant hereto for value received) will constitute, the valid and
legally binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy, reorganization, insolvency, moratorium or other
similar laws relating to creditors' rights generally or general principles of
equity (whether considered in a proceeding in equity or at law) or by public
policy applicable to securities laws.
4.1.3. CAPITALIZATION. The authorized capital stock of the Company
consists solely of 7,500,000 shares of common stock, par value $0.001 per share
("Common Stock"), and 250,000 shares of preferred stock, par value $0.001 per
share. As of February 29, 1996 there were 5,583,737 shares of Common Stock
issued and outstanding. As of the date hereof, no shares of Preferred Stock were
issued and outstanding. The Certificates of Designation for the Series A
Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock
are attached hereto as Exhibits A, B and C, respectively. Except as specified on
Section 4.1.3 of the Disclosure Letter, since such date, no additional shares of
capital stock of the Company have been issued. The Company has no outstanding
bonds, debentures, notes or other obligations the holders of which have the
right to vote (or which are convertible into or exercisable for securities
having the right to vote) with the stockholders of the Company on any matters.
All such issued and outstanding shares of Common Stock are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights. Other
than as contemplated by this Agreement or as disclosed in the Company Reports,
there are not at the date of this Agreement any existing options, warrants,
calls, subscriptions, convertible securities, phantom stock rights, or other
rights, agreements or commitments (each, a "Warrant") which obligate the Company
or any of its Subsidiaries to issue, transfer or sell any shares of capital
stock of the Company or any of its Subsidiaries, or any obligation of the
Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any outstanding capital stock of the Company or any of its Subsidiaries, or
otherwise entitle the holder thereof to receive or exercise any benefits or
rights similar to any rights enjoyed by or accruing to the holder of shares of
capital stock of the Company, including any right to participate in the equity
or income of the Company. The delivery of a certificate or certificates at the
Closing representing the Shares in the manner provided in Section 2.1 will
transfer to Purchaser good and valid title to the Shares, free and clear of
all Liens.
4.1.4. SUBSIDIARIES. Section 4.1.4 of the Disclosure Letter lists the
name of each Subsidiary and all lines of business in which each Subsidiary is
participating or engaged.
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Section 4.1.4 of the Disclosure Letter also lists for each Subsidiary the amount
of its authorized capital stock, the amount of its outstanding capital stock and
the record owners of such outstanding capital stock. The Company owns directly
or indirectly each of the outstanding shares of capital stock of each of its
Subsidiaries. Except as disclosed in Section 4.1.4 of the Disclosure Letter,
each of the outstanding shares of capital stock of each of the Company's
Subsidiaries is duly authorized, validly issued, fully paid and nonassessable,
and is owned, directly or indirectly, by the Company free and clear of all
Liens. There are no outstanding Warrants with respect to any Subsidiary. The
name of each director and officer of each Subsidiary on the date hereof, and the
position with such Subsidiary held by each, are listed in Section 4.1.4 of the
Disclosure Letter. The Company has prior to the execution of this Agreement
delivered to Purchaser true and complete copies of the certificate or articles
of incorporation and bylaws (or other comparable corporate charter documents) of
each of the Subsidiaries as in effect on the date hereof.
4.1.5. OTHER INTERESTS. Except for interests in the Company's
Subsidiaries, neither the Company nor any Subsidiary owns directly or indirectly
any interest or investment (whether equity or debt) in any corporation,
partnership, joint venture, business, trust or entity (other than investments in
short-term investment securities and corporate, partnership, development,
cooperative marketing and similar undertakings and arrangements entered into in
the ordinary course of the Company's business).
4.1.6. NO VIOLATION. Neither the execution and delivery by the Company
of this Agreement or of the other Transaction Documents, nor the consummation by
the Company of the transactions contemplated hereby or thereby in accordance
with the terms hereof and thereof, will (i) conflict with or result in a breach
or violation of any provisions of the certificate or articles of incorporation
or bylaws of the Company or any Subsidiary (or other comparable corporate
charter documents); (ii) result in a breach or violation of, a default under, or
the triggering of any payment or other material obligations pursuant to, or
accelerate vesting under, the Second Amended and Restated 1988 Stock Option Plan
and the 1992 Employee Stock Purchase Plan (collectively, the "Stock Plans"), or
any grant or award made thereunder, (iii) violate, or conflict with, or result
in a breach of any provision of, or constitute a default (or an event which,
with notice or lapse of time or both, would constitute a default) under, or
result in the termination or in a right of termination or cancellation of, or
accelerate the performance required by, or result in the creation of any Lien
upon any property of the Company or its Subsidiaries under, or result in any
additional rights under or in being declared void, voidable, or without further
binding effect, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust or any material license, franchise, permit,
lease, contract (whether written or oral), agreement or other instrument,
commitment or obligation to which the Company or any of its Subsidiaries is a
party, or by which the Company or any of its Subsidiaries or any of their
respective properties is bound or affected; (iv) require any consent, approval
or authorization of, or declaration, filing or registration with, any third
party or any domestic or foreign governmental or regulatory authority; or (v)
conflict with or result in a violation or breach of any term or provision of any
Law or Order applicable to the Company or any Subsidiary or any of their
respective assets and properties.
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4.1.7. BOOKS AND RECORDS. Except as set forth in Section 4.1.7 of the
Disclosure Letter, the minute books and other similar records of the Company and
its Subsidiaries as made available to Purchaser prior to the execution of this
Agreement contain a true and complete record, in all material respects, of all
action taken at all meetings and by all written consents in lieu of meetings of
the stockholders, the boards of directors and committees of the boards of
directors of the Company and its Subsidiaries.
4.1.8. SEC DOCUMENTS. The Company has delivered to Purchaser each
Company Report. As of their respective dates, the Company Reports (i) were
prepared in all material respects in accordance with the applicable requirements
of the Securities Act, the Exchange Act, and the rules and regulations
thereunder and (ii) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading. Each of the consolidated balance sheets of the
Company included in the Company Reports (including the related notes and
schedules) fairly represents the consolidated financial position of the Company
and the its Subsidiaries as of its date and each of the consolidated statements
of operations, stockholders' equity and cash flow of the Company included in the
Company Reports (including any related notes and schedules) fairly presents the
results of operations, stockholders' equity or cash flow, as the case may be, of
the Company and its Subsidiaries for the periods set forth therein. Except as
and to the extent set forth on the consolidated balance sheet of the Company and
its Subsidiaries at December 31, 1995, including all notes thereto, or as set
forth in the Company Reports, neither the Company nor any of its Subsidiaries
has any material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) that would be required to be reflected on, or
reserved against in, a balance sheet of the Company or in the notes thereto,
prepared in accordance with generally accepted accounting principles
consistently applied, except liabilities arising in the ordinary course of
business since such date.
4.1.9. LITIGATION. Except as disclosed in the Company Reports, there
are no Actions pending against, relating to or affecting the Company or any of
its Subsidiaries or any of their respective assets and properties or, to the
Knowledge of the Company, threatened against the Company or any of its
Subsidiaries, at law or in equity, or before or by any federal or state
commission, board, bureau, agency or instrumentality. There are no Orders
outstanding against the Company or any Subsidiary. Except as set forth in
Section 4.1.9 of the Disclosure Letter, prior to the execution of this
Agreement, the Company has delivered to Purchaser all responses of counsel for
the Company and its Subsidiaries to auditors' requests for information
delivered in connection with the Financial Statements and/or the interim
financial statements contained in the Company Reports (together with any
updates provided by such counsel) regarding such Actions pending or threatened
against, relating to or affecting the Company or any Subsidiary.
4.1.10. ABSENCE OF CERTAIN CHANGES. Since December 31, 1995, there has
been no event or condition of any character (whether actual, threatened or
contemplated) that has had, or can reasonably be anticipated to have,
individually or together with such other events or conditions, a Company
Material Adverse Effect. Without limiting the generality of the foregoing,
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except as set forth in Section 4.1.10 of the Disclosure Letter (with paragraph
references corresponding to those set forth below), neither the Company nor any
Subsidiary has, since December 31, 1995:
(a) borrowed any funds or, except in the ordinary course of
the Company's business consistent with past practices, (i) mortgaged or
otherwise subjected to any Lien or other liability any of its assets or
properties, (ii) sold, assigned or transferred any of its assets in
excess of $250,000 in the aggregate, or (iii) incurred any liability,
commitment, indebtedness or obligation (of any kind whatsoever, whether
accrued or contingent, matured or unmatured) in an amount, individually
or in the aggregate, in excess of $250,000;
(b) suffered any damage, destruction or loss, whether or not
covered by insurance in an amount, individually or in the aggregate, in
excess of $250,000, except for losses adequately reserved against on
the date of this Agreement;
(c) received notice or had knowledge or reasonable grounds to
believe that any labor unrest exists among any of its employees or that
any group, organization or union has attempted to organize any of its
employees;
(d) received notice or had knowledge or reasonable grounds to
believe that any of its franchisees or developers has terminated or
intends to terminate its relationship with the Company or any
Subsidiary;
(e) failed to operate its business in the ordinary course
consistent with past practices, or failed to preserve its business
organization intact or to preserve the goodwill of its developers,
suppliers, customers and others with whom it has business relations;
(f) incurred any loss in an amount in excess of $250,000,
except for losses adequately reserved against on the date of this
Agreement, or waived any material right in connection with any aspect
of its business, whether or not in the ordinary course of its business;
(g) cancelled any debt owed to it, or cancelled any of its
claims, or paid any of its noncurrent obligations or liabilities;
(h) made any capital expenditure or capital addition or
betterment in an amount in excess of $250,000 individually or
$1,500,000 in the aggregate;
(i) entered into any agreement requiring the payment,
conditionally or otherwise, of any salary, bonus, extra compensation,
pension or severance payment to any of its present or former directors,
officers or employees, except such agreements as are terminable at will
without any penalty or other payment by it, or increased the
compensation (including salaries, fees, bonuses, profit sharing,
incentive, pension,
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retirement or other similar payments) of any such person whose annual
compensation would, following such increase, exceed $100,000;
(j) declared, set aside, increased or paid any dividend, or
declared or made any distribution on, or directly or indirectly
combined, redeemed, reclassified, purchased or otherwise acquired, any
shares of Common Stock;
(k) authorized, issued, sold or otherwise disposed of any
shares of capital stock of or Warrant with respect to the Company or
any Subsidiary, or modified or amended any right of any holder of any
outstanding shares of capital stock or Warrant with respect to the
Company or any Subsidiary;
(l) changed any accounting, financial reporting or tax
practice or policy or any method of calculating any bad debt,
contingency or other reserve of the Company or any Subsidiary for
accounting, financial reporting or tax purposes, or any change in the
fiscal year of the Company or any Subsidiary;
(m) engaged in any transaction with any officer, director or
Affiliate of the Company or any Subsidiary (A) outside the ordinary
course of business consistent with past practice of (B) other than on
an arm's-length basis; or
(n) entered into any agreement, contract or commitment to do
any of the foregoing after the date hereof.
4.1.11. TAX RETURNS. The Company has accurately and timely filed all
federal, state and other tax returns which are required to be filed and has
timely paid all taxes covered by such returns which have become due and payable.
The Company has not been advised that any of its returns, federal, state or
other, have been or are being audited as of the date hereof. The Company is not
delinquent in taxes or assessments and has no tax deficiency proposed or
assessed and no waiver of the statute of limitations and assessment or
collections.
4.1.12. EMPLOYEE BENEFIT PLANS. All material employee benefit plans,
programs, policies, or arrangements (including, without limitation, each
employee benefit plan within the meaning of Section 3(3) of ERISA) that are
sponsored, maintained or contributed to or required to be contributed to by the
Company for the benefit of any active, former, or retired employee of the
Company or its Subsidiaries are listed in the Disclosure Letter (the "Company
Plans"). Each Company Plan has been maintained and administered in all material
respects with its terms and applicable law, including ERISA and the Code. Any
Company Plan intended to be qualified under Section 401(a) of the Code has
either obtained a favorable determination letter as to its qualified status from
the IRS or still has a remaining period of time under applicable Treasury
regulations or IRS pronouncements in which to apply for such determination
letter and to make any amendments necessary to obtain a favorable determination.
No Company Plan is covered by Title IV of ERISA or Section 412 of the Code. To
the Knowledge of the Company, neither the Company nor any officer or director of
the Company has incurred any liability or penalty
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under Sections 4975 through 4980 of the Code or Title I of ERISA. No suit,
action, or other litigation (excluding claims for benefits incurred in the
ordinary course of the Company Plan activities) has been brought or, to the
Knowledge of the Company, is threatened against or with respect to any such
Company Plan. All material contributions, reserves, or premium payments required
to be made or accrued as of the date hereof to the Company Plans have been made
or accrued.
4.1.13. LABOR MATTERS. Section 4.1.13 of the Disclosure Letter contains
a list of names of each officer and employee of the Company or its Subsidiaries
having an annual base salary or wages of at least $100,000 at the date hereof,
together with each such person's position or function, annual base salary or
wages and any incentive or bonus arrangement with respect to such person in
effect on such date. No employee of the Company or any of its Subsidiaries is a
party to, or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization. There is no
unfair labor practice, sex, age, race or other discrimination or labor
arbitration proceeding pending or, to the Knowledge of the Company, threatened
against the Company or its Subsidiaries relating to their business. To the
Knowledge of the Company, there are no organizational efforts with respect to
the formation of a collective bargaining unit presently being made or threatened
involving employees of the Company or any of its Subsidiaries. To the best of
the Company's Knowledge, the Company and the Subsidiaries have complied in all
material respects with all applicable Laws relating to the employment of labor,
including, without limitation, those relating to wages, hours and collective
bargaining.
4.1.14. NO BROKERS. The Company has not entered into any contract,
arrangement or understanding with any person or firm which may result in the
obligation of the Company, any Subsidiary or Purchaser to pay any finder's fees,
brokerage or agent's commission, or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. The Company is not aware of any claim for payment of any
finder's fees, brokerage or agent's commissions or other like payments in
connection with the negotiations leading to this Agreement or the consummation
of the transactions contemplated hereby.
4.1.15. AGREEMENTS.
(a) Neither the Company nor any of its Subsidiaries is a
party to:
(i) any agreement, contract or commitment containing
any covenant limiting the freedom of the Company or any of its
Subsidiaries to engage in any line of business or to compete
with any person in any line of business permitted by its or
their Certificate of Incorporation or by applicable law;
(ii) any written agreement, order or decree of or
with any federal or state regulatory agency; or
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(iii) any obligation of guaranty or indemnity, other
than obligations of Subsidiaries guaranteed by the Company and
obligations of the Company guaranteed by Subsidiaries.
(b) The list of exhibits to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, contains a true and
complete list of each of the material Contracts or other arrangements
required to be filed therewith (true and complete copies or, if none,
reasonably complete and accurate written descriptions of which,
together with all amendments and supplements thereto and all waivers of
any terms thereof, have been delivered to Purchaser prior to the
execution of this Agreement), to which the Company or any Subsidiary is
a party or by which any of their respective assets and properties is
bound.
(c) To the best of the Company's Knowledge, each of such
Contracts is in full force and effect and constitutes a legal, valid
and binding agreement, enforceable in accordance with its terms, of
each party thereto; and except as disclosed in Section 4.1.15(c) of the
Disclosure Letter, neither the Company, any Subsidiary nor, to the
Knowledge of the Company, any other party to such Contract is, or has
received notice that it is, in violation or breach of or default under
any such Contract (or with notice or lapse of time or both, would be in
violation or breach of or default under any such Contract) in any
material respect.
(d) To the best of the Company's Knowledge, except as
disclosed in Section 4.1.15(d) of the Disclosure Letter, neither the
Company nor any Subsidiary is a party to or bound by any Contract that
has resulted in, or could reasonably be expected, individually or in
the aggregate with any other such contracts, to result in a Company
Material Adverse Effect.
4.1.16. TITLE TO ASSETS. The Company has good and marketable title to
its properties and assets, and has good title to all of its leasehold interests,
in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge,
other than (i) the lien of current taxes not yet due and payable, and (ii)
possible minor liens and encumbrances that do not in any case materially detract
from the value of the property subject thereto or materially impair the
operations of the Company and which have not arisen otherwise than in the
ordinary course of business.
4.1.17. INSURANCE. Except as set forth in Section 4.1.17 of the
Disclosure Letter, the Company and each of its Subsidiaries maintain in force
insurance policies and bonds in such amounts and against such liabilities and
hazards as are reasonable and customary for persons engaged in such business and
operations and having such assets and properties. A true and complete list of
all such insurance policies is contained in Section 4.1.17 of the Disclosure
Letter. Neither the Company nor any of its Subsidiaries is now liable, nor to
the Knowledge of the Company, will it or any of them become liable, for any
material retroactive premium adjustment not recorded on its books or otherwise
provided for. All policies are valid and enforceable and
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in full force and effect, no premiums due thereunder have not been paid and
neither the Company nor any of its Subsidiaries has received any notice of a
material premium increase or cancellation with respect to any of its insurance
policies or bonds or of any default thereunder. Within the last three years,
neither the Company nor any of its Subsidiaries has been refused any basic
insurance coverage sought or applied for, and the Company has no reason to
believe that its existing insurance coverage cannot be renewed as and when same
shall expire, upon terms and conditions standard in the market at the time
renewal is sought. The insurance coverage provided by any of the policies set
forth in Section 4.1.17 of the Disclosure Letter will not terminate or lapse by
reason of the transactions contemplated by this Agreement.
4.1.18. ENVIRONMENTAL MATTERS. To the best Knowledge of the Company,
the Company is not in violation of any applicable statute, law, or regulation
relating to the environment or occupational health and safety, and, to the best
Knowledge of the Company, no material expenditures are or will be required in
order to comply with any such existing statute, law or regulation.
4.1.19. INTELLECTUAL PROPERTY. The Company Reports disclose all of the
Intellectual Property owned or used by or licensed to the Company or any
Subsidiary (the "Company Intellectual Property"). Except as disclosed in the
Company Reports, no licenses, sublicenses or other agreements in respect of such
Company Intellectual Property have been granted or entered into by the Company
or any Subsidiary. The Company and each of its Subsidiaries owns or has the
legal right to use all Company Intellectual Property.
4.1.20. LICENSES. To the best Knowledge of the Company, each of the
Company and its Subsidiaries has all necessary Licenses required to lawfully
conduct its respective business as presently conducted, including but not
limited to all material Licenses, permits, certifications, and other regulatory
authorizations required for each of the Company and its Subsidiaries to operate
as they currently operate and in accordance with all applicable laws, rules,
regulations, ordinances, or orders of any governmental authority, and, to the
best Knowledge of the Company, (a) each such License is valid, binding and in
full force and effect, (b) no such License is subject to revocation or
forfeiture by virtue of any existing circumstance, (c) there is no pending or,
to the Knowledge of the Company, threatened proceeding to modify in any material
respect or revoke any material License, (d) no such License is subject to any
outstanding order, decree, judgment, stipulation, or investigation known to the
Company that would materially affect such License, and (e) neither the Company
nor any Subsidiary is, or has received any notice that it is, in default (or
with the giving of notice or lapse of time or both, would be in default) under
any such License.
4.1.21. PREFERRED STOCK TO BE DELIVERED TO PURCHASER. The issuance and
delivery by the Company to Purchaser of the Shares and the Option Shares have
been duly and validly authorized by all necessary corporate action on the part
of the Company except for actions to be taken and approved under Section 5.7.
The Shares, and the Option Shares, if and when issued in accordance with the
terms of this Agreement, will be validly issued, fully paid and nonassessable
and free of all Liens.
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4.1.22. DISCLOSURE. None of the representations or warranties made by
the Company in this Agreement, and no information in the Exhibits hereto contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained herein and therein not
misleading.
4.1.23. NO UNDISCLOSED LIABILITIES. To the best Knowledge of the
Company, except as reflected or reserved against in the balance sheet or in the
notes thereto included in the Company Reports or as disclosed in Section of the
Disclosure Letter or any other Section 4.1.23 of the Disclosure Letter, there
are no indebtedness of any kind or obligations or other liabilities (whether
absolute, accrued, contingent, fixed or otherwise, or whether due or to become
due) against, relating to or affecting the Company or any Subsidiary or any of
their respective assets and properties, other than such indebtedness and
liabilities incurred in the ordinary course of business consistent with past
practice which in the aggregate do not have a Company Material Adverse Effect.
4.1.24. RECEIVABLES. All receivables of the Company (including accounts
receivable, loans receivable and advances) which are reflected in the balance
sheet or the notes thereto included in the Company Reports, and all such
receivables which shall have arisen since the date thereof and prior to the
Closing Date (including those that will exist on the Closing Date), have arisen
and shall have arisen only from bona fide transactions and represent bona fide
claims for sales or other charges arising in the ordinary course of business
and, to the best Knowledge of the Company, will be (or have been) fully
collectible when due, or in the case of each account receivable within 90 days
after the invoice date, without resort to litigation and without offset or
counterclaim, in the aggregate face amounts thereof.
4.1.25. BUSINESS PLAN. The Company has previously presented and
delivered to Purchaser the Company's Business Plan in the form most recently
approved by the Board of Directors. The pro forma financial statements,
projections and other estimates contained in the Business Plan are based upon
factual assumptions that were reasonably made by the Company and were made in
good faith at the time such projections and estimates were made, and such
factual assumptions remain reasonable and good faith assumptions. There has been
no material change in the business prospects of the Company or in any other fact
or circumstance which would or could reasonably be expected to render any such
projections or estimates, or the assumptions upon which they were based,
unreasonable or not made in good faith in any material respect.
SECTION 4.2. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser
represents and warrants to the Company, as of the date of this Agreement, as
follows:
4.2.1. EXISTENCE; GOOD STANDING. Purchaser is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware.
4.2.2. AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. Purchaser has
the requisite corporate power and authority to execute and deliver this
Agreement and the other Transaction
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Documents. The consummation by Purchaser of the transactions contemplated hereby
and thereby has been duly authorized by all requisite corporate action. This
Agreement constitutes, and the other Transaction Documents (when executed and
delivered pursuant hereto for value received) will constitute, the valid and
legally binding obligations of Purchaser, enforceable against Purchaser in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy, reorganization, insolvency, moratorium or other
similar laws relating to creditors' rights generally or general principles of
equity (whether considered in a proceeding in equity or at law) or by public
policy applicable to securities laws.
4.2.3. NO VIOLATION. Neither the execution and delivery by Purchaser of
this Agreement nor the consummation by Purchaser of the transactions
contemplated hereby in accordance with the terms hereof, will (i) conflict with
or result in a breach of any provisions of the certificate of incorporation or
bylaws of Purchaser; (ii) violate, or conflict with, or result in a breach of
any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust
or any material license, franchise, permit, lease, contract, agreement or other
instrument, commitment or obligation to which Purchaser is a party, or by which
Purchaser or any of its properties is bound or affected, (iii) require any
material consent, approval or authorization of, or declaration, filing or
registration with, any third party or any domestic or foreign governmental or
regulatory authority, or (iv) violate any statute, rule, regulation, order or
decree of any public body or authority by which Purchaser or any of its assets
or properties is bound, except for any of the foregoing matters in clauses (i),
(ii), (iii) or (iv) above which, either individually or in the aggregate, would
not prevent Purchaser from performing its obligations under this Agreement or
consummating the transactions contemplated hereby and thereby.
4.2.4. NO BROKERS. Neither Purchaser nor its Affiliates have entered
into any contract, arrangement or understanding with any person or firm which
may result in the obligation of Purchaser, any Affiliate of Purchaser or the
Company to pay any finder's fees, brokerage or agent's commission or like
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby. Purchaser is not aware of
any claim for payment of any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby.
4.2.5. INVESTMENT INTENT.
(a) Purchaser is acquiring the Shares, the Option and the
Option Shares, if any, solely for the purpose of investment for its own
account and not with a view to or for sale in connection with any
distribution thereof within the meaning of Section 2(11) of the
Securities Act. Purchaser acknowledges that the Shares (and the Option
Shares, if any) are being issued to Purchaser in reliance upon one or
more exemptions from registration contained in the Securities Act and
applicable state securities laws. The
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reliance by the Company upon such exemptions is based in part upon the
representations set forth in this Section 4.2.5.
(b) Purchaser understands that the Shares and the Option
Shares have not been registered under the Securities Act, and that it
has no right, except as provided in the Registration Rights Agreement,
to cause the Shares and the Option Shares to be so registered.
(c) Purchaser has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and
risks of an investment in the Shares and of making an informed
investment decision.
(d) Purchaser is an Accredited Investor.
(e) Purchaser acknowledges and agrees that the certificates
representing the Shares issued to Purchaser or any subsequent holder
thereof who acquires the Shares (and the Option Shares, if any) in a
transaction exempt from registration under the Securities Act may be
imprinted with an appropriate restrictive legend concerning
registration.
(f) Purchaser acknowledges and agrees that the Company's stock
records may be marked to indicate the provisions of this Section 4.2.5
and the Company may direct any transfer agent to enter a stop transfer
order in its records with respect to the Shares in accordance with this
Section 4.2.5.
ARTICLE 5
COVENANTS
SECTION 5.1. FEES. At the Closing, the Company shall pay Purchaser, in
addition to any reimbursements for expenses under Section 5.2, a financing fee
of $75,000. For so long as the Purchaser shall own the Requisite Shares (as
defined in the Series A Certificate of Designation), and for such time or times
as a Series A Designee (as defined in Section 5.11) shall not be serving as a
member of the Board of Directors, the Company shall pay Purchaser an annual fee
of $50,000, payable quarterly in arrears, plus shall reimburse Purchaser for all
reasonably incurred out-of-pocket expenses (including legal fees) incurred in
monitoring the investment in the Preferred Stock.
SECTION 5.2. EXPENSES. Whether or not the Closing occurs, all costs and
expenses of the Company and Purchaser incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the Company directly
or paid by the Company to Purchaser to reimburse Purchaser for any such
expenses; provided, however, that the Company shall not be obligated to pay on
behalf of or reimburse Purchaser for its out-of-pocket costs in excess of
$75,000. The Company shall reimburse Purchaser for its costs and expenses at the
earlier of (i) the Termination of this Agreement or (ii) the Closing.
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SECTION 5.3. CONDUCT OF BUSINESS. Prior to the Closing, except as
contemplated by any other provision of this Agreement, unless Purchaser has
consented in writing thereto, the Company:
(a) shall, and shall cause each of its Subsidiaries to,
conduct its operations according to its usual, regular and ordinary
course in substantially the same manner as heretofore conducted;
(b) shall not permit any change in the financial condition,
business, operations or prospects of the Company and its Subsidiaries,
taken as a whole, that would have or would be reasonably likely to have
a Company Material Adverse Effect; or
(c) shall not do, or enter into any agreement to do, any of
those acts set forth in clauses (i) through (x) of Section 6 of the
Certificates of Designation.
SECTION 5.4. OTHER ACTION. Subject to the terms and conditions herein
provided, the Company and Purchaser shall (a) use all reasonable efforts to
cooperate with one another in (i) determining whether any filings are required
to be made prior to the Closing with, and whether any consents, approvals,
permits or authorizations are required to be obtained prior to the Closing from,
governmental or regulatory authorities of the United States, the several states
and foreign jurisdictions in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and (ii)
timely making any such filings and timely seeking any such consents, approvals,
permits or authorizations; and (b) use all reasonable efforts to take, or cause
to be taken, all other action and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement. If at any time after the Closing,
any further action is necessary or desirable to carry out the purpose of or to
consummate the transactions contemplated by this Agreement, the Purchaser and
the Company shall use all reasonable efforts to cooperate with one another in
taking all such necessary action.
SECTION 5.5. INSPECTION OF RECORDS. From the date hereof through the
Closing, the Company shall allow, upon reasonable notice, all designated
officers, attorneys, accountants and other representatives of Purchaser access
at all reasonable times during normal business hours to the records and files,
correspondence, audits, properties and personnel, as well as to all information
relating to commitments, contracts, titles, franchise compliance and financial
position, or otherwise pertaining to the business and affairs, of the Company
and its Subsidiaries.
SECTION 5.6. PUBLICITY. The initial press release relating to this
Agreement shall be a joint press release and thereafter the Company and
Purchaser shall, subject to their respective legal obligations (including,
without limitation, requirements of stock exchanges and other similar regulatory
bodies), consult with each other, and use reasonable efforts to agree upon the
text of any press release, before issuing any such press release or otherwise
making public statements with respect to the transactions contemplated hereby
and in making any filings with any federal
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or state governmental or regulatory agency or with any national securities
exchange with respect thereto.
SECTION 5.7. MEETING OF STOCKHOLDERS. The Company will take all
necessary action in accordance with applicable law, the requirements of The
Nasdaq Stock Market, and the Company's certificate of incorporation and bylaws
to commence a meeting of its stockholders to consider and vote upon any and all
actions which the stockholders must take in order for this Agreement and the
transactions contemplated hereby to be consummated, including, without
limitation, amending the Company's certificate of incorporation to increase the
number of authorized shares of Common Stock and Preferred Stock and to authorize
the issuance of the Shares and Option Shares. The Board of Directors of the
Company shall recommend such approval, and the Company shall take all lawful
action to solicit such approval, including, without limitation, timely mailing
of a proxy statement.
SECTION 5.8. FILING OF CERTIFICATES OF DESIGNATION. Subject to the
approval of the stockholders of the Company of the amendments to the Company's
certificate of incorporation to increase the authorized number of shares of
Common Stock and Preferred Stock, the Company shall file the Certificates of
Designation with the Secretary of State of the State of Delaware.
SECTION 5.9. QUARTERLY, ANNUAL AND SPECIAL REPORTS. The Company will
furnish to Purchaser copies of all Quarterly Reports on Form 10-Q, Annual
Reports on Form 10-K, Current Reports on Form 8-K, Proxy Statements and any
other registration statement, report, proxy statement or information statement
filed with the Commission within three (3) days of the date any such
registration statement, report, proxy statement or information statement is
filed with the Commission.
SECTION 5.10. USE OF PROCEEDS. The Company will apply the proceeds from
the sale of Shares as provided in the business plan of the Company, a copy of
which has been delivered to Purchaser. The Company shall not use such proceeds
for any other purposes.
SECTION 5.11. CONTINUATION OF INDEMNIFICATION; INSURANCE.
(a) From and after the Closing, the Company shall indemnify,
defend and hold harmless each person who has been elected by the
holders of the Series A Preferred Stock, or appointed, pursuant to the
provisions of the Series A Certificate of Designation and who is
serving in the capacity of a director of the Company (a "Series A
Designee") from and against all losses, claims, damages, liabilities,
costs or expenses (including reasonable attorneys' fees) based upon or
arising from his acts or omissions as a director of the Company to the
fullest extent permitted under the laws of the State of Delaware.
(b) From and after the Closing, the Company shall not amend,
alter or repeal its certificate of incorporation or bylaws, except as
required by law, if the effect of such amendment, alteration or repeal
would be to increase the potential liability of a director of the
Company to the Company or to its stockholders for monetary damages for
breach
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of fiduciary duty, or to lessen or otherwise adversely affect the
indemnification rights of directors, officers, employees or agents of
the Company as provided in such certificate of incorporation or bylaws
as in effect on the date of this Agreement.
(c) The Company shall cause to be maintained, at its sole
cost, at all times following the Closing, directors and officers
liability insurance in an amount equal to or greater than $5,000,000
covering any Series A Designee serving in the capacity of a director of
the Company.
(d) This Section 5.11 is intended to benefit each Series A
Designee serving in the capacity of a director of the Company, each of
whom shall be entitled to enforce the provisions hereof as if they were
a party hereto. The Company shall pay all expenses, including
reasonable attorneys' fees, that may be incurred by any Series A
Designee serving in the capacity of a director of the Company in
enforcing the provisions of this Section 5.11.
(e) For purposes of this Section 5.11, "Series A Designee"
shall include any person that the holders of the Series A Preferred
Stock are entitled to nominate or elect to the Board of Directors as a
result of an "Event of Non-Compliance" as defined in the Series A
Certificate of Designation.
SECTION 5.12. REGISTRATION RIGHTS. At the Closing, the Company and
Purchaser will enter into a Registration Rights Agreement in substantially the
form of Exhibit A (the "Registration Rights Agreement").
SECTION 5.13. NO TRANSFER TO A COMPETITOR. The Purchaser will not
transfer the Shares, or, if converted into Series A Preferred Stock, the shares
of the Series A Preferred Stock, to any competitor of the Company without the
express written consent of the Company. The foregoing shall not apply to any
business combination approved by the Board of Directors or to sales made on the
open market by Purchaser.
ARTICLE 6
CONDITIONS
SECTION 6.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO CLOSE. The
respective obligation of each party to close the transactions contemplated
hereby shall be subject to the fulfillment at or prior to the Closing of the
following conditions:
(a) Neither of the parties hereto shall be subject to any
Order or injunction of a court of competent jurisdiction which
prohibits the consummation of the transactions contemplated by this
Agreement or any of the other Transaction Documents or which could
reasonably be expected to otherwise result in a material diminution of
the benefits of the transactions contemplated hereby or thereby to
Purchaser. In the event any such
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Order or injunction shall have been issued, each party agrees to use
its reasonable efforts to have any such Order or injunction lifted.
There shall not be pending or threatened on the Closing Date any Action
which could reasonably be expected to result in the issuance of any
such Order or injunction.
(b) All consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or
other regulatory body required in connection with the execution,
delivery and performance of this Agreement and the other Transaction
Documents shall have been obtained or made, except for any other
documents required to be filed after the Closing Date, which are set
forth in the Disclosure Letter.
SECTION 6.2. CONDITIONS TO OBLIGATION OF THE COMPANY TO CLOSE. The
obligation of the Company to close the transactions contemplated hereby shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions (which may be waived in whole or in part by the Company in its sole
discretion):
(a) The Company shall have received all necessary
stockholder approvals.
(b) The Company shall have received a certificate, dated the
Closing Date, of the Secretary of Purchaser, certifying as to the
incumbency of the officers of Purchaser executing this Agreement, the
validity and effect of the resolutions of the directors and
stockholders of Purchaser authorizing and approving this Agreement and
the other Transaction Documents and the transactions contemplated
hereby and thereby, and such other matters as Purchaser or its counsel
may reasonably request.
(c) Purchaser shall have performed its covenants and
agreements contained in this Agreement required to be performed on or
prior to the Closing Date and the representations and warranties of
Purchaser contained in this Agreement and in any document delivered in
connection herewith shall be true and correct as of the Closing Date in
all material respects, and the Company shall have received a
certificate of the President or a Vice President of Purchaser, dated
the Closing Date, certifying to such effect.
SECTION 6.3. CONDITIONS TO OBLIGATION OF PURCHASER TO CLOSE. The
obligations of Purchaser to close the transactions contemplated hereby shall be
subject to the fulfillment at or prior to the Closing Date of each of the
following conditions (all or any of which may be waived in whole or in part by
Purchaser in its sole discretion):
(a) The Purchaser shall have received the Business Plan of the
Company and the Strategic Plan of the Company, in each case as will be
in effect on and as of the Closing Date, and each shall be satisfactory
to Purchaser in all respects.
(b) The Company shall have received all necessary
stockholder approvals.
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(c) The Company shall have filed the Certificates of
Designation with the Secretary of the State of Delaware.
(d) The Company shall have performed and complied with each of
its covenants and agreements contained in this Agreement required to be
performed on or prior to the Closing Date and the representations and
warranties of the Company contained in this Agreement and in any
document delivered in connection herewith shall be true and correct in
all material respects as of the Closing Date as though such
representation or warranty was made on and as of the Closing Date, and
Purchaser shall have received a certificate, dated the Closing Date, of
the President or a Vice President of the Company, certifying to such
effect.
(e) From the date of this Agreement through the Closing, there
shall not have occurred any change in the financial condition,
business, operations or prospects of the Company and its Subsidiaries,
taken as whole, that would have or would be reasonably likely to have a
Company Material Adverse Effect.
(f) Purchaser shall have received a certificate, dated the
Closing Date, of the Secretary of the Company, certifying as to the
incumbency of the officers of the Company executing this Agreement, the
validity and effect of the resolutions of the directors and
stockholders of the Company authorizing and approving this Agreement
and the other Transaction Documents and the transactions contemplated
hereby and thereby, the validity and effect of the Certificate of
Incorporation and Bylaws of the Company, and such other matters as
Purchaser or its counsel may reasonably request.
(g) The Company shall have delivered to Purchaser a
certificate, dated the day prior to the Closing Date, from the
Secretary of State of the State of Delaware, certifying that the
Company is duly incorporated under the laws of the State of Delaware
and is in good standing and has a legal corporate existence at such
date.
(h) The Company shall have executed and delivered to Purchaser
the Registration Rights Agreement.
(i) Purchaser shall have received such other documents,
instruments or certificates incident to the transactions contemplated
by this Agreement or by the other Transaction Documents as it or its
counsel may reasonably request.
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ARTICLE 7
TERMINATION
SECTION 7.1. TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated, and the transactions contemplated hereby may be abandoned, at any
time prior to the Closing by the mutual consent of Purchaser and the Company.
SECTION 7.2. TERMINATION BY EITHER PURCHASER OR THE COMPANY. This
Agreement may be terminated by action of the Board of Directors of either
Purchaser or the Company if (a) the Closing shall not have occurred by August
31, 1996, or (b) a United States federal or state court of competent
jurisdiction or United States federal or state governmental, regulatory or
administrative agency or commission shall have issued an Order, decree or ruling
or taken any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement, and such Order,
decree, ruling or other action shall have become final and nonappealable;
provided, that the party seeking to terminate this Agreement pursuant to this
clause (b) shall have used all reasonable efforts to remove such Order,
injunction or decree; and further provided, in the case of a termination
pursuant to clause (a) above, that the terminating party shall not have breached
in any material respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the failure referred to
in said clause.
SECTION 7.3. TERMINATION BY THE COMPANY. This Agreement may be
terminated at any time prior to the Closing by action of the Board of Directors
of the Company if (a) any condition in Section 6.2 has not been satisfied as of
the Closing Date, or if satisfaction of such a condition is or becomes
impossible (other than through the failure of the Company to comply fully with
its obligations under this Agreement) and the Company has not waived such
condition on or before the Closing Date, or (b) there has been a material
breach of any of the covenants or agreements set forth in this Agreement on
the part of Purchaser, which breach is not curable or, if curable, is not
cured within 30 days after written notice of such breach is given by the
Company to Purchaser.
SECTION 7.4. TERMINATION BY PURCHASER. This Agreement may be terminated
at any time prior to the Closing by action of the Board of Directors of
Purchaser if (a) any condition in Section 6.3 has not been satisfied as of the
Closing Date, or if satisfaction of such a condition is or becomes impossible
(other than through the failure of Purchaser to comply fully with its
obligations under this Agreement) and Purchaser has not waived such condition on
or before the Closing Date, or (b) there has been a material breach of any of
the covenants or agreements set forth in this Agreement on the part of the
Company, which breach is not curable or, if curable, is not cured within 30 days
after written notice of such breach is given by Purchaser to the Company.
SECTION 7.5. EFFECT OF TERMINATION. In the event of termination of this
Agreement pursuant to this Article 7, all obligations of the parties hereto
shall terminate, except the
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obligations of the parties pursuant to this Section 7.5 and Section 5.2 and
except for the provisions of Articles 8 and 9, which will remain in effect.
Moreover, in the event of termination of this Agreement pursuant to Sections 7.3
or 7.4, nothing herein shall prejudice the ability of the non-breaching party
from seeking damages from any other party for any breach of this Agreement,
including without limitation, attorneys' fees and the right to pursue any remedy
at law or in equity.
ARTICLE 8
DEFINITIONS AND CONSTRUCTION
SECTION 8.1. DEFINITION OF CERTAIN TERMS. Except as otherwise expressly
provided or unless the context otherwise requires, the terms defined in this
Section 8.1, whenever used in this Agreement (including in the Schedules), shall
have the respective meanings assigned to them in this Section for all purposes
of this Agreement, and include the plural as well as the singular.
ACCREDITED INVESTOR: as defined in Regulation D promulgated
under the Securities Act.
ACTION: any claim, action, suit, proceeding, arbitration or
investigation that would have a Company Material Adverse Effect.
AFFILIATE: of a Person means a Person that directly or
indirectly through one or more intermediaries, controls, is controlled
by, or is under common control with, the first Person. "Control"
(including the terms "controlled by" and "under common control with")
means the possession, directly or indirectly, of the power to direct or
cause the direction of the management policies of a person, whether
through the ownership of voting securities, by contract or credit
arrangement, as trustee or executor, or otherwise.
AGREEMENT: this instrument as originally executed, including
the Schedules hereto, or as it may be from time to time supplemented or
amended by one or more supplements or amendments hereto entered
pursuant to the applicable provisions hereof.
APPLICABLE LAW: all applicable provisions of all (i)
constitutions, treaties, statutes, laws (including the common law),
rules, regulations, ordinances, codes or orders of any Governmental
Authority, (ii) Governmental Approvals and (iii) orders, decisions,
injunctions, judgments, awards and decrees of or agreements with any
Governmental Authority.
BUSINESS: the business of the Company described in the
Company's Annual Report of From 10-K filed with the Commission for the
fiscal year ended December 31, 1995.
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BUSINESS DAY: shall mean a day other than a Saturday, Sunday or
other day on which commercial banks in New York City are authorized or
required to close.
CERTIFICATES OF DESIGNATION: collectively, the Series A
Certificate of Designation, the Series B Certificate of Designation and
the Series C Certificate of Designation.
CLOSING: as defined in Section 2.1.
CLOSING DATE: as defined in Section 2.1.
CODE: the Internal Revenue Code of 1986, as amended.
COMMON STOCK: as defined in Section 4.1.3.
COMMISSION: Securities and Exchange Commission of the United
States of America and any successor commission, service, agency or
bureau.
COMPANY: as defined in the first paragraph of this Agreement.
COMPANY INTELLECTUAL PROPERTY: as defined in Section 4.1.19.
COMPANY MATERIAL ADVERSE EFFECT: as defined in Section 4.1.1.
COMPANY PLANS: as defined in Section 4.1.12.
COMPANY REPORT: each registration statement, report, proxy
statement or information statement prepared by the Company since
December 31, 1995, including without limitation the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, each in the
form (including exhibits and any amendments thereto) filed with the
Commission.
CONSENT: any consent, approval, authorization, waiver, permit,
grant, franchise, concession, agreement, license, exemption or order
of, registration, certificate, declaration or filing with, or report or
notice to, any Person, including but not limited to any Governmental
Authority.
CONTRACT: any agreement, license, lease, evidence of
indebtedness, mortgage, indenture or other contract (whether written or
oral).
DISCLOSURE LETTER: as defined in Section 4.1.
DOLLARS OR $: lawful money of the United States.
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ERISA: the Employee Retirement Income Security Act of 1974, as
amended.
GAAP: generally accepted accounting principles as in effect in
the United States.
GOVERNMENT APPROVAL: any Consent of, with or to any
Governmental Authority.
GOVERNMENTAL AUTHORITY: any nation or government, any state or
other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or
pertaining to government, including, without limitation, any government
authority, agency, department, board, commission or instrumentality of
the United States, any State of the United States or any political
subdivision thereof, and any tribunal or arbitrator(s) of competent
jurisdiction, and any self-regulatory organization.
INTELLECTUAL PROPERTY: any and all United States and foreign:
(a) patents (including design patents, industrial designs and utility
models) and patent applications (including docketed patent disclosures
awaiting filing, reissues, divisions, continuations-in-part and
extensions), patent disclosures awaiting filing determination,
inventions and improvements thereto; (b) trademarks, service marks,
trade names, trade dress, logos, business and product names, slogans,
and registrations and applications for registration thereof; (c)
copyrights (including software) and registrations thereof; (d)
inventions, processes, designs, formulae, trade secrets, know-how,
industrial models, confidential and technical information,
manufacturing, engineering and technical drawings, product
specifications and confidential business information; (e) mask work and
other semiconductor chip rights and registrations thereof; (f)
intellectual property rights similar to any of the foregoing; (g)
copies and tangible embodiments thereof (in whatever form or medium,
including electronic media).
IRS: the Internal Revenue Service of the United States of
America and any successor commission, service, agency or bureau.
KNOWLEDGE: An individual will be deemed to have "Knowledge" of
a particular fact or other matter if: (a) such individual is actually
aware of such fact or other matter; or (b) a prudent individual could
be expected to discover or otherwise become aware of such fact or other
matter in the course of conducting a reasonably comprehensive
investigation concerning the existence of such fact or other matter. A
Person (other than an individual) will be deemed to have "Knowledge" of
a particular fact or other matter if any individual who is serving as a
director, officer, partner, executor, or trustee of such Person (or in
any similar capacity) has Knowledge of such fact or other matter.
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LAW: as defined in Section 4.1.1.
LICENSE: any permit, license and other authorization, approval,
registration and similar consent.
LIEN: any mortgage, pledge, hypothecation, right of others,
claim, security interest, encumbrance, lease, sublease, license,
occupancy agreement, adverse claim or interest, easement, covenant,
encroachment, burden, title defect, title retention agreement, voting
trust agreement, interest, equity, option, lien, right of first
refusal, charge or other restrictions or limitations of any nature
whatsoever, including but not limited to such as may arise under any
Contracts.
OPTION: as defined in Section 3.1.
OPTION CLOSING: as defined in Section 3.2.
OPTION SHARES: as defined in Section 3.1.
ORDER: as defined in Section 4.1.1.
PERSON: any natural person, firm, partnership, association,
corporation, company, trust, business trust, Governmental Authority or
other entity.
PREFERRED STOCK: as defined in the Recitals.
PURCHASE PRICE: as defined in Section 1.2.
PURCHASER: as defined in the first paragraph of this Agreement.
REGISTRATION RIGHTS AGREEMENT: as defined in Section 5.12.
REMEDIAL ACTION: all actions required to (i) clean up, remove,
treat or in any other way remediate any Hazardous Substances; (ii)
prevent the release of Hazardous Substances so that they do not migrate
or endanger or threaten to endanger public health or welfare or the
environment; or (iii) perform studies, investigations and care related
to any such Hazardous Substances.
RESTRUCTURING PLAN: the restructuring plan announced by the
Company in December 1995 to return the Company to profitability.
SECURITIES ACT: the Securities Act of 1933, as amended.
SERIES A PREFERRED STOCK: as defined in the Recitals hereto.
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SERIES B PREFERRED STOCK: as defined in the Recitals hereto.
SERIES C PREFERRED STOCK: as defined in the Recitals hereto.
SERIES A CERTIFICATE OF DESIGNATION: the Certificate of
Designation of the Series A Preferred Stock, to be filed with the
Secretary of State of the State of Delaware in the form attached hereto
as Exhibit A.
SERIES B CERTIFICATE OF DESIGNATION: the Certificate of
Designation of the Series B Preferred Stock, to be filed with the
Secretary of State of the State of Delaware in the form attached hereto
as Exhibit B.
SERIES C CERTIFICATE OF DESIGNATION: the Certificate of
Designation of the Series C Preferred Stock, to be filed with the
Secretary of State of the State of Delaware in the form attached hereto
as Exhibit C.
SHARES: as defined in Section 1.1.
STOCKHOLDER MEETING DATE: the date on which the Company shall
hold the meeting of stockholders contemplated by Section 5.7.
STOCK PLANS: as defined in Section 4.1.6.
SUBSIDIARIES: each corporation or other Person in which a
Person owns or controls, directly or indirectly, capital stock or other
equity interests representing at least 50% of the outstanding voting
stock or other equity interests.
TAX: any federal, state, provincial, local, foreign or other
income, alternative, minimum, accumulated earnings, personal holding
company, franchise, capital stock, net worth, capital, profits,
windfall profits, gross receipts, value added, sales, use, goods and
services, excise, customs duties, transfer, conveyance, mortgage,
registration, stamp, documentary, recording, premium, severance,
environmental (including taxes under Section 59A of the Code), real
property, personal property, ad valorem, intangibles, rent, occupancy,
license, occupational, employment, unemployment insurance, social
security, disability, workers' compensation, payroll, health care,
withholding, estimated or other similar tax, duty or other governmental
charge or assessment or deficiencies thereof (including all interest
and penalties thereon and additions thereto whether disputed or not).
TAX RETURN: any return, report, declaration, form, claim for
refund or information return or statement relating to Taxes, including
any schedule or attachment thereto, and including any amendment
thereof.
TRANSACTION DOCUMENTS: as defined in Section 4.1.2.
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WARRANT: as defined in Section 4.1.3.
SECTION 8.2. RULES OF CONSTRUCTION.
(a) "This Agreement" means this instrument as originally
executed, including the Exhibits hereto, or as it may be from time to
time supplemented or amended by one or more supplements or amendments
hereto entered pursuant to the applicable provisions hereof;
(b) "includes" and "including" are not limiting, and, in
each case, shall be construed as if followed by the words "without
limitation," "but not limited to" or words of similar import;
(c) "may not" is prohibitive, and not permissive;
(d) "shall" is mandatory, and not permissive;
(e) "or" is not exclusive [i.e., if a party "may do (a),
(b) or (c)," then the party may do all of, any one of, or any
combination of, (a), (b) or (c)] unless the context expressly provides
otherwise;
(f) all references in this instrument to designated
"Articles," "Sections" and other subdivisions are to the designated
Articles, Sections and other subdivisions of this instrument as
originally executed;
(g) the words "herein," "hereof," "hereto" and
"hereunder" and other words of similar import refer to this Agreement
as a whole and not to any particular Article, Section or other
subdivision;
(h) all terms used herein which are defined in the
Securities Act, the Exchange Act or the rules and regulations
promulgated thereunder have the meanings assigned to them therein
unless otherwise defined herein; and
(i) all accounting terms not otherwise defined herein
have the meaning assigned to them in accordance with GAAP.
ARTICLE 9
GENERAL PROVISIONS
SECTION 9.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties contained in this Agreement shall survive the
execution and delivery of this
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<PAGE> 91
Agreement, any examination by or on behalf of the parties hereto and the
completion of the transactions contemplated herein, but only to the extent
specified below:
(a) except as set forth in clauses (b) and (c) below, the
representations and warranties contained in Section 4.1 and Section
4.2 shall survive for a period of two years following the Closing Date
and the date of each Option Closing;
(b) the representations and warranties contained in
Sections 4.1.1, 4.1.2, 4.1.6, 4.2.1 and 4.2.2 shall survive without
limitation; and
(c) the representations and warranties of the Company
contained in Section 4.1.11 shall survive as to any Tax covered by
such representations and warranties for so long as any statute of
limitations for such Tax remains open, in whole or in part, including
without limitation by reason of waiver of such statute of limitations.
SECTION 9.2. SEVERABILITY. If any provision of this Agreement,
including any phrase, sentence, clause, Section or subsection is inoperative or
unenforceable for any reason, such circumstances shall not have the effect of
rendering the provision in question inoperative or unenforceable in any other
case or circumstance, or of rendering any other provision or provisions herein
contained invalid, inoperative, or unenforceable to any extent whatsoever.
SECTION 9.3. NOTICES. All notices, requests, demands, waivers and
other communications required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given if (a)
delivered personally, (b) mailed by first-class, registered or certified mail,
return receipt requested, postage prepaid, or (c) sent by next-day or overnight
mail or delivery or (d) sent by telecopy or telegram:
(a) if to Purchaser, to:
Crescent Real Estate Equities Limited Partnership
777 Main Street, Suite 2100
Fort Worth, TX 76102
Attention: Gerald W. Haddock, President and Chief
Operating Officer
Fax No. (817) 878-0429
with copies to:
David M. Dean, Esq.
Senior Vice President, Law
Crescent Real Estate Equities, Ltd.
777 Main Street, Suite 2100
Fort Worth, TX 76102
Fax No. (817) 878-0429
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<PAGE> 92
Bruce A. Cheatham, Esq.
Winstead Sechrest & Minick P.C.
1201 Elm Street, Suite 5400
Dallas, Texas 75270
Fax No. (214) 745-5390
(b) if to the Company, to:
Fresh Choice, Inc.
2901 Tasman Drive, Suite 109
Santa Clara, CA 95054
Fax No. (408) 986-8427
Attention: Charles A. Lynch, Chairman
with a copy to:
Robert J. Brigham, Esq.
Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Fax No. (415) 857-0663
or, in each case, at such other address as may be specified in writing to the
other parties hereto.
All such notices, requests, demands, waivers and other communications
shall be deemed to have been received (w) if by personal delivery on the day
after such delivery, (x) if by certified or registered mail, on the seventh
business day after the mailing thereof, (y) if by next-day or overnight mail or
delivery, on the day delivered, (z) if by telecopy or telegram, on the next day
following the day on which such telecopy or telegram was sent, provided that a
copy is also sent by certified or registered mail.
SECTION 9.4. HEADINGS. The headings contained in this Agreement
are for purposes of convenience only and shall not affect the meaning or
interpretation of this Agreement.
SECTION 9.5. ENTIRE AGREEMENT. This Agreement (including the
Exhibits hereto) and the other Transaction Documents (when executed and
delivered) constitute the entire agreement and supersede all prior agreements
and understandings, both written and oral, between the parties with respect to
the subject matter hereof.
SECTION 9.6. COUNTERPARTS. This Agreement may be executed in
several counterparts, each of which shall be deemed an original and all of
which shall together constitute one and the same instrument.
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<PAGE> 93
SECTION 9.7. GOVERNING LAW, ETC. This Agreement shall be governed
in all respects, including as to validity, interpretation and effect, by the
internal laws of the State of Delaware, without giving effect to the conflict
of laws rules thereof. Purchaser and the Company hereby irrevocably submit to
the jurisdiction of the courts of the State of Delaware and the Federal courts
of the United States of America located in the State of Delaware, solely in
respect of the interpretation and enforcement of the provisions of this
Agreement and of the documents referred to in this Agreement, and hereby waive,
and agree not to assert, as a defense in any action, suit or proceeding for the
interpretation or enforcement hereof or of any such document, that it is not
subject thereto or that such action, suit or proceeding may not be brought or
is not maintainable in said courts or that the venue thereof may not be
appropriate or that this Agreement or any of such document may not be enforced
in or by said courts, and the parties hereto irrevocably agree that all claims
with respect to such action or proceeding shall be heard and determined in such
a Delaware State or Federal court. Purchaser and the Company hereby consent to
and grant any such court jurisdiction over the person of such parties and over
the subject matter of any such dispute and agree that mailing of process or
other papers in connection with any such action or proceeding in the manner
provided in Section 9.7, or in such other manner as may be permitted by law,
shall be valid and sufficient service thereof.
SECTION 9.8. BINDING EFFECT. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
successors and permitted assigns.
SECTION 9.9. ASSIGNMENT. This Agreement shall not be assignable
or otherwise transferable by any party hereto without the prior written consent
of the other parties hereto, provided that Purchaser may assign this Agreement
to (i) any Subsidiary of Purchaser, (ii) Purchaser may assign this Agreement to
any lender to Purchaser or any Subsidiary or Affiliate thereof as security for
obligations to such lender in respect of the financing arrangements entered into
in connection with the transactions contemplated hereby and any refinancings,
extensions, refundings or renewals thereof, provided, further, that no
assignment to any such lender shall in any way affect Purchaser's obligations or
liabilities under this Agreement; and (iii) Purchaser may assign the Option, in
whole or in part.
SECTION 9.10. NO THIRD PARTY BENEFICIARIES. Nothing in this
Agreement shall confer any rights upon any person or entity other than the
parties hereto and their respective heirs, successors and permitted assigns.
SECTION 9.11. AMENDMENT; WAIVERS, ETC. No amendment, modification
or discharge of this Agreement, and no waiver hereunder, shall be valid or
binding unless set forth in writing and duly executed by the party against whom
enforcement of the amendment, modification, discharge or waiver is sought. Any
such waiver shall constitute a waiver only with respect to the specific matter
described in such writing and shall in no way impair the rights of the party
granting such waiver in any other respect or at any other time. Neither the
waiver by any of the parties hereto of a breach of or a default under any of
the provisions of this Agreement, nor the failure by any of the parties, on one
or more occasions, to enforce any of the provisions of this Agreement or to
exercise any right or privilege hereunder, shall be construed as a waiver of
any other breach
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<PAGE> 94
or default of a similar nature, or as a waiver of any of such provisions, rights
or privileges hereunder. The rights and remedies herein provided are cumulative
and are not exclusive of any rights or remedies that any party may otherwise
have at law or in equity. The rights and remedies of any party based upon,
arising out of or otherwise in respect of any inaccuracy or breach of any
representation, warranty, covenant or agreement or failure to fulfill any
condition shall in no way be limited by the fact that the act, omission,
occurrence or other state of facts upon which any claim of any such inaccuracy
or breach is based may also be the subject matter of any other representation,
warranty, covenant or agreement as to which there is no inaccuracy or breach.
The representations and warranties of the Company shall not be affected or
deemed waived by reason of any investigation made by or on behalf of Purchaser
(including but not limited to by any of their respective advisors, consultants
or representatives) or by reason of the fact that Purchaser or any of such
advisors, consultants or representatives knew or should have known that any such
representation or warranty is or might be inaccurate. The representations and
warranties of Purchaser shall not be affected or deemed waived by reason of any
investigation made by or on behalf of the Company (including but not limited to
by any of their respective advisors, consultants or representatives) or by
reason of the fact that the Company or any of such advisors, consultants or
representatives knew or should have known that any such representation or
warranty is or might be inaccurate.
[This space left blank intentionally.]
[Signatures on following page.]
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<PAGE> 95
PREFERRED STOCK PURCHASE AGREEMENT
Signature Page
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
CRESCENT REAL ESTATE EQUITIES LIMITED
PARTNERSHIP
By: CRESCENT REAL ESTATE EQUITIES, LTD.
General Partner
By: /s/ DAVID M. DEAN
_____________________________________
David M. Dean
Senior Vice President, Law and
Secretary
FRESH CHOICE, INC.
By: /s/ CHARLES A. LYNCH
_____________________________________
Charles A. Lynch
Chairman
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<PAGE> 96
APPENDIX II
CERTIFICATE OF DESIGNATION
OF
SERIES A VOTING PARTICIPATING CONVERTIBLE PREFERRED STOCK
OF
FRESH CHOICE, INC.
Fresh Choice, Inc., a Delaware corporation, DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
said corporation by virtue of its Certificate of Incorporation as amended and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, said Board of Directors has duly adopted a resolution providing for
the issuance of a series of Preferred Stock, par value $0.001 per share,
designated as Series A Voting Participating Convertible Preferred Stock, which
resolution reads as follows:
"BE IT RESOLVED, that the Board of Directors (the "Board of Directors")
of Fresh Choice, Inc., a Delaware corporation (the "Corporation"), hereby
authorizes the issuance of a series of Preferred Stock and fixes its
designation, powers, preferences and relative, participating, optional or other
special rights, and qualifications, limitations and restrictions thereof, as
follows:
SECTION 1. DESIGNATION. The distinctive serial designation of said
series shall be "Series A Voting Participating Convertible Preferred Stock"
(hereinafter called "Series A"). Each share of Series A shall be identical in
all respects with all other shares of Series A except as to the dates from and
after which dividends thereon shall be cumulative.
SECTION 2. NUMBER OF SHARES. The number of shares in Series A shall
initially be 1,187,906, which number may from time to time be increased or
decreased (but not below the total number thereof then outstanding and reserved
for issuance) by the Board of Directors. Shares of Series A that are redeemed,
purchased or otherwise acquired by the Corporation or converted into Common
Stock shall be cancelled and shall revert to authorized but unissued shares of
Preferred Stock undesignated as to series.
SECTION 3. DIVIDENDS. So long as any share of Series A remains
outstanding, the holders of shares of Series A shall be entitled to participate,
on an "as converted" basis, in and to receive, when, as and if declared by the
Board of Directors of the Corporation, but only out of funds legally available
therefore, any and all cash dividends and other distributions paid or made with
respect to any junior stock. So long as any share of Series A remains
outstanding, no dividend whatever shall be paid or declared and no distribution
shall be made on any junior stock, unless, contemporaneously therewith, a
dividend or other distribution on the shares of the Series A then outstanding
shall have been declared and set apart for payment as hereinafter provided. All
dividends and other distributions paid or made by the Corporation at any time as
any share of the Series A remains outstanding shall be paid or distributed among
the holders of the Common Stock and the Series A in proportion to the shares of
Common Stock then held by
<PAGE> 97
the holders of the Common Stock and the shares of Common Stock which the holders
of the Series A then have the right to acquire upon conversion of the shares of
Series A then held by them.
In addition to the foregoing, in the event of any liquidation,
dissolution or winding up of the affairs of the Corporation (a "Liquidation")
following the occurrence of an Event of Non-Compliance, and continuing through
and including the date on which any such Liquidation occurs, the holders of the
Series A shall be entitled to receive, when, as and if declared by the Board of
Directors of the Corporation, but only out of funds legally available therefore,
cumulative preferential cash dividends at the annual rate of $0.56 per share,
and no more, calculated from the first date of the occurrence of an Event of
Non-Compliance, and payable pursuant to Section 4 hereof. So long as any share
of Series A remains outstanding, no dividend whatever shall be paid or declared
and no distribution shall be made on any junior stock, and no shares of junior
stock shall be purchased, redeemed or otherwise acquired for consideration by
the Corporation, directly or indirectly, unless all accrued dividends on all
outstanding shares of Series A shall have been paid. For the sole purpose of
this paragraph, any merger, consolidation or sale of substantially all the
assets of the Corporation shall be deemed to be a Liquidation for the purposes
of such rights to cumulative preferential dividends, and shall be paid prior to
the consummation of any such transaction.
SECTION 4. LIQUIDATION RIGHTS. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, then, after payment in full of all amounts, if any, owing to the
holders of the Corporation's Series B Non-Voting Participating Convertible
Preferred Stock (hereinafter called "Series B") and Series C Non-Voting
Participating Convertible Preferred Stock (hereinafter called "Series C"), but
before any distribution or payment shall be made to the holders of any junior
stock, the holders of shares of Series A shall be entitled to be paid in full an
amount equal to $4.63 per share, together with all accrued dividends to such
distribution or payment date whether or not earned or declared. After payment in
full of all amounts owing to the holders of shares of Series A as herein
provided, the remaining assets of the Corporation, if any, may be distributed by
the Corporation as provided in Section 281 of the General Corporation Law of the
State of Delaware or other controlling provision of applicable law, and the
holders of shares of Series A shall have no right to participate in any such
distributions.
SECTION 5. CONVERSION RIGHTS. The holders of shares of Series A shall
have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A shall be
convertible, at the option of the holder thereof, at any time after the
date of issuance of such share at the office of the Corporation or any
transfer agent for such stock, into such number of fully paid and
nonassessable shares of Common Stock of the Corporation as is
determined by
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<PAGE> 98
dividing $4.63 by the Current Conversion Price applicable to such
share, determined as hereinafter provided, in effect on the date the
certificate is surrendered for conversion. The price at which shares of
Common Stock shall be deliverable upon conversion of shares of the
Series A (the "Stated Conversion Price") shall initially be $4.63 per
share of Common Stock. The Stated Conversion Price shall be adjusted
from and after the date of filing this Certificate (the "Original
Filing Date") as hereinafter provided. The Stated Conversion Price at
any time in effect or, in the case of any such adjustment, such Stated
Conversion Price as most recently so adjusted, is herein called the
"Current Conversion Price."
(b) MANDATORY CONVERSION. At the option of the Corporation,
each share of Series A shall be converted into shares of Common Stock
at the Current Conversion Price then in effect at any time after both
the following conditions shall have been satisfied: (i) either (A) the
average Closing Prices (as hereinafter defined) for the Common Stock
during any 120-day consecutive Trading Day (as hereinafter defined)
period beginning on the first anniversary following the filing of this
Certificate shall equal or exceed $15.00 per share (as adjusted for any
stock dividends, combinations or splits with respect to such shares),
or (B) the Corporation shall have consummated the sale of originally
issued shares of Common Stock equal to or greater than 25% of the total
number of shares outstanding immediately preceding the date of such
original issuance (calculated on a fully diluted basis) at a price per
share (prior to underwriters' discounts and expenses) of Common Stock
equal to or greater than $15.00 (as adjusted for any stock dividends,
combinations or splits with respect to such shares) pursuant to a firm
commitment, underwritten public offering registered pursuant to the
provisions of the Securities Act of 1933, as amended, other than a
registration relating solely to a transaction under Rule 145 under such
Act (or any successor thereto) or to an employee benefit plan of the
Corporation; and (ii) the shares of the Common Stock issuable upon
conversion of the Series A shall have been registered for resale in the
open market without restriction by any holder of the Series A who
receives Common Stock pursuant to this mandatory conversion provision
pursuant to an effective shelf registration statement under the
Securities Act of 1933, as amended, and the Corporation shall have
agreed to keep such registration effective until the holder of the
Series A receiving Common Stock pursuant to this mandatory conversion
provision shall be free to resell such Common Stock in the open market
without restrictions. The Corporation may exercise its option by
delivering to the holders of the Series A and the transfer agent for
the Series A a certificate from the Corporation's independent certified
public accountants certifying compliance with both of the conditions
set forth above. As used herein, the term "Closing Price" on any day
shall mean the reported last sale price per share of Common Stock
regular way on such day or, in case no such sale takes place on such
day, the average of the reported closing bid and asked prices regular
way, in each case on the New York Stock Exchange, or, if the Common
Stock is not listed or admitted to trading
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<PAGE> 99
on such exchange, on the American Stock Exchange, or, if the Common
Stock is not listed or admitted to trading on such Exchange, on The
Nasdaq Stock Market, or if the Common Stock is not listed or admitted
to trade thereon, on the principal national securities exchange on
which the Common Stock is listed or admitted to trading, or, if the
Common Stock is not listed or admitted to trading on any national
securities exchange or market, the average of the closing bid and asked
prices in the over-the-counter market as reported by the National
Association of Securities Dealers, or, if not so reported, as reported
by the National Quotation Bureau, Incorporated, or any successor
thereof, or, if not so reported, the average of the closing bid and
asked prices as furnished by any member of that National Association of
Securities Dealers, Inc. selected from time to time by the Corporation
for that purpose; and the term "Trading Day" shall mean a day on which
the principal national securities exchange or market on which the
Common Stock is listed or admitted to trading is open for the
transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, a Monday,
Tuesday, Wednesday, Thursday or Friday on which banking institutions in
the Borough of Manhattan, The City of New York, are not authorized or
obligated by law or executive order to close.
(c) MECHANICS OF CONVERSION. Before any holder of Series A
shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for
such stock, and shall give written notice to the Corporation at such
office that such holder elects to convert the same and shall state
therein the name or names in which such holder wishes the certificate
or certificates for shares of Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver
at such office to such holder of Series A, a certificate or
certificates for the number of shares of Common Stock to which such
holder shall be entitled as aforesaid. Such conversion shall be deemed
to have been made immediately prior to the close of business on the
date of surrender of the shares of Series A to be converted, and the
person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(d) ADJUSTMENTS TO CURRENT CONVERSION PRICE FOR STOCK
DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the
event that the Corporation at any time or from time to time after the
Original Filing Date shall declare or pay, without consideration, any
dividend on the Common Stock payable in Common Stock or in any right to
acquire Common Stock for no consideration, or shall effect a
subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right
to acquire Common Stock), or in the event the outstanding shares
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<PAGE> 100
of Common Stock shall be combined or consolidated, by reclassification
or otherwise, into a lesser number of shares of Common Stock, then the
Current Conversion Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate. In the event
that the Corporation shall declare or pay, without consideration, any
dividend on the Common Stock payable in any right to acquire Common
Stock for no consideration, then the Corporation shall be deemed to
have made a dividend payable in Common Stock in an amount of shares
equal to the maximum number of shares issuable upon exercise of such
rights to acquire Common Stock.
(e) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If at
any time after the Original Filing Date the Common Stock issuable upon
conversion of the Series A shall be changed into the same or a
different number of shares of any other class or classes of stock,
whether by capital reorganization, reclassification or otherwise, the
Current Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series A shall be convertible
into, in lieu of the number of shares of Common Stock which the holders
would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares
of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series A immediately before that change.
(f) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. If at any time or from time to time after the Original Filing
Date there is a capital reorganization or reclassification of the
capital stock of the Corporation (other than a recapitalization,
subdivision, combination, reclassification, exchange or substitution of
shares provided for elsewhere in this Section 5) or a merger,
consolidation or sale of all or substantially all of the assets of the
Corporation, as a part of and as a condition to such capital
reorganization or reclassification, merger, consolidation or sale of
assets provision shall be made so that the holders of the Series A
shall thereafter be entitled to receive upon conversion of the Series A
the number of shares of stock or other securities or property of the
Corporation to which a holder of the number of shares of Common Stock
deliverable upon conversion of the Series A would have been entitled on
such capital reorganization or reclassification, merger, consolidation
or sale of assets, subject to adjustment in respect of such stock or
securities by the terms thereof. In any such case, appropriate
adjustment shall be made in the application of the provisions of this
Section 5 with respect to the rights of the holders of Series A after
the capital reorganization, merger, consolidation or sale of assets to
the end that the provisions of this Section 5 (including adjustment of
the Current Conversion Price then in effect and the number of shares
issuable upon conversion of the Series A) shall be applicable after
that event and be as nearly equivalent as practicable.
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<PAGE> 101
(g) NO IMPAIRMENT. From and after the Original Filing Date,
the Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder
by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 5, and in the taking
of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series A against
impairment.
(h) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of any Current Conversion Price
pursuant to this Section 5, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series A and
Series B Non-Voting Participating Convertible Preferred Stock
(hereinafter called "Series B") a certificate executed by the
Corporation's President or Chief Financial Officer setting forth such
adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon
the written request at any time of any holder of Series A or Series B,
furnish or cause to be furnished to such holder a like certificate
setting forth (i) such adjustments and readjustments, (ii) the Current
Conversion Price for such series of Preferred Stock at the time in
effect, and (iii) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of the Series A.
(i) NOTICES OF RECORD DATE. In the event that the Corporation
shall propose at any time after the Original Filing Date: (i) to
declare any dividend or distribution upon its Common Stock, whether in
cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or
series or other, rights; (iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in
the Common Stock; or (iv) to merge or consolidate with or into any
other corporation, or sell, lease or convey all or substantially all of
its assets, or to liquidate, dissolve or wind up; then, in connection
with each such event, the Corporation shall send to the holders of
Series A and Series B:
(i) at least twenty (20) days' prior written notice
of the date on which a record shall be taken for such
dividend, distribution or subscription rights (and specifying
the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote, if any,
in respect of the matters referred to in (iii) and (iv) above;
and
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<PAGE> 102
(ii) in the case of the matters referred to in (iii)
and (iv) above, at least twenty (20) days' prior written
notice of the date when the same shall take place (and
specifying the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event).
(j) ISSUE TAXES. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery
of shares of Common Stock on conversion of Series A pursuant hereto;
provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder
in connection with any such conversion.
(k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series A, such number
of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Series A; and
if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose, including,
without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to this Certificate.
(l) FRACTIONAL SHARES. No fractional share shall be issued
upon the conversion of any share or shares of Series A. All shares of
Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Series A by a holder thereof shall be aggregated
for purposes of determining whether the conversion would result in the
issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction
of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such
fraction a sum in cash equal to the fair market value of such fraction
on the date of conversion (as determined in good faith by the Board of
Directors).
(m) NOTICES. Any notice required by the provisions of this
Section 5 to be given to the holders of shares of Series A and Series B
shall be deemed given if deposited in the United States mail, postage
prepaid, or if sent by facsimile or delivered personally by hand or
nationally recognized courier and addressed to each holder of record at
such holder's address or facsimile number appearing in the records of
the Corporation.
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(n) MEANING OF "COMMON STOCK". For the purpose of this Section
5, the term "Common Stock" shall include any stock of any class or
series of the Corporation which has no preference or priority in the
payment of dividends or in the distribution of assets in the event of
any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation which is not subject to redemption by the Corporation.
However, shares issuable upon conversion of shares of Series A shall
include only shares of the class designated as Common Stock as of the
original date of issuance of shares of Series A or shares of the
Corporation of any classes or series resulting from any
reclassification or reclassifications thereof and which have no
preference or priority in the payment of dividends or in the
distribution of assets in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and which are
not subject to redemption by the Corporation, provided that if at any
time there shall be more than one such resulting class or series, the
shares of each such class and series then so issuable shall be
substantially in the proportion which the total number of shares of
such class and series resulting from all such reclassifications bears
to the total number of shares of all such classes and series resulting
from all such reclassifications.
(o) POSTPONEMENT OF ADJUSTMENTS; CALCULATIONS. Any adjustment
in the conversion price otherwise required by this Section 5 to be made
may be postponed if such adjustment (plus any other adjustments
postponed pursuant to this paragraph 5(o) and not theretofore made)
would not require an increase or decrease of more than 1% in such
price. All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100th of a share, as the case may be.
(p) TAX ADJUSTMENTS. The Board of Directors may make such
adjustments in the conversion price, in addition to those required by
this Section 5, as shall be determined by the Board of Directors to be
advisable in order to avoid taxation so far as practicable of any
dividend of stock or stock rights or any event treated as such for
Federal income tax purposes to the recipients. The Board of Directors
shall have the power to resolve any ambiguity or correct any error in
this Section 5, and its action in so doing shall be final and
conclusive.
(q) ADJUSTMENTS APPLICABLE TO NEW SECURITIES. In the event
that any time, as a result of an adjustment made pursuant to the
provisions hereof, the holder of any shares of Series A thereafter
surrendered for conversion shall become entitled to receive any shares
of capital stock of the Corporation other than Common Stock, thereafter
the number of such other shares so receivable upon conversion of such
shares of Series A shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Section 5 with
respect to the Common Stock shall apply on like terms to any such other
shares.
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(r) ACCOUNTANTS' CERTIFICATE. The certificate of any
independent firm of public accountants of recognized standing selected
by the Board of Directors shall be presumptive evidence of the
correctness of any computation made under this Section 5.
SECTION 6. VOTING RIGHTS. The holders of shares of Series A shall not
have any voting rights except as set forth below or as otherwise from time to
time required by law.
The holders of Series A shall be entitled to vote, voting together with
the holders of Common Stock as a single class, on all matters submitted to a
vote of, or approval by, the Corporation's stockholders. Each holder of Series A
shall be entitled to the number of votes equal to the number of shares of Common
Stock into which the shares of Series A held by such holder are, at the time of
any vote or approval, then convertible (in each case, rounded up to the next
whole share).
At any time when the Requisite Shares shall be outstanding, in addition
to any other vote or consent of stockholders required by law or by the
Certificate of Incorporation, the consent of the holders of at least a majority
of the shares of Series A at the time outstanding, voting together as a single
class, given in person or by proxy, either in writing without a meeting or by
vote at any meeting called for the purpose, shall be necessary for authorizing,
effecting or validating any of the following actions; provided, however, if
there are members of the Corporation's Board of Directors who have been elected
to hold such office by the holders of the Series A, or appointed to hold such
office, pursuant to, or in accordance with, the provisions hereof, then the
approval of the holders of the Series A shall be necessary only for authorizing,
effecting or validating any of the following actions which have not been
approved by each of such members:
(i) Any amendment, alteration or repeal of any of the
provisions of the Certificate of Incorporation, or of the
Bylaws, of the Corporation affecting in any manner whatsoever
meetings of stockholders, special meetings, meeting notices,
quorums, size of board, vacancies on the board, or provisions
relating to the amendment of the Certificate of Incorporation
or Bylaws;
(ii) The authorization or creation of, or the
increase in the authorized number of, any shares of any class
or series or any security convertible into shares of any class
or series ranking prior or senior to, or pari passu or on a
parity with, the shares of Series A in the distribution of
assets on any liquidation, dissolution, or winding up of the
Corporation or in the payment of dividends or otherwise, or
any increase or decrease (but not below the number of shares
thereof then outstanding) in the authorized number of shares
of Series A;
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(iii) The merger or consolidation of the Corporation
with or into any other corporation or other entity, or the
sale of all or substantially all of the assets of the
Corporation, or any other business combination (as such term
is defined in Section 203 of the Delaware General Corporation
Law;
(iv) Any increase in the number of Directors
constituting the whole Board of Directors of the Corporation
to more than seven;
(v) Any "fundamental change" transaction, including,
without limitation, any transaction or other event pursuant to
which the Corporation would change its principal business
activity or add additional business activities or other lines
of business;
(vi) Material deviations from annual operating or
capital budgets;
(vii) Material changes in the operating strategy of
the Corporation;
(viii) Any acquisition or repurchase of any security
of the Corporation except as permitted or required by any
employee benefit plan of the Corporation duly authorized and
approved by the Corporation's stockholders prior to its
implementation by the Corporation;
(ix) Any incurrence of, or the entering into any
contract or agreement to alter or amend the instruments
governing, any indebtedness for borrowed money or capital
leases (including liens and leases) in an aggregate amount
greater than $5,000,000; or
(x) The creation of or investment in any subsidiary
of the Corporation.
So long as the Requisite Shares of Series A are outstanding, if and
whenever an Event of Non-Compliance shall occur, and for so long as any Event of
Non-Compliance shall be continuing, the number of Directors then constituting
the whole Board of Directors shall be automatically increased to create such
number of vacancies as are necessary so that such vacancies constitute a
majority of the whole Board of Directors, and the holders of shares of Series A
at the time outstanding, in addition to any other vote or consent of
stockholders required by law or by the Certificate of Incorporation, voting
separately as a single class, given in person or by proxy, either in writing
without a meeting or by vote at any meeting called for the purpose,voting
separately as a class, shall be entitled to elect the additional directors
necessary to fill such newly created vacancies. Whenever all Events of
Non-Compliance shall have been cured or waived, then the right of the holders of
the shares of Series A to elect such additional directors shall cease (but
subject always to the same provisions for the vesting of such voting
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rights in the case of any similar future occurrences), and the terms of office
of all persons elected as Directors by the holders of the shares of Series A
shall forthwith terminate and the number of Directors constituting the whole
Board of Directors shall be reduced accordingly.
At any time after any additional voting power shall have been so vested
in the holders of shares of Series A, the Secretary of the Corporation may, and
upon the written request of any holder of shares of Series A (addressed to the
Secretary at the principal office of the Corporation) shall, call a special
meeting of the holders of the shares of Series A for the election of the
Directors to be elected by them as herein provided, such call to be made by
notice similar to that provided in the Bylaws for a special meeting of the
stockholders or as required by law. If any such special meeting required to be
called as above provided shall not be called by the Secretary within 20 days
after receipt of any such request, then any holder of shares of Series A may
call such meeting, upon the notice above provided, and for that purpose shall
have access to the stock books of the Corporation. The Directors elected at any
such special meeting shall hold office until the next annual meeting of the
stockholders if such office shall not have previously terminated as above
provided. In case any vacancy shall occur among the Directors elected by the
holders of the shares of Series A, a successor shall be elected by the Board of
Directors to serve until the next annual meeting of the stockholders upon the
nomination of the then remaining Directors elected by the holders of the shares
of Series A or the successor of such remaining Directors. Any Directors who
shall have been elected by the holders of Series A or by any Directors so
elected may be removed during the aforesaid term of office, either with or
without cause, by, and only by, the affirmative vote of the holders of a
majority of the shares of the Series A, voting separately as a single class,
given either at a special meeting of such stockholders duly called for that
purpose or pursuant to a written consent of stockholders, and any vacancy
thereby created may be filled by the holders of Series A represented at such
meeting or pursuant to such written consent. If the holders of shares of Series
A become entitled under the foregoing provisions to elect or participate in the
election of Directors, such entitlement shall not affect the right of such
holders to vote as stated in the first paragraph of this Section 6.
SECTION 7. COVENANTS; "EVENT OF NON-COMPLIANCE" DEFINED. For so long as
the Requisite Shares shall be outstanding, the Corporation shall do each of the
following:
(a) PROFITABILITY. The Corporation's consolidated net income
before all amounts properly recorded for interest, taxes, depreciation
and amortization ("EBITDA"), in each case, as set forth in the audited
financial statements of the Corporation for the fiscal years indicated,
shall be, (i) for fiscal year 1996, $1,500,000; (ii) for fiscal year
1997, $3,500,000; and (iii) for fiscal year 1998, $5,500,000. As used
herein, the term "EBITDA Period" means each fiscal year of the
Corporation ending in December 1996, December 1997, and December 1998;
and the term "EBITDA Target" for any EBITDA Period means the dollar
amount of EBITDA required to be earned by the Corporation for each such
EBITDA Period as set forth in the preceding sentence, or as
subsequently
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modified as hereinafter provided. If the Board of Directors of the
Corporation shall unanimously and specifically authorize and approve
any act or activity of the Corporation the result of which will be to
reduce the Corporation's EBITDA for any EBITDA Period, and such
reduction in the EBITDA is unanimously and specifically authorized and
approved by the Board of Directors, the EBITDA Target or Targets, as
the case may be, shall be deemed to be automatically reduced to the
dollar amount equal to the amount calculated by multiplying the
Corporation's new, revised budgeted EBITDA by a fraction the numerator
of which is the original EBITDA Target specified for the applicable
EBITDA Period in the first sentence of this paragraph and the
denominator of which is the originally budgeted EBITDA for such EBITDA
Period as such originally budgeted EBITDA is set forth in the Business
Plan of the Corporation as of April 26, 1996.
(b) MATTERS REQUIRING NOTICE. The Corporation shall notify the
holders of the Series A (i) ten days prior to the taking of any action
to reduce any EBITDA Target, and (ii) promptly upon acquiring knowledge
of the occurrence of any Event of Non-Compliance.
(c) "EVENT OF NON-COMPLIANCE" DEFINED. As used herein, an
"Event of Non-Compliance" means (i) the breach of or violation by the
Corporation of any covenant of the Corporation set forth in paragraphs
(a) and (b) of this Section 7, and such violation is not cured or
waived within 30 days, or (ii) either a monetary default or a material
non-monetary default, or both, under any material bond, note or other
evidence of indebtedness of the Corporation or under any indenture or
other instrument under which any such evidence if indebtedness has been
issued or by which it is governed and the expiration of the applicable
period of grace, if any, specified in such evidence of indebtedness;
provided, however, that, if such default under such evidence of
indebtedness, indenture or other instrument shall be cured by the
Corporation, or be waived by the holders of such indebtedness, in each
case as may be permitted by such evidence of indebtedness, indenture or
other instrument, the Event of Non-Compliance hereunder by reason of
such default shall be deemed likewise to have been thereupon cured or
waived. In the event the Corporation's EBITDA for any EBITDA Period
shall be an amount less than the EBITDA Target for such EBITDA Period,
but shall be an amount equal to or greater than the product obtained by
multiplying (i) the EBITDA Target for such EBITDA Period by (ii) .95
(the EBITDA Target less such amount being hereinafter called the
"Shortfall"), then, in such event, the failure of the Corporation to
earn an amount equal to or greater than the EBITDA Target for such
EBITDA Period shall be deemed to have been cured if, for the first
quarter of the Corporation's fiscal year next following the EBITDA
Period during which the Corporation shall fail to have earned the
EBITDA Target, the Corporation shall have earned the sum of (x) the
Shortfall, plus (y) the First Quarter Projected EBITDA (as hereinafter
defined). As used herein, the term "First Quarter Projected EBITDA"
shall mean either (i) the amount determined by
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multiplying the Corporation's budgeted EBITDA for the applicable
quarter by a fraction the numerator of which is the EBITDA Target for
the EBITDA Period in which the quarter falls and the denominator of
which is the Corporation's budgeted EBITDA for such EBITDA Period, or
(ii) if the Corporation's budgeted EBITDA for the applicable quarter
shall be a loss, then the Corporation's budgeted loss for such quarter,
whichever of (i) or (ii) is less. For the purposes hereof, the
references to budgeted amounts refer to the budgets of the Corporation
duly approved by the Corporation's Board of Directors in the ordinary
course of business and consistent with past practice.
SECTION 8. REDUCTION IN VALUE OR SECURITY. The Corporation shall not in
any manner, whether by amendment of the Certificate of Incorporation (including,
without limitation, any Certificate of Designations), merger, reorganization,
recapitalization, consolidation, sale of assets, sale of stock, tender offer,
dissolution or otherwise, take any action, or permit any action to be taken,
solely or primarily for the purpose of increasing the value of any class of
stock of the Corporation if the effect of such action is to reduce the value or
security of the Series A.
SECTION 9. DEFINITIONS. As used herein with respect to Series A, the
following terms shall have the following meanings:
(a) The term "accrued dividends," with respect to any share of
any class or series, shall mean an amount computed at the annual
dividend rate for the class or series of which the particular share is
a part, from the date on which dividends on such share became
cumulative to and including the date to which such dividends are to be
accrued, less the aggregate amount of all dividends theretofore paid
thereon.
(b) The term "business day" shall mean each Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions in the
Borough of Manhattan, The City of New York, are not authorized or
obligated by law or executive order to close.
(c) The term "junior stock" shall mean the Common Stock and
any other series of Preferred Stock of the Corporation, or any other
class or series of the capital stock of the Corporation, authorized or
issued after the date on which this Certificate is filed other than the
Series B Non-Voting Participating Convertible Preferred Stock of the
Corporation and the Series C Non-Voting Participating Convertible
Preferred Stock of the Corporation, which Series B Non-Voting
Participating Convertible Preferred Stock and Series C Non-Voting
Participating Convertible Preferred Stock are senior to, and have
preference and priority in the payment of dividends and in the
distribution of assets on any liquidation, dissolution or winding up of
the Corporation over, the Series A.
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(d) The term "person" shall mean any individual, corporation,
partnership, joint venture, joint stock association, business trust and
other business entity, trust, unincorporated organization, governmental
agency or authority or any other form of entity.
(e) The term "Requisite Shares" means the greater of (i)
593,953 shares of the Series A, Series B and Series C, taken together,
or (ii) 50% of the total shares of the Series A, Series B and Series C
issued on or after the date of filing this Certificate.
(f) The term "subsidiary" shall mean, as to a particular
parent corporation, any person of which 50% or more of the indicia of
equity rights is at the time directly or indirectly owned by such
parent corporation or by one or more persons controlled by, controlling
or under common control with such parent corporation.
SECTION 10. OTHER RIGHTS. The shares of Series A shall not have any
powers, preferences or relative, participating, optional or other special
rights, or qualifications, limitations or restrictions thereof, other than as
set forth herein.
IN WITNESS WHEREOF, Fresh Choice, Inc. has caused this Certificate to
be signed by _____________________, its President, this _____ day of
_____________, _____.
Fresh Choice, Inc.
By__________________________
Robert Ferngren, President
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APPENDIX III
CERTIFICATE OF DESIGNATION
OF
SERIES B NON-VOTING PARTICIPATING CONVERTIBLE PREFERRED STOCK
OF
FRESH CHOICE, INC.
Fresh Choice, Inc., a Delaware corporation, DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
said corporation by virtue of its Certificate of Incorporation as amended and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, said Board of Directors has duly adopted a resolution providing for
the issuance of a series of Preferred Stock, par value $0.001 per share,
designated as Series B Non-Voting Participating Convertible Preferred Stock,
which resolution reads as follows:
"BE IT RESOLVED, that the Board of Directors (the "Board of Directors")
of Fresh Choice, Inc., a Delaware corporation (the "Corporation"), hereby
authorizes the issuance of a series of Preferred Stock and fixes its
designation, powers, preferences and relative, participating, optional or other
special rights, and qualifications, limitations and restrictions thereof, as
follows:
SECTION 1. DESIGNATION. The distinctive serial designation of said
series shall be "Series B Non-Voting Participating Convertible Preferred Stock"
(hereinafter called "Series B"). Each share of Series B shall be identical in
all respects with all other shares of Series B except as to the dates from and
after which dividends thereon shall be cumulative.
SECTION 2. NUMBER OF SHARES. The number of shares in Series B shall
initially be 1,187,906, which number may from time to time be increased or
decreased (but not below the total number thereof then outstanding and reserved
for issuance) by the Board of Directors. Shares of Series B that are redeemed,
purchased or otherwise acquired by the Corporation or converted into Common
Stock shall be cancelled and shall revert to authorized but unissued shares of
Preferred Stock undesignated as to series.
SECTION 3. DIVIDENDS. So long as any share of Series B remains
outstanding, the holders of shares of Series B shall be entitled to participate,
on an "as converted" basis, in and to receive, when, as and if declared by the
Board of Directors of the Corporation, but only out of funds legally available
therefore, any and all cash dividends and other distributions paid or made with
respect to any junior stock. So long as any share of Series B remains
outstanding, no dividend whatever shall be paid or declared and no distribution
shall be made on any junior stock, unless, contemporaneously therewith, a
dividend or other distribution on the shares of the Series B then outstanding
shall have been declared and set apart for payment as hereinafter provided. All
dividends and other distributions paid or made by the Corporation at any time as
any share of the Series B remains outstanding shall be paid or distributed among
the holders of the Common Stock and the Series B in proportion to the shares of
Common Stock then held by
<PAGE> 111
the holders of the Common Stock and the shares of Common Stock which the holders
of the Series B then have the right to acquire upon conversion of the shares of
Series B then held by them.
In addition to the foregoing, in the event of any liquidation,
dissolution or winding up of the affairs of the Corporation (a "Liquidation")
following the occurrence of an Event of Non-Compliance, and continuing through
and including the date on which any such Liquidation occurs, the holders of the
Series B shall be entitled to receive, when, as and if declared by the Board of
Directors of the Corporation, but only out of funds legally available therefore,
cumulative preferential cash dividends at the annual rate of $0.56 per share,
and no more, calculated from the first date of the occurrence of an Event of
Non-Compliance, and payable pursuant to Section 4 hereof. So long as any share
of Series B remains outstanding, no dividend whatever shall be paid or declared
and no distribution shall be made on any junior stock, and no shares of junior
stock shall be purchased, redeemed or otherwise acquired for consideration by
the Corporation, directly or indirectly, unless all accrued dividends on all
outstanding shares of Series B shall have been paid. For the sole purpose of
this paragraph, any merger, consolidation or sale of substantially all the
assets of the Corporation shall be deemed to be a Liquidation for the purposes
of such rights to cumulative preferential dividends, and shall be paid prior to
the consummation of any such transaction.
SECTION 4. LIQUIDATION RIGHTS. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, then, after payment in full of all amounts, if any, owing to the
holders of the Corporation's Series C Non-Voting Participating Convertible
Preferred Stock, but before any distribution or payment shall be made to the
holders of any junior stock, the holders of shares of Series B shall be entitled
to be paid in full an amount equal to $4.63 per share, together with all accrued
dividends to such distribution or payment date whether or not earned or
declared. After payment in full of all amounts owing to the holders of shares of
Series B as herein provided, the remaining assets of the Corporation, if any,
may be distributed by the Corporation as provided in Section 281 of the General
Corporation Law of the State of Delaware or other controlling provision of
applicable law, and the holders of shares of Series B shall have no right to
participate in any such distributions.
SECTION 5. CONVERSION RIGHTS. The holders of shares of Series B shall
have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series B shall be
convertible at the office of the Corporation or any transfer agent for
such stock, at the option of the holder thereof, into either (i) at any
time after the date of issuance of such share through and including the
date on which the Series A shall have become mandatorily convertible
one fully paid and nonassessable share of Series A Voting Participating
Convertible Preferred Stock
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(hereinafter called "Series A") of the Corporation or (ii) at any time
after the date of issuance of such share such number of fully paid and
nonassessable shares of Common Stock of the Corporation as is
determined by dividing $4.63 by the Current Conversion Price applicable
to such share, determined as hereinafter provided, in effect on the
date the certificate representing such share is surrendered for
conversion. The price at which shares of Common Stock shall be
deliverable upon conversion of shares of the Series B (the "Stated
Conversion Price") shall initially be $4.63 per share of Common Stock.
The Stated Conversion Price shall be adjusted from and after the
Original Issue Date as hereinafter provided. The Stated Conversion
Price at any time in effect or, in the case of any such adjustment,
such Stated Conversion Price as most recently so adjusted, is herein
called the "Current Conversion Price."
(b) MECHANICS OF CONVERSION. Before any holder of Series B
shall be entitled to convert the same into shares of Series A or Common
Stock, as the case may be, such holder shall surrender the certificate
or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for such stock, and shall give
written notice to the Corporation at such office that such holder
elects to convert the same and shall state therein the name or names in
which such holder wishes the certificate or certificates for shares of
Series A or Common Stock, as the case may be, to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver
at such office to such holder of Series B, a certificate or
certificates for the number of shares of Series A or Common Stock, as
the case may be, to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to
the close of business on the date of surrender of the shares of Series
B to be converted, and the person or persons entitled to receive the
shares of Series A or Common Stock, as the case may be, issuable upon
such conversion shall be treated for all purposes as the record holder
or holders of such shares of Series A or Common Stock, as the case may
be, on such date.
(c) ADJUSTMENTS TO CURRENT CONVERSION PRICE FOR STOCK
DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the
event that the Corporation at any time or from time to time after the
Original Issue Date shall declare or pay, without consideration, any
dividend on the Common Stock payable in Common Stock or in any right to
acquire Common Stock for no consideration, or shall effect a
subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right
to acquire Common Stock), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the
Current Conversion Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate. In the event
that the
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Corporation shall declare or pay, without consideration, any dividend
on the Common Stock payable in any right to acquire Common Stock for no
consideration, then the Corporation shall be deemed to have made a
dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to
acquire Common Stock.
(d) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If at
any time after the Original Issue Date the Common Stock issuable upon
conversion of the Series B shall be changed into the same or a
different number of shares of any other class or classes of stock,
whether by capital reorganization, reclassification or otherwise, the
Current Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series B shall be convertible
into, in lieu of the number of shares of Common Stock which the holders
would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares
of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series B immediately before that change.
(e) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. If at any time or from time to time after the Original Issue
Date there is a capital reorganization or reclassification of the
capital stock of the Corporation (other than a recapitalization,
subdivision, combination, reclassification, exchange or substitution of
shares provided for elsewhere in this Section 5) or a merger,
consolidation or sale of all or substantially all of the assets of the
Corporation, as a part of and as a condition to such capital
reorganization or reclassification, merger, consolidation or sale of
assets provision shall be made so that the holders of the Series B
shall thereafter be entitled to receive upon conversion of the Series B
the number of shares of stock or other securities or property of the
Corporation to which a holder of the number of shares of Common Stock
deliverable upon conversion of the Series B would have been entitled on
such capital reorganization or reclassification, merger, consolidation
or sale of assets, subject to adjustment in respect of such stock or
securities by the terms thereof. In any such case, appropriate
adjustment shall be made in the application of the provisions of this
Section 5 with respect to the rights of the holders of Series B after
the capital reorganization or reclassification, merger, consolidation
or sale of assets to the end that the provisions of this Section
5(including adjustment of the Current Conversion Price then in effect
and the number of shares issuable upon conversion of the Series B)
shall be applicable after that event and be as nearly equivalent as
practicable.
(f) NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale
of securities or any other voluntary action,
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avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the
provisions of this Section 5 and in the taking of all such action as
may be necessary or appropriate in order to protect the Conversion
Rights of the holders of the Series B against impairment.
(g) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of any Current Conversion Price
pursuant to this Section 5, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series B a
certificate executed by the Corporation's President or Chief Financial
Officer setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any
holder of Series B, furnish or cause to be furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments,
(ii) the Current Conversion Price for such series of Preferred Stock at
the time in effect, and (iii) the number of shares of Common Stock and
the amount, if any, of other property which at the time would be
received upon the conversion of the Series B.
(h) NOTICES OF RECORD DATE. In the event that the Corporation
shall propose at any time after the Original Issue Date: (i) to declare
any dividend or distribution upon its Common Stock, whether in cash,
property, stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus; (ii) to
offer for subscription pro rata to the holders of any class or series
of its stock any additional shares of stock of any class or series or
other, rights; (iii) to effect any reclassification or recapitalization
of its Common Stock outstanding involving a change in the Common Stock;
or (iv) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all of its assets, or to
liquidate, dissolve or wind up; then, in connection with each such
event, the Corporation shall send to the holders of Series B:
(i) at least twenty (20) days' prior written notice
of the date on which a record shall be taken for such
dividend, distribution or subscription rights (and specifying
the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote, if any,
in respect of the matters referred to in (iii) and (iv) above;
and
(ii) in the case of the matters referred to in (iii)
and (iv) above, at least twenty (20) days' prior written
notice of the date when the same shall take place (and
specifying the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event).
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(i) ISSUE TAXES. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery
of shares of Series A or Common Stock, as the case may be, on
conversion of Series B pursuant hereto; provided, however, that the
Corporation shall not be obligated to pay any transfer taxes resulting
from any transfer requested by any holder in connection with any such
conversion.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Series A and Common Stock, solely for
the purpose of effecting the conversion of the shares of the Series B,
such number of its shares of Series A and Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding
shares of the Series B; and if at any time the number of authorized but
unissued shares of Series A or Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series B,
the Corporation will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued
shares of Series A or Common Stock, as the case may be, to such number
of shares as shall be sufficient for such purpose, including, without
limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to the Certificate of
Incorporation of the Corporation.
(k) FRACTIONAL SHARES. No fractional share shall be issued
upon the conversion of any share or shares of Series B. All shares of
Series A or Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series B by a holder thereof shall
be aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance
of a fraction of a share of Series A or Common Stock, the Corporation
shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of conversion (as determined
in good faith by the Board of Directors).
(l) NOTICES. Any notice required by the provisions of this
Section 5 to be given to the holders of shares of Series B shall be
deemed given if deposited in the United States mail, postage prepaid,
or if sent by facsimile or delivered personally by hand or nationally
recognized courier and addressed to each holder of record at such
holder's address or facsimile number appearing in the records of the
Corporation.
(m) MEANING OF "COMMON STOCK". For the purpose of this Section
5, the term "Common Stock" shall include any stock of any class or
series of the Corporation which has no preference or priority in the
payment of dividends or in the distribution of assets in the event of
any voluntary or involuntary liquidation, dissolution or winding up
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of the Corporation which is not subject to redemption by the
Corporation. However, shares issuable upon conversion of shares of
Series B shall include only shares of the class designated as Common
Stock as of the original date of issuance of shares of Series B or
shares of the Corporation of any classes or series resulting from any
reclassification or reclassifications thereof and which have no
preference or priority in the payment of dividends or in the
distribution of assets in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and which are
not subject to redemption by the Corporation, provided that if at any
time there shall be more than one such resulting class or series, the
shares of each such class and series then so issuable shall be
substantially in the proportion which the total number of shares of
such class and series resulting from all such reclassifications bears
to the total number of shares of all such classes and series resulting
from all such reclassifications.
(n) POSTPONEMENT OF ADJUSTMENTS; CALCULATIONS. Any adjustment
in the conversion price otherwise required by this Section 5 to be made
may be postponed if such adjustment (plus any other adjustments
postponed pursuant to this paragraph 5(n) and not theretofore made)
would not require an increase or decrease of more than 1% in such
price. All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100th of a share, as the case may be.
(o) TAX ADJUSTMENTS. The Board of Directors may make such
adjustments in the conversion price, in addition to those required by
this Section 5, as shall be determined by the Board of Directors to be
advisable in order to avoid taxation so far as practicable of any
dividend of stock or stock rights or any event treated as such for
Federal income tax purposes to the recipients. The Board of Directors
shall have the power to resolve any ambiguity or correct any error in
this Section 5, and its action in so doing shall be final and
conclusive.
(p) ADJUSTMENTS APPLICABLE TO NEW SECURITIES. In the event
that any time, as a result of an adjustment made pursuant to the
provisions hereof, the holder of any shares of Series B thereafter
surrendered for conversion shall become entitled to receive any shares
of capital stock of the Corporation other than Series A or Common
Stock, thereafter the number of such other shares so receivable upon
conversion of such shares of Series B shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock
contained in Section 5 with respect to the Common Stock shall apply on
like terms to any such other shares.
(q) ACCOUNTANTS' CERTIFICATE. The certificate of any
independent firm of public accountants of recognized standing selected
by the Board of Directors shall be presumptive evidence of the
correctness of any computation made under this Section 5.
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(r) REIT SAVINGS CLAUSE. The Conversion Rights with respect to
the Series B shall not exist to the extent that immediately after the
conversion of such shares of Series B into Series A or Common Stock,
Crescent Real Estate Equities, Inc., a Maryland corporation (together
with its successors, "Crescent"), would be treated as owning more than
10 percent of the outstanding voting securities of the Corporation for
purposes of Section 856(c)(5) of the Internal Revenue Code of 1986, as
amended (the "Code"). Any request by any holder of the Series B to
exercise such holder's Conversion Rights must be accompanied by an
opinion of counsel, which counsel and the form, scope and substance of
such opinion must be satisfactory to Crescent in its sole and absolute
discretion, stating that any proposed exercise of any holder's
Conversion Rights will not cause Crescent to be treated as owning more
than 10 percent of the outstanding voting securities of the Corporation
for purposes of Section 856(c)(5) of the Code. Any exercise or
purported exercise of any Conversion Rights in violation of this
Section 5(r) shall be void ab initio.
SECTION 6. VOTING RIGHTS. The holders of shares of Series B shall not
have any voting rights except as from time to time required by law.
SECTION 7. COVENANTS; "EVENT OF NON-COMPLIANCE" DEFINED. For so long as
the Requisite Shares shall be outstanding, the Corporation shall do each of the
following:
(a) PROFITABILITY. The Corporation's consolidated net income
before all amounts properly recorded for interest, taxes, depreciation
and amortization ("EBITDA"), in each case, as set forth in the audited
financial statements of the Corporation for the fiscal years indicated,
shall be, (i) for fiscal year 1996, $1,500,000; (ii) for fiscal year
1997, $3,500,000; and (iii) for fiscal year 1998, $5,500,000. As used
herein, the term "EBITDA Period" means each fiscal year of the
Corporation ending in December 1996, December 1997, and December 1998;
and the term "EBITDA Target" for any EBITDA Period means the dollar
amount of EBITDA required to be earned by the Corporation for each such
EBITDA Period as set forth in the preceding sentence, or as
subsequently modified as hereinafter provided. If the Board of
Directors of the Corporation shall unanimously and specifically
authorize and approve any act or activity of the Corporation the result
of which will be to reduce the Corporation's EBITDA for any EBITDA
Period, and such reduction in the EBITDA is unanimously and
specifically authorized and approved by the Board of Directors, the
EBITDA Target or Targets, as the case may be, shall be deemed to be
automatically reduced to the dollar amount equal to the amount
calculated by multiplying the Corporation's new, revised budgeted
EBITDA by a fraction the numerator of which is the original EBITDA
Target specified for the applicable EBITDA Period in the first sentence
of this paragraph and the denominator of which is the originally
budgeted EBITDA for such EBITDA Period as such originally budgeted
EBITDA is set forth in the Business Plan of the Corporation as of April
26, 1996.
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(b) MATTERS REQUIRING NOTICE. The Corporation shall notify the
holders of the Series B (i) ten days prior to the taking of any action
to reduce any EBITDA Target, and (ii) promptly upon acquiring knowledge
of the occurrence of any Event of Non-Compliance.
(c) "EVENT OF NON-COMPLIANCE" DEFINED. As used herein, an
"Event of Non-Compliance" means (i) the breach of or violation by the
Corporation of any covenant of the Corporation set forth in paragraphs
(a) and (b) of this Section 7, and such violation is not cured or
waived within 30 days, or (ii) the default under any material bond,
note or other evidence of indebtedness of the Corporation or under any
indenture or other instrument under which any such evidence if
indebtedness has been issued or by which it is governed and the
expiration of the applicable period of grace, if any, specified in such
evidence of indebtedness; provide, however, that, if such default under
such evidence of indebtedness, indenture or other instrument shall be
cured by the Corporation, or be waived by the holders of such
indebtedness, in each case as may be permitted by such evidence of
indebtedness, indenture or other instrument, the Event of
Non-Compliance hereunder by reason of such default shall be deemed
likewise to have been thereupon cured or waived. In the event the
Corporation's EBITDA for any EBITDA Period shall be an amount less than
the EBITDA Target for such EBITDA Period, but shall be an amount equal
to or greater than the product obtained by multiplying (i) the EBITDA
Target for such EBITDA Period by (ii) .95 (the EBITDA Target less such
amount being hereinafter called the "Shortfall"), then, in such event,
the failure of the Corporation to earn an amount equal to or greater
than the EBITDA Target for such EBITDA Period shall be deemed to have
been cured if, for the first quarter of the Corporation's fiscal year
next following the EBITDA Period during which the Corporation shall
fail to have earned the EBITDA Target, the Corporation shall have
earned the sum of (x) the Shortfall, plus (y) the First Quarter
Projected EBITDA (as hereinafter defined). As used herein, the term
"First Quarter Projected EBITDA" shall mean either (i) the amount
determined by multiplying the Corporation's budgeted EBITDA for the
applicable quarter by a fraction the numerator of which is the EBITDA
Target for the EBITDA Period in which the quarter falls and the
denominator of which is the Corporation's budgeted EBITDA for such
EBITDA Period, or (ii) if the Corporation's budgeted EBITDA for the
applicable quarter shall be a loss, then the Corporation's budgeted
loss for such quarter, whichever of (i) or (ii) is less. For the
purposes hereof, the references to budgeted amounts refer to the
budgets of the Corporation duly approved by the Corporation's Board of
Directors in the ordinary course of business and consistent with past
practice.
SECTION 8. REDUCTION IN VALUE OR SECURITY. The Corporation shall not in
any manner, whether by amendment of the Certificate of Incorporation (including,
without limitation, any Certificate of Designations), merger, reorganization,
recapitalization, consolidation, sale of assets, sale of stock, tender offer,
dissolution or otherwise, take any action, or permit any action
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to be taken, solely or primarily for the purpose of increasing the value of any
class of stock of the Corporation if the effect of such action is to reduce the
value or security of the Series B.
SECTION 9. DEFINITIONS. As used herein with respect to Series B, the
following terms shall have the following meanings:
(a) The term "accrued dividends," with respect to any share of
any class or series, shall mean an amount computed at the annual
dividend rate for the class or series of which the particular share is
a part, from the date on which dividends on such share became
cumulative to and including the date to which such dividends are to be
accrued, less the aggregate amount of all dividends theretofore paid
thereon.
(b) The term "business day" shall mean each Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions in the
Borough of Manhattan, The City of New York, are not authorized or
obligated by law or executive order to close.
(c) The term "junior stock" shall mean the Common Stock and
any other series of Preferred Stock of the Corporation, or any other
class or series of the capital stock of the Corporation, authorized or
issued after the Original Issue Date other than the Series C Non-Voting
Participating Convertible Preferred Stock of the Corporation, which
Series C Non-Voting Participating Convertible Preferred Stock is senior
to, and has preference and priority in the payment of dividends and in
the distribution of assets on any liquidation, dissolution or winding
up of the Corporation over, the Series B.
(d) The term "Original Issue Date" shall mean the date on
which a share of Series B was first issued.
(e) The term "person" shall mean any individual, corporation,
partnership, joint venture, joint stock association, business trust and
other business entity, trust, unincorporated organization, governmental
agency or authority or any other form of entity.
(f) The term "Requisite Shares" means the greater of (i)
593,953 shares of the Series A, Series B and Series C, taken together,
or (ii) 50% of the total shares of the Series A, Series B and Series C
issued on or after the date of filing this Certificate.
(g) The term "subsidiary" shall mean, as to a particular
parent corporation, any person of which 50% or more of the indicia of
equity rights is at the time directly or indirectly owned by such
parent corporation or by one or more persons controlled by, controlling
or under common control with such parent corporation.
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SECTION 10. OTHER RIGHTS. The shares of Series B shall not have any
powers, preferences or relative, participating, optional or other special
rights, or qualifications, limitations or restrictions thereof, other than as
set forth herein.
IN WITNESS WHEREOF, Fresh Choice, Inc. has caused this Certificate to
be signed by _____________________, its President, this _____ day of
_____________, _____.
Fresh Choice, Inc.
By______________________________
Robert Ferngren, President
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<PAGE> 121
APPENDIX IV
CERTIFICATE OF DESIGNATION
OF
SERIES C NON-VOTING PARTICIPATING CONVERTIBLE PREFERRED STOCK
OF
FRESH CHOICE, INC.
Fresh Choice, Inc., a Delaware corporation, DOES HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
said corporation by virtue of its Certificate of Incorporation as amended and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, said Board of Directors has duly adopted a resolution providing for
the issuance of a series of Preferred Stock, par value $0.001 per share,
designated as Series C Non-Voting Participating Convertible Preferred Stock,
which resolution reads as follows:
"BE IT RESOLVED, that the Board of Directors (the "Board of Directors")
of Fresh Choice, Inc., a Delaware corporation (the "Corporation"), hereby
authorizes the issuance of a series of Preferred Stock and fixes its
designation, powers, preferences and relative, participating, optional or other
special rights, and qualifications, limitations and restrictions thereof, as
follows:
SECTION 1. DESIGNATION. The distinctive serial designation of said
series shall be "Series C Non-Voting Participating Convertible Preferred Stock"
(hereinafter called "Series C"). Each share of Series C shall be identical in
all respects with all other shares of Series C except as to the dates from and
after which dividends thereon shall be cumulative.
SECTION 2. NUMBER OF SHARES. The number of shares in Series C shall
initially be 593,953, which number may from time to time be increased or
decreased (but not below the total number thereof then outstanding and reserved
for issuance) by the Board of Directors. Shares of Series C that are redeemed,
purchased or otherwise acquired by the Corporation or converted into Common
Stock shall be cancelled and shall revert to authorized but unissued shares of
Preferred Stock undesignated as to series.
SECTION 3. DIVIDENDS. So long as any share of Series C remains
outstanding, the holders of shares of Series C shall be entitled to participate,
on an "as converted" basis, in and to receive, when, as and if declared by the
Board of Directors of the Corporation, but only out of funds legally available
therefore, any and all cash dividends and other distributions paid or made with
respect to any junior stock. So long as any share of Series C remains
outstanding, no dividend whatever shall be paid or declared and no distribution
shall be made on any junior stock, unless, contemporaneously therewith, a
dividend or other distribution on the shares of the Series C then outstanding
shall have been declared and set apart for payment as hereinafter provided. All
dividends and other distributions paid or made by the Corporation at any time as
any share of the Series C remains outstanding shall be paid or distributed among
the holders of the Common Stock and the Series C in proportion to the shares of
Common Stock then held by
<PAGE> 122
the holders of the Common Stock and the shares of Common Stock which the holders
of the Series C then have the right to acquire upon conversion of the shares of
Series C then held by them.
In addition to the foregoing, in the event of any liquidation,
dissolution or winding up of the affairs of the Corporation (a "Liquidation")
following the occurrence of an Event of Non-Compliance, and continuing through
and including the date on which any such Liquidation occurs, the holders of the
Series C shall be entitled to receive, when, as and if declared by the Board of
Directors of the Corporation, but only out of funds legally available therefore,
cumulative preferential cash dividends at the annual rate of $0.72 per share,
and no more, calculated from the first date of the occurrence of an Event of
Non-Compliance, and payable pursuant to Section 4 hereof. So long as any share
of Series C remains outstanding, no dividend whatever shall be paid or declared
and no distribution shall be made on any junior stock, and no shares of junior
stock shall be purchased, redeemed or otherwise acquired for consideration by
the Corporation, directly or indirectly, unless all accrued dividends on all
outstanding shares of Series C shall have been paid. For the sole purpose of
this paragraph, any merger, consolidation or sale of substantially all the
assets of the Corporation shall be deemed to be a Liquidation for the purposes
of such rights to cumulative preferential dividends, and shall be paid prior to
the consummation of any such transaction.
SECTION 4. LIQUIDATION RIGHTS. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, then, before any distribution or payment shall be made to the
holders of any junior stock, the holders of shares of Series C shall be entitled
to be paid in full an amount equal to $6.00 per share, together with all accrued
dividends to such distribution or payment date whether or not earned or
declared. After payment in full of all amounts owing to the holders of shares of
Series C as herein provided, the remaining assets of the Corporation, if any,
may be distributed by the Corporation as provided in Section 281 of the General
Corporation Law of the State of Delaware or other controlling provision of
applicable law, and the holders of shares of Series C shall have no right to
participate in any such distributions.
SECTION 5. CONVERSION RIGHTS. The holders of shares of Series C shall
have conversion rights as follows (the "Conversion Rights"):
(A) RIGHT TO CONVERT. Each share of Series C shall be
convertible, at the option of the holder thereof, at any time after the
date of issuance of such share at the office of the Corporation or any
transfer agent for such stock, into such number of fully paid and
nonassessable shares of Common Stock of the Corporation as is
determined by dividing $4.63 by the Current Conversion Price applicable
to such share, determined as hereinafter provided, in effect on the
date the certificate is surrendered for conversion. The price at which
shares of Common Stock shall be deliverable upon conversion of
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shares of the Series C (the "Stated Conversion Price") shall initially
be $4.63 per share of Common Stock. The Stated Conversion Price shall
be adjusted from and after the Original Issue Date as hereinafter
provided. The Stated Conversion Price at any time in effect or, in the
case of any such adjustment, such Stated Conversion Price as most
recently so adjusted, is herein called the "Current Conversion Price."
(B) MECHANICS OF CONVERSION. Before any holder of Series C
shall be entitled to convert the same into shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for
such stock, and shall give written notice to the Corporation at such
office that such holder elects to convert the same and shall state
therein the name or names in which such holder wishes the certificate
or certificates for shares of Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver
at such office to such holder of Series C, a certificate or
certificates for the number of shares of Common Stock to which such
holder shall be entitled as aforesaid. Such conversion shall be deemed
to have been made immediately prior to the close of business on the
date of surrender of the shares of Series C to be converted, and the
person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(C) ADJUSTMENTS TO CURRENT CONVERSION PRICE FOR STOCK
DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the
event that the Corporation at any time or from time to time after the
Original Issue Date shall declare or pay, without consideration, any
dividend on the Common Stock payable in Common Stock or in any right to
acquire Common Stock for no consideration, or shall effect a
subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or
otherwise than by payment of a dividend in Common Stock or in any right
to acquire Common Stock), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the
Current Conversion Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate. In the event
that the Corporation shall declare or pay, without consideration, any
dividend on the Common Stock payable in any right to acquire Common
Stock for no consideration, then the Corporation shall be deemed to
have made a dividend payable in Common Stock in an amount of shares
equal to the maximum number of shares issuable upon exercise of such
rights to acquire Common Stock.
(D) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If at
any time after the Original Issue Date the Common Stock issuable upon
conversion of the Series
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C shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise, the Current Conversion Price then in
effect shall, concurrently with the effectiveness of such
reorganization or reclassification, be proportionately adjusted so that
the Series C shall be convertible into, in lieu of the number of shares
of Common Stock which the holders would otherwise have been entitled to
receive, a number of shares of such other class or classes of stock
equivalent to the number of shares of Common Stock that would have been
subject to receipt by the holders upon conversion of the Series C
immediately before that change.
(E) REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF
ASSETS. If at any time or from time to time after the Original Issue
Date there is a capital reorganization or reclassification of the
capital stock of the Corporation (other than a recapitalization,
subdivision, combination, reclassification, exchange or substitution of
shares provided for elsewhere in this Section 5) or a merger,
consolidation or sale of all or substantially all of the assets of the
Corporation, as a part of and as a condition to such capital
reorganization or reclassification, merger, consolidation or sale of
assets provision shall be made so that the holders of the Series C
shall thereafter be entitled to receive upon conversion of the Series C
the number of shares of stock or other securities or property of the
Corporation to which a holder of the number of shares of Common Stock
deliverable upon conversion of the Series C would have been entitled on
such capital reorganization or reclassification, merger, consolidation
or sale of assets, subject to adjustment in respect of such stock or
securities by the terms thereof. In any such case, appropriate
adjustment shall be made in the application of the provisions of this
Section 5 with respect to the rights of the holders of Series C after
the capital reorganization, merger, consolidation or sale of assets to
the end that the provisions of this Section 5 (including adjustment of
the Current Conversion Price then in effect and the number of shares
issuable upon conversion of the Series C) shall be applicable after
that event and be as nearly equivalent as practicable.
(F) NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale
of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good
faith assist in the carrying out of all the provisions of this Section
5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of
the Series C against impairment.
(G) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of any Current Conversion Price
pursuant to this Section 5, the
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Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Series C a certificate executed by the
Corporation's President or Chief Financial Officer setting forth such
adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon
the written request at any time of any holder of Series C, furnish or
cause to be furnished to such holder a like certificate setting forth
(i) such adjustments and readjustments, (ii) the Current Conversion
Price for such series of Preferred Stock at the time in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of
other property which at the time would be received upon the conversion
of the Series C.
(H) NOTICES OF RECORD DATE. In the event that the Corporation
shall propose at any time after the Original Issue Date: (i) to declare
any dividend or distribution upon its Common Stock, whether in cash,
property, stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus; (ii) to
offer for subscription pro rata to the holders of any class or series
of its stock any additional shares of stock of any class or series or
other, rights; (iii) to effect any reclassification or recapitalization
of its Common Stock outstanding involving a change in the Common Stock;
or (iv) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all of its assets, or to
liquidate, dissolve or wind up; then, in connection with each such
event, the Corporation shall send to the holders of Series C:
(i) at least twenty (20) days' prior written notice
of the date on which a record shall be taken for such
dividend, distribution or subscription rights (and specifying
the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote, if any,
in respect of the matters referred to in (iii) and (iv) above;
and
(ii) in the case of the matters referred to in (iii)
and (iv) above, at least twenty (20) days' prior written
notice of the date when the same shall take place (and
specifying the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event).
(I) ISSUE TAXES. The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery
of shares of Common Stock on conversion of Series C pursuant hereto;
provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder
in connection with any such conversion.
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(J) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series C, such number
of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Series C; and
if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series C, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose, including,
without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to the Certificate of
Incorporation of the Corporation.
(K) FRACTIONAL SHARES. No fractional share shall be issued
upon the conversion of any share or shares of Series C. All shares of
Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Series C by a holder thereof shall be aggregated
for purposes of determining whether the conversion would result in the
issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction
of a share of Common Stock, the Corporation shall, in lieu of issuing
any fractional share, pay the holder otherwise entitled to such
fraction a sum in cash equal to the fair market value of such fraction
on the date of conversion (as determined in good faith by the Board of
Directors).
(L) NOTICES. Any notice required by the provisions of this
Section 5 to be given to the holders of shares of Series C shall be
deemed given if deposited in the United States mail, postage prepaid,
or if sent by facsimile or delivered personally by hand or nationally
recognized courier and addressed to each holder of record at such
holder's address or facsimile number appearing in the records of the
Corporation.
(M) MEANING OF "COMMON STOCK". For the purpose of this Section
5, the term "Common Stock" shall include any stock of any class or
series of the Corporation which has no preference or priority in the
payment of dividends or in the distribution of assets in the event of
any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation which is not subject to redemption by the Corporation.
However, shares issuable upon conversion of shares of Series C shall
include only shares of the class designated as Common Stock as of the
original date of issuance of shares of Series C or shares of the
Corporation of any classes or series resulting from any
reclassification or reclassifications thereof and which have no
preference or priority in the payment of dividends or in the
distribution of assets in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and which are
not subject to
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redemption by the Corporation, provided that if at any time there shall
be more than one such resulting class or series, the shares of each
such class and series then so issuable shall be substantially in the
proportion which the total number of shares of such class and series
resulting from all such reclassifications bears to the total number of
shares of all such classes and series resulting from all such
reclassifications.
(N) POSTPONEMENT OF ADJUSTMENTS; CALCULATIONS. Any adjustment
in the conversion price otherwise required by this Section 5 to be made
may be postponed if such adjustment (plus any other adjustments
postponed pursuant to this paragraph 5(n) and not theretofore made)
would not require an increase or decrease of more than 1% in such
price. All calculations hereunder shall be made to the nearest cent or
to the nearest 1/100th of a share, as the case may be.
(O) TAX ADJUSTMENTS. The Board of Directors may make such
adjustments in the conversion price, in addition to those required by
this Section 5, as shall be determined by the Board of Directors to be
advisable in order to avoid taxation so far as practicable of any
dividend of stock or stock rights or any event treated as such for
Federal income tax purposes to the recipients. The Board of Directors
shall have the power to resolve any ambiguity or correct any error in
this Section 5, and its action in so doing shall be final and
conclusive.
(P) ADJUSTMENTS APPLICABLE TO NEW SECURITIES. In the event
that any time, as a result of an adjustment made pursuant to the
provisions hereof, the holder of any shares of Series C thereafter
surrendered for conversion shall become entitled to receive any shares
of capital stock of the Corporation other than Common Stock, thereafter
the number of such other shares so receivable upon conversion of such
shares of Series C shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Section with
respect to the Common Stock shall apply on like terms to any such other
shares.
(Q) ACCOUNTANTS' CERTIFICATE. The certificate of any
independent firm of public accountants of recognized standing selected
by the Board of Directors shall be presumptive evidence of the
correctness of any computation made under this Section 5.
(R) REIT SAVINGS CLAUSE. The Conversion Rights with respect to
the Series C shall not exist to the extent that immediately after the
conversion of such shares of Series C into Common Stock, Crescent Real
Estate Equities, Inc., a Maryland corporation (together with its
successors, "Crescent"), would be treated as owning more than 10
percent of the outstanding voting securities of the Corporation for
purposes of Section 856(c)(5) of the Internal Revenue Code of 1986, as
amended (the "Code"). Any request
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by any holder of the Series C to exercise such holder's Conversion
Rights must be accompanied by an opinion of counsel, which counsel and
the form, scope and substance of such opinion must be satisfactory to
Crescent in its sole and absolute discretion, stating that any proposed
exercise of any holder's Conversion Rights will not cause Crescent to
be treated as owning more than 10 percent of the outstanding voting
securities of the Corporation for purposes of Section 856(c)(5) of the
Code. Any exercise or purported exercise of any Conversion Rights in
violation of this Section 5(r) shall be void ab initio.
SECTION 6. VOTING RIGHTS. The holders of shares of Series C shall not
have any voting rights except as from time to time required by law.
SECTION 7. COVENANTS; "EVENT OF NON-COMPLIANCE" DEFINED. For so long as
the Requisite Shares shall be outstanding, the Corporation shall do each of the
following:
(A) PROFITABILITY. The Corporation's consolidated net income
before all amounts properly recorded for interest, taxes, depreciation
and amortization ("EBITDA"), in each case, as set forth in the audited
financial statements of the Corporation for the fiscal years indicated,
shall be, (i) for fiscal year 1996, $1,500,000; (ii) for fiscal year
1997, $3,500,000; and (iii) for fiscal year 1998, $5,500,000. As used
herein, the term "EBITDA Period" means each fiscal year of the
Corporation ending in December 1996, December 1997, and December 1998;
and the term "EBITDA Target" for any EBITDA Period means the dollar
amount of EBITDA required to be earned by the Corporation for each such
EBITDA Period as set forth in the preceding sentence, or as
subsequently modified as hereinafter provided. If the Board of
Directors of the Corporation shall unanimously and specifically
authorize and approve any act or activity of the Corporation the result
of which will be to reduce the Corporation's EBITDA for any EBITDA
Period, and such reduction in the EBITDA is unanimously and
specifically authorized and approved by the Board of Directors, the
EBITDA Target or Targets, as the case may be, shall be deemed to be
automatically reduced to the dollar amount equal to the amount
calculated by multiplying the Corporation's new, revised budgeted
EBITDA by a fraction the numerator of which is the original EBITDA
Target specified for the applicable EBITDA Period in the first sentence
of this paragraph and the denominator of which is the originally
budgeted EBITDA for such EBITDA Period as such originally budgeted
EBITDA is set forth in the Business Plan of the Corporation as of April
26, 1996.
(B) MATTERS REQUIRING NOTICE. The Corporation shall notify the
holders of the Series C (i) ten days prior to the taking of any action
to reduce any EBITDA Target, and (ii) promptly upon acquiring knowledge
of the occurrence of any Event of Non-Compliance.
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(C) "EVENT OF NON-COMPLIANCE" DEFINED. As used herein, an
"Event of Non-Compliance" means (i) the breach of or violation by the
Corporation of any covenant of the Corporation set forth in paragraphs
(a) and (b) of this Section 7, and such violation is not cured or
waived within 30 days, or (ii) the default under any material bond,
note or other evidence of indebtedness of the Corporation or under any
indenture or other instrument under which any such evidence if
indebtedness has been issued or by which it is governed and the
expiration of the applicable period of grace, if any, specified in such
evidence of indebtedness; provide, however, that, if such default under
such evidence of indebtedness, indenture or other instrument shall be
cured by the Corporation, or be waived by the holders of such
indebtedness, in each case as may be permitted by such evidence of
indebtedness, indenture or other instrument, the Event of
Non-Compliance hereunder by reason of such default shall be deemed
likewise to have been thereupon cured or waived. In the event the
Corporation's EBITDA for any EBITDA Period shall be an amount less than
the EBITDA Target for such EBITDA Period, but shall be an amount equal
to or greater than the product obtained by multiplying (i) the EBITDA
Target for such EBITDA Period by (ii) .95 (the EBITDA Target less such
amount being hereinafter called the "Shortfall"), then, in such event,
the failure of the Corporation to earn an amount equal to or greater
than the EBITDA Target for such EBITDA Period shall be deemed to have
been cured if, for the first quarter of the Corporation's fiscal year
next following the EBITDA Period during which the Corporation shall
fail to have earned the EBITDA Target, the Corporation shall have
earned the sum of (x) the Shortfall, plus (y) the First Quarter
Projected EBITDA (as hereinafter defined). As used herein, the term
"First Quarter Projected EBITDA" shall mean either (i) the amount
determined by multiplying the Corporation's budgeted EBITDA for the
applicable quarter by a fraction the numerator of which is the EBITDA
Target for the EBITDA Period in which the quarter falls and the
denominator of which is the Corporation's budgeted EBITDA for such
EBITDA Period, or (ii) if the Corporation's budgeted EBITDA for the
applicable quarter shall be a loss, then the Corporation's budgeted
loss for such quarter, whichever of (i) or (ii) is less. For the
purposes hereof, the references to budgeted amounts refer to the
budgets of the Corporation duly approved by the Corporation's Board of
Directors in the ordinary course of business and consistent with past
practice.
SECTION 8. REDUCTION IN VALUE OR SECURITY. The Corporation shall not in
any manner, whether by amendment of the Certificate of Incorporation (including,
without limitation, any Certificate of Designations), merger, reorganization,
recapitalization, consolidation, sale of assets, sale of stock, tender offer,
dissolution or otherwise, take any action, or permit any action to be taken,
solely or primarily for the purpose of increasing the value of any class of
stock of the Corporation if the effect of such action is to reduce the value or
security of the Series C.
SECTION 9. DEFINITIONS. As used herein with respect to Series C, the
following terms shall have the following meanings:
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(a) The term "accrued dividends," with respect to any share of
any class or series, shall mean an amount computed at the annual
dividend rate for the class or series of which the particular share is
a part, from the date on which dividends on such share became
cumulative to and including the date to which such dividends are to be
accrued, less the aggregate amount of all dividends theretofore paid
thereon.
(b) The term "business day" shall mean each Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions in the
Borough of Manhattan, The City of New York, are not authorized or
obligated by law or executive order to close.
(c) The term "junior stock" shall mean the Common Stock, the
Series A Voting Participating Convertible Preferred Stock of the
Corporation, the Series B Non-Voting Participating Convertible
Preferred Stock of the Corporation, and any other series of Preferred
Stock of the Corporation, or any other class or series of the capital
stock of the Corporation, authorized or issued after the date on which
this Certificate is filed.
(d) The term "Original Issue Date" shall mean the date on
which a share of Series B was first issued.
(e) The term "person" shall mean any individual, corporation,
partnership, joint venture, joint stock association, business trust and
other business entity, trust, unincorporated organization, governmental
agency or authority or any other form of entity.
(f) The term "Requisite Shares" means the greater of (i)
593,953 shares of the Series A, Series B and Series C, taken together,
or (ii) 50% of the total shares of the Series A, Series B and Series C
issued on or after the date of filing this Certificate.
(g) The term "subsidiary" shall mean, as to a particular
parent corporation, any person of which 50% or more of the indicia of
equity rights is at the time directly or indirectly owned by such
parent corporation or by one or more persons controlled by, controlling
or under common control with such parent corporation.
SECTION 10. OTHER RIGHTS. The shares of Series C shall not have any
powers, preferences or relative, participating, optional or other special
rights, or qualifications, limitations or restrictions thereof, other than as
set forth herein.
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IN WITNESS WHEREOF, Fresh Choice, Inc. has caused this Certificate to
be signed by _____________________, its President, this _____ day of
_____________, _____.
Fresh Choice, Inc.
By
---------------------------------
Robert Ferngren, President
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APPENDIX V
REGISTRATION RIGHTS AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE 1
REGISTRATION RIGHTS
<S> <C> <C>
Section 1.1 Certain Definitions.................................................................. 1
Section 1.2 Demand Registration Rights........................................................... 3
Section 1.3 Company Registration................................................................. 6
Section 1.4 Expenses of Registration............................................................. 8
Section 1.5 Registration Procedures.............................................................. 9
Section 1.6 Indemnification...................................................................... 11
Section 1.7 Information by Holder................................................................ 14
Section 1.8 Limitations on Subsequent Registration Rights........................................ 14
Section 1.9 Rule 144 Reporting................................................................... 14
Section 1.10 Transfer or Assignment of Registration Rights........................................ 15
Section 1.11 "Market Stand-Off" Agreement......................................................... 15
Section 1.12 Allocation of Registration Opportunities............................................. 16
Section 1.13 Termination of Registration Rights................................................... 16
ARTICLE 2
MISCELLANEOUS
Section 2.1 Governing Law........................................................................ 17
Section 2.2 Successors and Assigns............................................................... 17
Section 2.3 Entire Agreement; Amendment; Waiver.................................................. 18
Section 2.4 Notices, Etc......................................................................... 18
Section 2.5 Delays or Omissions.................................................................. 18
Section 2.6 Rights; Separability................................................................. 18
Section 2.7 Information Confidential............................................................. 19
Section 2.8 Titles and Subtitles................................................................. 19
Section 2.9 Counterparts......................................................................... 19
</TABLE>
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REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated as of
the ____ day of __________, 1996, and is being entered into by and between
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP, a Delaware limited
partnership (the "Stockholder") and FRESH CHOICE, INC., a Delaware corporation
(the "Company").
RECITALS
This is the Registration Rights Agreement referred to in that certain
Preferred Stock Purchase Agreement (herein so called) dated as of April 26,
1996, by and between the Company and the Stockholder, and is being entered
pursuant to the provisions thereof.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
representations, warranties, covenants and agreements set forth herein and in
the Preferred Stock Purchase Agreement, and intending to be legally bound, the
paries hereto hereby agree as follows:
ARTICLE 1
REGISTRATION RIGHTS
SECTION 1.1 CERTAIN DEFINITIONS.
As used in this Agreement, the following terms shall have the
meanings set forth below:
(A) CLOSING. "Closing" shall mean the Closing under
the Preferred Stock Purchase Agreement.
(B) COMMISSION. "Commission" shall mean the
Securities and Exchange Commission or any other federal agency
at the time administering the Securities Act.
(C) EXCHANGE ACT. "Exchange Act" shall mean the
Securities Exchange Act of 1934, as amended, or any similar
successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to
time.
(D) HOLDER. "Holder" shall mean any holder of Shares
or Registrable Securities and any holder of Registrable
Securities to whom the registration rights conferred by this
Agreement have been transferred in compliance with Section
1.10 hereof.
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(E) INITIATING HOLDERS. "Initiating Holders" shall
mean any Holder or Holders who in the aggregate hold not less
than fifty percent (50%) of the Registrable Securities, or who
in the aggregate have the right to acquire fifty percent (50%)
of the Registrable Securities upon conversion of the Shares.
It shall not be necessary that a Holder convert the Shares
into Registrable Securities to be an "Initiating Holder."
(F) OTHER STOCKHOLDERS. "Other Stockholders" shall
mean persons other than Holders who, by virtue of agreements
with the Company, are entitled to include their securities in
certain registrations hereunder.
(G) REGISTRABLE SECURITIES. "Registrable Securities"
shall mean (i) shares of Common Stock issued or issuable
pursuant to the conversion of the Shares and (ii) any Common
Stock issued as a dividend or other distribution with respect
to or in exchange for or in replacement of the shares
referenced in (i) above; provided, however, that Registrable
Securities shall not include any shares of Common Stock which
have previously been registered or which have been sold to the
public either pursuant to a registration statement or Rule
144, or which have been sold in a private transaction in which
the transferor's rights under this Agreement are not assigned.
(H) REGISTER, REGISTERED AND REGISTRATION. The terms
"register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable
rules and regulations thereunder, and the declaration or
ordering of the effectiveness of such registration statement.
(I) REGISTRATION EXPENSES. "Registration Expenses"
shall mean all expenses incurred in effecting any registration
pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for
the Company, blue sky fees and expenses, and expenses of any
regular or special audits incident to or required by any such
registration, but shall not include Selling Expenses, fees and
disbursements of counsel for the Holders and the compensation
of regular employees of the Company, which shall be paid in
any event by the Company.
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(J) RULE 144. "Rule 144" shall mean Rule 144 as
promulgated by the Commission under the Securities Act, as
such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
(K) RULE 145. "Rule 145" shall mean Rule 145 as
promulgated by the Commission under the Securities Act, as
such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
(L) SECURITIES ACT. "Securities Act" shall mean the
Securities Act of 1933, as amended, or any similar successor
federal statute and the rules and regulations thereunder, all
as the same shall be in effect from time to time.
(M) SELLING EXPENSES. "Selling Expenses" shall mean
all underwriting discounts, selling commissions and stock
transfer taxes applicable to the sale of Registrable
Securities and fees and disbursements of counsel for any
Holder (other than the fees and disbursements of counsel
included in Registration Expenses).
(N) SHARES. "Shares" shall mean, collectively, the
Company's Series A Voting Participating Convertible Preferred
Stock, par value $0.001 per share, Series B Non-Voting
Participating Convertible Preferred Stock, par value $0.001
per share, and the Company's Series C Non-Voting Participating
Convertible Preferred Stock, par value $0.001 per share.
SECTION 1.2 DEMAND REGISTRATION RIGHTS.
(A) REQUEST FOR REGISTRATION. If the Company shall
receive from Initiating Holders at any time or from time to
time after the date hereof a written request that the Company
effect any registration with respect to all or a part of the
Registrable Securities the Company shall:
(i) promptly give written notice of the
proposed registration to all other Holders; and
(ii) as soon as practicable, use its best
efforts to effect such registration (including,
without limitation, filing post-effective amendments,
appropriate qualifications under
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applicable blue sky or other state securities laws,
and appropriate compliance with the Securities Act)
and as would permit or facilitate the sale and
distribution of all or such portion of such
Registrable Securities as are specified in such
request, together with all or such portion of the
Registrable Securities of any Holder or Holders
joining in such request as are specified in a written
request received by the Company within twenty (20)
days after such written notice from the Company is
mailed or delivered.
The Company shall not be obligated to
effect, or to take any action to effect, any such
registration pursuant to this Section 1.2:
(A) In any particular jurisdiction
in which the Company would be required to
execute a general consent to service of
process in effecting such registration,
qualification, or compliance, unless the
Company is already subject to service in
such jurisdiction and except as may be
required by the Securities Act;
(B) After the Company has initiated
two such registrations pursuant to this
Section 1.2(a) (counting for these purposes
only registrations which have been declared
or ordered effective and pursuant to which
securities have been sold and registrations
which have been withdrawn by the Holders as
to which the Holders have not elected to
bear the Registration Expenses pursuant to
Section 1.4 hereof and would, absent such
election, have been required to bear such
expenses); or
(C) During the period starting with
the date sixty (60) days prior to the
Company's good faith estimate of the date of
filing of, and ending on a date one hundred
eighty (180) days after the effective date
of, a Company-initiated registration;
provided that the Company is actively
employing in good faith all reasonable
efforts to cause such registration statement
to become effective.
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(B) FILING OF REGISTRATION STATEMENT. Subject to the
foregoing clauses (A) through (C), the Company shall file a
registration statement covering the Registrable Securities so
requested to be registered as soon as practicable after
receipt of the request or requests of the Initiating Holders;
provided, however, that if (i) in the good faith judgment of
the Board of Directors of the Company, such registration would
be seriously detrimental to the Company and the Board of
Directors of the Company concludes, as a result, that it is
essential to defer the filing of such registration statement
at such time, and (ii) the Company shall furnish to such
Holders a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to
the Company for such registration statement to be filed in the
near future and that it is, therefore, essential to defer the
filing of such registration statement, then the Company shall
have the right to defer such filing (except as provided in
clause (C) above) for a period of not more than ninety (90)
days after receipt of the request of the Initiating Holders,
and, provided further, that the Company shall not defer its
obligation in this manner more than once in any twelve-month
period.
The registration statement filed pursuant to the
request of the Initiating Holders may, subject to the
provisions of Sections 1.2(b) and 1.12 hereof, include other
securities of the Company, with respect to which registration
rights have been granted, and may include securities of the
Company being sold for the account of the Company.
(C) UNDERWRITING. If the registration of which the
Initiating Holders give notice is for a registered public
offering involving an underwriting, the Initiating Holders
shall so advise the Company as a part of the written request
given pursuant to Section 1.2(a). In such event, the right of
any Holder to registration pursuant to Section 1.2 shall be
conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and
such Holder with respect to such participation and inclusion)
to the extent provided herein. A Holder may elect to include in
such underwriting all or a part of the Registrable Securities
held by such Holder.
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(D) PROCEDURES. If the Company shall request
inclusion in any registration pursuant to Section 1.2 of
securities being sold for its own account, or if other persons
shall request inclusion in any registration pursuant to
Section 1.2, the Initiating Holders shall, on behalf of all
Holders, offer to include such securities in the registration,
and may condition such offer on their acceptance of the
further applicable provisions of this Article 1 (including
Section 1.2). If such registration be an underwritten
firm-commitment offering, the Company shall (together with all
Holders and other persons proposing to distribute their
securities through such underwriting) enter into an
underwriting agreement in customary form with the
representative of the underwriter or underwriters selected for
such underwriting by a majority in interest of the Initiating
Holders, which underwriters are reasonably acceptable to the
Company. Notwithstanding any other provision of this Section
1.2, if the representative of the underwriters advises the
Initiating Holders in writing that marketing factors require a
limitation on the number of shares to be underwritten, the
number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 1.12
hereof. If a person who has requested inclusion in such
registration as provided above does not agree to the terms of
any such underwriting, such person shall be excluded therefrom
by written notice from the Company, the underwriter or the
Initiating Holders. The securities so excluded shall also be
withdrawn from registration. Any Registrable Securities or
other securities excluded or withdrawn from such underwriting
shall also be withdrawn from such registration. If shares are
so withdrawn from the registration and if the number of shares
to be included in such registration was previously reduced as
a result of marketing factors pursuant to this Section 1.2(d),
then the Company shall offer to all holders who have retained
rights to include securities in the registration the right to
include additional securities in the registration in an
aggregate amount equal to the number of shares so withdrawn,
with such shares to be allocated among such holders requesting
additional inclusion in accordance with Section 1.12.
SECTION 1.3 COMPANY REGISTRATION.
(A) NOTICE OF REGISTRATION. If the Company shall, at
any time or from time to time after the date hereof, determine
to register any of its securities either for its own account
or the
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account of a security holder or holders exercising their
respective demand registration rights (other than pursuant to
Section 1.2 hereof), other than a registration relating solely
to employee benefit plans, or a registration relating to a
corporate reorganization or other transaction under Rule 145,
or a registration on any registration form that does not
permit secondary sales, the Company shall:
(i) promptly give to each Holder written
notice thereof; and
(ii) use its best efforts to include in such
registration (and any related qualification under
blue sky laws or other compliance), except as set
forth in Section 1.3(b) below, and in any
underwriting involved therein, all the Registrable
Securities specified in a written request or
requests, made by any Holder and received by the
Company within ten (10) days after the written notice
from the Company described in clause (i) above is
mailed or delivered by the Company. Such written
request may specify all or a part of a Holder's
Registrable Securities.
(B) UNDERWRITING. If the registration of which the
Company gives notice is for a registered public offering
involving an underwriting, the Company shall so advise the
Holders as a part of the written notice given pursuant to
Section 1.3(a)(i). In such event, the right of any Holder to
registration pursuant to this Section 1.3 shall be conditioned
upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders
proposing to distribute their securities through such
underwriting shall (together with the Company and the other
holders of securities of the Company with registration rights
to participate therein distributing their securities through
such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or
underwriters selected by the Company.
Notwithstanding any other provision of this Section
1.3, if the representative of the underwriters advises the
Company in writing that marketing factors require a limitation
on the number of shares to be underwritten, the representative
may (subject to the
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limitations set forth below) exclude all Registrable
Securities from, or limit the number of Registrable Securities
to be included in, the registration and underwriting. The
Company shall so advise all holders of securities requesting
registration, and the number of shares of securities that are
entitled to be included in the registration and underwriting
shall be allocated first to the Company for securities being
sold for its own account and thereafter as set forth in
Section 1.12. If any person does not agree to the terms of any
such underwriting, such person shall be excluded therefrom by
written notice from the Company or the underwriter. Any
Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such
registration.
If shares are so withdrawn from the registration or
if the number of shares of Registrable Securities to be
included in such registration was previously reduced as a
result of marketing factors, the Company shall then offer to
all persons who have retained the right to include securities
in the registration the right to include additional securities
in the registration in an aggregate amount equal to the number
of shares so withdrawn, with such shares to be allocated among
the persons requesting additional inclusion in accordance with
Section 1.12 hereof.
SECTION 1.4 EXPENSES OF REGISTRATION.
All Registration Expenses incurred in connection with any
registration, qualification or compliance pursuant to Sections 1.3 hereof, and
the first two registrations pursuant to Section 1.2 hereof and reasonable fees
of one counsel for the selling stockholders in the case of registrations
pursuant to Section 1.2 shall be borne by the Company; provided, however, that
if the Holders bear the Registration Expenses for any registration proceeding
begun pursuant to Section 1.2 and subsequently withdrawn by the Holders
registering shares therein, such registration proceeding shall not be counted as
a requested registration pursuant to Section 1.2 hereof. Furthermore, in the
event that a withdrawal by the Holders is based upon material adverse
information relating to the Company that is different from the information known
or available (upon request from the Company or otherwise) to the Holders
requesting registration at the time of their request for registration under
Section 1.2, such registration shall not be treated as a counted registration
for purposes of Section 1.2 hereof, even though the Holders do not bear the
Registration Expenses for such registration. All Selling Expenses relating to
securities so registered shall be borne by the Holders of such securities pro
rata on the basis of the number of shares of securities so registered on their
behalf, as shall any other
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expenses in connection with the registration required to be borne by the Holders
of such securities.
SECTION 1.5 REGISTRATION PROCEDURES.
In the case of each registration effected by the Company
pursuant to Article 1, the Company will keep each Holder advised in writing as
to the initiation of each registration and as to the completion thereof. At its
expense, the Company will use its best efforts to:
(A) Keep such registration effective for a period of
one hundred twenty (120) days or until the Holder or Holders
have completed the distribution described in the registration
statement relating thereto, whichever first occurs; provided,
however, that (i) such 120-day period shall be extended for a
period of time equal to the period the Holder refrains from
selling any securities included in such registration at the
request of an underwriter of Common Stock (or other
securities) of the Company; or, in the case of any
registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such
120-day period shall be extended, if necessary, to keep the
registration statement effective until all such Registrable
Securities are sold, provided that Rule 415 permits an
offering on a continuous or delayed basis, and provided
further that applicable rules under the Securities Act
governing the obligation to file a post-effective amendment
permit, in lieu of filing a post-effective amendment that (I)
includes any prospectus required by Section 10(a)(3) of the
Securities Act or (II) reflects facts or events representing a
material or fundamental change in the information set forth in
the registration statement, the incorporation by reference of
information required to be included in (I) and (II) above to
be contained in periodic reports filed pursuant to Section 13
or 15(d) of the Exchange Act in the registration statement;
(B) Prepare and file with the Commission such
amendments and supplements to such registration statement and
the prospectus used in connection with such registration
statement as may be necessary to comply with the provisions of
the Securities Act with respect to the disposition of all
securities covered by such registration statement;
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(C) Furnish such number of prospectuses and other
documents thereto, including any amendment of or supplement to
the prospectus, as a Holder from time to time may reasonably
request;
(D) Notify each seller of Registrable Securities
covered by such registration statement at any time when a
prospectus relating thereto is required to be delivered under
the Securities Act of the happening of any event as a result
of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading or incomplete in the light of the circumstances
then existing, and at the request of any such seller, prepare
and furnish to such seller a reasonable number of copies of a
supplement to or an amendment of such prospectus shall not
include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(E) Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange or
market on which similar securities issued by the Company are
then listed or admitted to trading;
(F) Provide a transfer agent and registrar for all
Registrable Securities registered pursuant to such
registration statement and a CUSIP number for all such
Registrable Securities, in each case not later than the
effective date of such registration;
(G) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make
available to its security holders, as soon as reasonably
practicable, an earnings statement covering the period of at
least twelve months, but not more than eighteen months,
beginning with the first month after the effective date of the
Registration Statement, which earnings statement shall satisfy
the provisions of Section 11(a) of the Securities Act; and
(H) In connection with any underwritten offering
pursuant to a registration statement filed pursuant to
Section 1.2
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hereof, the Company will enter into an underwriting agreement
in form reasonably necessary to effect the offer and sale of
Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further that if
the underwriter so requests the underwriting agreement will
contain customary contribution provisions.
SECTION 1.6 INDEMNIFICATION.
(A) The Company will indemnify each Holder, each of
its officers, directors and partners, legal counsel, and
accountants and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to
which registration, qualification, or compliance has been
effected pursuant to this Article 1, and each underwriter, if
any, and each person who controls within the meaning of
Section 15 of the Securities Act any underwriter, against all
expenses, claims, losses, damages, and liabilities (or
actions, proceedings, or settlements in respect thereof)
arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any
prospectus, offering circular, or other document (including
any related registration statement, notification, or the like)
incident to any such registration, qualification, or
compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or
any violation by the Company of the Securities Act or any rule
or regulation thereunder applicable to the Company and
relating to action or inaction required of the Company in
connection with any such registration, qualification, or
compliance, and will reimburse each such Holder, each of its
officers, directors, partners, legal counsel, and accountants
and each person controlling such Holder, each such
underwriter, and each person who controls any such
underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending or
settling any such claim, loss, damage, liability, or action,
provided that the Company will not be liable in any such case
to the extent that any such claim, loss, damage, liability, or
expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the
Company by such Holder or underwriter and stated to be
specifically for use therein. It is agreed that the indemnity
agreement contained in this Section 1.6(a) shall not apply to
amounts paid in settlement of any
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such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company
(which consent has not been unreasonably withheld).
(B) Each Holder will, if Registrable Securities held
by such Holder are included in the securities as to which such
registration, qualification, or compliance is being effected,
indemnify the Company, each of its directors, officers,
partners, legal counsel, and accountants and each underwriter,
if any, of the Company's securities covered by such a
registration statement, each person who controls the Company
or such underwriter within the meaning of Section 15 of the
Securities Act, each other such Holder and Other Stockholder,
and each of their officers, directors, and partners, and each
person controlling such Holder or Other Stockholder, against
all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus,
offering circular, or other document, or any omission (or
alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading, and will reimburse the Company and such
Holders, Other Stockholders, directors, officers, partners,
legal counsel, and accountants, persons, underwriters, or
control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any
such claim, loss, damage, liability, or action, in each case
to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement,
prospectus, offering circular, or other document in reliance
upon and in conformity with written information furnished to
the Company by such Holder and stated to be specifically for
use therein; provided, however, that the obligations of such
Holder hereunder shall not apply to amounts paid in settlement
of my such claims, losses, damages, or liabilities (or actions
in respect thereof) if such settlement is effected without the
consent of such Holder (which consent shall not be
unreasonably withheld); and provided that in no event shall
any indemnity under this Section 1.6 exceed the gross proceeds
from the offering received by such Holder.
(C) Each party entitled to indemnification under this
Section 1.6 (the "Indemnified Party") shall give notice to the
party
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required to provide indemnification (the "Indemnifying Party")
promptly after such Indemnified Party has actual knowledge of
any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such
claim or any litigation resulting therefrom, provided that
counsel for the Indemnifying Party, who shall conduct the
defense of such claim or any litigation resulting therefrom,
shall be approved by the Indemnified Party (whose approval
shall not unreasonably be withheld), and the Indemnified Party
may participate in such defense at such party's expense, and
provided further that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Article 1, to
the extent such failure is not prejudicial. No Indemnifying
Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement that does
not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation.
Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be
reasonably required in connection with defense of such claim
and litigation resulting therefrom.
(D) If the indemnification provided for in this
Section 1.6 is held by a court of competent jurisdiction to be
unavailable to an Indemnified Party with respect to any loss,
liability, claim, damage, or expense referred to therein, then
the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such
loss, liability, claim, damage, or expense in such proportion
as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified
Party on the other in connection with the statements or
omissions that resulted in such loss, liability, claim,
damage, or expense as well as other relevant equitable
considerations. The relative fault of the Indemnifying Party
and of the Indemnified Party shall be determined by reference
to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a
material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the
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parties' relative intent, knowledge, access to information,
and opportunity to correct or prevent such statement or
omission.
(E) Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained
in the underwriting agreement entered into in connection with
the underwritten public offering are in conflict with the
foregoing provisions, the provisions in the underwriting
agreement shall control.
SECTION 1.7 INFORMATION BY HOLDER.
Each Holder of Registrable Securities shall furnish to the
Company such information regarding such Holder and the distribution proposed by
such Holder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification, or
compliance referred to in this Article 1.
SECTION 1.8 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS.
From and after the date of this Agreement, the Company shall
not, without the prior written consent of a majority in interest of the Holders,
enter into any agreement with any holder or prospective holder of any securities
of the Company giving such holder or prospective holder any registration rights
the terms of which are more favorable than the registration rights granted to
the Holders hereunder.
SECTION 1.9 RULE 144 REPORTING.
With a view to making available the benefits of certain rules
and regulations of the Commission that may permit the sale of the restricted
securities to the public without registration, the Company agrees to use its
best efforts to:
(A) Make and keep public information regarding the
Company available as, those terms are understood and defined
in Rule 144, at all times from and after the date hereof;
(B) File with the Commission in a timely manner all
reports and other documents required of the Company under the
Securities Act and the Exchange Act;
(C) So long as a Holder owns any restricted
securities, furnish to the Holder forthwith upon written
request a written statement by the Company as to its
compliance with the reporting
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requirements of Rule 144, and of the Securities Act and the
Exchange Act, a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents so
filed as a Holder may reasonably request in availing itself of
any rule or regulation of the Commission allowing a Holder to
sell any such securities without registration.
SECTION 1.10 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS.
The rights to cause the Company to register securities granted
to a Holder by the Company under this Article 1 may be transferred or assigned
by a Holder only to a transferee or assignee of not less than 250,000 shares of
Registrable Securities (as presently constituted and subject to subsequent
adjustments for stock splits, stock dividends, reverse stock splits, and the
like), provided that the Company is given written notice at the time of or
within a reasonable time after said transfer or assignment, stating the name and
address of the transferee or assignee and identifying the securities with
respect to which such registration rights are being transferred or assigned,
and, provided further, that the transferee or assignee of such rights assumes in
writing the obligations of such Holder under this Article 1.
SECTION 1.11 "MARKET STAND-OFF" AGREEMENT.
If requested by the Company and an underwriter of Common Stock
(or other securities) of the Company, a Stockholder shall not sell or otherwise
transfer or dispose of any Common Stock (or other securities) of the Company
held by such Stockholder (other than those included in the registration) during
the one hundred eighty (180) day period following the effective date of a
registration statement of the Company filed under the Securities Act, provided
that:
(A) such agreement shall only apply to the first such
registration statement of the Company, including securities to
be sold on its behalf to the public in an underwritten
offering, filed after the date hereof; and
(B) all officers and directors of the Company and
holders of at least one percent (1%) of the Company's voting
securities are bound by and have entered into similar
agreements other than holders who have purchased shares in the
public markets and are affiliates of the Company based solely
on the size of their holdings.
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The obligations described in this Section 1.11 shall not
apply to a registration relating solely to employee benefit plans on Form S-1 or
Form S-8 or similar forms that may be promulgated in the future, or a
registration relating solely to a Commission Rule 145 transaction on Form S-4 or
similar forms that may be promulgated in the future. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.
SECTION 1.12 ALLOCATION OF REGISTRATION OPPORTUNITIES.
In any circumstance in which all of the Registrable Securities
and other shares of Common Stock of the Company (including shares of Common
Stock issued or issuable upon conversion of shares of any currently unissued
series of Preferred Stock of the Company) with registration rights (the "Other
Shares") requested to be included in a registration on behalf of the Holders or
other selling stockholders cannot be so included as a result of limitations of
the aggregate number of shares of Registrable Securities and Other Shares that
may be so included, the number of shares of Registrable Securities and Other
Shares that may be so included shall be allocated among the Holders and other
selling stockholders requesting inclusion of shares pro rata on the basis of the
number of shares of Registrable Securities and Other Shares that would be held
by such Holders and other selling stockholders, assuming conversion; provided,
however, that such allocation shall not operate to reduce the aggregate number
of Registrable Securities and Other Shares to be included in such registration.
If any Holder or other selling stockholder does not request inclusion of the
maximum number of shares of Registrable Securities and Other Shares allocated to
such Holder or other stockholder pursuant to the above-described procedure, the
remaining portion of such Holder's or other stockholder's allocation shall be
reallocated among those requesting Holders and other selling stockholders whose
allocations did not satisfy their requests pro rata on the basis of the number
of shares of Registrable Securities and Other Shares which would be held by such
Holders and other selling stockholders, assuming conversion, and this procedure
shall be repeated until all of the shares of Registrable Securities and Other
Shares which may be included in the registration on behalf of the Holders and
other selling stockholders have been so allocated. The Company shall not limit
the number of Registrable Securities to be included in a registration pursuant
to this Agreement in order to include shares held by stockholders with no
registration rights or to include any shares of stock issued to employees,
officers, directors, or consultants pursuant to the Company's Second Amended and
Restated 1988 Stock Option Plan, 1992 Employee Stock Purchase Plan, or any other
compensatory plan or agreement, or, with respect to registration under Sections
1.2 hereof, in order to include in such registration securities registered
for the Company's own account.
SECTION 1.13 TERMINATION OF REGISTRATION RIGHTS.
(A) Except as set forth in subparagraph (b) below,
the right of any Holder to request registration or inclusion
in any registration pursuant to Section 1.2 or 1.3 shall
terminate on such
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date as all Registrable Securities held by such Holder may
immediately be sold by such Holder in the open market without
limitations as to the manner of such sale or the volume of
such sale and without having to file any forms or reports with
the Commission with respect to such sale under the Securities
Act.
(B) The provisions of subparagraph (a) above shall
not apply to any Holder who owns more than one percent (1%) of
the Company's outstanding stock until such time as such Holder
beneficially owns less than one percent (1%) of the
outstanding securities of the Company.
ARTICLE 2
MISCELLANEOUS
SECTION 2.1 GOVERNING LAW.
This Agreement shall be governed in all respects, including as
to validity, interpretation and effect, by the internal laws of the State of
Delaware, without giving effect to the conflict of laws rules thereof. Holder
and the Company hereby irrevocably submit to the jurisdiction of the courts of
the State of Delaware and the Federal courts of the United States of America
located in the State of Delaware, City and County of Dallas, solely in respect
of the interpretation and enforcement of the provisions of this Agreement and of
the documents referred to in this Agreement, and hereby waive, and agree not to
assert, as a defense in any action, suit or proceeding for the interpretation or
enforcement hereof or of any such document, that it is not subject thereto or
that such action, suit or proceeding may not be brought or is not maintainable
in said courts or that the venue thereof may not be appropriate or that this
Agreement or any of such document may not be enforced in or by said courts, and
the parties hereto irrevocably agree that all claims with respect to such action
or proceeding shall be heard and determined in such a Delaware State or Federal
court. Holder and the Company hereby consent to and grant any such court
jurisdiction over the person of such parties and over the subject matter of any
such dispute and agree that mailing of process or other papers in connection
with any such action or proceeding in the manner provided in Section 2.4, or in
such other manner as may be permitted by law, shall be valid and sufficient
service thereof.
SECTION 2.2 SUCCESSORS AND ASSIGNS.
Except as otherwise expressly provided herein, the provisions
hereof shall inure to the benefit of, and be binding upon, the successors,
assigns, heirs, executors and administrators of the parties hereto.
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SECTION 2.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER.
This Agreement (including the Exhibits hereto) constitutes the
full and entire understanding and agreement between the parties with regard to
the subjects hereof and thereof. Neither this Agreement nor any term hereof may
be amended, waived, discharged or terminated, except by a written assignment
signed by the Company and the holders of at least fifty percent (50%) of the
Registrable Shares and any such amendment, waiver, discharge or termination
shall be binding on all the Holders, but in no event shall the obligation of any
Holder hereunder be materially increased, except upon the written consent of
such Holder.
SECTION 2.4 NOTICES, ETC.
All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by United Stan first-class
mail, postage prepaid, sent by facsimile or delivered personally by hand or
nationally recognized courier addressed (a) if to a Holder, as indicated on the
list of Holders attached hereto as Exhibit A, or at such other address as such
holder or permitted assignee shall have furnished to the Company in writing, or
(b) if to the Company, at such address or facsimile number as the Company shall
have furnished to each Holder in writing. All such notices and other written
communications shall be effective on the date of mailing, facsimile transfer or
delivery.
SECTION 2.5 DELAYS OR OMISSIONS.
No delay or omission to exercise any right, power or remedy
accruing to any Holder, upon any breach or default of the Company under this
Agreement shall impair any such right, power or remedy of such Holder nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default therefore or thereafter occurring. Any waiver, permit, consent
or approval of any kind or character on the part of any Holder of any breach or
default under this Agreement or any waiver on the part of any Holder of any
provisions or conditions of this Agreement must be made in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
Holder, shall be cumulative and not alternative.
SECTION 2.6 RIGHTS; SEPARABILITY.
Unless otherwise expressly provided herein, a Holder's rights
hereunder are several rights, not rights jointly held with any of the other
Holders. In case any provision of the Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
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SECTION 2.7 INFORMATION CONFIDENTIAL.
Each Holder acknowledges that the information received by them
pursuant hereto may be confidential and for its use only, and it will not use
such confidential information in violation of the Exchange Act or reproduce,
disclose or disseminate such information to any other person (other than its
employees or agents having a need to know the contents of such information, and
its attorneys), except in connection with the exercise of rights under this
Agreement, unless the Company has made such information available to the public
generally or such Holder is required to disclose such information by a
governmental body.
SECTION 2.8 TITLES AND SUBTITLES.
The titles of the paragraphs and subparagraphs of this
Agreement are for convenience of reference only and are not to be considered in
construing or interpreting this Agreement.
SECTION 2.9 COUNTERPARTS.
This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which together shall constitute
one instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement effective as of the day and year first above written.
FRESH CHOICE, INC.
By:
----------------------------------
Title:
STOCKHOLDER:
By:
----------------------------------
Name:
Title:
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<PAGE> 153
FRESH CHOICE INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Charles A. Lynch and Robert Ferngren,
and each of them, with full power of substitution to represent the undersigned
and to vote all the shares of the stock of Fresh Choice, Inc. (the "Company")
which the undersigned is entitled to vote at the Annual Meeting of Stockholders
of the Company to be held at the Hyatt Rickeys, 4219 El Camino Real, Palo Alto,
California, on , August , 1996 at : a/p.m. local time, and
at any adjournment thereof (1) as hereinafter specified upon the proposals
listed below and as more particularly described in the Company's Proxy
Statement, receipt of which is hereby acknowledged, and (2) in their discretion
upon such other matters as may properly come before the meeting. The
undersigned hereby acknowledges receipt of the Company's 1995 Annual Report to
Stockholders.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO SIGN
AND PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK MAY BE
REPRESENTED AT THE MEETING.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
The shares represented hereby shall be voted as specified. If no
specification is made, such shares shall be voted FOR proposals 1, 2, 3, 4, 5,
6 and 7.
A vote FOR the following proposals is recommended by the Board of
Directors:
Proposal 1. To approve the sale of 1,187,906 shares of Series B Non-Voting
Participating Convertible Preferred Stock and the grant of an option to
purchase 593,953 shares of Series C Non-Voting Participating Convertible
Preferred Stock to Crescent Real Estate Equities Limited Partnership and all
transactions contemplated by such action. Approval of this Proposal is
contingent on approval of Proposals 2 and 3.
FOR AGAINST ABSTAIN
/ / / / / /
Proposal 2. To increase the number of shares of Preferred Stock authorized
to be issued to three million five hundred thousand (3,500,000). Approval of
this Proposal is contingent on approval of Proposals 1 and 2.
FOR AGAINST ABSTAIN
/ / / / / /
Proposal 3. To increase the number of shares of Common Stock authorized to be
issued to fifteen million (15,000,000).
FOR AGAINST ABSTAIN
/ / / / / /
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE> 154
Proposal 4. Election of Class I director listed below:
(INSTRUCTION: To withhold authority to vote for an individual nominee, strike a
line through that nominee's name in the list below.)
Vern O. Curtis
FOR the nominee WITHHOLD
listed (except as AUTHORITY
marked to the to vote for the
contrary nominee listed
----------------- ---------------
/ / / /
Proposal 5. To amend the Company's 1988 Stock Option Plan to increase the
number of shares authorized for issuance from 800,000 to 1,500,000.
FOR AGAINST ABSTAIN
/ / / / / /
Proposal 6. To ratify the appointment of Deloitte & Touche LLP as the
Company's independent accountants for the fiscal year ending December 29, 1996.
FOR AGAINST ABSTAIN
/ / / / / /
Proposal 7. Transacting of such other business as may properly come before the
meeting or any adjournment thereof.
FOR AGAINST ABSTAIN
/ / / / / /
Sign exactly as your name(s) appears on your stock certificate. If shares of
stock stand of record in the names of two or more persons or in the name of
husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign the above Proxy. If shares of stock are held of record by a
corporation, the Proxy should be executed by the President or Vice President
and the Secretary or Assistant Secretary, and the corporate seal should be
affixed thereto. Executors or administrators or other fiduciaries who execute
the above Proxy for a deceased stockholder should give their full title. Please
date the Proxy.
Date: _________________ ________________________________
[signature]
Date: _________________ ________________________________
[signature]
