-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HjbRnlX+g9W6YN4OjO9UaGhTHFtaDF8zt6imvlUTaXw+ip64kX+6jbKwcbGK9vMv kUKeH22yXEUD/6W/Z4UPIw== 0000927016-99-000693.txt : 19990217 0000927016-99-000693.hdr.sgml : 19990217 ACCESSION NUMBER: 0000927016-99-000693 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19990216 GROUP MEMBERS: CAHILL EDWARD L GROUP MEMBERS: CAHILL, WARNOCK & COMPANY, LLC GROUP MEMBERS: CAHILL, WARNOCK STRATEGIC PARTNERS FUND L.P. GROUP MEMBERS: CAHILL, WARNOCK STRATEGIC PARTNERS, L.P. GROUP MEMBERS: DAVID L. WARNOCK GROUP MEMBERS: STRATEGIC ASSOCIATES, L.P. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: JACOBS JAY INC CENTRAL INDEX KEY: 0000812127 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 910698077 STATE OF INCORPORATION: WA FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: SEC FILE NUMBER: 005-39426 FILM NUMBER: 99542836 BUSINESS ADDRESS: STREET 1: 1530 5TH AVE CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2066225400 MAIL ADDRESS: STREET 1: 1530 FIFTH AVE CITY: SEATTLE STATE: WA ZIP: 98101 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: CAHILL EDWARD L CENTRAL INDEX KEY: 0001025665 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: A STREET 2: 10 NORTH CALVERT ST STE 735 CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4102441300 MAIL ADDRESS: STREET 1: 10 NORTH CALVERT ST STREET 2: SUITE 735 CITY: BALTIMORE STATE: MD ZIP: 21202 SC 13D/A 1 SCHEDULE 13D/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ SCHEDULE 13D/A (Rule 13d-101) INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT TO 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO 13d-2(a) (Amendment No. 2 )/1/ --- Jay Jacobs, Inc. ---------------- (Name of Issuer) Common Stock, $.01 par value ---------------------------- (Title of Class of Securities) 469 816 102 ----------- (CUSIP Number) Victor I. Chang, Esq. (617) 248-7000 c/o Testa, Hurwitz & Thibeault, LLP, ------------------------------------ High Street Tower, 125 High Street, Boston, MA 02110 ---------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) February 3, 1999 ---------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box. [_] Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7(b) for other parties to whom copies are to be sent. - -------------------- /1/ The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). - ---------------------------- CUSIP No. 469 816 102 13D - ---------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY) Edward L. Cahill - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [_] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS* AF - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [_] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION USA - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER SHARES 0 Shares ----------------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER 3,810,296 Shares OWNED BY See Item 5 below for additional information ----------------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER REPORTING 0 ----------------------------------------------------------- PERSON 10 SHARED DISPOSITIVE POWER 3,810,296 Shares WITH See Item 5 below for additional information - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,810,296 Shares - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [X] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 87.4% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON* IN - -------------------------------------------------------------------------------- *SEE INSTRUCTIONS BEFORE FILLING OUT! - ---------------------------- CUSIP No. 469 816 102 13D - ---------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY) David L. Warnock - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [_] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS* AF - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [_] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION USA - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER SHARES 0 Shares ----------------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER 3,810,296 Shares OWNED BY See Item 5 below for additional information ----------------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER REPORTING 0 Shares ----------------------------------------------------------- PERSON 10 SHARED DISPOSITIVE POWER 3,810,296 Shares WITH See Item 5 below for additional information - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,810,296 Shares - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [X] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 87.4% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON * IN - -------------------------------------------------------------------------------- *SEE INSTRUCTIONS BEFORE FILLING OUT! - ---------------------------- CUSIP No. 469 816 102 13D - ---------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY) Cahill, Warnock Strategic Partners, L.P. IRSN: 52-1970604 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [_] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS* AF - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [_] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION Delaware Limited Partnership - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER SHARES 0 Shares ----------------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER 3,810,296 Shares OWNED BY See Item 5 below for additional information ----------------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER REPORTING 0 Shares ----------------------------------------------------------- PERSON 10 SHARED DISPOSITIVE POWER 3,810,296 Shares WITH See Item 5 below for additional information - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,810,296 Shares - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [X] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 87.4% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON * PN - -------------------------------------------------------------------------------- *SEE INSTRUCTIONS BEFORE FILLING OUT! - ---------------------------- CUSIP No. 469 816 102 13D - ---------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY) Cahill, Warnock Strategic Partners Fund, L.P. IRSN: 52-1970619 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [_] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS* WC - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [_] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION Delaware Limited Partnership - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER SHARES 0 Shares ----------------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER 3,810,296 Shares OWNED BY See Item 5 below for additional information ----------------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER REPORTING 0 Shares ----------------------------------------------------------- PERSON 10 SHARED DISPOSITIVE POWER 3,810,296 Shares WITH See Item 5 below for additional information - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,810,296 Shares - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [X] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 87.4% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON * PN - -------------------------------------------------------------------------------- *SEE INSTRUCTIONS BEFORE FILLING OUT! - ---------------------------- CUSIP No. 469 816 102 13D - ---------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY) Cahill, Warnock & Company, LLC IRSN: 52-1931617 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [_] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS* AF - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [_] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION Maryland Limited Liability Company - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER SHARES 0 Shares ----------------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER 3,810,296 Shares OWNED BY See Item 5 below for additional information ----------------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER REPORTING 0 Shares ----------------------------------------------------------- PERSON 10 SHARED DISPOSITIVE POWER 3,810,296 Shares WITH See Item 5 below for additional information - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,810,296 Shares - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [X] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 87.4% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON * OO - -------------------------------------------------------------------------------- *SEE INSTRUCTIONS BEFORE FILLING OUT! - ---------------------------- CUSIP No. 469 816 102 13D - ---------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NO. OF ABOVE PERSON (ENTITIES ONLY) Strategic Associates, L.P. IRSN: 52-1991689 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [_] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS* WC - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [_] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION Delaware Limited Partnership - -------------------------------------------------------------------------------- NUMBER OF 7 SOLE VOTING POWER SHARES 0 Shares ----------------------------------------------------------- BENEFICIALLY 8 SHARED VOTING POWER 3,810,296 Shares OWNED BY See Item 5 below for additional information ----------------------------------------------------------- EACH 9 SOLE DISPOSITIVE POWER REPORTING 0 Shares ----------------------------------------------------------- PERSON 10 SHARED DISPOSITIVE POWER 3,810,296 Shares WITH See Item 5 below for additional information - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 3,810,296 Shares - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [X] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 87.4% - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON * PN - -------------------------------------------------------------------------------- *SEE INSTRUCTIONS BEFORE FILLING OUT! This Schedule 13D Amendment No. 2 ("Amendment No. 2") is an amendment to the Schedule 13D (the "Original 13D") (filed on December 6, 1997) that was filed with the Securities and Exchange Commission ("SEC") and the Schedule 13D Amendment No. 1 ("Amendment No. 1") (filed on March 11, 1998) that was filed with the SEC, on behalf of Cahill, Warnock Strategic Partners Fund, L.P. ("Strategic Partners Fund"), Cahill, Warnock Strategic Partners, L.P. ("Strategic Partners"), Strategic Associates, L.P. ("Strategic Associates"), Cahill, Warnock & Company, LLC ("Cahill, Warnock & Co."), Edward L. Cahill ("Cahill") and David L. Warnock ("Warnock"). Strategic Partners Fund, Strategic Partners, Strategic Associates, Cahill, Warnock & Co., Cahill and Warnock are sometimes referred to collectively herein as the "Reporting Persons." Jay Jacobs, Inc., a Washington corporation, is referred to herein as the "Issuer." Unless otherwise noted, the information contained in this Amendment No. 2 amends and supplements the information previously disclosed in the Original 13D and the Amendment No. 1 filed on behalf of the Reporting Persons on March 11, 1998. Capitalized terms not defined in this Amendment No. 2 shall have their respective meanings as set forth in the Original 13D (or the Amendment No. 1, as appropriate) filed on behalf of the Reporting Persons on March 11, 1998. Item 3. Source and Amount of Funds or Other Consideration: -------------------------------------------------- On March 11, 1998 Strategic Partners Fund acquired a warrant to purchase 1,020,200 shares of the Issuer's Common Stock in partial consideration for the purchase of a subordinated debenture of the Issuer in the principal amount of $1,218,000 (the "Fund Original Warrants"). The working capital of Strategic Partners Fund was the source of funds for the purchase. No part of the purchase price was financed by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, trading, or voting the securities. On March 11, 1998 Strategic Associates acquired a warrant to purchase 56,957 shares of the Issuer's Common Stock in partial consideration for the purchase of a subordinated debenture of the Issuer in the principal amount of $68,000 (the "Associates Original Warrants"). The working capital of Strategic Associates was the source of funds for the purchase. No part of the purchase price was financed by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, trading, or voting the securities. On February 3, 1999, pursuant to the terms of the Securities Purchase Agreement dated by and among the Issuer, Strategic Partners Fund, Strategic Associates, T. Rowe Price Recovery Fund II, L.P. ("Recovery II") dated as of February 1, 1999 (the "Securities Purchase Agreement," attached hereto as Exhibit 3), Strategic Partners Fund agreed to cancel the Fund Original Warrants - --------- and acquired warrants to purchase up to 1,341,693 shares of the issuer's Common Stock ("Fund New Warrants") and Strategic Associates agreed to cancel the Associates Original Warrants and acquired warrants to purchase up to 74,906 shares of the Issuer's Common Stock ("Associates New Warrants"). The working capital of Strategic Partners Fund and Strategic Associates was the source of funds for each transaction respectively. No part of the purchase price for either Strategic Partners Fund or Strategic Associates was financed by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, trading, or voting the securities. Item 5. Interest in the Securities of the Issuer: ---------------------------------------- The information contained in this Item 5 amends and restates, in its entirety, the information previously disclosed in the Amendment No. 1 filed on behalf of the Reporting Persons on March 11, 1997. (a) Strategic Partners Fund is the record owner of 15,014 shares of Series B Preferred Stock of the Issuer (the "Fund B Preferred Shares") and warrants to purchase up to 1,341,693 shares of the Issuer's Common Stock (the "New Fund Warrants"). The Fund B Preferred Shares are currently convertible into 2,267,125 shares of the Issuer's Common Stock (the "Fund Series B Conversion Shares"). The Fund B Preferred and the New Fund Warrants are currently convertible into 3,608,818 shares of the Issuer's Common Stock (the "Fund Conversion Shares"). Strategic Associates is the record owner of 831 shares of Series B Preferred Stock of the Issuer (the "Associates B Preferred Shares") and warrants to purchase up to 74,906 shares of the Issuer's Common Stock (the "New Associates Warrants"). The Associates B Preferred Shares are currently convertible into 126,572 shares of the Issuer's Common Stock (the "Associates Series B Conversion Shares"). The Associates B Preferred Shares and the New Associates Warrants are currently convertible into 201,478 shares of the Issuer's Common Stock (the "Associates Conversion Shares"). The Fund Conversion Shares and the Associates Conversion Shares are sometimes referred to herein collectively as the "Jay Jacobs Shares." Because of their relationship as affiliated entities, both Strategic Partners Fund and Strategic Associates may be deemed to own beneficially the Jay Jacobs Shares. As general partners of Strategic Partners Fund and Strategic Associates, respectively, Strategic Partners and Cahill, Warnock & Co. may be deemed to own beneficially the Jay Jacobs Shares. As the individual general partners of Strategic Partners and as the members of Cahill, Warnock & Co., both Cahill and Warnock may be deemed to own beneficially the Jay Jacobs Shares. By virtue of the Voting Agreement (attached hereto as Exhibit 6), each of the --------- Reporting Persons may be deemed to share voting power with respect to each share of the Issuer's stock subject to the agreement. Consequently, the Reporting Persons may be deemed to beneficially own, in addition to the Jay Jacobs Shares, an additional 2,429,619 shares of the Issuer's Common Stock (the "Agreement Shares"). Strategic Partners Fund disclaims beneficial ownership of the Associates Conversion Shares and the Agreement Shares. Strategic Associates disclaims beneficial ownership of the Fund Conversion Shares and Agreement Shares. Strategic Partners, Cahill, Warnock & Co., Cahill, and Warnock each disclaim beneficial ownership of the Jay Jacobs Shares and the Agreement Shares, except with respect to their pecuniary interest therein, if any. Each of the Reporting Persons may be deemed to own beneficially 87.4% of the Issuer's Common Stock, which percentage is calculated based upon (i) 549,220 shares of the Issuer's Common Stock reported as outstanding by the Issuer in Securities Purchase Agreement and (ii) 3,810,296 shares of the Issuer's Common Stock issuable upon conversion or exercise of the Fund B Preferred Shares, the New Fund Warrants, Associates B Preferred Shares and the New Associates Warrants. The calculation of beneficial ownership percentage does not reflect potential deemed beneficial ownership of the Agreement Shares. In Amendment No. 1 to the Limited Partnership Agreement of Strategic Partners Fund, dated July 26, 1996 (attached hereto as Exhibit 2), Strategic Partners and --------- the limited partners of Strategic Partners Fund agreed that any securities of a particular issuer that are acquired by both Strategic Partners Fund and Strategic Associates shall be sold or otherwise disposed of at substantially the same time, on substantially the same terms and in amounts proportionate to the size of each of their investments. As a consequence, Strategic Associates and Strategic Partners Fund may be deemed to be members of a group pursuant to Rule 13d-5(b)(1) of the Securities Exchange Act of 1934. Strategic Partners, Cahill, Warnock & Co., Cahill and Warnock each disclaim membership in the aforementioned group. (b) Number of Shares as to which each such person has (i) Sole power to vote or direct the vote: 0 shares for each Reporting Person; (ii) Shared power to vote or direct the vote: 3,810,296* shares for each Reporting Person; (iii) Sole power to dispose or to direct the disposition: 0 shares for each Reporting Person; (iv) Shared power to dispose or to direct the disposition: 3,810,296 shares for each Reporting Person. * Does not reflect potential deemed beneficial ownership of the Agreement Shares. (c) Except as set forth above, none of the Reporting Persons has effected any transaction in the Shares during the last 60 days. (d) No other person is known to have the right to receive or the power to direct the receipt of dividends from, or any proceeds from the sale of, the Shares beneficially owned by any of the Reporting Persons. (e) Not applicable. Item 6. Contracts, Arrangements, Undertakings or Relationships with Respect to Securities of the Issuer. Pursuant to the terms of a Registration Rights Agreement dated as of February 1, 1999 and closing on February 3, 1999 by and among the Issuer, Strategic Partners Fund, Strategic Associates and Recovery II, (the "Registration Rights Agreement," attached hereto as Exhibit 4), Strategic Partners Fund, Strategic --------- Associates and Recovery II are granted, subject to certain restrictions and limitations, certain demand and "piggyback" registration rights with respect to the shares of Common Stock issuable upon (i) conversion of the Series B Preferred Shares or Series C Preferred Shares, (ii) exercise of warrants received pursuant to the terms of the Securities Purchase Agreement. Pursuant to the terms of the Securities Purchase Agreement dated February 1, 1999 and closing on February 3, 1999 by and among the Issuer, Strategic Partners Fund, Strategic Associates and Recovery II (the "Securities Purchase Agreement," attached hereto as Exhibit 3), Strategic Partners (i) purchased 12,180 shares of ---------- Series D Preferred Stock of the Issuer (non-voting, non-convertible), (ii) exchanged its 14% Subordinated Convertible Debentures issued on March 11, 1998 for new debentures and (iii) exchanged the Fund Original Warrants for warrants to purchase up to 1,341,693 shares of the Issuer's Common Stock and Strategic Associates (i) purchased 680 shares of Series D Preferred Stock of the Issuer (non-voting, non-convertible), (ii) exchanged its 14% Subordinated Convertible Debentures issued on March 11, 1998 for new debentures and (iii) exchanged the Associates Original Warrants for warrants to purchase up to 74,906 shares of the Issuer's Common Stock. Item 7. Material to be Filed as Exhibits: Exhibit 1 Agreement regarding joint filing of Schedule 13D. --------- Exhibit 2 Amendment No. 1 to the Limited Partnership Agreement of Strategic --------- Partners Fund (filed as Exhibit 2 to the Original 13D filed with the SEC on --------- December 16, 1997 and incorporated herein by reference). Exhibit 3 Execution Copy of the Securities Purchase Agreement dated as of --------- February 1, 1999 by and among the Issuer, Strategic Partners Fund, Strategic Associates, and Recovery II . Exhibit 4 Registration Rights Agreement dated as of February 1, 1999 by and ---------- among the Issuer, Strategic Partners Fund, Strategic Associates, and Recovery II. Exhibit 5 Form of Common Stock Purchase Warrant issued to Strategic Partners --------- Fund, Strategic Partners, and Recovery II by Issuer pursuant to the terms of the Securities Purchase Agreement. Exhibit 6 Voting Agreement dated December 5, 1997, by and among Strategic --------- Partners Fund, Strategic Associates, T. Rowe Price, Michael D. Sullivan, Rex Loren Steffey, and William L. Lawrence, Jr. (filed as Exhibit 4.2 to the ----------- Issuer's Current Report on 8-K filed with the SEC on December 15, 1997 and incorporated herein by reference). SIGNATURE After reasonable inquiry and to the best of our knowledge and belief, we certify that the information set forth in this statement is true, complete and correct. Dated: February 16, 1999 /s/ Edward L. Cahill -------------------- Edward L. Cahill /s/ David L. Warnock -------------------- David L. Warnock CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P. By: Cahill, Warnock Strategic Partners, L.P., its Sole General Partner By: /s/ Edward L. Cahill -------------------- Edward L. Cahill, General Partner By: /s/ David L. Warnock -------------------- David L. Warnock, General Partner CAHILL, WARNOCK STRATEGIC PARTNERS, L.P. By: /s/ Edward L. Cahill -------------------- Edward L. Cahill, General Partner By: /s/ David L. Warnock --------------------- David L. Warnock, General Partner STRATEGIC ASSOCIATES, L.P. By: Cahill, Warnock & Co., LLC, its sole General Partner By: /s/ Edward L. Cahill -------------------- Edward L. Cahill, Member By: /s/ David L. Warnock -------------------- David L. Warnock, Member CAHILL, WARNOCK & CO., LLC By: /s/ Edward L. Cahill -------------------- Edward L. Cahill, Member By: /s/ David L. Warnock -------------------- David L. Warnock, Member EX-1 2 AGREEMENT EXHIBIT 1 --------- AGREEMENT Pursuant to Rule 13d-1(k)(1) under the Securities Exchange Act of 1934, the undersigned hereby agree that only one statement containing the information required by Schedule 13D/A need be filed with respect to the ownership by each of the undersigned of shares of stock of Jay Jacobs, Inc. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. Executed February 16, 1999. /s/ Edward L. Cahill -------------------- Edward L. Cahill /s/ David L. Warnock -------------------- David L. Warnock CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P. By: Cahill, Warnock Strategic Partners, L.P., its Sole General Partner By: /s/ Edward L. Cahill -------------------- Edward L. Cahill, General Partner By: /s/ David L. Warnock -------------------- David L. Warnock, General Partner CAHILL, WARNOCK STRATEGIC PARTNERS, L.P. By: /s/ Edward L. Cahill -------------------- Edward L. Cahill, General Partner By: /s/ David L. Warnock -------------------- David L. Warnock, General Partner STRATEGIC ASSOCIATES, L.P. By: Cahill, Warnock & Co., LLC, its sole General Partner By: /s/ Edward L. Cahill -------------------- Edward L. Cahill, Member By: /s/ David L. Warnock -------------------- David L. Warnock, Member CAHILL, WARNOCK & CO., LLC By: /s/ Edward L. Cahill -------------------- Edward L. Cahill, Member By: /s/ David L. Warnock -------------------- David L. Warnock, Member EX-3 3 SECURITIES PURCHASE AGREEMENT Exhibit 3 SECURITIES PURCHASE AGREEMENT DATED February __, 1999 BY AND AMONG JAY JACOBS, INC., CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P., STRATEGIC ASSOCIATES, L.P. AND T. ROWE PRICE RECOVERY FUND II, L.P. TABLE OF CONTENTS
Page ---- SECTION 1 Definitions 2 1.1 Defined Terms 2 ------------- 1.2 Other Defined Terms 4 ------------------- SECTION 2 Authorization and Sale of Series D Stock, Issuance of Warrants and Revised Debentures and Exchange of Debentures 4 2.1 Authorization of Securities 4 2.2 Sale and Purchase of Preferred Stock and Closing Warrants. 4 2.3 Exchange of Debentures. 5 2.4 Issuance of Debenture Warrants at the First Closing. 5 2.5 Issuance of Additional Debenture Warrants. 5 SECTION 3 Closings; Delivery 6 3.1 Closing Dates 6 3.2 Delivery 6 3.3 Use of Proceeds. 6 SECTION 4 Representations and Warranties of the Company 7 4.1 Organization, Good Standing and Qualification 7 4.2 Capitalization 7 4.3 Subsidiaries 8 4.4 Partnerships, Joint Ventures 9 4.5 Authorization 9 4.6 Governmental Consents 9 4.7 Company SEC Reports and Financial Statements 9 4.8 Changes 10 4.9 Accuracy of Prior Representations and Warranties 11 4.10 Conformity with Law; Absence of Litigation. 11 4.11 Disclosure. 12 4.12 FINOVA Credit Facility. 12 4.13 IRS Dispute. 12 4.14 U.S. Real Property Holding Corporation. 12 SECTION 5 Representations and Warranties of the Purchasers 12 5.1 Accredited Investor; Experience; Risk 12 5.2 Authorization 13 5.3 Governmental Consents 13 5.4 Organization, Good Standing and Qualification 13
Page ---- SECTION 6 Conditions to Closing of Purchasers 14 6.1 Representations and Warranties Correct 14 6.2 Covenants 14 6.3 Opinion of Company's Counsel 14 6.4 No Material Adverse Change 14 6.5 Statement of Rights and Preferences 14 6.6 State Securities Laws 14 6.7 Issuance of Shares , Warrants and Revised Debentures 14 6.8 Certificates 14 6.9 Registration Rights Agreement 15 6.10 Consents 15 6.11 Revised FINOVA Facility. 15 6.12 Delivery of Financial Information. 15 SECTION 7 Conditions to Closing of the Company 15 7.1 Representations 15 7.2 Purchase Price 15 7.3 Certificate 16 7.4 State Securities Laws 16 7.5 Registration Rights Agreement 16 SECTION 8 Covenants of the Company 16 8.1 Information. 16 8.2 Communication 18 8.3 Access 18 8.4 Directors' and Officers' Insurance 18 8.5 Confidentiality 18 8.6 Restrictive Covenant. 19 8.7 Foreign Corrupt Practices. 19 8.8 Payment of Expenses. 19 SECTION 9 Miscellaneous 19 9.1 Amendment; Waiver 19 9.2 Notices 19 9.3 Severability 21 9.4 Successors and Assigns 21 9.5 Survival of Representations, Warranties and Covenants 21 9.6 Entire Agreement 21 9.7 Choice of Law 21 9.8 Counterparts 21 9.9 Costs and Expenses 21 9.10 No Third-Party Beneficiaries 22 9.11 Indemnification 22 9.12 Dispute Resolution 23
JAY JACOBS, INC SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is dated as of --------- February __, 1999, by and among JAY JACOBS, INC., a Washington corporation (the "Company"), CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P., a limited partnership ------- organized under the laws of the State of Delaware, STRATEGIC ASSOCIATES, L.P., a limited partnership organized under the laws of the State of Delaware, and T. ROWE PRICE RECOVERY FUND II, L.P., a limited partnership organized under the laws of the State of Delaware (each a "Purchaser" and collectively the --------- "Purchasers."). - ----------- W I T N E S S E T H WHEREAS, the Company has issued and outstanding the shares of capital stock described in Section 4.2 hereof and the Company has reserved for issuance additional shares of capital stock upon the exercise of the outstanding convertible securities, including rights, options and warrants, identified in Section 4.2; and WHEREAS, the Company proposes to issue and sell, and the Purchasers desire to purchase from the Company, severally and in the amounts set forth on Exhibit ------- A hereto, shares of the Company's Series D Preferred Stock, par value $.01 per - - share, on the terms and subject to the conditions set forth herein; and WHEREAS, in connection with the sale of such shares of Series D Stock, the Company proposes to issue to the Purchasers, severally and in the amounts set forth on Exhibit A hereto, certain warrants to purchase shares of Common Stock --------- of the Company on the terms and subject to the conditions set forth herein; and WHEREAS, the Company and the Purchasers desire to enter into a registration rights agreement of even date herewith (which agreement shall restate and supersede certain other registration rights agreements of the Company), pursuant to which the Purchasers have, among other rights, certain registration rights; and WHEREAS, the Company and the Purchasers wish to amend certain terms of the Company's 14% Subordinated Convertible Debentures issued on March 11, 1998 (the "Original Debentures") and the Company will issue new debentures with revised ------------------- terms (the "New Debentures") and the holders of the Original Debentures will -------------- exchange the Original Debentures for New Debentures and additional warrants to purchase shares of Common Stock of the Company on the terms and subject to the conditions set forth herein; and WHEREAS, the Company and the Purchasers wish to amend certain terms of the Company's outstanding warrants issued on March 11, 1998 (the "Original -------- Warrants") and the Company will issue revised warrants and the holders of the Original Warrants will exchange the Original Warrants for such revised Warrants; and WHEREAS, at the First Closing (as defined in Section 3.1), the Purchasers shall cause to be paid to FINOVA Capital Corporation ("FINOVA") the sum of $ ------ ____________, such amount to reduce the indebtedness of the Company to FINOVA and such payment to be deemed a payment of the purchase price for the Shares (as defined in Section 1.1) to be purchased at the First Closing. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, the parties hereto agree as follows: SECTION 1 Definitions ----------- 1.1 Defined Terms. The following terms are defined as follows: ------------- "Affiliate" means, with respect to any Person, (i) any Person that holds --------- direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of voting securities or other voting interests representing at least 5% of the outstanding voting power of a Person or equity securities or other equity interests representing at least 5% of the outstanding equity securities or equity interests in a Person, (ii) any brother, sister, parent, child or spouse of such Person or any Person described in clause (i), and (iii) any Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such entity. "Closing Warrants" means the warrants issued to the Purchasers as part of ---------------- the consideration for entering into this Agreement, which may be exercised to purchase in the aggregate 1,918,743 shares of the Company's common Stock which constitute on the Closing Date twenty-five percent (25%) of the Company's issued and outstanding stock on a fully diluted basis. "Debenture Warrants" means the Warrants that (i) are issued at the First ------------------ Closing in replacement of prior warrants as described in Section 2.4, (ii) are issued at the First Closing to the Purchasers pursuant to Section 2.1(d)(ii) of the Debenture Purchase Agreement, dated as of March 11, 1998 ("Debenture --------- Purchase Agreement"), which in the aggregate may be exercised to purchase three - ------------------ percent (3%) of the Common Stock on a fully diluted basis or (iii) are issuable to the holders of New Debentures on January 1 of each year for so long as the New Debentures remain outstanding. "Common Stock" means the Company's Common Stock, par value $.01 per share. ------------ "Exchange Act" means the Securities Exchange Act of 1934, as amended. ------------ "Knowledge" or derivations thereof shall mean information that is known or, --------- in the exercise of reasonable diligence, should have been known by the officers of the Company. "Lien" means any lien, pledge, mortgage, deed of trust, security interest, ---- claim, lease, charge, option, right of first refusal, easement, servitude, transfer restriction under any shareholder or similar agreement, encumbrance or any other restriction or limitation whatsoever. "Management Option Plan" means the Jay Jacobs, Inc. 1998 Stock Incentive ---------------------- Plan as adopted by the Board of Directors of the Company on December 3, 1997. "Material Adverse Effect" means any materially adverse effect on the ----------------------- business, assets, liabilities, condition (financial or otherwise), results of operations or prospects of the Company. "Permits" means any approvals, authorizations, consents, licenses, permits ------- or certificates. "Person" means an individual, partnership, limited liability company, ------ corporation, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Preferred Stock" means any of the Series A Stock, the Series B Stock, the --------------- Series C Stock or the Series D Stock. "Registration Rights Agreement" means the Registration Rights Agreement of ----------------------------- even date herewith by and between the Company, the Purchasers and others in the form attached hereto as Exhibit B. --------- "SEC" means the United States Securities and Exchange Commission. --- "Securities Act" means the Securities Act of 1933, as amended. -------------- "Series A Stock" means the Series A Preferred stock of the Company, $.01 -------------- par value per share. "Series B Stock" means the Series B Preferred Stock of the Company, $.01 -------------- par value per share. "Series C Stock" means the Series C Preferred Stock of the Company, $.01 -------------- par value per share. "Series D Stock" means the Series D Preferred Stock of the Company, $.01 -------------- par value per share. "Shares" means the Series D Stock to be sold to the Purchasers hereunder. ------ "Subsidiaries" means each corporation in which the Company owns or ------------ controls, directly or indirectly, capital stock or other equity interests representing at least 50% of the outstanding voting stock or other equity interests, and includes without limitation J.J. Distribution Company, a Washington corporation. "Warrants" means collectively, the Closing Warrants and the Debenture -------- Warrants. The Warrants shall have the rights, preferences, privileges and restrictions and be substantially in the form of Warrant Certificate attached hereto as Exhibit D. All Warrants shall have a Termination Date (as defined therein) five years from the date of their issuance, provided, however, that -------- ------- Warrants issued in replacement of other warrants shall have a Termination Date five years from the date of issuance of the original warrants. 1.2 Other Defined Terms. Additional capitalized terms shall have the ------------------- meanings assigned to them in the text of this Agreement. Terms defined in the singular shall have a comparable meaning when used in the plural and vice versa. SECTION 2 Authorization and Sale of Series D Stock, ----------------------------------------- Issuance of Warrants and Revised Debentures and Exchange of Debentures ----------------------------------------------------------------------- 2.1 Authorization of Securities. At the First Closing, the Company --------------------------- will have authorized: (a) the issuance and sale to each Purchaser of the number of shares of Series D Stock set forth opposite its name in Exhibit A. The Series D --------- Stock will have the rights, preferences, privileges and restrictions set forth in the Statement of Rights and Preferences attached to this Agreement as Exhibit C hereto (the "Statement of Rights and Preferences"); --------- ----------------------------------- (b) the issuance to each Purchaser of the number of Closing Warrants and Debenture Warrants set forth opposite its name in Exhibit A; and ---------- (c) the issuance to the holders of the Original Debentures (each of which is a Purchaser) of an equal principal amount of the Company's New Debentures substantially in the form set forth at Exhibit E. --------- 2.2 Sale and Purchase of Preferred Stock and Closing Warrants. In --------------------------------------------------------- reliance on the representations and warranties of the Company contained herein and subject to the terms and conditions hereof, at the First Closing, each Purchaser agrees to purchase from the Company, severally, the number of Shares of Series D Stock set forth opposite its name on Exhibit A hereto to be --------- purchased at the First Closing, and the Company agrees to sell to each Purchaser, such number of shares of Series D Stock and to issue to each purchaser the number of Closing Warrants set forth opposite its name on Exhibit A hereto. The Closing Warrants shall have an exercise price equal to the - ------- - Fair Market Value (as defined in the Warrant) for the 15 trading days prior to the First Closing, subject to adjustment as provided in Exhibit D. If the Company and the Purchasers so agree, the Purchasers may purchase from the Company and the Company may issue and sell to the Purchasers additional Shares (up to a maximum of 20,000 total Shares) at one or more Additional Closings. At each Additional Closing, in reliance on the representations and warranties of the Company contained herein and subject to the terms and conditions hereof, each Purchaser will purchase from the Company, severally, its pro rata share, based on its share of the Shares purchased at the First Closing, of the number of Shares of Series D Stock to be purchased by the Purchasers at such Additional Closing, and the Company agrees to sell to each Purchaser, such number of shares of Series D Stock. The aggregate purchase price for all of the Series D Stock to be sold to the Purchasers at the First Closing shall be Two Million Dollars ($2,000,000), reduced by the amount the expenses of Purchasers associated with the transactions contemplated hereby, up to and including the First Closing. The purchase price payable at any Additional Closings shall be based on the same price per Share as the Shares purchased and sold at the First Closing and shall be reduced by the amount of any further expenses of Purchasers associated with the transactions contemplated hereby, up to and including such Closing. 2.3 Exchange of Debentures. At the First Closing, the Company agrees ---------------------- to issue to each holder of Original Debentures, and subject to and in reliance upon the representations, warranties, terms and conditions of this Agreement, each holder of Original Debentures agrees to exchange the Original Debentures held by such person for an equal principal amount of New Debentures. At the First Closing, each holder of Original Debentures will deliver to the Company, severally and not jointly, the Original Debentures to be exchanged by it for New Debentures. 2.4 Issuance of Debenture Warrants at the First Closing. At the First --------------------------------------------------- Closing: (a) The Company agrees to issue to each holder of Original Warrants, and subject to and in reliance upon the representations, warranties, terms and conditions of this Agreement, each holder of Original Warrants agrees to exchange the Original Warrants held by such person for an equal number of Debenture Warrants. The Debenture Warrants so issued will have an exercise price equal to $0.15 per share, subject to adjustment as provided in Exhibit D. At the First --------- Closing, each holder of Original Warrants will deliver to the Company, severally and not jointly, certificates representing the Original Warrants to be exchanged by it for Debenture Warrants; and (b) Pursuant to the terms of the Debenture Agreement, the Company shall also issue to each Purchaser the number of additional Debenture Warrants set forth opposite its name on Exhibit A, which in the aggregate entitle --------- the Purchasers to acquire three percent (3%) of the Common Stock on a fully diluted basis and giving effect to the transactions contemplated hereby (other than the issuance of those additional Debenture Warrants as provided in Section 2.5). The Debenture Warrants so issued will have an exercise price equal to $0.15 per share, subject to adjustment as provided in Exhibit D. --------- 2.5 Issuance of Additional Debenture Warrants. Until the New ----------------------------------------- Debentures are repaid in full, the holders of the New Debentures shall receive additional Debenture Warrants on January 1 of each year to purchase two percent (2%) of the shares of the Company's Common Stock then outstanding, on a fully diluted basis. The Debenture Warrants so issued will have an exercise price equal to the average Fair Market Value (as defined in the Debenture Warrant) for the 15 days prior to the issuance of such Debenture Warrant, subject to adjustment as provided in Exhibit D. Prior to each issuance, the Company will --------- reserve a sufficient number of shares of Common Stock for issuance upon exercise of these Debenture Warrants. SECTION 3 Closings; Delivery ------------------ 3.1 Closing Dates. The first closing of the purchase and sale of the ------------- Series D Stock (the "First Closing") shall be held at the offices of Stoel ------------- Rives, LLP, 600 University Street, Suite 3600, Seattle, Washington 98101 on February 1, 1999, or on such other date or at such other place as the Purchasers and the Company shall mutually agree. Any other closings that occur pursuant to the terms hereof ("Additional Closings") shall be held on such dates and at such ------------------- times as the parties shall mutually agree. Any of the date of the First Closing and any Additional Closing is referred to herein as a "Closing Date." ------------ 3.2 Delivery. At the First Closing and any Additional Closings, the -------- Company shall: (a) deliver to each Purchaser a certificate or certificates evidencing the Shares being purchased by such Purchaser, and, at the First Closing, the Warrants being issued to such Purchaser, registered in such Purchaser's name against delivery to the Company or FINOVA, as the case may be, of payment in an amount equal to the full purchase price of the Shares being purchased by such Purchaser by certified check or wire transfer to an account designated by the Company or, in the case of any payment to FINOVA, to an account designated by FINOVA; (b) at the First Closing, deliver the Original Debentures in exchange for the Revised Debentures and the Warrants and (c) make such other deliveries as may be required under the terms of this Agreement. 3.3 Use of Proceeds. The Company agrees to use the full proceeds from --------------- the First Closing solely to repay a portion of the existing borrowing under the FINOVA line of credit and the Purchaser's expenses associated with the transactions contemplated hereby. The proceeds of Additional Closings, if any, shall be designated by the Purchasers, in their sole discretion, but shall not exceed the scope or the amounts set forth below:
- -------------------------------------------------------------------------------- Purpose Maximum Amount - -------------------------------------------------------------------------------- Bring certain obligations to $1,300,000 merchandise vendors that are past due to current status - -------------------------------------------------------------------------------- Payment of past due taxes $ 100,000 - -------------------------------------------------------------------------------- Payment of past due rents $ 100,000 - -------------------------------------------------------------------------------- TOTAL $1,500,000 - --------------------------------------------------------------------------------
The proceeds of a subsequent Additional Closing, the maximum amount of which shall be $500,000, shall be designated by the Purchasers in their sole discretion. SECTION 4 Representations and Warranties of the Company --------------------------------------------- The Company hereby represents and warrants to, and agrees with, the Purchasers as follows: 4.1 Organization, Good Standing and Qualification. Each of the --------------------------------------------- Company and its Subsidiaries (i) is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all requisite power and authority to carry on its business, (iii) is duly qualified to transact business and is in good standing in all jurisdictions where its ownership, lease or operation of property or the conduct of its business requires such qualification, except where the failure to do so would not be material to the Company. The Company and each of the Subsidiaries has the corporate power and authority and is in possession of all material franchises, grants, authorizations, licenses, permits, easements, consents, certificates, approvals and orders (i) to own, lease and operate its properties and to carry on its business as now being conducted and (ii) in the case of the Company, to execute and deliver this Agreement and the documents and instruments contemplated hereby and to consummate the transactions contemplated hereby. 4.2 Capitalization. -------------- 4.2.1 The authorized capital stock of the Company is 25,000,000 shares, consisting of 20,000,000 shares of common stock, par value $.01 per share ("Common Stock") of which 549,220 shares are issued and outstanding and ------------ no shares are held in treasury, and 5,000,000 shares of Preferred Stock. Of the authorized shares of Preferred Stock, 46,000 shares have been designated as Series A Preferred Stock, of which 46,000 shares are issued and outstanding; 25,000 shares have been designated as Series B Preferred Stock, of which 25,000 shares are issued and outstanding; and 20,000 shares have been designated as Series C Preferred Stock, none of which shares are issued and outstanding. Upon the filing with the Secretary of State of Washington of the Statement of Rights and Preferences, there will have been designated a series of preferred stock, consisting of 40,000 shares of Series D Stock, none of which will have been issued or outstanding. Subject to the terms and conditions hereof, the Company has authorized the issuance at the First Closing of 20,000 shares of Series D Stock. Schedule 4.2 lists all options, warrants or other rights of any ------------ kind granted by the Company to purchase or otherwise acquire capital stock of the Company issued and outstanding prior to Closing. The Company has duly and validly reserved for issuance 1,146,774 shares of Common Stock upon exercise or conversion of rights, options, warrants and other convertible securities currently outstanding or issued under the Management Option Plan. The Company has reserved or, prior to the Closing, will reserve 2,203,112 shares of Common Stock for issuance upon exercise of the Warrants other than those Debenture Warrants issuable pursuant to Section 2.5. Except as set forth in this Section 4.2.1 or ----------- ------------- as listed on Schedule 4.2 or Schedule 4.3, there are outstanding (a) no ------------ shares of capital stock or other voting stock of the Company or any Subsidiary, (b) no securities of the Company, any Subsidiary or any Person convertible into or exchangeable for shares of capital stock or voting securities of the Company or any Subsidiary, (c) no options, warrants or other rights to acquire from the Company or any Subsidiary (including any rights issuable or issued under any shareholder rights plan or similar arrangement), and no obligations, contingent or otherwise, of the Company or any Subsidiary to issue any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company or any Subsidiary, (d) no equity equivalent in the earnings or ownership of the Company, any Subsidiary or any Person or any similar rights to share earnings or ownership, and (e) no outstanding obligations of the Company to repurchase, redeem or otherwise acquire any of its securities or to make any investment (by loan, capital contribution or otherwise) in any entity or Person. All outstanding options, rights and warrants have been duly and validly issued and are in full force and effect. All shares of capital stock subject to issuance upon exercise of any options, rights or warrants or otherwise, upon issuance pursuant to the instruments under which they are issuable, shall be duly authorized, validly issued, fully paid for and non-assessable and free of all preemptive rights. No outstanding options, warrants or other securities exercisable for or convertible into shares of capital stock of the Company require anti-dilution adjustments by reason of the consummation of the transactions contemplated hereby. 4.2.2 The issued and outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and non-assessable. The shares of Series D Stock to be issued pursuant to this Agreement, upon delivery to the Purchasers of certificates therefor against payment in accordance with the terms of this Agreement, and the shares of Common Stock to be issued upon exercise of the Warrants, (i) will be validly issued, fully paid and non-assessable, (ii) will be free and clear of all Liens, and (iii) assuming that the representations of the Purchasers in Section 5 hereof are true and correct, will be issued in compliance with all applicable federal and state securities laws. 4.3 Subsidiaries. Schedule 4.3 sets forth a complete and accurate ------------ ------------ list of all Subsidiaries of the Company, showing (as to each such Subsidiary) the date of its incorporation, the jurisdiction of its incorporation, the number of shares of its authorized capital stock, the number and class of shares thereof duly issued and outstanding, the names of all stockholders of such Subsidiaries and the number and percentage of the outstanding shares of each such class owned, directly or indirectly, by all such stockholders, including the Company. At Closing, all of the outstanding capital stock of, or other ownership interests in, each Subsidiary, will be owned by the Company, directly or indirectly, free and clear of any Lien or any other limitation or restriction (including restrictions on the right to vote). All outstanding shares of the capital stock of the Company and any Subsidiary have been duly authorized, validly issued, fully paid and non-assessable and are free of any preemptive rights. There are no outstanding securities of any Subsidiary convertible into or evidencing the right to purchase or subscribe for any shares of capital stock of any Subsidiary, there are no outstanding or authorized options, warrants, calls, subscriptions, rights, commitments or any other agreements of any character obligating any Subsidiary to issue any shares of its capital stock or any securities convertible into or evidencing the right to purchase or subscribe for any shares of such stock, and there are no agreements or understandings with respect to the voting, sale, transfer or registration of any shares of capital stock of any Subsidiary. 4.4 Partnerships, Joint Ventures. Neither the Company nor any ---------------------------- Subsidiary is a party to, or holds, any equity interests in any partnership, limited partnership, limited liability company or other joint venture of any kind. 4.5 Authorization. The Company has all requisite corporate power and ------------- authority to execute and deliver this Agreement and each agreement, document or instrument adopted, entered into or delivered by it as contemplated herewith (the "Transaction Documents") and to perform its obligations hereunder and --------------------- thereunder. The execution, delivery and performance of the Agreement and the transactions contemplated hereby have been duly authorized by all necessary corporate, including shareholder (if required), action on the part of the Company. Each Transaction Document to which it is a party has been duly and validly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 4.6 Governmental Consents. No consent, approval, order or --------------------- authorization of, or registration, qualification, designation, declaration or filing with, any federal, state, or local governmental authority on the part of the Company is required in connection with the valid execution and delivery by the Company of the Transaction Documents to which it is a party, or the consummation by the Company of the transactions contemplated by the Transaction Documents to which it is a party, except for (i) filings pursuant to federal or state securities laws and (ii) the filing of registration statements with the SEC and any applicable state securities commission. 4.7 Company SEC Reports and Financial Statements. -------------------------------------------- 4.7.1 The Company has made available to Purchasers true and complete copies of all periodic reports, statements and other documents that the Company has filed with the SEC under the Exchange Act for the past three years (collectively, the "Company SEC Reports"), each in the form (including ------------------- exhibits and any amendments thereto) required to be filed with the SEC. As of their respective dates, each of the Company's SEC Reports (i) complied in all respects with all applicable requirements of the Securities Act and the Exchange Act, and the rules and regulations promulgated thereunder, respectively, provided, however, that no -------- ------- representation is made with respect to the timely filing of any such reports prior to December 5, 1997, 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 in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the Subsidiaries is required to file any forms, reports or other documents with the SEC. 4.7.2 Each of the audited consolidated financial statements of the Company (including any related notes and schedules thereto) included (or incorporated by reference) in its Annual Report on Form 10-K for the fiscal year ended January 31, 1998, is accurate and complete and presents fairly, in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved ---- (except as may be noted therein), and in conformity with the SEC's Regulation S-X, the consolidated financial position of the Company and its consolidated subsidiaries as of its date and the consolidated results of operations and changes in financial position for the period then ended. Each of the unaudited consolidated financial statements of the Company (including any related notes and schedules thereto) included (or incorporated by reference) in its Quarterly Report on Form 10-Q for the quarter and nine-month period ended October 31, 1998, is accurate and complete and fairly presents, in conformity with GAAP applied on a consistent basis throughout the periods involved (except as may be noted therein), and in conformity with the SEC's Regulation S-X, the consolidated financial position of the Company and its consolidated subsidiaries as of its date and the consolidated results of operations and changes in financial position for the periods then ended. 4.7.3 Except as and to the extent set forth (or incorporated by reference) in the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 1998 (the "Balance Sheet Date"), none of the Company or any of its ------------------ Subsidiaries has incurred any liability or obligation of any nature whatsoever (whether due or to become due, accrued, fixed, contingent, liquidated, unliquidated or otherwise) that would be required by GAAP to be accrued on, reflected on, or reserved against it on, a consolidated balance sheet (the "Balance Sheet") (or in the applicable notes thereto) ------------- of the Company or any of its Subsidiaries prepared in accordance with GAAP consistently applied as of the date and for the period required. 4.8 Changes. Except as set forth on Schedule 4.8, since the Balance ------- ------------ Sheet Date, there has not been: 4.8.1 any material change in the assets, liabilities, financial condition or operating results of the Company or any of its Subsidiaries, except changes in the ordinary course of business; 4.8.2 any material damage, destruction or loss to real or personal property, whether or not covered by insurance; 4.8.3 any waiver by the Company or any of its Subsidiaries of a material legal or contractual valuable right or of a debt owed to it outside of the ordinary course of business; 4.8.4 any satisfaction or discharge of any Lien or payment of any obligation by the Company or any of its Subsidiaries other than (i) in respect of normal operating obligations in the ordinary course of business, and (ii) payments to FINOVA under the FINOVA line of credit; 4.8.5 any change or amendment to a contract or arrangement by which the Company or any of its Subsidiaries or any of their respective assets or properties is bound or subject; 4.8.6 other than in the ordinary course of business, any material increase in excess of $15,000 annually in any compensation arrangement or agreement with any employee of the Company or any of its Subsidiaries receiving compensation; 4.8.7 any events or circumstances (other than losses from operations in the ordinary course of business) that otherwise could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect; and 4.8.8 none of the Company or any of its Subsidiaries has (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock or equity interests, (ii) incurred any indebtedness for money borrowed in excess of $15,000, (iii) made any loans or advances to any Person, other than ordinary advances for travel expenses not exceeding $15,000, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights for consideration in excess of $15,000 in any one transaction or series of related transactions. 4.9 Accuracy of Prior Representations and Warranties. Each of the ------------------------------------------------ representations and Warranties regarding the Company set forth in (i) Section 4 of the Preferred Stock Purchase Agreement, dated as of December 5, 1997 (the "Preferred Agreement"); and (ii) Section 5 of the Subordinated Debenture Purchase Agreement, dated as of March 11, 1998, each by and between the parties hereto and other parties named therein, was true, complete and accurate in all material respects when made. Except as set forth on Schedule 4.9, or as is ------------ evident from the Company SEC Reports filed since December 5, 1997, since the dates on which such representations and warranties were made, no event has occurred that has had a Material Adverse Effect and that would cause any such representation or warranty, if made as of the date of this Agreement, to be materially false. 4.10 Conformity with Law; Absence of Litigation. The Company has not ------------------------------------------ violated any law or regulation or any order of any court or federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over it which would have a Material Adverse Effect. Except as set forth in Schedule 4.10, there are no claims, actions, ------------- suits, proceedings or investigations pending or, to its Knowledge, threatened, nor, to its Knowledge, are there any facts which with the passage of time, the giving of notice or both, would likely result in any such claims, actions, suits, proceedings or investigations against the Company or any of its Subsidiaries, or any properties or rights of the Company or its Subsidiaries, before any court, arbitrator or administrative, governmental or regulatory authority or body, domestic or foreign, which would have a Material Adverse Effect. 4.11 Disclosure. All written agreements, lists, schedules, ---------- instruments, exhibits, documents, certificates, reports, statements and other writings furnished to the Purchasers pursuant hereto or in connection with this Agreement or the transactions contemplated hereby, are and will be complete and accurate in all material respects. No representation or warranty by the Company contained in this Agreement, in the schedules attached hereto or in any certificate furnished or to be furnished by the Company to the Purchasers in connection herewith will omit to state any material fact necessary in order to make any statement contained herein or therein not misleading. There is no fact known to the officers and directors of the Company that has specific application to the Company and that materially adversely affects or, as far as such officers and directors can reasonably foresee, materially threatens, the assets, business, prospects, financial condition, or results of operations of the Company that is required to be and has not been set forth in this Agreement or any schedule hereto. 4.12 FINOVA Credit Facility. Attached hereto at Schedule 4.12(a) is a ---------------------- ---------------- true, complete and accurate copy of the Loan and Security Agreement, dated as of June 2, 1998, as amended, between FINOVA and the Company (the "FINOVA Facility"). Upon giving effect to that certain Amendment No. 2 and Limited Waiver and Consent to Loan and Security Agreement, substantially in the form attached as Schedule 4.12(b), no event of default will exist under the FINOVA ---------------- Facility. 4.13 IRS Dispute. The Company SEC Reports, as updated by Schedule ----------- 4.13, attached hereto, fairly describe the status of the Company's dispute with the Internal Revenue Service. 4.14 U.S. Real Property Holding Corporation. The Company is not now -------------------------------------- and has never been a "United States real property holding corporation" as defined in Section 897(c)(2) of the Code and Section 1.897-2(b) of the Regulations promulgated by the Internal Revenue Service, and the Company has filed with the Internal Revenue Service all statements, if any, wit its United States income tax returns which are required under Section 1.897(h) of such Regulations. SECTION 5 Representations and Warranties of the Purchasers ------------------------------------------------ Each of the Purchasers (severally and not jointly), hereby represents and warrants to and agrees with the Company, as follows: 5.1 Accredited Investor; Experience; Risk. ------------------------------------- 5.1.1 Such Purchaser is an accredited investor and has been advised and understands that the Series D Stock and the Warrants have not been registered under the Securities Act, on the basis that no distribution or public offering of the Series D Stock or Warrants is to be effected, except in compliance with the applicable securities laws and regulations or pursuant to an exemption therefrom; provided, however, that nothing in this -------- ------- Section 5.1 shall limit the Purchaser's right to exercise the Warrants. 5.1.2 Such Purchaser is purchasing the Series D Stock and Warrants for investment purposes, for its own account and not with a view to, or for sale in connection with, any distribution thereof in violation of federal or state securities laws. 5.1.3 Such Purchaser has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the purchase of the Series D Stock and Warrants pursuant to this Agreement. 5.1.4 The certificates representing the Series D Stock, the Warrants and any securities issuable on exercise of the Warrants shall bear a legend evidencing such restriction on transfer substantially in the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO REGISTRATION UNDER THE ACT OR AN EXEMPTION THEREFROM." 5.2 Authorization. Such Purchaser has all requisite power and ------------- authority to execute and deliver this Agreement and each of the Transaction Documents and to perform its obligations hereunder and thereunder. The execution, delivery and performance of the Agreement and the transactions contemplated hereby have been duly authorized by all necessary, action on the part of such Purchaser. Each Transaction Document to which it is a party has been duly and validly executed and delivered by such Purchaser and constitutes the legal, valid and binding obligation of such Purchaser, enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 5.3 Governmental Consents. No consent, approval, order or --------------------- authorization of, or registration, qualification, designation, declaration or filing with, any federal, state, or local governmental authority on the part of such Purchaser is required in connection with the valid execution and delivery by such Purchaser of the Transaction Documents to which it is a party, or the consummation by such Purchaser of the transactions contemplated by the Transaction Documents to which it is a party, except for such filings as have been made prior to the Closing. 5.4 Organization, Good Standing and Qualification. Such Purchaser (i) --------------------------------------------- is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all requisite power and authority to carry on its business, (iii) is duly qualified to transact business and is in good standing in all jurisdictions where its ownership, lease or operation of property or the conduct of its business requires such qualification, except where the failure to do so would not be material to the Purchaser. SECTION 6 Conditions to Closing of Purchasers ----------------------------------- Each Purchaser's obligation to purchase Shares at the First Closing or any Additional Closing is, at the option of such Purchaser, subject to the fulfillment to such Purchaser's reasonable satisfaction on or prior to such Closing of the following conditions: 6.1 Representations and Warranties Correct. The representations and -------------------------------------- warranties made by the Company in Section 4 hereof shall be true and correct when made, and shall be true and correct on the date of such Closing with the same force and effect as if they had been made on and as of such date. 6.2 Covenants. All covenants, agreements and conditions contained in --------- this Agreement to be performed by the Company on or prior to the date of such Closing shall have been performed or complied with in all respects. 6.3 Opinion of Company's Counsel. The Purchasers shall have received ---------------------------- at the First Closing from Stoel Rives LLP, counsel to the Company, an opinion addressed to the Purchasers, dated the Closing Date, in the form set forth on Exhibit F. - --------- 6.4 No Material Adverse Change. There shall not have occurred since -------------------------- the date of this Agreement any events or circumstances that could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect. 6.5 Statement of Rights and Preferences. The Company's Articles of ----------------------------------- Incorporation shall have been duly amended by the Company to include the Series D Stock Statement of Rights and Preferences and filed with the Washington Secretary of State. 6.6 State Securities Laws. All registrations, qualifications and --------------------- Permits required under applicable state securities laws, if any, shall have been obtained for the lawful execution, delivery and performance of this Agreement at such Closing. 6.7 Issuance of Shares, Warrants and Revised Debentures. The Company ---------------------------------------------------- shall have issued and delivered to the Purchasers the Shares, Warrants and Revised Debentures required to be so delivered at such Closing pursuant to this Agreement. 6.8 Certificates. Each of the Purchasers shall have received a ------------ certificate of the Chief Executive Officer or Chief Financial Officer of the Company, dated the date of such Closing, to the effect set forth in Sections 6.1, 6.2 and 6.4. 6.9 Registration Rights Agreement. The Company and all other parties ----------------------------- thereto shall have executed and delivered the Registration Rights Agreement to Purchasers. 6.10 Consents. The Company shall have obtained all written consents -------- necessary for the Company to complete the transactions contemplated hereby, including, without limitation, the consent of FINOVA. 6.11 Revised FINOVA Facility. The Company and FINOVA shall have ----------------------- executed an Amendment and Waiver Agreement with respect to the FINOVA Facility, substantially in the form of Schedule 4.12(b). 6.12 Delivery of Financial Information. The Company shall have --------------------------------- delivered the following financial information (i) calculation of loan covenant(s) in default on November 30, 1998 and December 31, 1998, (ii) Fiscal Year 2000 financial projections on a monthly basis of Income Statement, Balance Sheet, Cash Flows and Borrowing Capacity on the same format as previous internal projections (which shall be based on the revised Fiscal Year 2000 projections provided to FINOVA on December 23, 1998), (iii) monthly analysis for Fiscal Year 1999 of actual Income Statement, Balance Sheet, Cash Flows and Borrowing Capacity on the same format as the Fiscal year 1999, 2000 and 2001 projections (with the December 1998 and January 1999 amounts in projection form); (iv) detailed aging of accounts payable as of the periods ended November and December 1998, (v) detailed analysis of sales delineated between men's and women's lines and major category of goods, for the months of November 1998 and December 1998, together with beginning and ending inventories for each such category, (vi) updated summary of the estimated cost of new computer hardware and software giving effect to new projected numbers of stores for Fiscal Year 2000, and (vii) listing of cost saving measures, estimate amount saved and timetables for implementation. SECTION 7 Conditions to Closing of the Company ------------------------------------ The Company's obligation to issue and sell Shares or Warrants at the First Closing or any Additional Closing is, at the option of the Company, subject to the fulfillment of the following conditions: 7.1 Representations. The representations and warranties made by the --------------- Purchasers in Section 5 hereof shall be true and correct when made, and shall be true and correct on the date of such Closing with the same force and effect as if they had been made on and as of such date. 7.2 Purchase Price. The Purchasers shall have tendered the purchase -------------- price for the shares to be purchased at such Closing. 7.3 Certificate. The Company shall have received a certificate from ----------- the Purchasers to the effect set forth in Section 7.1. 7.4 State Securities Laws. All registrations, qualifications and Permits --------------------- required under applicable state securities laws, if any, shall have been obtained for the lawful execution, delivery and performance of this Agreement. 7.5 Registration Rights Agreement. The Purchasers and the Company ----------------------------- shall have executed and delivered the Registration Rights Agreement to the Company. SECTION 8 Covenants of the Company ------------------------ Unless waived by the holders of not less than 75% of the Series D Stock then outstanding: 8.1 Information. Following the First Closing and continuing so long as ----------- any shares of Series D Stock remain outstanding (or such earlier time as provided below), the Company shall deliver to each of the Purchasers the information specified in this Section 8.1 unless any such Purchaser at any time specifically requests that such information not be delivered to it: 8.1.1 Quarterly Financial Statements. As soon as available, but in any event ------------------------------ not later than forty-five (45) days after the end of each quarterly fiscal period (other than the last quarterly fiscal period in any fiscal year of the Company), the unaudited consolidated balance sheet of the Company and its Subsidiaries as at the end of each such period and the related unaudited consolidated statements of income and cash flows of the Company and its Subsidiaries for such period and for the elapsed period in such fiscal year, all in reasonable detail and stating in comparative form (i) the figures as of the end of and for the comparable periods of the preceding fiscal year and (ii) the figures reflected in the operating budget (if any) for such period as specified in the financial plan of the Company. All such financial statements shall be prepared in accordance with GAAP applied on a consistent basis throughout the periods reflected therein except as stated therein. 8.1.2 Annual Financial Statements. As soon as available, but in any event --------------------------- within one hundred twenty (120) days after the end of each fiscal year of the Company, a copy of the audited consolidated balance sheets of the Company and its Subsidiaries as at the end of such fiscal year and the related audited consolidated statements of operations, stockholders' equity and cash flows of the Company and its Subsidiaries for such fiscal year, all in reasonable detail and stating in comparative form the figures as at the end of and for the immediately preceding fiscal year, accompanied (in the case of the audited consolidated financial statements) by an opinion of an accounting firm of recognized national standing selected by the Company, which opinion shall state that such accounting firm's audit was conducted in accordance with generally accepted auditing standards. All such financial statements shall be prepared in accordance with GAAP applied on a consistent basis throughout the periods reflected therein except as stated therein. 8.1.3 Other Financial Information. Not less often than monthly, (i) financial --------------------------- statements in the form internally generated by the Company, (ii) a roll- forward activity report under the FINOVA line of credit, (iii) a detailed aging of vendor payables, (iv) an "open to buy" report and (v) weekly or monthly inventory status and sales reports by store; 8.1.4 Material Litigation. Within twenty (20) days after the Company learns of ------------------- the commencement or written threat of commencement of any litigation or proceeding against the Company, any of its Subsidiaries or any of the Partnerships or any of their respective assets that could reasonably be expected to have a Material Adverse Effect, written notice of the nature and extent of such litigation or proceeding. 8.1.5 Material Agreements. Within five (5) days after the expiration of the ------------------- applicable cure period, if any, or if no such cure period exists within five (5) days after the receipt by the Company of written notice of a default by the Company or any of its Subsidiaries under any material contract, agreement or document to which it is a party or by which it is bound, written notice of the nature and extent of such default. 8.1.6 Other Reports and Statements. Promptly upon (i) any distribution to its ---------------------------- stockholders generally, to its directors or to the financial community of an annual report, quarterly report, proxy statement, registration statement or other similar report or communication, (ii) filing by the Company with the SEC or with The National Market System, Inc., the National Association of Securities Dealers, Inc. or any national securities exchange or other market system of any and all regular and other reports or applications, or (iii) the issuance of any press release or other communication to the general public, a copy of each such report, application release or other communication. 8.1.7 Accountants' Management Letters, Etc. Promptly after receipt by the ------------------------------------- Company, copies of all accountants' management letters and all management and board responses to such letters, and copies of all certificates as to compliance, defaults, material adverse changes, material litigation or similar matters relating to the Company and its Subsidiaries, which shall be prepared by the Company or its officers and delivered to the third parties. 8.1.8 Stockholders' Lists. Within sixty (60) days after the end of each fiscal ------------------- year, a stockholders' list, showing the authorized and outstanding shares by class (including the Common Stock equivalents of any convertible security), the holders of all outstanding shares (both before giving effect to dilution and on a fully diluted basis) and all outstanding options, warrants and convertible securities, and detailing all options and warrants granted, exercised or lapsed (including in each case, without limitation, all option and warrant exercise prices, stock issuance prices' and other terms) and all shares issued or sold (whether to directors or managers, in connection with financing or otherwise). 8.1.9 Annual Budget. Promptly after management presents an annual budget to ------------- the Board of Directors, a copy of such annual budget, but in no event later than 30 days before year-end. 8.2 Communication. At the request of any Purchaser that continues to ------------- hold Series D Stock, the Company shall hold weekly status meetings among the Company's management group and such Purchasers to discuss items proposed by such Purchasers. 8.3 Access. So long as the Purchasers hold at least fifteen percent ------ (15%) of the Series D Stock purchased hereunder, upon the written request of the Purchasers, the Company shall afford the Purchasers and its accountants, counsel and other representatives, full access during normal business hours to all of its properties, books, contracts, commitments and records, permit them to copy or make extracts therefrom and, the Company shall furnish promptly to Purchasers all information concerning its business, properties and personnel as Purchasers may reasonably request; provided, however, that no investigation pursuant to -------- ------- this Section 8.3 shall affect any representations or warranties of either party hereunder. 8.4 Directors' and Officers' Insurance. So long as the Purchasers ---------------------------------- hold at least fifteen percent (15%) of the Series D Stock purchased hereunder, the Company shall maintain a directors' and officers' liability insurance policy providing coverage in the amount of not less than One Million Dollars ($1,000,000) and having such other terms as are reasonably acceptable to Purchasers. 8.5 Confidentiality. From and after the date of this Agreement, each --------------- of the Company and Purchasers agree to hold, and will cause its employees, agents and representatives to hold, in confidence, unless compelled to disclose by judicial or administrative process or, in the written opinion of their counsel, by other requirements of law, information furnished by the Company, on the one hand, to Purchasers and information furnished by Purchasers, on the other hand, to the Company in connection with the transactions contemplated by this Agreement, and each of such persons agree that they shall not release or disclose such information to any other person, except their respective officers, directors, partners, employees, auditors, attorneys, financial advisors and other consultants, advisors and representatives who need to know such information and who have been informed of the confidential nature of such information and have been directed to treat such information as confidential. The foregoing provisions of this Section 8.5 shall not apply to any such information which (i) becomes generally available to the public other than as a result of a disclosure by any person bound hereunder, (ii) was available to a person bound hereunder on a non-confidential basis prior to its disclosure hereunder, (iii) becomes available to any person bound hereunder on a non- confidential basis by virtue of the disclosure thereof by a source other than the party providing such information in reliance upon the protection of confidentiality reposed hereby, or (iv) is required to be disclosed pursuant to an order of a court of competent jurisdiction, provided that if disclosure is so required, the disclosing party shall provide notice of the same to each other party hereto. Notwithstanding anything herein to the contrary, from and after the date of this Agreement, if either party to this Agreement or any agreement contemplated herein shall be required by law to file as part of any public record this Agreement or the agreements relating to any transactions contemplated hereby, both parties shall jointly identify those provisions, if any, of such agreements that shall remain confidential and shall request and seek confidential treatment of those provisions in accordance with the applicable provisions of any applicable law, rule or regulation, and shall take all reasonable actions necessary to secure such confidential treatment. 8.6 Restrictive Covenant. Without the consent of the holders of 75% -------------------- of the Series D Stock then outstanding, the Company may not fail to use the proceeds of the sale of any Shares as required under the terms of any agreement that was a condition of any such sale. 8.7 Foreign Corrupt Practices. Neither the Company nor any Subsidiary ------------------------- will offer or agree to offer anything of value to any governmental official, political party or candidate for government office nor will it otherwise take any action that would cause the Company to be in violation of the U.S. Foreign Corrupt Practices Act or any law of similar effect. 8.8 Payment of Expenses. At each Closing, the purchasers may deduct ------------------- from the Purchase Price otherwise payable for the Shares being purchased at such Closing, the amount of their reasonable expenses associated with the transactions contemplated hereby and not earlier paid. 8.9 Additional Warrants. As long as the New Debentures remain ------------------- outstanding, on each anniversary of January 1, the Company shall issue to the holders of New Debentures additional Debenture Warrants to acquire two percent (2%) of the then outstanding shares of Common Stock of the Company, on a fully diluted basis. The Debenture Warrants so issued will have an exercise price equal to the average Fair Market Value (as defined in the Debenture Warrant) for the 15 days prior to the issuance of such Debenture Warrant. The Company will reserve a sufficient number of additional shares of Common Stock prior to each subsequent issuance of Debenture Warrants. SECTION 9 Miscellaneous ------------- 9.1 Amendment; Waiver. Neither this Agreement nor any provision ----------------- hereof may be amended, modified, supplemented or waived, except by a written instrument executed by (i) the Company and (ii) the Purchasers. 9.2 Notices. Any notices or other communications required or ------- permitted hereunder shall be sufficiently given if in writing and delivered in Person, transmitted by facsimile transmission (fax) or sent by registered or certified mail (return receipt requested) or recognized overnight delivery service, postage pre-paid, addressed as follows, or to such other address has such party may notify to the other parties in writing: 9.2.1 if to the Company: Jay Jacobs, Inc. 1530 Fifth Avenue Seattle, Washington 98101 Attn: William L. Lawrence, Jr. Telephone No.: 206-622-5400 Facsimile No.: 206-621-9830 with a copy to: Stoel Rives, LLP 600 University Street, Suite 3600 Seattle, Washington 98101 Attn: John J. Halle, Esq. Telephone No.: 206-624-0900 Facsimile No.: 206-386-7500 9.2.2 if to the Purchasers: c/o Cahill, Warnock & Company, LLC One South Street, Suite 2150 Baltimore, Maryland 21202 Attn: Edward L. Cahill Telephone No.: 410-895-3800 Facsimile No.: 410-464-0484 with a copy to: Wilmer, Cutler & Pickering 1445 M St. NW Washington, D.C. 20037 Attn: George P. Stamas, Esq. Telephone No.: 202-663-6000 Facsimile No.: 202-663-6363 and a copy to: T. Rowe Price Associates 100 East Pratt Street, 7th Floor Baltimore, MD 21202 Attn: Kim Golden Telephone No.: 410-345-6703 Facsimile No.: 410-345-2304 and a copy to: Testa Hurwitz & Thibeault, LLP High Street Tower 125 High Street Boston, MA 02110 Attn: Michael Collins, Esq. Facsimile No.: 617-248-7100 A notice or communication will be effective (i) if delivered in Person or by overnight courier, on the business day it is delivered, (ii) if transmitted by telecopier or EMail, on the business day of actual confirmed receipt by the addressee thereof, and (iii) if sent by registered or certified mail, three (3) business days after dispatch. 9.3 Severability. Whenever possible, each provision of this Agreement ------------ shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 9.4 Successors and Assigns. Except as otherwise provided herein, the ---------------------- provisions hereof shall inure to the benefit of, and be binding upon, the successors and permitted assigns of the parties hereto. No party hereto may assign its rights or delegate its obligations under this Agreement without the prior written consent of the other parties hereto. 9.5 Survival of Representations, Warranties and Covenants. All ----------------------------------------------------- representations and warranties made in, pursuant to or in connection with this Agreement shall survive the execution and delivery of this Agreement, any investigation at any time made by or on behalf of any Purchaser, and the sale and purchase of the Series D Stock and payment therefor for a period of two (2) years. All covenants shall survive as long as any of the Purchasers hold any shares of Series D Stock. 9.6 Entire Agreement. This Agreement and the other documents ---------------- delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subject matter hereof and thereof and supersede and cancel all prior representations, alleged warranties, statements, negotiations, undertakings, letters, acceptances, understandings, contracts and communications, whether verbal or written, among the parties hereto and thereto or their respective agents with respect to or in connection with the subject matter hereof. 9.7 Choice of Law. This Agreement shall be governed by, and construed ------------- in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws. 9.8 Counterparts. This Agreement may be executed in any number of ------------ counterparts and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument. 9.9 Costs and Expenses. The Company shall pay all reasonable fees ------------------ and expense of the Purchasers. The Purchasers shall have the right to reduce the amount of the purchase price to offset any amounts payable for their costs and expenses associated with the transactions contemplated hereby. 9.10 No Third-Party Beneficiaries. Nothing in this Agreement will ---------------------------- confer any third party beneficiary or other rights upon any Person (specifically including any employees of the Company and its Subsidiaries) or entity that is not a party to this Agreement. 9.11 Indemnification. --------------- 9.11.1 The Company agrees to indemnify and hold harmless the Purchasers and their Affiliates, and their respective partners, co-investors, officers, directors, employees, agents, consultants, attorneys and advisers (each, an "Indemnified Party"), from and against any and all actual losses, ----------------- claims, damages, liabilities, costs and expenses (including, without limitation, environmental liabilities, costs and expenses and all reasonable fees, expenses and disbursements of counsel), joint or several (hereinafter collectively referred to as a "Loss"), which may be ---- incurred by or asserted or awarded against any Indemnified Party in connection with or in any manner arising out of or relating to any investigation, litigation or proceeding or the preparation of any defense with respect thereto, arising out of or in connection with or relating to this Agreement, the other Transaction Documents or the transactions contemplated hereby or thereby or any use made or proposal to be made with the proceeds of the Purchasers' purchase of the Series D Stock pursuant to this Agreement, whether or not such investigation, litigation or proceeding is brought by the Company, any of its Subsidiaries, shareholders or creditors, whether or not any of the transactions contemplated by this Agreement or the other Transaction Documents are consummated, except to the extent such Loss is found in a final judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. 9.11.2 An Indemnified Party shall give written notice to the Company of any claim with respect to which it seeks indemnification within ten (10) days after the discovery by such parties of any matters giving rise to a claim for indemnification pursuant to Section 9.11(a); provided that the -------- failure of any Indemnified Party to give notice as provided herein shall not relieve the Company of its obligations under this Section 9.11, except to the extent that the Company is actually prejudiced by such failure to give notice. In case any such action or claim is brought against any Indemnified Party, the Company shall be entitled to participate in and, unless in the reasonable good faith judgment of the Indemnified Party a conflict of interest between such Indemnified Party and the Company may exist in respect of such action or claim, to assume the defense thereof, with counsel satisfactory to the Indemnified Party and after notice from the Company to the Indemnified Party of its election so to assume the defense thereof, the Company shall not be liable to such Indemnified Party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. In any event, unless and until the Company elects in writing to assume and does so assume the defense of any such action or claim the Indemnified Party's costs and expenses arising out of the defense, settlement or compromise of any such action or claim shall be Losses subject to indemnification hereunder. If the Company elects to defend any such action or claim, then the Indemnified Party shall be entitled to participate in such defense with counsel of its choice at its sole cost and expense. The Company shall not be liable for any settlement of any action or claim effected without its written consent. Anything in this Section 9.11 to the contrary notwithstanding, the Company shall not, without the Indemnified Party's prior written consent, settle or compromise any claim or consent to entry of any judgment in respect thereof that imposes any future obligation on the Indemnified Party or that does not include, as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnified Party, a release from all liability in respect of such claim. 9.12 Dispute Resolution. Any dispute, controversy or claim arising ------------------ out of or relating to this Agreement, or the breach termination validity thereof, shall be settled by arbitration in accordance with the American Arbitration Association (AAA) Commercial Rules as at present in force. The number of arbitrators shall be one. The arbitrator shall be neutral and appointed by the AAA. The place of arbitration shall. commence no later than thirty (30) days after the Arbitrator has been appointed. The losing party shall be responsible for the costs and expenses incurred by both sides with respect to the arbitration. [The remainder of this page is intentionally blank.] SECURITIES PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, the Company and the Purchasers have caused this Agreement to be executed effective as of the date first above written. JAY JACOBS, INC. By:_____________________________________ Rex Loren Steffey President and Chief Executive Officer CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P. By: Cahill, Warnock Strategic Partners, L.P., its general partner By:_____________________________________ Edward L. Cahill, a general partner STRATEGIC ASSOCIATES, L.P. By: Cahill, Warnock & Company, LLC, its general partner By:_____________________________________ Edward L. Cahill, a managing member T. ROWE PRICE RECOVERY FUND II, L.P. By: T. Rowe Price Recovery Fund II Associates, LLC, its general partner By:_____________________________________ Kim Z. Golden, its managing director Exhibit A ---------
Name ---- Cahill, Warnock Strategic Partners Fund, L.P. 12,180 $1,218,000 Strategic Associates, L.P. 680 68,000 T. Rowe Price Recovery Fund II, L.P. 7,140 714,000 Total 20,000 $2,000,000
Number of Shares of Number of Shares of Common Stock Underlying Common Stock Underlying Debenture Warrants Closing Warrants to be Issued at Closing - ------------------------------------------ ------------------------------- ----------------------------- Cahill, Warnock Strategic Partners Fund, L.P. 1,168,514 105,166 Strategic Associates, L.P. 65,237 5,872 T. Rowe Price Recovery Fund II, L.P. 684,991 61,649 Total 1,918,743 172,687
Exhibit B --------- Registration Rights Agreement Exhibit C --------- Statement of Rights and Preferences of Series D Stock Exhibit D --------- Form of Warrant Certificate Exhibit E Form of New Debentures Exhibit F Form of Stoel Rives LLP Opinion SCHEDULE 4.2 OUTSTANDING SECURITIES AND RIGHTS 1. Attached hereto is current list of outstanding options to purchase Common Stock. 2. The following warrants to acquire Common Stock are currently outstanding:
Name Number of Warrant Shares - ---------------------------------------------------- ------------------------ Cahill, Warnock Strategic Partners Fund, L.P. 68,013 Strategic Associates, L.P. 3,797 T. Rowe Price Recovery Fund II, L.P. 39,870
SCHEDULE 4.3 SUBSIDIARIES J.J. Distribution Company Date of Incorporation: February 16, 1993 Jurisdiction: Washington Shares of Authorized Capital Stock: 10,000 Shares of Issued and Outstanding Stock: 10,000 Stockholders: J.J. Distribution Company is a wholly-owned subsidiary of the Company Liens: Pursuant to the FINOVA Facility, all issued and outstanding capital stock of J.J. Distribution Company is pledged in favor of FINOVA.
SCHEDULE 4.8 RECENT CHANGES None. SCHEDULE 4.9 UPDATE OF PRIOR REPRESENTATIONS AND WARRANTIES 1. To the extent the representations and warranties contained in Section 4 of this Agreement are inconsistent with the representations and warranties contained in Section 4 of the Preferred Agreement or Section 5 of the Debenture Purchase Agreement, the representations and warranties contained in Section 4 of the Purchase Agreement and Section 5 of the Debenture Purchase Agreement are hereby qualified and are superseded by the representations and warranties contained in Section 4 of this Agreement. 2. The disclosure of the Company with respect to Schedule 4.11 of the Preferred Agreement is amended to read as follows: 1. J.J. Distribution Company is a wholly-owned subsidiary of the Company. 2. ADP Prototype 401(k) Plan Administrative Services Agreement and Trust Agreement dated February 2, 1996. 3. The Company's Insurance Summary (attached hereto). 4. The Preferred Agreement and all agreements associated therewith. 5. The Debenture Purchase Agreement and all agreements associated therewith. 6. The FINOVA Facility. 7. Agreement with SPS Payment Systems, dated April __, 1998. 3. The disclosure of the Company with respect to Schedule 4.13 of the Preferred Agreement is amended to include the Registration Rights Agreement, dated as of March 11, 1998, between the Company and the Purchasers. 4. The disclosure of the Company with respect to Schedule 4.15 of the Preferred Agreement is amended to reflect the changes to the number and composition of the Company's stores, a current listing of which is attached hereto. 5. The disclosure of the Company with respect to Schedule 4.16(c) of the Preferred Agreement is amended to (i) delete the security interests created by the Revolving Credit Loan to the Company by General Electric Capital Corporation, and (ii) include the security interests created by the FINOVA Facility. 6. The disclosure of the Company with respect to Schedule 4.21 of the Preferred Agreement and Schedule 5.8 of the Debenture Purchase Agreement is amended by the attached disclosure relating to payments over 30 days past due by the Company. SCHEDULE 4.10 LITIGATION None, except as set forth at Schedule 4.13. SCHEDULE 4.12(a) FINOVA FACILITY Attached hereto. SCHEDULE 4.12(b) FINOVA AMENDMENT AND WAIVER Attached hereto. SCHEDULE 4.13 UPDATE OF IRS STATUS At January 7, 1999, additional requests for information regarding the Company's filings for the fiscal year ended January, 1996 had been received by the Company from the IRS auditor. An audit conference is not expected until late spring or summer of 1999. EX-4 4 AMEND. & RESTATED REGISTRATION RIGHTS AGREEMENT Exhibit 4 Execution Copy AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement"), dated as of --------- February __, 1999, is by and among JAY JACOBS, INC., a Washington corporation (the "Company"); CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P., a limited ------- partnership organized under the laws of the State of Delaware; STRATEGIC ASSOCIATES, L.P., a limited partnership organized under the laws of the State of Delaware (Cahill, Warnock Strategic Partners Fund, L.P. and Strategic Associates, L.P. are together known as "Cahill"); T. ROWE PRICE RECOVERY ------ FUND II, L.P., a limited partnership organized under the laws of the State of Delaware ("T. Rowe" and together with Cahill, the "Purchasers"); and Michael D. ------- ---------- Sullivan (Michael D. Sullivan and the Purchasers, collectively, the "Investors"). --------- WHEREAS, the Investors and the Company entered into a Stock Purchase Agreement (the "Series B Purchase Agreement") dated as of December 3, 1997 --------------------------- pursuant to which the Company issued to the Investors, among other securities, 25,000 shares of Series B Convertible Preferred Stock, par value $.01 per share, of the Company (the "Series B Preferred Shares"); and ------------------------- WHEREAS, the Purchasers and the Company entered into a Debenture Purchase Agreement (the "Debenture Purchase Agreement") dated as of March 11, 1998 ---------------------------- pursuant to which the Company issued to the Purchasers (i) convertible subordinated debentures in an aggregate principal amount of $2,000,000 (the "Debentures"); and (ii) warrants (the "Warrants") to acquire shares of the - ----------- -------- Company's common stock, par value $.01 per share ("Common Stock"); ------------ WHEREAS, upon the occurrence of certain events set forth in the Debenture Purchase Agreement, each Debenture is convertible into (i) additional warrants to acquire Common Stock (the "Additional Warrants"); or (ii) shares of the ------------------- Company's Series C Convertible Preferred Stock (the "Series C Preferred ------------------ Shares"), which would be convertible into shares of Common Stock; and WHEREAS, on February ___, 1999, the Company is entering into a Securities Purchase Agreement (the "Series D Purchase Agreement") with the Purchasers --------------------------- pursuant to which the Company is issuing to the Purchasers (i) shares of Series D Preferred Stock of the Company (the "Series D Preferred Shares"); and (ii) ------------------------- certain warrants to purchase shares of the Company's Common Stock (the "Series D -------- Warrants"); and - -------- WHEREAS, the Company granted to the Investors as an inducement to enter into the Series B Purchase Agreement, certain rights with respect to the Series B Preferred Shares; WHEREAS, the Company granted to the Purchasers as an inducement to enter into the Debenture Purchase Agreement, certain rights with respect to the Debentures, the Warrants, the Additional Warrants, and the Series C Preferred Shares; WHEREAS, the Company has agreed to grant to the Purchasers, as an inducement to enter into the Series D Purchase Agreement, certain rights with respect to the Series D Warrants; NOW, THEREFORE, in consideration of the premises set forth herein, the parties hereto hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms ------------------- shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission, or any ---------- other federal agency at the time administering the Securities Act. "Common Stock" shall mean the Common Stock, $.01 par value, of the Company, ------------ as constituted as of the date of this Agreement. "Conversion Shares" shall mean shares of Common Stock issued or issuable ----------------- upon (i) conversion of the Series B Preferred Shares or Series C Preferred Shares; (ii) exercise of the warrants, the Additional Warrants, or the Series D Warrants; and (iii) any shares of capital stock received in respect of clause (i) or clause (ii). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, ------------ or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Holder" shall mean the person who is the then record owner of Restricted ------ Stock. "Registrable Shares" shall mean the shares of Restricted Stock. ------------------ "Registration Expenses" shall mean the expenses so described in Section 8. --------------------- "Restricted Stock" shall mean the Conversion Shares, excluding shares which ---------------- have been (a) registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with the registration statement covering them or (b) publicly sold pursuant to Rule 144 under the Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended, or any -------------- similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. 2. Restrictive Legend. ------------------ Each certificate representing the Restricted Stock shall bear a legend stating in substance: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED [FOR NON U.S. PERSONS ADD: IN THE UNITED STATES OR TO U.S. PERSONS] WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS, OR THE AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS. A certificate shall not be required to bear such legend if, in the opinion of counsel satisfactory to the Company, the securities represented thereby may be publicly sold without registration under the Securities Act. 3. Notice of Proposed Transfer. --------------------------- Prior to any proposed transfer of any Restricted Stock (other than under the circumstances described in Section 4, 5 or 6), the Holder thereof shall give written notice to the Company of its intention to effect such transfer. Each such notice shall describe the manner of the proposed transfer and, if requested by the Company, shall be accompanied by an opinion of counsel satisfactory to the Company to the effect that the proposed transfer may be effected without registration under the Securities Act, whereupon the Holder of such stock shall be entitled to transfer such stock in accordance with the terms of its notice; provided, however, that no such opinion of counsel shall be required for a - -------- ------- distribution by a corporation, partnership, limited partnership, limited liability company or other entity formed to hold investments in other businesses to its shareholders, partners, members, other equity holder, distributees or assignees of such stock in respect of such interest. Each certificate for shares of Restricted Stock transferred as above provided shall bear the legend set forth in Section 2, except that such certificate shall not bear such legend if (i) such transfer is in accordance with the provisions of Rule 144 (or any other rule permitting public sale without registration under the Securities Act); or (ii) the opinion of counsel referred to above is to the further effect that the transferee and any subsequent transferee (other than an affiliate of the Company) would be entitled to transfer such securities in a public sale without registration under the Securities Act. The restrictions provided for in this Section 3 shall not apply to securities which are not required to bear the legend prescribed by Section 2 in accordance with the provisions of that Section. 4. Required Registration. --------------------- (a) At any time prior to December 31, 2007, the Holders of Registrable Shares constituting at least 75% of the total shares of Registrable Shares then outstanding may request the Company to register under the Securities Act all or any portion of the Registrable Shares held by such requesting Holder or Holders for sale in the manner specified in such notice (which may include a delayed and continuous offering pursuant to Rule 415 promulgated under the Securities Act); provided that the Registrable Shares for which registration has been requested - -------- shall constitute at least 25% of the total Registrable Shares originally issued if such Holder or Holders shall request the registration of less than all Registrable Shares then held by such Holder or Holders. Notwithstanding anything to the contrary contained herein, no request may be made under this Section 4 within one hundred and eighty (180) days after the effective date of a registration statement filed by the Company covering a firm commitment underwritten public offering in which the Holders of Registrable Shares shall have been entitled to join pursuant to Section 5 or 6 and in which there shall have been effectively registered all Registrable Shares to which registration shall have been requested. (b) Following receipt of any notice under this Section 4, the Company shall immediately notify all Holders of Registrable Shares from whom notice has not been received and shall use its reasonable best efforts to register under the Securities Act, for public sale in accordance with the method of disposition specified in such notice from requesting Holders, the number of Registrable Shares specified in such notice (and in all notices received by the Company from other Holders within thirty (30) days after the giving of such notice by the Company). If such method of disposition shall be an underwritten public offering, the Holders of a majority of the Registrable Shares to be sold in such offering may designate the managing underwriter of such offering, subject to the approval of the Company, which approval shall not be unreasonably withheld or delayed. The Company shall be obligated to register Registrable Shares pursuant to this Section 4 on two occasions only; provided, however, that such obligation -------- ------- shall be deemed satisfied only when a registration statement, which covers all Registrable Shares specified in notices received as aforesaid and with respect to which the request for registration has not been withdrawn and provides for sale of such shares in accordance with the method of disposition specified by the requesting Holders, shall have become effective and, if such method of disposition is a firm commitment underwritten public offering, all such shares shall have been sold pursuant thereto. (c) The Company shall be entitled to include in any registration statement referred to in this Section 4, for sale in accordance with the method of disposition specified by the requesting Holders, shares of Common Stock to be sold by the Company for its own account, except as and to the extent that, in the opinion of the managing underwriter (if such method of disposition shall be an underwritten public offering), such inclusion would adversely affect the marketing of the Registrable Shares to be sold. Except for registration statements on Form S-4, S-8 or any successor thereto, the Company will not file with the Commission any other registration statement with respect to its Common Stock or Common Stock Equivalents, whether for its own account or that of other stockholders, from the date of receipt of a notice from requesting Holders pursuant to this Section 4 (the "Demand Holders") until the first to occur of -------------- (i) withdrawal of such registration statement; or (ii) the effectiveness of such registration statement unless such registration statement relates to a firm commitment underwritten public offering, then the completion of the period of distribution of the registration contemplated thereby; provided, however, that -------- ------- following receipt of any notice under this Section 4, the Company shall immediately notify all holders of the Company's Common Stock or Common Stock Equivalents who have contractual rights to demand registrations pursuant to the terms of any other registration rights agreement to which the Company is a party. Upon the written request of such demand rights holders constituting the requisite percentages of shares to initiate a demand under such other registration rights agreement specifying the number of shares to be registered, which request shall be deemed to be an exercise of a demand right under the terms of the registration rights agreement to which they are parties, such demand rights holders shall be deemed to be Demand Holders and the shares requested to be registered by such Demand Holders shall be deemed to be Registrable Shares, in each case, for purposes of Section 4(d); provided that -------- such written request is received by the Company within thirty (30) days of the giving of notice by the Company. (d) If, in the opinion of the managing underwriter, the inclusion in a registration statement to be filed under this Section of any shares other than the Registrable Shares requested to be registered under this Section by Demand Holders would adversely affect the marketing of such shares, then, in such event (a) such other shares may be included in such registration only if all of the Registrable Shares requested to be registered by Demand Holders hereunder are included; and (b) such other shares shall be subject to the provisions of Section 5 and the first sentence of Section 4(c) as to priority of inclusion. If, in the opinion of the managing underwriter, the inclusion of the Registrable Shares requested to be registered under this Section by Demand Holders would adversely affect the marketing of such Registrable Shares. Registrable Shares to be sold by the Demand Holders shall be excluded in such manner that the Registrable Shares to be excluded shall first be the Registrable Shares of Demand Holders who are not affiliates (as defined in Rule 144 of the Securities Act) of the Company (the "Affiliate Holders") and whose Registrable Shares are ----------------- then saleable under Rule 144(e) or Rule 144(k) under the Securities Act and then pro rata among them, and if further reduction is necessary, shall next be pro rata among the remaining Registrable Shares of the Demand Holders who are Affiliate Holders or whose Registrable Shares are not then saleable under Rule 144(e) or Rule 144(k); provided, however, that, notwithstanding anything in this -------- ------- Agreement to the contrary, in respect of the first underwritten public offering following the date of this Agreement, no reduction shall reduce the number of shares which may be sold by requesting Holders to less than 25% of the shares to be sold in such offering. 5. Incidental Registration. ----------------------- If the Company at any time (other than pursuant to Section 4 or Section 6) proposes to register any of its securities under the Securities Act for sale to the public, whether for its own account or for the account of other securityholders or both (except with respect to registration statements on Forms S-4, S-8 or another form not available for registering the Restricted Stock for sale to the public), each such time the Company will give written notice to all Holders of outstanding Restricted Stock of its intention to do so. Upon the written request of any such Holder received by the Company within 30 days of the giving of any such notice by the Company to register any of such Holder's Restricted Stock (which request shall state the intended method of disposition thereof), the Company will use its reasonable best efforts to cause the Restricted Stock as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the Holder (in accordance with such Holder's written request) of such Restricted Stock so registered. In the event that any registration pursuant to this Section 5 shall be, in whole or in part, an underwritten public offering of Common Stock or Common Stock Equivalents, the number of shares of Restricted Stock to be included in such an underwriting may be reduced if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company or the requesting party therein or that such reduction is otherwise advisable; provided, however, that after any shares -------- ------- to be sold by holders that do not have contractual rights to have shares included in such registration have been excluded, shares to be sold by the Holders shall be excluded in such manner that the shares to be excluded shall first be the shares of selling Holders and other requesting holders who, in each case, are not Affiliate Holders and whose shares are then saleable under Rule 144(e) or Rule 144(k) under the Securities Act and then pro rata among them, and if further reduction is necessary, shall next be pro rata among the remaining shares of the selling Holders and other requesting holders who are Affiliate Holders or whose share are not then saleable under Rule 144(e) or Rule 144(k), unless such registration is pursuant to the exercise of a demand right of another securityholder, in which event such securityholder shall be entitled to include all shares it desires to have so included before any shares of Restricted Stock or shares of any other holder are included therein and; provided, however, that, notwithstanding anything in this Agreement to the - -------- ------- contrary, in respect of the first underwritten public offering following the date of this Agreement, no reduction shall reduce the number of shares which may be sold by requesting Holders to less than 25% of the shares to be sold in such offering. 6. Registration on Form S-3. ------------------------ If at any time prior to December 31, 2007 (i) a Holder or Holders of Registrable Shares request that the Company file a registration statement on Form S-3 or any successor thereto for a public offering of all or any portion of the Registrable Shares held by such requesting Holder or Holders, with a reasonably anticipated aggregate price to the public of at least $500,000; and (ii) the Company is a registrant entitled to use Form S-3 or any successor thereto to register such shares, then the Company shall use its reasonable best efforts to register under the Securities Act on Form S-3 or any successor thereto, for public sale in accordance with the method of disposition specified in such notice, the number of Registrable Shares specified in such notice. Whenever the Company is required by this Section 6 to use its reasonable best efforts to effect the registration of Registrable Shares, each of the procedures and requirements of Section 4 (including but not limited to the requirement that the Company notify all Holders of Registrable Shares from whom notice has not been received and provide them with the opportunity to participate in the offering) shall apply to such registration; provided, however, that there shall -------- ------- be up to five (5) registrations on Form S-3 which may be requested and obtained under this Section 6, and the Company shall not be obligated to register Registrable Shares pursuant to this Section 6 on more than one occasion per twelve (12) month period; and provided, further, that the requirements contained -------- ------- in the first sentence of Section 4(a) shall not apply to any registration on Form S-3 which may be requested and obtained under this Section 6. 7. Registration Procedures. ----------------------- If and whenever the Company is required by the provisions of Section 4, 5 or 6 to use its reasonable best efforts to effect the registration of any shares of Restricted Stock under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission a registration statement (which, in the case of an underwritten public offering pursuant to Section 4, shall be on Form S-1 or other form of general applicability satisfactory to the managing underwriter selected as therein provided) with respect to such securities and use its reasonable best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided). (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified in paragraph (a) above and comply with the provisions of the Securities Act with respect to the disposition of all Restricted Stock covered by such registration statement in accordance with the sellers' intended method of disposition set forth in such registration statement for such period; (c) furnish to each seller of Restricted Stock and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons reasonably may request in order to facilitate the public sale or other disposition of the Restricted Stock covered by such registration statement; (d) use its reasonable best efforts to register or qualify the Restricted Stock covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the sellers of Restricted Stock or, in the case of an underwritten public offering, the managing underwriter reasonably shall request; provided, however, that the Company shall not for any such purpose be -------- ------- required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) use its reasonable best efforts to list the Restricted Stock covered by such registration statement with any securities exchange on which the Common Stock is then listed; (f) immediately notify each seller of Restricted Stock and each underwriter under such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and promptly prepare and furnish to such seller a reasonable number of copies of a prospectus supplemented or amended so that, as thereafter delivered to the purchasers of such Restricted Stock, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (g) if the offering is underwritten and at the request of any seller of Restricted Stock as provided herein, use its reasonable best efforts to furnish on the date that Restricted Stock is delivered to the underwriters for sale pursuant to such registration: (i) an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters and to such seller, stating that such registration statement has become effective under the Securities Act and that (A) to the knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (B) the registration statement, the related prospectus and each amendment or supplement thereof comply as to form in all material respects with the requirements of the Securities Act (except that such counsel need not express any opinion as to financial statements, schedules and other financial or statistical information contained therein); and (C) to such other effects as reasonably may be requested by counsel for the underwriters or by such seller or its counsel; and (ii) a letter dated such date from the independent public accountants retained by the Company, addressed to the underwriters and to such seller, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to such registration as such underwriters reasonably may request; (h) make available for inspection by each seller of Restricted Stock, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant or other agent retained by such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (i) cooperate with the selling holders of Restricted Stock and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Restricted Stock to be sold, such certificates to be in such denominations and registered in such names as such holders or the managing underwriters may request at least two business days prior to any sale of Restricted Stock; and (j) permit any holder of Restricted Stock which holder, in the sole and exclusive judgment, exercised in good faith, of such holder, might be deemed to be a controlling person of the Company, to participate in good faith in the preparation of such registration or comparable statement and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such holder and its counsel should be included. For purposes of Section 7(a) and 7(b) and of Section 4(c), the period of distribution of Restricted Stock included therein shall be deemed to extend until the first to occur of (i) each underwriter's completion of the distribution of all securities purchased by it; and (ii) one hundred and twenty (120) days. In connection with each registration hereunder, the sellers of Restricted Stock will furnish to the Company in writing such information with respect to themselves and the proposed distribution by them as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws. In connection with each registration pursuant to Section 4, 5 or 6 covering an underwritten public offering, the Company and each seller agree to enter into a written agreement with the managing underwriter selected in the manner herein provided in such form and containing such provisions as are customary in the securities business for such an arrangement between such underwriter and companies of the Company's size and investment stature. No Holder of shares of Restricted Stock included in a registration statement shall (until further notice) effect sales thereof after receipt of telegraphic or written notice from the Company to suspend sales to permit the Company to correct or update a registration statement or prospectus; but the obligations of the Company with respect to maintaining any registration statement current and effective shall be extended by a period of days equal to the period such suspension is in effect unless (i) such extension would result in the Company's inability to use the financial statements in the registration statement as initially filed; and (ii) such correction or update did not result from the Company's acts or failures to act. At the end of the period during which the Company is obligated to keep the registration statement current and effective as described above (and any extensions thereof required by the preceding sentence), the Holders of shares of Restricted Stock included in the registration statement shall discontinue sales of shares pursuant to such registration statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such registration statement which remain unsold, and such Holders shall notify the Company of the number of shares registered which remain unsold immediately upon receipt of such notice from the Company. 8. Expenses. -------- All expenses incurred by the Company in complying with Section 4, 5 and 6, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs of insurance, and fees and disbursements of one counsel for the sellers of Restricted Stock, but excluding any Selling Expenses, are called "Registration Expenses." All underwriting discounts and --------------------- selling commissions applicable to the sale of Restricted Stock are called "Selling Expenses." - ----------------- The Company will pay all Registration Expenses in connection with each registration statement under Sections 4, 5 or 6. All Selling Expenses in connection with each registration statement under Sections 4, 5 or 6 shall be borne by the participating sellers in proportion to the number of shares sold by each, or by such participating sellers other than the Company (except to the extent the Company shall be a seller) as they may agree. 9. Indemnification and Contribution. -------------------------------- (a) In the event of a registration of any of the Restricted Stock under the Securities Act pursuant to Section 4, 5 or 6, the Company will indemnify and hold harmless each seller of such Restricted Stock thereunder, its officers and directors, each underwriter of such Restricted Stock thereunder and each other person, if any, who controls such seller or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller, officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Restricted Stock was registered under the Securities Act pursuant to Sections 4, 5 or 6, any preliminary prospectus or final prospectus contained therein or any amendment or supplement thereof; (ii) any blue sky application or other document executed by the Company specifically for that purpose or based upon written information furnished by the Company filed in any state or other jurisdiction in order to qualify any or all of the Restricted Stock under the securities laws thereof (any such application, document or information herein called a "Blue Sky Application"); (iii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (iv) any violation by the Company or its agents of any rule or regulation promulgated under the Securities Act applicable to the Company or its agents and relating to action or inaction required of the Company in connection with such registration; or (v) any failure to register or qualify the Restricted Stock in any state where the Company or its agents has affirmatively undertaken or agreed in writing that the Company (the undertaking of any underwriter chosen by the Company being attributed to the Company) will undertake such registration or qualification on the seller's behalf (provided that in such instance the Company shall not be so liable if it has undertaken its best efforts to so register or qualify the Restricted Stock) and will reimburse each such seller, and such officer and director, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will -------- -------- not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by any such seller, any such underwriter or any such controlling person in writing specifically for use in such registration statement or prospectus, and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement or alleged untrue statement or omission or alleged omission made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the amended prospectus filed with the Commission pursuant to Rule 424(b) or in the prospectus subject to completion and term sheet under Rule 434 of the Securities Act, which together meet the requirements of Section 10(a) of the Securities Act (the "Final Prospectus"), such indemnity agreement shall ---------------- not inure to the benefit of any such seller, any such underwriter or any such controlling person, if such seller, underwriter or controlling person was obligated under law to provide a copy of the Final Prospectus to the person or entity asserting the loss, liability, claim or damage and failed to do so after sufficient copies of the Final Prospectus were delivered by the Company to such seller, underwriter or controlling person in sufficient time to deliver the Final Prospectus within the period required by the Securities Act; provided, -------- further, that this indemnity shall not be deemed to relieve any underwriter of - ------- any of its due diligence obligations. (b) To the extent permitted by law, in the event of a registration of any of the Restricted Stock under the Securities Act pursuant to Sections 4, 5 or 6, each seller of such Restricted Stock thereunder, severally and not jointly, will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Restricted Stock was registered under the Securities Act pursuant to Sections 4, 5 or 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made, and will reimburse the Company and each such officer, director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that such seller will be liable hereunder in any such case if - -------- ------- and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in reliance upon and in conformity with information pertaining to such seller furnished in writing to the Company by such seller specifically for use in such registration statement or prospectus; and provided, -------- further, that the foregoing indemnity agreement is subject to the condition - ------- that, insofar as it relates to any such untrue statement or alleged untrue statement or omission or alleged omission made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the Final Prospectus, such indemnity agreement shall not inure to the benefit of the Company , any controlling person or any underwriter, if the Company, underwriter or controlling person was obligated under law to provide a copy of the Final Prospectus to the person or entity asserting the loss, liability, claim or damage and failed to do so within the period required by the Securities Act; provided, further, that this indemnity shall not be deemed to relieve any - -------- ------- underwriter of any of its due diligence obligations; and provided, further, that -------- ------- in no event shall any indemnity by a seller under this Section 9(b) exceed the gross proceeds from the offering received by such seller. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 9 and shall only relieve it from any liability which it may have to such indemnified party under this Section 9 if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 9 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected; provided, -------- however, that, if the defendants in any such action include both the indemnified - ------- party and the indemnifying party and counsel to the indemnified party shall have reasonably concluded that there are reasonable defenses available to the indemnified party which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgement or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any Holder of Restricted Stock exercising rights under this Agreement, or any controlling person of any such Holder, makes a claim for Indemnification pursuant to this Section 9 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 9 provides for indemnification in such case; or (ii) contribution under the Securities Act may be required on the part of any such selling Holder or any such controlling person in circumstances for which indemnification is provided under this Section 9; then, and in each such case, the Company and such Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Holder is responsible for the portion represented by the percentage that the public offering price of its Restricted Stock offered by the registration statement bears to the public offering price of all securities offered by such registration statement, and the Company is responsible for the remaining portion; provided, however, that, in any such case, (A) no such Holder will be -------- ------- required to contribute any amount in excess of the public offering price of all such Restricted Stock offered by it pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 10. Changes in Common Stock, Series A Preferred Stock, Series B Preferred --------------------------------------------------------------------- Stock, Series C Preferred Stock or Series D Preferred Stock. If, and as often - ----------------------------------------------------------- as, there is any change in the Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock by way of a stock split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof so that the rights and privileges granted hereby shall continue with respect to the Conversion Shares as so changed. 11. Rule 144 Reporting. With a view to making available the benefits of ------------------ certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Stock to the public without registration, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act; (b) use its reasonable best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; (c) furnish to each Holder of Restricted Stock forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of such Rule 144 and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing such Holder to sell any Restricted Stock without registration. The Company shall not be required to effect a registration pursuant to Sections 4, 5 or 6 hereof for any Holder desiring to participate in such registration who (a) may then dispose of all of its shares of Restricted Stock pursuant to Rule 144 within the three-month period following such proposed registration; and (b) holds less than 1% of the outstanding capital stock of the Company (on a common stock-equivalent basis) at the time of such registration. 12. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to you as follows: (a) The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Charter or By-laws of the Company or any provision of any indenture, agreement or other instrument to which it or any of its properties or assets is bound, conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. (b) This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms (subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting the rights of creditors generally), except to the extent the indemnification provisions herein may be deemed not enforceable. (c) The Company has not granted any registration rights, and no such registration rights exist, that conflict with the registrations rights set forth herein or contemplated hereby. All registration rights agreements relating to the capital stock of the Company permit, or have been amended to permit the transactions and rights set forth herein and contemplated hereby. 13. Miscellaneous. ------------- (a) All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including without limitation transferees of any of the shares of Restricted Stock), whether so expressed or not; provided, however, that registration rights conferred herein -------- ------- on the Holders of shares of Restricted Stock shall only inure to the benefit of a transferee of shares of Restricted Stock if such transferee, in the Company's reasonable judgment, is not a competitor of the Company, and (i) there is transferred to such transferee at least 20% of the total shares of Restricted Stock originally issued to the direct or indirect transferor of such transferee by the Company; or (ii) such transfer is made in connection with the distribution by a Holder to such Holders beneficial owners (including, without limitation, to partners of a general or limited partnership, shareholders of a corporation and beneficiaries of a trust) of securities of the Holder or to the partners or employees of the Holder, provided that at the Company's request, one person shall be designated by such transferees as their agent for purposes of their rights hereunder and the provision of a notice by the Company to such agent in accordance with the provisions hereof shall be deemed compliance with such provisions for all such beneficial owners, partners and employees, and following such request by the Company, the Company shall have no obligation under said provisions with respect to such transferees until it shall have been notified of the name and address of such agent. (b) Each Holder agrees that it will provide notice to the Company of any transfer or assignment of its rights or interests hereunder. Any failure by the Company to fulfill a covenant or obligation hereunder which is the direct result of a failure by a Holder to provide such notice shall not be deemed to be a breach of any covenant or obligation hereunder. Nothing in this Agreement shall be construed to create any rights or obligations except among the parties hereto and their respective and permitted successors and assigns, and no person or entity shall be regarded as a third- party beneficiary of this Agreement. Except as provided in Section 13(a) above, all notices, requests, consents and other communications hereunder shall be in writing, shall be addressed to the receiving party's address set forth below or to such other address as a party may designate by notice hereunder, and shall be either (i) delivered by hand; (ii) sent by overnight courier, with a receipt obtained; or (iii) sent by registered or certified mail, return receipt requested, postage prepaid. If to the Company: Jay Jacobs, Inc. 1530 Fifth Avenue Seattle, Washington 98101 Facsimile No.: (206) 621-9830 Attn.: Rex L. Steffey with a copy to: Stoel Rives, LLP One Union Square 600 University Street, Suite 3600 Seattle, Washington 98101-3197 Facsimile No.: (206) 386-7500 Attn: John J. Halle, Esq. If to the Purchasers or Investors: c/o Cahill, Warnock & Company, LLC One South Street, Suite 2150 Baltimore, Maryland 21202 Attn: Edward L. Cahill Facsimile No.: (410) 895-3805 with a copy to: Wilmer, Cutler & Pickering 100 Light Street Baltimore, Maryland 21202 Attn: George P. Stamas, Esq. Facsimile No.: (410) 986-2828 and: T. Rowe Price Recovery Fund II, L.P. 100 East Pratt Street, 7th Floor Baltimore, Maryland 21202 Attn: Kim Golden Facsimile No.: (410) 345-2304 with a copy to: Testa, Hurwitz & Thibeault, LLP High Street Tower 125 High Street Boston, Massachusetts 02110 Attn: Michael Collins, Esq. Facsimile No.: (617) 248-7100 and: Michael D. Sullivan 9101G Yellow Brick Road Rosedale, Maryland 21237 All notices, requests, consents and other communications hereunder shall be deemed to have been given (i) if by hand, at the time of the delivery thereof to the receiving party at the address of such party set forth above; (ii) if sent by overnight courier, on the next business day following the day such notice is delivered to the courier service; or (iii) if sent by registered or certified mail, on the 5th business day following the day such mailing is made. (c) This Agreement shall be governed and construed in accordance with the law of the State of Delaware, without giving effect to the conflict of laws principles thereof. (d) This Agreement may be amended or modified, and any provision hereof may be waived in whole or in part, but only by the written consent of the Company and the holders of a majority of the aggregate number of outstanding shares of Restricted Stock held of record by the Holders or their permitted successors and assigns. This Agreement may be terminated by written agreement of the Company and the holders of at least a majority of the aggregate number of outstanding shares of Restricted Stock held of record by the Holders or their permitted successors and assigns. (e) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (f) Except as otherwise expressly provided herein, the obligations of the Company to register shares of Restricted Stock under Section 4, 5 or 6 as provided herein shall terminate on December 31, 2007. (g) If requested by the underwriter or underwriters for an underwritten public offering of securities of the Company which offering is by the Company, each Holder of Restricted Stock who is a party to this Agreement (including, without limitation, a successor or permitted assignee of a party) shall agree not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any shares of Restricted Stock or any other shares of Common Stock or Common Stock Equivalents (other than shares being registered in such offering), without the consent of such underwriter or underwriters, for a period of not more than 90 days following the effective date of the registration statement relating to such offering (unless in any event such underwriter or underwriters shall, based on then current market conditions, agree to a shorter period); provided, with respect to each such offering, that -------- all persons entitled to registration rights in such offering who are not parties to this Agreement, all other persons selling shares of Common Stock or Common Stock Equivalents in such offering and all executive officers of the Company shall also have agreed to be bound by provisions pertaining to the sale of their shares of Common Stock or Common Stock Equivalents following such offering which provisions are substantially similar to the provisions binding upon the Holders of Restricted Stock obligated under this Agreement with respect to the sale of their shares following such offering. (h) The Company shall be permitted to require any Holders requesting registration under Section 4, 5 or 6 to delay any request for registration or to cease sales under any effective registration statement if the Company is then contemplating a transaction that could reasonably be expected to be adversely affected or the Company would be required to make public disclosure of information, the disclosure of which at such time could reasonably be expected to cause a material adverse effect upon the Company's business. In addition, if at the time of any request to register Registrable Shares pursuant to Section 4 or Section 6 hereof, the Company is engaged or has fixed plans to engage within ninety (90) days of the time of the request in a registered public offering as to which such Holders may include Registrable Shares pursuant to Section 5 hereof, then the Company may at its option direct that such request be delayed. (i) If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein. In the event that any court of competent jurisdiction shall determine that any provision, or any portion thereof, contained in this Agreement shall be unreasonable or unenforceable in any respect, then such provision shall be deemed limited to the extent that such court deems it reasonable and enforceable, and as so limited shall remain in full force and effect. (j) The headings and captions of the various subdivisions of this Agreement are for convenience of reference only and shall in no way modify, or affect the meaning or construction of any of the terms or provisions hereof. 14. Entire Agreement. ---------------- This Agreement embodies the entire agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings related to the subject matter hereof including, without limitation the Registration Rights Agreement dated as of December 3, 1997 and the Registration Rights Agreement dated as of March 11, 1998. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the undersigned have executed this Registration Rights Agreement as a sealed instrument as of the day and year first written above. JAY JACOBS, INC. By: ------------------------------------------- Name: Rex L. Steffey Title: President and Chief Executive Officer CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P. By: CAHILL WARNOCK STRATEGIC PARTNERS, L.P., By: ------------------------------------------- Name: Edward L. Cahill Title: a General Partner STRATEGIC ASSOCIATES, L.P. By: CAHILL, WARNOCK & COMPANY, LLC its General Partner By: ------------------------------------------- Name: Edward L. Cahill Title: Managing Member T. ROWE PRICE RECOVERY FUND II, L.P. By: T. ROWE PRICE RECOVERY FUND II ASSOCIATES, L.L.C., its General Partner By: T. ROWE PRICE ASSOCIATES, INC., its Manager By: -------------------------------------------- Name: Kim Z. Golden Title: Managing Director ------------------------------------------------ Michael D. Sullivan EX-5 5 FORM OF COMMON STOCK PURCHASE WARRANT Exhibit 5 THIS WARRANT AND THE SHARES OF COMMON STOCK UNDERLYING THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER APPLICABLE STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SECURITIES ARE REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED. THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH IN SECTION 5 OF THIS WARRANT -------------------------------------- Warrant No. ________ Number of Shares:__________ (subject to adjustment) Date of Issuance: ________ ____, ___ JAY JACOBS, INC. ---------------- Form of Common Stock Purchase Warrant ----------------------------- Jay Jacobs, Inc., a Washington corporation (the "Company"), for value received, hereby certifies that [recipient], or his, her or its registered ----------- assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company, at any time after the date of this Warrant and on or before the Termination Date (as defined in Section 15 hereof) of this Warrant (the "Exercise Period"), that number of shares (the "Warrant Shares") of common stock, par value $.01 per share, of the Company (the "Common Stock") as set forth in Section 2.a. hereof, and at an exercise price per share set forth in Section 1. Capitalized words not defined herein shall have the meanings set forth in the Securities Purchase Agreement, dated as of February __, 1999. 1. Exercise Price. -------------- The exercise price at which this Warrant may be exercised shall be equal to [$0.15 per share][$ _______ per share of Common Stock, which is equal to the average Fair Market Value (as defined below) for the 15 trading days prior to the Date of Issuance (the "Exercise Price")]. Upon a Change of Control or Redemption Event (as defined in the Statement of rights and Preferences of Series D Preferred Stock), the Exercise Price shall be reduced to $.01 and shall remain as the Exercise Price throughout the Exercise Period. 2. Exercise of Warrant. ------------------- a. Number of Shares for Which Warrant is Exercisable. This Warrant shall ------------------------------------------------- initially be exercisable to purchase [_________] shares of Common Stock. The number of Warrant Shares issuable upon exercise of this Warrant shall be subject to adjustment as set forth in Section 3 hereof. b. Procedure for Exercise of Warrant. The Warrant may be exercised in --------------------------------- whole or in part on any date during the Exercise Period (each an "Exercise Date") by surrendering this Warrant, with the purchase form provided for herein duly executed by the Holder or by the Holder's duly authorized attorney-in-fact, at the principal office of the Company or at such other office or agency in the United States as the Company may designate by notice in writing to the Holder, accompanied by payment (i) in cash, bank cashier's check or certified check payable to the order of the Company, or (ii) by cancellation by the Holder of indebtedness or other obligations of the Company to the Holder or (iii) by a combination of (i) and (ii), equal to the product of (x) the Exercise Price multiplied by (y) the number of Warrant Shares being purchased. c. Conversion. In addition to and without limiting the rights of the ---------- Holder under the terms of this Warrant, the Holder shall have the right to convert this Warrant or any portion thereof (the "Conversion Right") into shares of Common Stock as provided in this subsection 1.c. The Holder may exercise this Conversion Right on any date during the Exercise Period (the "Conversion Date") by surrendering this Warrant as described in subsection 2.b. above, together with a notice of conversion, the form of which is attached hereto as Exhibit II. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the "Converted Warrant Shares"), the Company shall deliver to the Holder (without payment by the Holder of any exercise price or any cash or other consideration) (x) that number of Warrant Shares equal to the quotient obtained by dividing the value of this Warrant (or the specified portion hereof) on the Conversion Date by (y) the Fair Market Value of one share of Common Stock on the Conversion Date. The value of this Warrant shall be determined by subtracting (A) the aggregate Exercise Price of the Converted Warrant Shares on the Conversion Date from (B) the aggregate Fair Market Value (as defined below) of the Converted Warrant Shares on the Conversion Date. Expressed as a formula, the number of Warrant Shares issuable upon such conversion shall be computed as follows: B-A X = --- Y Where: X = the number of shares of Common Stock that may be issued to Holder Y = the Fair Market Value of one share of Common Stock A = the aggregate Exercise Price (i.e., Converted Warrant Shares multiplied by the Exercise Price) B = the aggregate Fair Market Value (i.e., Converted Warrant Shares multiplied by the Fair Market Value) The Fair Market Value per share of Common Stock shall be determined as follows: i. If the Common Stock is listed on a national securities exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the Nasdaq Bulletin Board, or another nationally recognized exchange or trading system as of the Conversion Date, the Fair Market Value per share of Common Stock shall be deemed to be the last reported sale price per share of Common Stock thereon on the Conversion Date; or, if no such price is reported on such date, such price on the next preceding business day; or, if no such price is reported on such date, the average of the mean of the high closing bid and the low closing asked prices for the three preceding business days (provided that if no such price is reported for the three preceding business days, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (ii)). ii. If the Common Stock is not listed on a national securities exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the Nasdaq Bulletin Board or another nationally recognized exchange or trading system as of the Conversion Date, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company). Notwithstanding the foregoing, if the Board of Directors has not made such a determination within the three-month period prior to the Conversion Date, then (A) the Fair Market Value per share of Common Stock shall be the amount next determined by the Board of Directors to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing Common Stock under an employee benefit plan of the Company), and (B) the exercise of this Warrant pursuant to this subsection 2.c. shall be delayed for a period of up to one month until such determination is made. d. Each exercise or conversion of this Warrant shall be deemed to have been effected immediately prior to the close of business on each Exercise Date or Conversion Date. At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 2.c. below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates. e. As soon as practicable after the exercise or conversion of this Warrant in full or in part, and in any event within ten (10) days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct: i. a certificate or certificates for the number of full Warrant Shares to which such Holder shall be entitled upon such exercise or conversion plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash in an amount determined pursuant to Section 4 hereof; and ii. in case such exercise or conversion is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the sum of (a) the number of such shares delivered to the Holder upon such exercise or conversion plus (b) the number of Warrant Shares (if any) canceled in payment of the Exercise Price or pursuant to the exercise of the Conversion Right. 3. Adjustments. ----------- a. If outstanding shares of the Company's Common Stock shall be subdivided into a greater number of shares or a dividend in Common Stock shall be paid in respect of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend shall simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend be proportionately reduced. If outstanding shares of Common Stock shall be combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased. When any adjustment is required to be made in the Exercise Price, the number of Warrant Shares purchasable upon the exercise or conversion of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. b. If there shall occur any capital reorganization or reclassification of the Company's Common Stock (other than a change in par value or a subdivision or combination as provided for in subsection 3.a. above), or any consolidation or merger of the Company with or into another corporation, or a transfer of all or substantially all of the assets of the Company, then, as part of any such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Holder of this Warrant shall have the right thereafter to receive upon the exercise hereof the kind and amount of shares of stock or other securities or property which such Holder would have been entitled to receive if, immediately prior to any such reorganization, reclassification, consolidation, merger or sale, as the case may be, such Holder had held the number of shares of Common Stock which were then purchasable upon the exercise of this Warrant if exercised for full in the same manner as that in which the Warrant is actually exercised. In any such case, appropriate adjustment (as reasonably determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Holder of this Warrant, such that the provisions set forth in this Section 3 (including provisions with respect to adjustment of the Exercise Price) shall thereafter be applicable, as nearly as is reasonably practicable, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Warrant. c. If at any time while all or any portion of this Warrant remains outstanding the Company (i) sells any shares of Common Stock of the Company at a price per share less than the Exercise Price per share then applicable to this Warrant, or (ii) issues any security convertible into shares of Common Stock of the Company with a conversion price per share less than the Exercise Price per share then applicable to this Warrant, or (iii) issues any option, warrant or other right to purchase shares of Common Stock of the Company at any exercise price per share less than the Exercise Price per share then applicable to this Warrant (except, in each case, pursuant to an employee or director stock option plan or similar compensation plan approved by the Board of Directors); then in any and every such event the Exercise Price per share for this Warrant shall be reduced and shall be equal to such lower sales, conversion or exercise price per share. d. When any adjustment is required to be made pursuant to this Section 3, the Company shall promptly mail to the Holder a certificate setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which this Warrant shall be exercisable following the occurrence of any of the events specified in subsection 2(a) or 2(b) above. 4. Fractional Shares. The Company shall not be required upon the exercise or ----------------- conversion of this Warrant to issue any fractional shares. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment to the Holder equal to the Fair Market Value per share of Common Stock multiplied by such fraction. 5. Requirements for Transfer. ------------------------- a. This Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Act or (ii) the Company first shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such sale or transfer is exempt from the registration requirements of the Act. b. Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner, if the transferee agrees in writing to be subject to the terms of this Section 5, or (ii) a transfer made in accordance with Rule 144 under the Act. c. Each certificate representing Warrant Shares shall bear a legend substantially in the following form: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such securities are registered under such Act or an opinion of counsel satisfactory to the Company is obtained to the effect that such registration is not required." The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act. 6. No Impairment. The Company will not, by amendment of its charter or through ------------- reorganization, consolidation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. 7. Liquidating Dividends. If the Company pays a dividend or makes a --------------------- distribution on the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Company will pay or distribute to the Holder of this Warrant, upon the exercise hereof, in addition to the Warrant Shares purchased upon such exercise, the Liquidating Dividend which would have been paid to such Holder if he had been the owner of record of such Warrant Shares immediately prior to the date on which a record is taken for such Liquidating Dividend or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends or distribution are to be determined. 8. Notices of Record Date, etc. In case: ---------------------------- a. the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or b. of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the surviving entity), or any transfer of all or substantially all of the assets of the Company; or c. of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Holder of this Warrant a notice specifying, as the case may be, (i) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution/ liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten (10) days prior to the record date or effective date for the event specified in such notice. 9. Reservation of Stock. The Company will at all times reserve and keep -------------------- available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other stock, securities and property, as from time to time shall be issuable upon the exercise of this Warrant. 10. Exchange of Warrants. Upon the surrender by the Holder of any Warrant or -------------------- Warrants, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of such Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in the name of such Holder or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 11. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory ----------------------- to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor. 12. Transfers, etc. a. The Company will maintain a register containing the names and addresses of the Holders of this Warrant and all comparable Warrants. Any Holder may change his, her or its address as shown on the warrant register by written notice to the Company requesting such change. b. Subject to the provisions of Section 5 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit III hereto) at the principal office of the Company. ----------- c. Until any transfer of this Warrant is made in the warrant register, the Company may treat the Holder of this Warrant as the absolute owner hereof for all purposes; provided, however, that if and when this -------- ------- Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 13. Mailing of Notices, etc. All notices and other communications from the ------------------------ Company to the Holder of this Warrant shall be mailed by first-class certified or registered mail, or overnight courier service, postage prepaid, to the address set forth in the Preferred Stock Purchase Agreement. All notices and other communications from the Holder of this Warrant or in connection herewith to the Company shall be mailed by first- class certified or registered mail or overnight courier service, postage prepaid, to the Company at its principal office set forth below. The principal office of the Company is as follows: Jay Jacobs, Inc. 1530 Fifth Avenue Seattle, Washington 98101 14. No Rights as Stockholder. Until the exercise of this Warrant, the Holder ------------------------ of this Warrant shall not have or exercise any rights by virtue hereof as a stockholder of the Company. 15. Governing Law. This Warrant will be governed by and construed in ------------- accordance with the laws of the State of Delaware. 16. Termination. Unless previously exercised pursuant to the terms of this ----------- Warrant, the right to exercise this Warrant shall expire at 5:00 p.m. (Pacific time) on ______ __, 2004 (the "Termination Date"). Notwithstanding the foregoing, if on the Termination Date, the Fair Market Value per share of the Common Stock exceeds the Exercise Price per share of the Warrant Shares, this Warrant shall automatically be deemed to be exercised in full pursuant to the provisions of Section 2.c. hereof, without any further action on behalf of the Registered Holder, immediately prior to the time this Warrant would otherwise expire on the Termination Date pursuant to the preceding sentence. JAY JACOBS, INC. By: -------------------------------------- Title: ----------------------------------- EXHIBIT I --------- PURCHASE FORM ------------- To: Jay Jacobs, Inc. Dated: The undersigned, pursuant to the provisions set forth in the attached Warrant (No.___), hereby irrevocably elects to purchase _______ shares of the Common Stock covered by such Warrant. The undersigned herewith makes payment of $____________, representing the full Exercise Price for such shares at the Exercise Price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes): $__________ in lawful money of the United States, and/or the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ Warrant Shares (using a Fair Market Value of $________ per share for purposes of this calculation). Signature: Address: ------------------------------------ ------------------------------------ ------------------------------------ EXHIBIT II ---------- NOTICE OF CONVERSION -------------------- To: Jay Jacobs, Inc. Dated: The undersigned hereby elects to convert the attached Warrant into such number of shares of Common Stock of Jay Jacobs, Inc. as is determined pursuant to Section 1(c) of this Warrant, which conversion shall be effected pursuant to the terms of the attached Warrant. Signature: Address: ------------------------------------ ------------------------------------ ------------------------------------ EXHIBIT III ----------- ASSIGNMENT FORM --------------- FOR VALUE RECEIVED, _____________________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No. ____) with respect to the number of shares of Common Stock covered thereby set forth below, unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- Dated: Signature: Dated: Witness: -----END PRIVACY-ENHANCED MESSAGE-----