-----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, FWSLhFxJ4CIi9dQEgLO2xQ0AvrLTZ6HknSyrLzdtt1Dfql5RZHC0PsaXdcxSbDEk J+275eQeRaYM136cC/c1NQ== 0000927016-98-001106.txt : 19980324 0000927016-98-001106.hdr.sgml : 19980324 ACCESSION NUMBER: 0000927016-98-001106 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980323 SROS: NONE GROUP MEMBERS: CAHILL EDWARD L GROUP MEMBERS: CAHILL, WARNOCK & CO., 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: 98571229 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 (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. 1)/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) March 11, 1998 - -------------------------------------------------------------------------------- (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(b)(3) or (4), check the following box [ ]. Note: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) 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). SCHEDULE 13D - ----------------------- CUSIP NO. 469 816 102 - ----------------------- - ------------------------------------------------------------------------------ NAME OF REPORTING PERSON 1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Edward L. Cahill - ------------------------------------------------------------------------------ CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* 2 (a) [_] (b) [X] - ------------------------------------------------------------------------------ SEC USE ONLY 3 - ------------------------------------------------------------------------------ SOURCE OF FUNDS* 4 AF - ------------------------------------------------------------------------------ CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED 5 PURSUANT TO ITEMS 2(d) or 2(e) [_] - ------------------------------------------------------------------------------ CITIZENSHIP OR PLACE OF ORGANIZATION 6 USA - ------------------------------------------------------------------------------ SOLE VOTING POWER 7 NUMBER OF -0- SHARES ----------------------------------------------------------- SHARED VOTING POWER BENEFICIALLY 8 36,974,302 OWNED BY ----------------------------------------------------------- EACH SOLE DISPOSITIVE POWER 9 REPORTING -0- PERSON ----------------------------------------------------------- SHARED DISPOSITIVE POWER WITH 10 36,974,302 - ------------------------------------------------------------------------------ AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 36,974,302 - ------------------------------------------------------------------------------ CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 12 [X] - ------------------------------------------------------------------------------ PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 81.8% - ------------------------------------------------------------------------------ TYPE OF REPORTING PERSON* 14 IN - ------------------------------------------------------------------------------ *SEE INSTRUCTIONS BEFORE FILLING OUT! SCHEDULE 13D - ----------------------- CUSIP NO. 469 816 102 - ----------------------- - ------------------------------------------------------------------------------ NAME OF REPORTING PERSON 1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON David L. Warnock - ------------------------------------------------------------------------------ CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* 2 (a) [_] (b) [X] - ------------------------------------------------------------------------------ SEC USE ONLY 3 - ------------------------------------------------------------------------------ SOURCE OF FUNDS* 4 AF - ------------------------------------------------------------------------------ CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED 5 PURSUANT TO ITEMS 2(d) or 2(e) [_] - ------------------------------------------------------------------------------ CITIZENSHIP OR PLACE OF ORGANIZATION 6 USA - ------------------------------------------------------------------------------ SOLE VOTING POWER 7 NUMBER OF -0- SHARES ----------------------------------------------------------- SHARED VOTING POWER BENEFICIALLY 8 36,974,302 OWNED BY ----------------------------------------------------------- EACH SOLE DISPOSITIVE POWER 9 REPORTING -0- PERSON ----------------------------------------------------------- SHARED DISPOSITIVE POWER WITH 10 36,974,302 - ------------------------------------------------------------------------------ AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 36,974,302 - ------------------------------------------------------------------------------ CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 12 [X] - ------------------------------------------------------------------------------ PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 81.8% - ------------------------------------------------------------------------------ TYPE OF REPORTING PERSON* 14 IN - ------------------------------------------------------------------------------ *SEE INSTRUCTIONS BEFORE FILLING OUT! SCHEDULE 13D - ----------------------- CUSIP NO. 469 816 102 - ----------------------- - ------------------------------------------------------------------------------ NAME OF REPORTING PERSON 1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Cahill, Warnock Strategic Partners, L.P. IRSN: 52-1970604 - ------------------------------------------------------------------------------ CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* 2 (a) [_] (b) [X] - ------------------------------------------------------------------------------ SEC USE ONLY 3 - ------------------------------------------------------------------------------ SOURCE OF FUNDS* 4 AF - ------------------------------------------------------------------------------ CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED 5 PURSUANT TO ITEMS 2(d) or 2(e) [_] - ------------------------------------------------------------------------------ CITIZENSHIP OR PLACE OF ORGANIZATION 6 Delaware Limited Partnership - ------------------------------------------------------------------------------ SOLE VOTING POWER 7 NUMBER OF -0- SHARES ----------------------------------------------------------- SHARED VOTING POWER BENEFICIALLY 8 36,974,302 OWNED BY ----------------------------------------------------------- EACH SOLE DISPOSITIVE POWER 9 REPORTING -0- PERSON ----------------------------------------------------------- SHARED DISPOSITIVE POWER WITH 10 36,974,302 - ------------------------------------------------------------------------------ AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 36,974,302 - ------------------------------------------------------------------------------ CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 12 [X] - ------------------------------------------------------------------------------ PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 81.8% - ------------------------------------------------------------------------------ TYPE OF REPORTING PERSON* 14 PN - ------------------------------------------------------------------------------ *SEE INSTRUCTIONS BEFORE FILLING OUT! SCHEDULE 13D - ----------------------- CUSIP NO. 469 816 102 - ----------------------- - ------------------------------------------------------------------------------ NAME OF REPORTING PERSON 1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Cahill, Warnock Strategic Partners Fund, L.P. IRSN: 52-1970619 - ------------------------------------------------------------------------------ CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* 2 (a) [X] (b) [_] - ------------------------------------------------------------------------------ SEC USE ONLY 3 - ------------------------------------------------------------------------------ SOURCE OF FUNDS* 4 WC - ------------------------------------------------------------------------------ CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED 5 PURSUANT TO ITEMS 2(d) or 2(e) [_] - ------------------------------------------------------------------------------ CITIZENSHIP OR PLACE OF ORGANIZATION 6 Delaware Limited Partnership - ------------------------------------------------------------------------------ SOLE VOTING POWER 7 NUMBER OF -0- SHARES ----------------------------------------------------------- SHARED VOTING POWER BENEFICIALLY 8 36,974,302 OWNED BY ----------------------------------------------------------- EACH SOLE DISPOSITIVE POWER 9 REPORTING -0- PERSON ----------------------------------------------------------- SHARED DISPOSITIVE POWER WITH 10 36,974,302 - ------------------------------------------------------------------------------ AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 36,974,302 - ------------------------------------------------------------------------------ CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 12 [X] - ------------------------------------------------------------------------------ PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 81.8% - ------------------------------------------------------------------------------ TYPE OF REPORTING PERSON* 14 PN - ------------------------------------------------------------------------------ *SEE INSTRUCTIONS BEFORE FILLING OUT! SCHEDULE 13D - ----------------------- CUSIP NO. 469 816 102 - ----------------------- - ------------------------------------------------------------------------------ NAME OF REPORTING PERSON 1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Cahill, Warnock & Company, LLC IRSN: 52-1931617 - ------------------------------------------------------------------------------ CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* 2 (a) [_] (b) [X] - ------------------------------------------------------------------------------ SEC USE ONLY 3 - ------------------------------------------------------------------------------ SOURCE OF FUNDS* 4 AF - ------------------------------------------------------------------------------ CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED 5 PURSUANT TO ITEMS 2(d) or 2(e) [_] - ------------------------------------------------------------------------------ CITIZENSHIP OR PLACE OF ORGANIZATION 6 Delaware Limited Partnership - ------------------------------------------------------------------------------ SOLE VOTING POWER 7 NUMBER OF -0- SHARES ----------------------------------------------------------- SHARED VOTING POWER BENEFICIALLY 8 36,974,302 OWNED BY ----------------------------------------------------------- EACH SOLE DISPOSITIVE POWER 9 REPORTING -0- PERSON ----------------------------------------------------------- SHARED DISPOSITIVE POWER WITH 10 36,974,302 - ------------------------------------------------------------------------------ AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 36,974,302 - ------------------------------------------------------------------------------ CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 12 [X] - ------------------------------------------------------------------------------ PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 81.8% - ------------------------------------------------------------------------------ TYPE OF REPORTING PERSON* 14 OO - ------------------------------------------------------------------------------ *SEE INSTRUCTIONS BEFORE FILLING OUT! SCHEDULE 13D - ----------------------- CUSIP NO. 469 816 102 - ----------------------- - ------------------------------------------------------------------------------ NAME OF REPORTING PERSON 1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Strategic Associates, L.P. IRSN: 52-1991689 - ------------------------------------------------------------------------------ CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* 2 (a) [X] (b) [_] - ------------------------------------------------------------------------------ SEC USE ONLY 3 - ------------------------------------------------------------------------------ SOURCE OF FUNDS* 4 WC - ------------------------------------------------------------------------------ CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED 5 PURSUANT TO ITEMS 2(d) or 2(e) [_] - ------------------------------------------------------------------------------ CITIZENSHIP OR PLACE OF ORGANIZATION 6 Delaware Limited Partnership - ------------------------------------------------------------------------------ SOLE VOTING POWER 7 NUMBER OF -0- SHARES ----------------------------------------------------------- SHARED VOTING POWER BENEFICIALLY 8 36,974,302 OWNED BY ----------------------------------------------------------- EACH SOLE DISPOSITIVE POWER 9 REPORTING -0- PERSON ----------------------------------------------------------- SHARED DISPOSITIVE POWER WITH 10 36,974,302 - ------------------------------------------------------------------------------ AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11 36,974,302 - ------------------------------------------------------------------------------ CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 12 [X] - ------------------------------------------------------------------------------ PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 13 81.8% - ------------------------------------------------------------------------------ TYPE OF REPORTING PERSON* 14 PN - ------------------------------------------------------------------------------ *SEE INSTRUCTIONS BEFORE FILLING OUT! This Schedule 13D Amendment No. 1 ("Amendment No. 1") is an amendment to the Schedule 13D (filed on December 16, 1997) that was filed with the Securities and Exchange Commission ("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. 1 amends and supplements the information previously disclosed in the Schedule 13D filed on behalf of the Reporting Persons on December 16, 1997. Capitalized terms not defined in this Amendment No. 1 shall have their respective meanings as set forth in the Schedule 13D filed on behalf of the Reporting Persons on December 16, 1997. 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 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 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. 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 Schedule 13D filed on behalf of the Reporting Persons on December 16, 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") and a warrant to purchase 1,020,200 shares of the Issuer's Common Stock (the "Fund Warrant"). The Fund B Preferred and the Fund Warrant are currently convertible into 35,034,699 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") and a warrant to purchase 56,957 shares of the Issuer's Common Stock (the "Associates Warrant"). The Associates B Preferred and the Associates Warrant are currently convertible into 1,939,603 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 3), 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 23,221,663 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 81.8% of the Issuer's Common Stock, which percentage is calculated based upon (i) 8,216,576 shares of the Issuer's Common Stock reported as outstanding by the Issuer in the Issuer's Form S-3 Registration Statement as filed with the SEC on February 11, 1998, and (ii) 36,974,302 shares of the Issuer's Common Stock issuable upon conversion or exercise of the Fund B Preferred, the Fund Warrant, Associates B Preferred and the Associates Warrant. 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: 36,974,302* 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: 36,974,302* 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, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER: Pursuant to the terms of a Subordinated Debenture Purchase Agreement dated March 11, 1998 by and among the Issuer, Strategic Partners Fund, Strategic Associates, and T. Rowe Price (the "Purchase Agreement," attached hereto as Exhibit 4), Strategic Partners Fund acquired a warrant to purchase 1,020,200 - --------- shares of the Issuer's Common Stock as partial consideration for the purchase of a subordinated debenture of the Issuer in the principal amount of $1,218,000. Pursuant to the Purchase Agreement, Strategic Associates acquired a warrant to purchase 56,957 shares of the Issuer's Common Stock as partial consideration for the purchase of a subordinated debenture of the Issuer in the principal amount of $68,000. In addition, pursuant to the terms of the Purchase Agreement, Strategic Partners Fund, Strategic Associates and/or T. Rowe Price may, upon an event of default by the Issuer, (i) demand immediate payment, (ii) extend the term of their respective portions of the subordinated debenture and receive additional warrants to purchase the Issuer's Common Stock or Common Stock equivalents up to an aggregate amount of 3% (three percent) of the Common Stock or Common Stock equivalents on a fully diluted basis, (iii) convert the principal amount of their respective portions of the subordinated debenture into the Issuer's Series C Preferred Stock (non-voting, non-convertible), or (iv) enter into any other written agreement with the Issuer. Pursuant to the terms of a Registration Rights Agreement dated March 11, 1998 by and among the Issuer, Strategic Partners Fund, Strategic Associates and T. Rowe Price (attached hereto as Exhibit 5), Strategic Partners Fund, Strategic --------- Associates, and T. Rowe Price are granted, subject to certain restrictions and limitations, certain demand and "piggyback" registration rights with respect to the shares of Common Stock issuable upon the exercise of their respective warrants. 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.* Exhibit 3 - 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 Company's Current Report on ----------- Form 8-K filed December 15, 1997 and incorporated herein by reference). Exhibit 4 - Execution Copy of the Subordinated Debenture Purchase Agreement dated March 11, 1998 by and among the Issuer, Strategic Partners Fund, Strategic Associates and T. Rowe Price. Exhibit 5 - Registration Rights Agreement dated March 11, 1998 by and among the Issuer, Strategic Partners Fund, Strategic Associates and T. Rowe Price. Exhibit 6 - Form of Warrant to Acquire 1,020,200 shares of Common Stock or Common Stock Equivalent Shares of Jay Jacobs, Inc. dated March 11, 1998 issued by the Issuer to Strategic Partners Fund. Exhibit 7 - Form of Warrant to acquire 56,957 shares of Common Stock or Common Stock Equivalent Shares of Jay Jacobs, Inc. dated March 11, 1998 issued by the Issuer to Strategic Associates. * Previously filed as Exhibit 2 to the Schedule 13D filed on behalf of the Reporting Persons on December 16, 1997. 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: March 23, 1998. /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 AGREEMENT Pursuant to Rule 13d-1(f)(1) under the Securities Exchange Act of 1934, the undersigned hereby agree that only one statement containing the information required by Schedule 13D 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 this March 23, 1998. /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-4 3 SUBORDINATED DEBENTURE PURCH. AGREE. Exhibit 4 --------- EXECUTION COPY - -------------------------------------------------------------------------------- SUBORDINATED DEBENTURE PURCHASE AGREEMENT DATED AS OF MARCH 11, 1998 BY AND BETWEEN JAY JACOBS, INC. AND 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 Authorization, Purchase and Sale of Debentures; Issuance of Warrants....... - 1 - 1.1 Authorization of the Debentures..................................... - 1 - 1.2 Authorization of the Warrants....................................... - 1 - 1.3 Purchase and Sale of Debentures..................................... - 2 - (a) The Closing.................................................... - 2 - (b) Use of Proceeds................................................ - 2 - 1.4 Issuance of Warrants................................................ - 2 - SECTION 2 Certain Terms of the Debentures and Warrants............................... - 2 - 2.1 Certain Terms of the Debentures..................................... - 2 - (a) General........................................................ - 2 - (b) Voluntary Prepayment........................................... - 3 - (c) Mandatory Prepayment........................................... - 3 - (d) Rights of Holder upon an Event of Default...................... - 4 - (e) Manner of Conversion........................................... - 4 - 2.2 Certain Terms of the Warrants....................................... - 5 - 2.3 Replacement of Debenture or Warrant................................. - 5 - 2.4 Registration, etc................................................... - 5 - SECTION 3 Conditions to Purchaser's Obligation....................................... - 6 - 3.1 Certificate that Representations True at Closing.................... - 6 - 3.2 Covenants of the Company............................................ - 6 - 3.3 No Injunction....................................................... - 6 - 3.4 Approvals........................................................... - 6 - 3.5 Opinion of Seller's Counsel......................................... - 6 - 3.6 Delivery of Warrants and Debentures................................. - 6 - 3.7 Other Deliveries.................................................... - 7 - 3.8 Director Approval................................................... - 7 - 3.9 Lender's Consent.................................................... - 7 - 3.10 Preferred Stock Shareholder Approval................................ - 7 - SECTION 4 Conditions to Company's Obligations........................................ - 7 - 4.1 Certificate That Representations True at Closing.................... - 7 - 4.2 Covenants of Purchaser.............................................. - 8 - 4.3 No Injunction....................................................... - 8 - 4.4 Director Approval................................................... - 8 - 4.5 Lender's Consent.................................................... - 8 - SECTION 5 Representations and Warranties of the Company.............................. - 8 - 5.1 Authority; Validity................................................. - 8 - 5.2 No Conflicts or Defaults............................................ - 8 - 5.3 Consents and Approvals.............................................. - 9 -
5.4 Representations and Warranties Regarding the Company................ - 9 - 5.5 No Material Changes................................................. - 9 - 5.6 Accuracy of Information............................................. - 9 - 5.7 Capitalization...................................................... - 9 - 5.8 Payment of Indebtedness............................................. - 10 - SECTION 6 Representations and Warranties of Purchasers............................... - 11 - 6.1 Authority........................................................... - 11 - 6.2 No Conflicts........................................................ - 11 - 6.3 Investment Representations.......................................... - 11 - SECTION 7 Events of Default......................................................... - 11 - 7.1 Events of Default................................................... - 11 - 7.2 Annulment of Defaults............................................... - 13 - SECTION 8 Covenants of the Company................................................... - 14 - 8.1 General Covenants of the Company.................................... - 14 - (a) Punctual Payment............................................... - 14 - (b) Payment of Taxes and Other Obligations......................... - 14 - (c) Maintenance of Insurance....................................... - 14 - (d) Preservation of Corporate Existence............................ - 14 - (e) Compliance with Laws........................................... - 15 - (f) Access to Information.......................................... - 15 - (g) Keeping of Records and Books of Account........................ - 15 - (h) Maintenance of Properties, etc................................. - 15 - (i) Compliance with ERISA.......................................... - 15 - (j) Dealings with Affiliates....................................... - 15 - (k) SEC Reports.................................................... - 16 - (l) Debt........................................................... - 16 - (m) Proceeds from Public Offering.................................. - 16 - (n) Use of Proceeds................................................ - 17 - (o) Additional Warrants and/or Conversion Shares................... - 17 - (p) Designation of Series C Convertible Preferred Stock and Common Stock Equivalent Shares................................. - 17 - (q) Notice to Purchasers Upon an Event of Default.................. - 17 - SECTION 9 Subordination of Debentures................................................ - 17 - 9.1 Subordinate to Senior Indebtedness.................................. - 17 - 9.2 Ranking with respect to other Subordinated Indebtedness............. - 18 - SECTION 10 Miscellaneous.............................................................. - 18 - 10.1 Indemnification..................................................... - 18 - 10.2 No Waiver; Cumulative Remedies...................................... - 18 - 10.3 Amendments, Waiver and Consents..................................... - 19 - 10.4 Notices............................................................. - 19 -
- ii -
10.5 Costs and Expenses.................................................. - 20 - 10.6 Binding Effect; Assignment.......................................... - 20 - 10.7 Survival of Representations and Warranties.......................... - 21 - 10.8 Prior Agreements.................................................... - 21 - 10.9 Governing Law....................................................... - 21 - 10.10 Headings............................................................ - 21 - 10.11 Counterparts........................................................ - 21 - 10.12 Further Assurances.................................................. - 21 -
- iii - SUBORDINATED DEBENTURE PURCHASE AGREEMENT THIS SUBORDINATED DEBENTURE PURCHASE AGREEMENT (the "Debenture Agreement" ------------------- or this "Agreement") is made as of March 11, 1998, by and between JAY JACOBS, INC., a Washington corporation (the "Company") and 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"). - ---------- ---------- WHEREAS, the Company wishes to sell Purchasers the Company's Debentures (as defined below) in an aggregate principal amount of Two Million Dollars ($2,000,000); WHEREAS, to induce the Purchasers to acquire the Company's Debentures and as consideration hereunder, the Company has agreed to grant Purchasers warrants (the "Warrants"), as set forth on Exhibit A hereto, to acquire two percent (2%), -------- --------- on a fully diluted basis, of the Company's common stock, par value $.01 (the "Common Stock") or such other stock with rights and privileges set forth on - ------------- Exhibit B hereto (the "Common Stock Equivalent Shares" or the "Common Stock - --------- ------------------------------ ------------ Equivalents"); and - ----------- WHEREAS, each Purchaser wishes to purchase from the Company, severally and not jointly, the Company's Debentures in the principal amount set forth next to such Purchaser's name on Exhibit A hereto. --------- NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, the parties hereby agree as follows: SECTION 1 Authorization, Purchase and Sale of Debentures; Issuance of Warrants ----------------------------------- 1.1 Authorization of the Debentures. The Company has authorized the ------------------------------- issuance and sale to Purchasers of the Company's subordinated convertible debentures in the aggregate original principal amount of Two Million Dollars ($2,000,000). Such debentures shall be substantially in the form set forth as Exhibit C (each a "Debenture" and collectively the "Debentures"). The Debentures --------- ---------- shall be repayable at the times and under the terms and conditions specified therein. 1.2 Authorization of the Warrants. The Company has authorized the ----------------------------- issuance of Warrants as part of the consideration for the loan evidenced by the Debentures. The Warrants initially entitle Purchasers to purchase an aggregate of 1,675,205 shares of the Company's Common Stock, or Common Stock Equivalents, at an exercise price of $.01 per share of Common Stock or $1.00 per Common Stock Equivalent Share, subject to any adjustment as set forth in Section 3.3 of the Warrant. The Warrant shall be substantially in the form set forth as Exhibit D (each a "Warrant" and ------- collectively the "Warrants"). The Company has reserved a sufficient number of -------- shares of Common Stock or Common Stock Equivalents for issuance upon exercise of the Warrant. (The shares of Common Stock or Common Stock Equivalents issuable upon exercise of each Warrant are referred to as the "Warrant Shares.") -------------- 1.3 Purchase and Sale of Debentures. ------------------------------- (a) The Closing. The Company agrees to issue and sell to each ----------- Purchaser, and subject to and in reliance upon the representations, warranties, terms and conditions of this Agreement, each Purchaser agrees to purchase, severally and not jointly, a Debenture for the purchase price (the "Purchase Price") and in the principal amount of: (i) One Million Two Hundred Eighteen Thousand Dollars ($1,218,000) with respect to Cahill, Warnock Strategic Partners Fund, L.P.; (ii) Sixty-eight Thousand Dollars ($68,000) with respect to Strategic Associates, L.P.; and (iii) Seven Hundred Fourteen Thousand Dollars ($714,000) with respect to T. Rowe Price Recovery Fund II, L.P. Such purchase and sale shall take place at a closing (the "Closing") to be held by exchange of ------- documents on March 11, 1998, or on such other date as may be mutually agreed, at the offices of Wilmer, Cutler & Pickering at 100 Light Street, 13th Floor, Baltimore, Maryland 21202 (the date of such Closing is the "Closing Date"). At ------------ the Closing, the Company will issue and deliver to each Purchaser a duly executed Debenture and Warrant each in the amounts set forth on Exhibit A --------- hereto. At the Closing, each Purchaser will deliver to the Company severally and not jointly, by wire transfer of immediately available funds to an account designated by the Company by written notice to Purchasers, the Purchase Price. (b) Use of Proceeds. The Company agrees to use the full proceeds, to --------------- the extent required, from the sale of the Debentures to finance working capital requirements. 1.4 Issuance of Warrants. At the Closing, the Company agrees to issue to -------------------- each Purchaser, as part of the consideration for the loan evidenced by the Debenture, a Warrant substantially in the form as set forth in Exhibit C. --------- SECTION 2 Certain Terms of the Debentures and Warrants -------------------------------------------- 2.1 Certain Terms of the Debentures. ------------------------------- (a) General. All principal, interest and amounts outstanding under the Debentures shall be due and payable in full on December 31, 1998 (the "Maturity Date"). The Debentures shall bear interest at an annual rate of ------------- fourteen percent (14%). Accrued and unpaid interest shall be due and payable semiannually in arrears on June 30 and December 31 of each year until maturity. Payments of principal and interest on the Debentures shall be made in immediately available funds in lawful currency of the United States by wire transfer directly to an account designated by Purchaser, or its registered assignee(s) (the Purchaser and any registered assignee(s) of the Debenture is sometimes referred to as the "Holder") by written notice to the Company or by ------ certified check duly mailed or delivered to Purchaser at its address set forth in Section 10.4 of the Agreement. The Debenture (and any rights of the Purchaser hereunder or related thereto) is non-transferable except to a person or entity controlled by, or under common control with, Purchaser. No sinking fund or similar provision shall be required to fund payment of principal or interest under the Debenture. Payment of principal and interest on the Debenture is unsecured. (b) Voluntary Prepayment. Except as set forth herein, the Debenture -------------------- may not be prepaid or redeemed, in whole or in part, by the Company prior to maturity without the prior written consent of the Holder of the Debenture. (c) Mandatory Prepayment. Unless agreed to in writing by the Holder, -------------------- the Company shall be required to prepay: (i) In the event that the Company consummates a registered underwritten public offering covering the offer and sale of Common Stock or Common Stock Equivalents for the account of the Company in which net proceeds to the Company of the public offering equals or exceeds $5 million (a "Public Offering"), then the Company must apply, --------------- at the request of the Holder, the proceeds of such Public Offering (to the extent available after payment of all Senior Indebtedness (as defined in Section 9.5 herein) to prepay the unpaid principal amount and outstanding interest of this Debenture; (ii) Upon an Event of Default, subject to the provisions of Section 2.1(d); (iii) Upon a Change of Control (as defined below) of the Company, in which case the Holder shall have the right, at is sole discretion, to require the Company to repurchase the Debenture upon ten (10) business days' prior written notice at a price equal to 105% of the principal amount of the Debenture plus any unpaid interest thereon. The Company shall provide the Holder with written notice within two (2) business days of a Change of Control. For purposes of this Section only, "Change of Control" means any event or series of ----------------- events by which (A) any Person or group obtains a majority (by voting or otherwise) of the securities of the Company ordinarily having the right to vote in the election of directors; (B) during any two year period, individuals who at the beginning of any such two year period constituted the Board of Directors of the Company (together with any new directors whose election by such Board or whose nomination for election by the stockholders of the Company was approved by a vote of the majority of the directors then still in office who were either directors at the beginning of such period or whose election, recommendation, or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; (C) the merger, consolidation, reorganization, recapitalization, dissolution or liquidation of the Company if as a result the current stockholders no longer own more than 50% of the voting securities of the Company; (D) any sale, lease, exchange or other transfer of all, or substantially all, of the assets of the Company; or (E) the adoption of a plan leading to the liquidation or dissolution of the Company; or (iv) Upon the issuance of any subordinated indebtedness by the Company, other than the Debentures ("New Subordinated Debt"). -------------------- (d) Rights of Holder upon an Event of Default. Upon an Event of ----------------------------------------- Default (including without limitation failure to pay principal and interest), the Holder, at its discretion, shall have the right to: (i) demand payment in full of the principal amount of the Debenture and all unpaid interest thereon; (ii) extend the term of the Debenture, for an additional term of up to a maximum of one year, subject to receiving additional warrants (the "Additional Warrants") to purchase Common Stock or Common Stock ------------------- Equivalents equal to such Holder's Pro Rata Interest (as set forth on Exhibit A hereto) in an aggregate of three percent (3%) of the Common --------- Stock or Common Stock Equivalents on a fully diluted basis; in such case the terms of the Additional Warrants shall be substantially similar to those of the Warrants, including without limitation a term of five years and an exercise price of $.01 per share of Common Stock or $1.00 per Common Stock Equivalent Share; (iii) convert the principal amount of this Debenture, or any portion thereof, into the number of fully paid and non-assessable shares of Series C Convertible Preferred Stock, par value $.01 per share, with the rights and preferences set forth in Exhibit E, of the --------- Company determined by dividing the principal amount so converted by the purchase price of $100 per share (the "Conversion Shares"); or ----------------- (iv) enter into such other written agreement with the Company upon terms and conditions mutually agreeable to the parties thereto. (e) Manner of Conversion. The manner of conversion shall be set -------------------- forth in the Debenture. 2.2 Certain Terms of the Warrants. The Warrants initially shall be exercisable into an aggregate of 1,675,205 shares of Common Stock or Common Stock Equivalents, as set forth on Exhibit A hereto, subject to adjustment --------- pursuant to Section 3.3 of the Warrant. The Warrants shall be exercisable at any time between the Closing Date and the fifth anniversary of the Closing Date (the "Exercise Period"), regardless of whether any or all of the Debentures have been --------------- redeemed. The Warrant entitles the holder (the Purchaser and any registered assignee(s) of the Warrant is sometimes referred to as the "Holder") to purchase ------ the Warrant Shares at an exercise price ("Exercise Price") of $.01 per share. -------------- During the Exercise Period, at the option of the Holder, the Warrant may be exercised in whole or in part by payment in cash, bank cashier's check or certified check. 2.3 Replacement of Debenture or Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Debenture or Warrant and, if requested in the case of any such loss, theft or destruction, upon delivery of an indemnity bond or other agreement or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Debenture or Warrant, the Company will issue a new Debenture or Warrant, of like tenor and amount, in lieu of such lost, stolen, destroyed or mutilated Debenture or Warrant; provided, however, if -------- ------- any Debenture or Warrant of which Purchaser, its nominee, or any of its partners, officers or principals is the registered Holder is lost, stolen or destroyed, the affidavit of such principal or general partner or any principal or corporate officer of such Holder setting forth the circumstances with respect to such loss, theft or destruction, together with an agreement to indemnify the Company with respect thereto shall be delivered to the Company and shall be accepted as satisfactory evidence thereof, and no bond or other security shall be required as a condition to the execution and delivery by the Company of a new Debenture or Warrant in replacement of such lost, stolen or destroyed Debenture or Warrant. 2.4 Registration, etc. The Company shall maintain at its principal office ----------------- a register with respect to the Debentures and the Warrants and shall record therein the names and addresses of the respective registered Holders thereof, to which notices are to be sent and the addresses to which payments (in the case of the Debentures) are to be made as designated by the registered Holder if other than the address of such Holder, and the particulars of all permitted transfers, exchanges and replacements of the Debentures and Warrants. Provided that such transfer is permitted herein, the Company shall record on such register any and all transfers of the Debentures and Warrants by or for the registered Holder or such Holder's executors or administrators or their duly appointed attorney, in form reasonably satisfactory to the Company, in order to maintain an accurate record of the Holder(s) thereof. Each Debenture and Warrant issued hereunder, whether originally or upon transfer, exchange or replacement, shall be registered on the date of execution thereof by the Company. The registered Holder of a Debenture or Warrant issued hereunder shall be that individual, corporation, partnership, joint venture, trust or unincorporated organization or other entity (a "Person") in whose name the Debenture or Warrant has been so ------ registered by the Company. A registered Holder shall be deemed the owner of a Debenture or Warrant for all purposes of this Agreement and, subject to the provisions hereof, shall be entitled to all of the benefits thereof and rights thereunder free from all equities or rights of set off or counterclaim between the Company and the transferor of such registered Holder or any previous registered Holder of such Debenture or Warrant. SECTION 3 Conditions to Purchaser's Obligation ------------------------------------ The obligation of each Purchaser to purchase and pay for the Debenture at the Closing is subject to the following conditions, which may be waived by each Purchaser at its sole discretion: 3.1 Certificate that Representations True at Closing. Purchasers shall ------------------------------------------------ have received the executed certificate of an executive officer of the Company to the effect that each of the Company's representations and warranties herein, including without limitation those incorporated by reference herein, and in any document or instrument delivered to Purchasers hereunder shall be true and correct on the Closing Date with the same force and effect as though such representations and warranties had been made again on and as of such time. 3.2 Covenants of the Company. The Company shall have duly performed all ------------------------ of the covenants, acts and undertakings to be performed by it on or prior to the Closing Date, including but not limited to the closing deliveries required of it and shall deliver to Purchasers an executed certificate of an executive officer of the Company to such effect. 3.3 No Injunction. No action, proceeding, investigation, regulation or ------------- legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain, prohibit, or obtain substantial damages in respect of, or that is related to, or arises out of, this Agreement or the consummation of the transactions contemplated hereby, or which is related to or arises out of the business of the Company, if such action, proceeding, investigation, regulation or legislation, in the reasonable judgment of Purchaser, would make it inadvisable to consummate such transactions. 3.4 Approvals. The execution and the delivery of this Agreement and the --------- consummation of the transactions contemplated hereby shall have been approved by all regulatory authorities whose approvals are required by law and by all third parties whose approvals are required by an agreement binding upon the Company. 3.5 Opinion of Seller's Counsel. Purchasers shall have received from --------------------------- Stoel Rives, LLP, counsel to the Company, an opinion addressed to Purchasers, dated the Closing Date, in form and substance reasonably satisfactory to Purchasers and their counsel. 3.6 Delivery of Warrants and Debentures. Purchasers shall have received ----------------------------------- from the Company the Debentures, in substantially the form of Exhibit C hereto, --------- and Warrants, in substantially the form of Exhibit D hereto, all duly authorized --------- and executed by an officer of the Company in the amounts set forth on Exhibit A --------- hereto. 3.7 Other Deliveries. Purchasers shall have received from the Company (i) a letter executed by a duly authorized executive officer of the Company, which is attached hereto as Exhibit G, confirming that, except as set forth therein, --------- the Company has not undergone any material change since December 5, 1997 (the "Bring-down Letter"); (ii) a Registration Rights Agreement substantially in the ----------------- form of Exhibit H granting each Purchaser registration rights described therein --------- with respect to the Warrant Shares and any shares of Common Stock or Common Stock Equivalents obtained, directly or indirectly, upon conversion of a Debenture pursuant to Section 2.1(d); (iii) an incumbency certificate; (iv) a certificate executed by the Company's Secretary stating that the articles of incorporation and bylaws attached thereto are true, complete and accurate as of the Closing Date; and (v) a short form Certificate of Good Standing, or equivalent certificate, from the State of Washington. 3.8 Director Approval. The transactions described in this Agreement shall ----------------- have been approved by the three directors of the Company who have no interest in those transactions. 3.9 Lender's Consent. General Electric Capital Corporation ("GECC" or ---- the "Lender") shall have (i) consented in writing to the transactions hereunder, ------ and (ii) executed and delivered to the Company and the Purchasers an amendment, in form and content satisfactory to the Company and the Purchasers, to the Loan and Security Agreement, dated as of August 29, 1997 (as amended, the "GECC Loan --------- Agreement") between the Company and GECC. - --------- 3.10 Preferred Stock Shareholder. The Series A Preferred Stock --------------------------- shareholders and the Series B Convertible Preferred Stock shareholders shall have approved the designation of 20,000 shares of preferred stock as Series C Convertible Preferred Stock with the rights and preferences set forth in Exhibit E. - --------- SECTION 4 Conditions to Company's Obligations ----------------------------------- The obligation of the Company to issue and sell the Debentures at the Closing is subject to the following conditions, which may be waived by the Company at its sole discretion: 4.1 Certificate That Representations True at Closing. The Company shall ------------------------------------------------ have received an executed certificate of each Purchaser to the effect that Purchaser's representations and warranties herein and in any document or instrument delivered to the Company hereunder shall be true and correct on the Closing Date with the same force and effect as though such representations and warranties had been made again on and as of such time. 4.2 Covenants of Purchaser. Purchasers shall have duly performed all of ---------------------- the covenants, acts and undertakings to be performed by it on or prior to the Closing Date, including but not limited to the closing deliveries required of them and shall deliver to the Company an executed certificate of each Purchaser to such effect. 4.3 No Injunction. No action, proceeding, investigation, regulation or ------------- legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain, prohibit, or obtain substantial damages in respect of, or that is related to, or arises out of, this Agreement or the consummation of the transactions contemplated hereby, or which is related to or arises out of the business of Purchasers, if such action, proceeding, investigation, regulation or legislation, in the reasonable judgment of Company, would make it inadvisable to consummate such transactions. 4.4 Director Approval. The transactions described in this Agreement shall ----------------- have been approved by the three directors of the Company who have no interest in those transactions. 4.5 Lender's Consent. GECC shall have (i) consented in writing to the ---------------- transactions hereunder, and (ii) executed and delivered to the Company and the Purchasers an amendment, in form and content satisfactory to the Company and the Purchasers, to the GECC Loan Agreement. SECTION 5 Representations and Warranties of the Company --------------------------------------------- The Company hereby represents and warrants to and agrees with each Purchaser as follows: 5.1 Authority; Validity. The Company has the full legal right, power and ------------------- authority to enter into this Agreement and to issue the Debentures and Warrants in accordance with the terms of this Agreement. This Agreement has been duly and validly executed by the Company and this Agreement, the Debentures and Warrants constitute legal, valid and binding obligations of the Company, enforceable in accordance with their 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) and except to the extent that rights to indemnification and contribution under this Agreement may be limited by federal or state securities laws or public policy thereto. 5.2 No Conflicts or Defaults. Except as set forth in Schedule 5.2, the ------------------------ execution, delivery and performance of this Agreement, the Debentures and the Warrants and the consummation of the transactions by the Company contemplated hereby and thereby will not conflict with, violate or result in a breach or constitute a default under any mortgage, indenture, loan agreement (including without limitation the GECC Loan Agreement) or other agreement or instrument binding upon the Company (including without limitation the Company's articles of incorporation and/or bylaws), or any order, decree, statute, ordinance, regulation or other law applicable to the Company; and the Company is not in default under any such agreement. Except as disclosed in the Preferred Agreement, the Company is not currently in default under any such agreement, instrument or law. 5.3 Consents and Approvals. Except for (i) the consent of the Company's Common Stock shareholders with respect to authorizing the proposed one-for- fifteen reverse stock split and/or the issuance of additional shares of Common Stock and (ii) the filing of the articles of amendment with respect to the designation of the Series C Convertible Preferred Stock, with the rights and preferences set forth in Exhibit E, and Common Stock Equivalent Shares, no --------- consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority or any third party (including without limitation GECC or any other lender) is required in connection with the execution, delivery and performance of this Agreement, the Debentures and the Warrants by the Company and the consummation of the transactions by the Company hereunder. 5.4 Representations and Warranties Regarding the Company. In order to ---------------------------------------------------- induce the Purchasers to enter into this Agreement, the Company hereby represents and warrants that except as set forth on Schedule 5.4, each of the ------------ representations and Warranties regarding the Company set forth in Section 4 of the Preferred Stock Purchase Agreement, dated as of December 5, 1997, by and between the parties hereto and other parties named therein (the "Preferred --------- Agreement"), attached hereto as Exhibit F, is true, complete and accurate in all - --------- --------- respects as if such representations and warranties had been made on the date hereof. 5.5 No Material Changes. Except as set forth in the Bring-down Letter, ------------------- attached hereto as Exhibit F, there have been no material changes with respect --------- to the Company (including without limitation the Company's capital stock) since December 5, 1997. 5.6 Accuracy of Information. None of this Agreement, the Debentures, the ----------------------- Warrants nor any certificate, instrument or other agreement furnished or to be furnished by or on behalf of the Company (including without limitation the Preferred Agreement), contains or will contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. 5.7 Capitalization. -------------- (a) The authorized capital stock of the Company is 25,000,000 shares, consisting of 20,000,000 shares of common stock, par value $.01 per share ("Common Stock") of which 8,216,546 shares are issued and outstanding and no - -------------- shares are held in treasury, and 5,000,000 shares of preferred stock, consisting of 46,000 shares of Series A Stock and 25,000 shares of Series B Stock, all of which is issued and outstanding. Schedule 5.7 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 74,896,731 shares of Common Stock upon exercise or conversion of currently outstanding rights, options, warrants and other convertible securities. The Company has reserved and designated or, prior to the Closing, will reserve and designate 20,000 shares of Series C Convertible Preferred Stock and 1,675,520 shares of Common Stock for issuance upon conversion of the Warrants, and has reserved a sufficient number of shares of Common Stock Equivalents for issuance upon conversion of the Warrants, and will, concurrent with the termination of all currently outstanding options, reserve 17,342,761 shares of Common Stock for issuance upon exercise of options authorized under the Management Option Plan. Except as listed on Schedule 5.7, there are outstanding (i) no shares of capital stock or other - ------------ voting stock of the Company or any Subsidiary, (ii) 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, (iii) 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, (iv) 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 (v) 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, assuming approval of the fifteen-for- one reverse stock split, shall be duly authorized, validly issued, fully paid for and non-assessable and free of all preemptive rights. No outstanding options, warrants or other securities exercisable for or convertible into shares of capital stock of the Company require anti-dilution adjustments by reason of the consummation of the transactions contemplated hereby. (b) The issued and outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and non-assessable. Upon delivery to the Purchasers of certificates therefor against payment in accordance with the terms of this Agreement, the Debentures, the Warrants, and the Warrant Shares (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 6 hereof are true and correct, will be issued in compliance with all applicable federal and state securities laws. 5.8 Payment of Indebtedness. Except as set forth on Schedule 5.8 hereto, ----------------------- ------------ the Company has satisfied in full all obligations (including without limitation payments due with respect to leases, taxes and payables) owed by the Company where payment of such obligation is at least thirty (30) days past the date on which payment was initially due. SECTION 6 Representations and Warranties of Purchasers -------------------------------------------- Each Purchaser (severally and not jointly) hereby represents and warrants to and agrees with the Company as follows: 6.1 Authority. Purchaser is duly organized and validly existing and has --------- the full legal right, power and authority to enter into this Agreement. This Agreement has been duly and validly authorized, executed and delivered by Purchaser and constitutes a valid and binding obligation of Purchaser, enforceable in accordance with its terms. 6.2 No Conflicts. The execution, delivery and performance of this ------------ Agreement and the consummation of the transactions by Purchaser contemplated hereby will not conflict with, violate or result in a breach or constitute a default under, any mortgage, indenture, loan agreement or other agreement or instrument, or any order, decree, statute, ordinance, regulation or other law applicable to the Purchaser. 6.3 Investment Representations. -------------------------- (a) Purchaser is acquiring the Debenture and the Warrant for its own account for investment, and not with a view to the distribution thereof within the meaning of the Securities Act of 1933, as amended (the "Securities Act"); -------------- (b) Purchaser is an "Accredited Investor" as defined under the ------------------- Securities Act; and (c) Purchaser is aware and it acknowledges that neither the Debenture nor the Warrant is registered under the Securities Act or any state securities laws, and that the Debenture and the Warrant are each subject to certain restrictions on the subsequent transfer and/or sale thereof. SECTION 7 Events of Default ------------------ 7.1 Events of Default. For so long as any indebtedness under the ----------------- Debentures shall be outstanding, the following events shall constitute an event of default hereunder (each an "Event of Default" and collectively the "Events of ---------------- --------- Default"): - ------- (a) The Company shall fail to pay any installment of principal of or interest on the Debentures when due (including without limitation payment in full of all principal and unpaid interest on the Maturity Date) and any such failure shall not be cured by full performance thereof within five (5) business days after written notice thereof shall have been given to the Company by any registered Holder of the Debentures; or (b) The Company shall default in the performance of any covenant contained in Section 8 of this Agreement, any financing or loan agreement (including without limitation the GECC Loan Agreement), and any such failure shall not be cured by full performance thereof within five (5) business days after written notice thereof shall have been given to the Company by any registered Holder of the Debentures; or (c) Any representation or warranty made by the Company or any Subsidiary in this Agreement (including without limitation those incorporated herein from the Preferred Agreement) or by the Company or any Subsidiary (or any officers of the Company or any Subsidiary) in any certificate, instrument or written statement contemplated by or made or delivered pursuant to or in connection with this Agreement, any financing or loan agreement (including without limitation the GECC Loan Agreement), shall prove to have been incorrect when made in any material respect; or (d) The Company or any Subsidiary shall fail to perform or observe any other material term, covenant or agreement contained in the Debentures, or the Warrants on its part to be performed or observed and any such failure shall not be cured or by full performance thereof within five (5) days after written notice thereof shall have been given to the Company by any registered Holder of the Debenture or Warrant; or (e) The Company or any Subsidiary shall (i) admit in writing its inability to pay its debts generally as they become due; (ii) commence a voluntary case under Title 11 of the United States Code as from time to time in effect, or authorize, by appropriate proceedings of its Board of Directors or other governing body, the commencement of such a voluntary case; (iii) file an answer or other pleading omitting or failing to deny the material allegations of a petition filed against it commencing an involuntary case under such Title 11, or seek, consent to or acquiesce in the relief therein provided, or fail to controvert timely the material allegations of any such petition; (iv) suffer the entry of an order for relief in any involuntary case commenced under said Title 11; (v) seek relief as a debtor under any applicable law, other than said Title 11, of any jurisdiction relating to the liquidation or reorganization of debtors or to the modification or alteration of the rights of creditors, or consent to or acquiesce in such relief; (vi) suffer the entry of an order by a court of competent jurisdiction (A) finding it to be bankrupt or insolvent, (B) ordering or approving its liquidation, reorganization or any modification or alteration of the rights of its creditors, or (C) assuming custody of, or appointing a receiver or other custodian for, all or a substantial part of its property (not otherwise covered by subsection (f) below); or (vii) make an assignment for the benefit of, or enter into a composition with, its creditors, or appoint or consent to the appointment of a receiver or other custodian or all or a substantial part of its property; or (f) Any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against the property of the Company or any Subsidiary in an aggregate amount which exceeds $250,000 and such judgment, writ, or similar process shall not be released, vacated or fully bonded or stayed pending appeal within sixty (60) days after its issue or levy; or (g) The Company fails to prepay the unpaid principal amount of the Debenture and outstanding interest thereon, to the extent available after payment of all Senior Indebtedness, in the event of (i) a Public Offering, (ii) a Change of Control, or (iii) an issuance of New Subordinated Debt. Upon the occurrence of any Event of Default, and in any such event, Purchaser or any other Holder of any Debenture may, by notice to the Company, declare the entire unpaid principal amount of such Debenture, all interest accrued and unpaid thereon and all other amounts payable to such Holder under such Debenture or this Agreement to be forthwith due and payable, whereupon such Debenture, all such accrued interest and all such amounts shall become and be forthwith due and payable (unless there shall have occurred an Event of Default under Section 6.1(e) in which case all such accounts shall automatically become due and payable without such declaration), without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Company with respect to itself and its Subsidiaries. Upon the occurrence of any Event of Default, the Holder shall have the rights set forth in Section 2.1(d). 7.2 Annulment of Defaults. Section 7.1 is subject to the condition that, --------------------- if at any time after the principal of any Debenture shall have become due and payable, and before any judgment or decree for the payment of the moneys so due shall have been entered, all arrears of interest upon such Debenture and all other sums payable to the Holder under such Debenture and under this Agreement (except the principal amount which by such declaration shall have become payable) shall have been duly paid, and every other default and Event of Default shall have been made good or cured, then and in every such case the Holder of such Debenture, by written instrument delivered to the Company, may rescind and annul such declaration and its consequences; but no such rescission or annulment shall extend to or affect any other or subsequent default or Event of Default or impair any right of the holders of any other Debentures consequent thereon. SECTION 8 Covenants of the Company ------------------------ 8.1 General Covenants of the Company. Without limiting any other -------------------------------- covenants and provisions hereof, the Company covenants and agrees that, as long as any Debenture or Warrant is outstanding, it will perform and observe the following covenants and provisions and will cause each Subsidiary to perform and observe such of the following covenants and provisions as are applicable to such Subsidiary: (a) Punctual Payment. The Company shall pay the principal of and interest ---------------- on the Debentures at the times and place and in the manner provided in the Debentures and herein. (b) Payment of Taxes and Other Obligations. The Company shall pay and -------------------------------------- discharge, and cause each Subsidiary to pay and discharge, all material taxes, assessments and governmental charges or levies imposed on it or upon its income or profits or business, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, might likely become a lien or charge upon any properties of the Company or any Subsidiary, provided that neither the Company nor the Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim which is being contested and/or negotiated in good faith and by appropriate proceedings if the Company or Subsidiary concerned shall have set aside on its books adequate reserves with respect thereto. The Company shall pay, when due, or in conformity with customary trade terms, all material lease obligations, all material trade debt, and all other material indebtedness incident to the operations of the Company, except such as are being contested in good faith and by appropriate proceedings if the Company shall have set aside on its books adequate reserves with respect thereto. (c) Maintenance of Insurance. The Company shall maintain, and cause each ------------------------ Subsidiary to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Company or such Subsidiary operates. (d) Preservation of Corporate Existence. Except with the prior written ----------------------------------- consent of the Purchasers, the Company shall preserve and maintain, and cause each Subsidiary to preserve and maintain, its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each Subsidiary to qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is necessary or desirable in view of its business and operations or the ownership of its properties; the Company shall preserve and maintain, and cause each Subsidiary to preserve and maintain, all licenses and other rights to use patents, processes, licenses, trademarks, trade names, inventions, intellectual property rights or copyrights owned or used by and necessary to the conduct of its business; provided, however, that the Company shall not be required to -------- ------- preserve any such Subsidiary, license or right if the Board of Directors shall determine that the preservation is no longer desirable in the conduct of the Company's business and that the loss thereof is not, and will not be, adverse in any material respect to the Holders of the Debentures and/or Warrants. (e) Compliance with Laws. The Company shall comply, and cause each -------------------- Subsidiary to comply, with all applicable laws, rules, regulations and orders of any governmental authority, noncompliance with which could materially adversely affect its business or condition, financial or otherwise. (f) Access to Information. In the Event of a Default (as defined in --------------------- Section 7.1 above), the Company shall permit Purchaser or any representatives thereof, at any reasonable time and from time to time, to receive, to examine and make copies of and extract from the records and books of account of (including without limitation unaudited balance sheets of the Company as at the end of each month and unaudited statements of income and of cash flows of the Company for each month and for the current fiscal year to the end of each month, setting forth in comparative form the Company's budget for the corresponding periods for the current fiscal year, all in reasonable detail and duly certified by the chief financial officer of the Company as having been prepared in accordance with generally accepted accounting principles consistently applied), and visit and inspect the properties of, the Company and any Subsidiary, and to discuss the affairs, finances and accounts of the Company and any Subsidiary with any of their officers or directors and independent accountants. (g) Keeping of Records and Books of Account. The Company shall keep, and --------------------------------------- cause each Subsidiary to keep, adequate records and books of account, in which complete entries shall be made in accordance with generally accepted accounting principles consistently applied, reflecting all financial transactions of the Company and such Subsidiary, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, inventory realization, amortization, taxes, bad debts and other purposes in connection with its business shall be made. (h) Maintenance of Properties, etc. The Company shall maintain and ------------------------------ preserve, and cause each Subsidiary to maintain and preserve, all of its properties, necessary or useful in the proper conduct of its business, in good repair, working order and condition, ordinary wear and tear excepted, except as otherwise determined by the Board of Directors. (i) Compliance with ERISA. The Company shall use its best efforts to --------------------- comply, and cause each Subsidiary to comply, with the provisions of ERISA and the Code, and the rules and regulations thereunder, which are applicable to any Plan. Neither the Company nor any Subsidiary shall permit any event or condition it knows to exist which would likely permit any such plan to be terminated under circumstances which would cause the lien provided for in Section 4068 of ERISA to attach to the assets of the Company or any Subsidiary. (j) Dealings with Affiliates. Except for employee or director ------------------------ compensation, stock bonus, stock option or similar plans or arrangements approved by the Board of Directors, the Company will not enter or permit any Subsidiary to enter into any transaction with any holder of five percent (5%) or more of any class of capital stock of the Company, or any member of their families or any corporation or other entity in which any one or more of such stockholders or members of their immediate families directly or indirectly holds five percent (5%) or more of any class of capital stock except in the ordinary course of business and on terms not less favorable to the Company or the Subsidiary than it would obtain in a transaction between unrelated parties. (k) SEC Reports. The Company shall file all reports and other information ----------- and documents which it is required to file with the Securities and Exchange Commission ("SEC") pursuant to Section 13 or 15(d) of the Securities and --- Exchange Act of 1934, as amended (the "Exchange Act"). The Company will cause ------------ any quarterly and annual reports, proxy statements and any other documents which it mails to its stockholders to be mailed to the registered Holder of the Debenture. If the Company is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will prepare, for the first three quarters of each fiscal year, quarterly financial statements substantially equivalent to the financial statements required to be included in a report on Form 10-Q under the Exchange Act. The Company will also prepare, on an annual basis, complete audited consolidated financial statements, including, but not limited to, a balance sheet, a statement of income and retained earnings, a statement of changes in financial position and all appropriate notes. All such financial statements will be prepared in accordance with generally accepted accounting principles consistently applied, except for changes with which the Company's independent accountants concur, and except that quarterly statements may be subject to year-end adjustments. The Company will cause a copy of such financial statements to be mailed to the registered Holders of the Debentures and Warrants as soon as available within sixty (60) days after the close of each of the first three quarters of each fiscal year and within one hundred twenty (120) days after the close of each fiscal year. The Holders of the Debentures and Warrants and prospective purchasers designated by such Holder will have the right to obtain from the Company upon request by such Holder or prospective purchasers, during any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act, the information required by Rule 144A(d)(4)(i) of the Securities Act. (l) Debt. The Company shall not and shall not permit any Subsidiary to ---- create, incur, assume, guaranty or suffer to exist any secured debt in excess of an aggregate of $14 million outstanding principal amount, excluding purchase money indebtedness for office equipment or fixtures; or issue any New Subordinated Indebtedness without first repurchasing the Debentures pursuant to Section 2.1(c)(iv) hereof. (m) Proceeds from Public Offering. The Company shall apply, at the ----------------------------- request of a Purchaser, the proceeds of a Public Offering to prepay the unpaid principal amount and outstanding interest on the Debentures, to the extent that proceeds are available after payment in full of any Senior Indebtedness (as defined in Section 9.1). (n) Use of Proceeds. The Company shall apply the proceeds received as a --------------- result of the transactions contemplated hereunder as set forth in Section 1.3(b), or as otherwise agreed to by the parties in writing. (o) Additional Warrants and/or Conversion Shares. The Company shall fully -------------------------------------------- and unconditionally comply with a Holder's election to receive Additional Warrants or Conversion Shares pursuant to Section 2.1(d) within ten (10) days from the date on which the Company receives notice of such Holder's determination or such longer period as may reasonably be required; provided -------- however that the Company shall diligently take all actions necessary to comply - ------- with such request as promptly as possible after the ten day period. The Conversion Shares, the Additional Warrants, and the shares of Common Stock or Common Stock Equivalent Shares issuable upon conversion of the Conversion Shares and/or Additional Warrants shall be duly authorized, validly issued, fully paid and non-assessable; will be free and clear of all Liens; and assuming that the representations of the Purchasers in Section 6 hereof are true and correct, will be issued in compliance with all applicable federal and state securities laws. (p) Designation of Series C Convertible Preferred Stock and Common Stock -------------------------------------------------------------------- Equivalent Shares. By no later than May 1, 1998, the board of directors of the - ----------------- Company shall designate and reserve: (i) 20,000 shares of the Company's preferred stock as Series C Convertible Preferred Stock for issuance as Conversion Shares; and (ii) a sufficient number of shares of the Company's preferred stock as Common Stock Equivalent Stock for issuance upon conversion of the Warrants, Additional Warrants and/or Conversion Shares if the Company does not have a sufficient number of shares of its Common Stock to issue upon such conversions. (q) Notice to Purchasers Upon an Event of Default. Upon the occurrence --------------------------------------------- of an Event of Default (including without limitation an event of default under any loan agreement with senior debt creditors) and prior to the expiration of any applicable cure period, the Company shall provide prompt notice of such Event of Default to each Purchaser pursuant to Section 10.4 hereof. SECTION 9 Subordination of Debentures --------------------------- 9.1 Subordinate to Senior Indebtedness. The Company agrees, and each ---------------------------------- Purchaser by its acceptance hereof likewise agrees, that the payment of the principal of and interest on these Debentures is hereby expressly made subject to the terms and conditions contained in that certain Subordination Agreement, which is attached hereto as Exhibit I, dated as of March 11, 1998, by and --------- between each of the Purchasers and GECC (the "Subordination Agreement"). ----------------------- 9.2 Ranking with respect to other Subordinated Indebtedness. The ------------------------------------------------------- Debentures shall rank pari passu with all other Subordinated Indebtedness of the Company. "Subordinated Indebtedness" means any indebtedness of the Company, ------------------------- whether outstanding on the date hereof or incurred, assumed or guaranteed by the Company, which is subordinated in right of payment or in rights upon liquidation to Senior Indebtedness. 9.3 Miscellaneous. The Company agrees that no provision of the ------------- Subordination Agreement, by its own terms, shall impair as between each Purchaser and the Company, the Company's obligations to pay each Purchaser the principal, interest, and other charges due under this Agreement as and when the same shall become due in accordance with the terms of this Agreement, the Debentures, and the Warrants; and no provision of the Subordination Agreement, by its own terms, shall prevent any Purchaser from exercising all rights and remedies otherwise permitted by applicable law upon default. SECTION 10 Miscellaneous ------------- 10.1 Indemnification. The Company hereby agrees to indemnify, exonerate --------------- and hold each Purchaser and each of its partners, and their stockholders, officers, directors, employees and agents free and harmless from and against any and all actions, causes of action, suits, litigation, losses, liabilities and damages, investigations or proceedings instituted by any governmental agency or any other Person, and expenses in connection therewith, including without limitation reasonable attorneys' fees and disbursements, incurred by the indemnitee or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part directly or indirectly with proceeds from the sale by the Company of any securities hereunder, or (b) the execution, delivery, performance or enforcement of this Agreement or any instrument contemplated hereby by any of the indemnitees, except in each such case to the extent any such indemnified liabilities arise on account of such indemnitee's gross negligence, willful misconduct or bad faith. Purchasers hereby agree to indemnify, exonerate and hold the Company and its stockholders, officers, directors, employees and agents free and harmless from and against any and all actions, causes of action, suits, litigation, losses, liabilities and damages, investigations or proceedings instituted by any governmental agency or any other Person, and expenses in connection therewith, including without limitation reasonable attorneys' fees and disbursements, incurred by the indemnitee or any of them as a result of, or arising out of, or relating to the execution, delivery, performance or enforcement of this Agreement or any instrument contemplated hereby by any of the indemnitees, except in each such case to the extent any such indemnified liabilities arise on account of such indemnitee's gross negligence, willful misconduct or bad faith. 10.2 No Waiver; Cumulative Remedies. No failure or delay on the part of ------------------------------ any party in exercising any right, power or remedy hereunder or thereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder or thereunder. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 10.3 Amendments, Waiver and Consents. No amendment, modification or ------------------------------- addition to this Agreement, and no waiver of or consent to noncompliance with any covenant or other provision of this Agreement, the Debentures or the Warrants shall be effective unless in writing and duly executed by the party against whom enforcement of such amendment, modification, addition, waiver or consent is sought. Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 10.4 Notices. All notices, demands, requests, or other communications ------- which may be or are required to be given, served, or sent by any party to any other party pursuant to this Agreement shall be in writing and shall be mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by hand delivery (including delivery by courier), or facsimile transmission, addressed as follows: (a) 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: Lee J. Brunz, Esq. (b) if to the Purchasers: 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 Each party may designate by notice in writing a new address to which any notice, demand, request or communication may thereafter be so given, served or sent. Each notice, demand, request, or communication which shall be mailed, delivered or transmitted in the manner described above shall be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, the affidavit of messenger being deemed conclusive (but not exclusive) evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. 10.5 Costs and Expenses. The Company agrees to pay all of the Purchasers' ------------------ reasonable legal fees and expenses (incurred by Wilmer, Cutler & Pickering and Testa, Hurwitz & Thibeault, LLP) in connection with the preparation, execution and delivery of this Agreement, the Debenture, the Warrant and other instruments and documents to be delivered hereunder. 10.6 Binding Effect; Assignment. This Agreement shall be binding upon and -------------------------- inure to the benefit of the Company and each Purchaser and their respective successors and assigns and in addition shall inure to the benefit of and be enforceable by each Person who shall become from time to time a Holder of any Debenture and/or Warrant; provided, however, that the Company shall not have the -------- ------- right to assign its rights hereunder or any interest herein without the prior written consent of each Purchaser. The parties hereto agree that the Warrants are not attached to the Debentures and the Warrants may be assigned separately from the Debentures. 10.7 Survival of Representations and Warranties. All representations and ------------------------------------------ warranties made in this Agreement, the Debentures or any other instrument or document delivered in connection herewith or therewith, shall survive the execution and delivery hereof or thereof until the payment in full of the outstanding principal and accrued interest of the Debentures, except for those representations and warranties of the Company made in the Preferred Agreement and incorporated herein, which shall survive as provided in the Preferred Agreement. 10.8 Prior Agreements. This Agreement, the Debentures, the Warrants, and ---------------- the instruments in documents referred to herein constitutes the entire agreement between the parties and supersedes any prior understandings or agreements concerning the subject matter hereof. 10.9 Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the laws of the State of Delaware (excluding the choice of laws provisions thereof). 10.10 Headings. Article, Section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 10.11 Counterparts. This Agreement may be executed in any number of ------------ counterparts, all of which taken together shall constitute one and the same instrument, and each of the parties hereto may execute this Agreement by signing any such counterpart. 10.12 Further Assurances. From and after the date of this Agreement, upon ------------------ the request of Purchaser, the Company and each Subsidiary shall execute and deliver such instruments, documents and other writings as may be necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement, the Debentures, the Warrants, the Warrant Shares, the Conversion Shares, the Additional Warrants and the other agreements and instruments contemplated hereby. [Balance of Page Left Blank Intentionally -- Signature Page Follows] DEBENTURE PURCHASE AGREEMENT SIGNATURE PAGE IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed on its behalf as of the date first above written. THE COMPANY: JAY JACOBS, INC. By: ______________________________ Name: Rex L. Steffey Title: President and Chief Executive Officer THE PURCHASERS: CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P. By: CAHILL WARNOCK STRATEGIC PARTNERS, L.P., its General Partner 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 EX-5 4 REGISTRATION RIGHTS AGREEMENT Exhibit 5 --------- EXECUTION COPY REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement"), dated as of March 11, --------- 1998, is by and among Jay Jacobs, Inc. (the "Company") and the parties listed under the heading of Investors on signature page attached hereto (the "Investors"). --------- WHEREAS, the Investors and the Company are, on the date hereof, entering into a Debenture Purchase Agreement (the "Purchase Agreement") pursuant to which ------------------ the Company is issuing to the Investors (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") or shares of preferred stock designated as ------------ having rights and preferences substantially similar to the Common Stock (the "Common Stock Equivalent Shares"); - ------------------------------- WHEREAS, upon the occurrence of certain events set forth in the Debentures and in the Purchase Agreement, each Debenture is convertible into (i) additional warrants (the "Additional Warrants") to acquire Common Stock or Common Stock ------------------- Equivalents or (ii) shares of Series C Convertible Preferred Stock (the "Series ------ C Preferred Shares"), which would be convertible into shares of Common Stock or - ------------------ Common Stock equivalents; and WHEREAS, the Company has agreed to grant to the Investors, as an inducement to enter into the Purchase Agreement, certain rights with respect to the Debentures, the Warrants, the Additional Warrants, the Series C Preferred Shares, and the Conversion Shares; NOW, THEREFORE, in consideration of the premises set forth herein, the parties hereto hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms ------------------- shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission, or any ---------- other federal agency at the time administering the Securities Act. "Common Stock" shall mean the Common Stock, $.01 par value, of the ------------ Company, as constituted as of the date of this Agreement. "Common Stock Equivalents or Common Stock Equivalent Shares" shall ---------------------------------------------------------- mean shares of preferred stock of the Company designated as Series D Preferred Stock, which shall have all of the rights and preferences of Common Stock and shall be convertible into Common Stock on a 1 to 100 basis. "Conversion Shares" shall mean shares of Common Stock or Common Stock ----------------- Equivalents issued or issuable upon (i) conversion of the Series C Preferred Shares, (ii) exercise of the Warrants or Additional Warrants, and (iii) any shares of capital stock received in respect of the shares described in clause (i) and/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. 2 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 or other equity holders of such stock in respect of such interest. Each certificate for shares of Restricted Stock transferred as above provided shall bear the legend set forth in Section 2, except that such certificate shall not bear such legend if (i) such transfer is in accordance with the provisions of Rule 144 (or any other rule permitting public sale without registration under the Securities Act) or (ii) the opinion of counsel referred to above is to the further effect that the transferee and any subsequent transferee (other than an affiliate of the Company) would be entitled to transfer such securities in a public sale without registration under the Securities Act. The restrictions provided for in this Section 3 shall not apply to securities which are not required to bear the legend prescribed by Section 2 in accordance with the provisions of that Section. 4. Required Registration. --------------------- (a) At any time prior to December 31, 2007, the Holders of Registrable Shares constituting at least 51% of the total shares of Registrable Shares then outstanding may request the Company to register under the Securities Act all or any portion of the Registrable Shares held by such requesting Holder or Holders for sale in the manner specified in such notice, provided that the Registrable -------- Shares for which registration has been requested shall constitute at least 25% of the total Registrable Shares originally issued if such Holder or Holders shall request the registration of less than all Registrable Shares then held by such Holder or Holders. Notwithstanding anything to the contrary contained herein, no request may be made under this Section 4 within 180 days after the effective date of a registration statement filed by the Company covering a firm commitment underwritten public offering in which the Holders of Registrable Shares shall have been entitled to join pursuant to Section 5 or 6 and in which there shall have been effectively registered all Registrable Shares to which registration shall have been requested. (b) Following receipt of any notice under this Section 4, the Company shall immediately notify all Holders of Registrable Shares from whom notice has not been received and shall use its reasonable best efforts to register under the Securities Act, for public sale in accordance with the method of disposition specified in such notice from requesting Holders, the number of Registrable Shares specified in such notice (and in all notices received by the Company from other Holders within 30 days after the giving of such notice by the Company). If 3 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 Equivalent Shares, 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 Equivalent Shares who have contractual rights to demand registrations pursuant to the terms of any other registration rights agreement to which the Company is a party. Upon the written request of such demand rights holders constituting the requisite percentages of shares to initiate a demand under such other registration rights agreement specifying the number of shares to be registered, which request shall be deemed to be an exercise of a demand right under the terms of the registration rights agreement to which they are parties, such demand rights holders shall be deemed to be Demand Holders and the shares requested to be registered by such Demand Holders shall be deemed to be Registrable Shares, in each case, for purposes of Section 4(d), provided that -------- such written request is received by the Company within 30 days of the giving of notice by the Company. (d) If, in the opinion of the managing underwriter, the inclusion in a registration statement to be filed under this Section of any shares other than the Registrable Shares requested to be registered under this Section by Demand Holders would adversely affect the marketing of such shares, then, in such event (a) such other shares may be included 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 4 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 Equivalent Shares, the number of shares of Restricted Stock to be included in such an underwriting may be reduced if and to the extent that the managing underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company or the requesting party therein or that such reduction is otherwise advisable; provided, however, that after any shares -------- ------- to be sold by holders that do not have contractual rights to have shares included in such registration have been excluded, shares to be sold by the Holders shall be excluded in such manner that the shares to be excluded shall first be the shares of selling Holders and other requesting holders who, in each case, are not Affiliate Holders and whose shares are then saleable under Rule 144(e) or Rule 144(k) under the Securities Act and then pro rata among them, and if further reduction is necessary, shall next be pro rata among the remaining shares of the selling Holders and other requesting holders who are Affiliate Holders or whose shares are not then saleable under Rule 144(e) or Rule 144(k), unless such registration is pursuant to the exercise of a demand right of another securityholder, in which event such securityholder shall be entitled to include all shares it desires to have so included before any shares of Restricted Stock or shares of any other holder 5 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, however, that the requirements -------- ------- ------- contained in the first sentence of Section 4(a) shall not apply to any registration on Form S-3 which may be requested and obtained under this Section 6. 7. Registration Procedures. ----------------------- If and whenever the Company is required by the provisions of Section 4, 5 or 6 to use its reasonable best efforts to effect the registration of any shares of Restricted Stock under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission a registration statement (which, in the case of an underwritten public offering pursuant to Section 4, shall be on Form S-1 or other form of general applicability satisfactory to the managing underwriter selected as therein provided) with respect to such securities and use its reasonable best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided); (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified in paragraph (a) above and comply with the provisions of the Securities Act with respect to the disposition of all Restricted Stock covered by such registration statement in accordance with the sellers' intended method of disposition set forth in such registration statement for such period; 6 (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 7 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 8 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 Section 4, 5 or 6. All Selling Expenses in connection with each registration statement under Section 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 Section 4, 9 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 Section 4, 5 or 6, each seller of such Restricted Stock thereunder, severally and not jointly, will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the 10 Company or such officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Restricted Stock was registered under the Securities Act pursuant to Section 4, 5 or 6, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances in which they were made, and will reimburse the Company and each such officer, director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, -------- ------- that such seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in reliance 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 11 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 judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any Holder of Restricted Stock exercising rights under this Agreement, or any controlling person of any such Holder, makes a claim for Indemnification pursuant to this Section 9 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 9 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling Holder or any such controlling person in circumstances for which indemnification is provided under this Section 9; then, and in each such case, the Company and such Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Holder is responsible for the portion represented by the percentage that the public offering price of its Restricted Stock offered by the registration statement bears to the public offering price of all securities offered by such registration statement, and the Company is responsible for the remaining portion; provided, however, that, in any such case, (A) no such Holder will be -------- ------- required to contribute any amount in excess of the public offering price of all such Restricted Stock offered by it pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 10. Changes in Stock. If, and as often as, there is any change in the ---------------- Common Stock, Common Stock Equivalents, Series A Preferred Stock, Series B Convertible Preferred Stock, or Series C Preferred Shares by way of a stock split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof so that the rights and privileges granted hereby shall continue with respect to the Common Stock, Common Stock Equivalents, Series A Preferred Stock, Series B Convertible Preferred Stock or Series C Preferred 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: 12 (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; and (c) furnish to each Holder of Restricted Stock forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of such Rule 144 and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing such Holder to sell any Restricted Stock without registration. The Company shall not be required to effect a registration pursuant to Section 4, 5 or 6 hereof for any Holder desiring to participate in such registration who (a) may then dispose of all of its shares of Restricted Stock pursuant to Rule 144 within the three-month period following such proposed registration; and (b) holds less than 1% of the outstanding capital stock of the Company (on a common stock-equivalent basis) at the time of such registration. 12. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to you as follows: (a) The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Charter or By-laws of the Company or any provision of any indenture, agreement or other instrument to which it or any or its properties or assets is bound, conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company. (b) This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms (subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting the rights of creditors generally), except to the extent the indemnification provisions herein may be deemed not enforceable. (c) The Company has not granted any registration rights, and no such registration rights exist, that conflict with the registrations rights set forth herein or contemplated hereby. All registration rights agreements relating to the capital stock of the Company permit, or have been amended to permit, the transactions and rights set forth herein and contemplated hereby. 13 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 14 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: Lee J. Brunz, Esq. If to the Purchasers: 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 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 15 following the day such notice is delivered to the courier service, or (iii) if sent by registered or certified mail, on the 5th business day following the day such mailing is made. (c) This Agreement shall be governed and construed in accordance with the law of the Sate of 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 16 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. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 17 IN WITNESS WHEREOF, the undersigned have executed this Registration Rights Agreement as a sealed instrument as of the day and year first written above. THE COMPANY: JAY JACOBS, INC. By: --------------------------------- Name: Rex L. Steffey Title: President and Chief Executive Officer THE INVESTORS: CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P. By: CAHILL WARNOCK STRATEGIC PARTNERS, L.P., its General Partner 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 EX-6 5 WARRANT TO ACQUIRE Exhibit 6 --------- THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER APPLICABLE STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO JAY JACOBS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO THE PROVISIONS OF RULE 144 OF THE ACT. WARRANT TO ACQUIRE 1,020,200 SHARES OF COMMON STOCK OR 10,202 COMMON STOCK EQUIVALENT SHARES OF JAY JACOBS, INC. March 11, 1998 THIS CERTIFIES THAT CAHILL, WARNOCK STRATEGIC PARTNERS FUND, L.P., a limited partnership organized under the laws of the State of Delaware (the "Purchaser") or its registered assigns (the Purchaser or its registered - ---------- assign(s), as applicable, is referred to herein as the "Holder") is entitled to ------ purchase, on the terms and subject to the conditions hereinafter set forth, from JAY JACOBS, INC., a Washington corporation (the "Company"), at any time after ------- the date hereof and on or before 5:00 p.m., Seattle time, on the date that is five (5) years after the date hereof (the "Exercise Period"), that number of --------------- shares (the "Warrant Shares") of common stock, par value $.01 per share, of the -------------- Company (the "Common Stock") or the number of shares of preferred stock ------------ designated as common stock equivalent shares (the "Common Stock Equivalent ----------------------- Shares" or the "Common Stock Equivalents"), as set forth in Section 2.1 hereof. - ------ ------------------------ The Company issued this Warrant and a Debenture to the Purchaser pursuant to the Debenture Purchase Agreement, dated as of March 11, 1998, by and between the Company and the Purchaser and other parties identified therein (the "Debenture --------- Purchase Agreement"). This Warrant and the Debenture are not attached and each - ------------------ may be assigned or transferred separately. Capitalized words not defined herein shall have the meaning set forth in the Debenture Purchase Agreement. SECTION 1 Exercise Price -------------- The exercise price at which this Warrant may be exercised shall be $.01 per share of Common Stock or $1.00 per Common Stock Equivalent Share (the "Exercise -------- Price"), subject to any adjustment pursuant to Section 3.3. - ----- -1- SECTION 2 Exercise of Warrant, Etc. ------------------------- 2.1 Number of Shares for Which Warrant is Exercisable. This Warrant ------------------------------------------------- initially shall be exercisable for 1,020,200 shares of Common Stock or 10,202 Common Stock Equivalent Shares, subject to any adjustment pursuant to Section 3.3. 2.2 Procedure for Exercise of Warrant. The Warrant may be exercised in --------------------------------- whole or in part during the Exercise Period 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 in full, in cash, bank cashier's check or certified check payable to the order of the Company, of the Exercise Price payable in respect of the Warrant Shares being exercised. 2.3 Conversion. This Warrant is exercisable at any time during the ---------- Exercise Period at the option of the Holder. 2.4 Transfer Restriction Legend. Each certificate for Warrant Shares --------------------------- initially issued upon exercise of this Warrant, unless at the time of exercise such Warrant Shares are registered under the Act, shall bear the following legend (and any additional legend required by any securities exchange upon which such Warrant Shares may, at the time of such exercise, be listed) on the face thereof: "These securities have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may be offered, sold or transferred only if registered pursuant to the provisions of such laws, or if in the opinion of counsel satisfactory to the Company, an exemption from such registration is available." 2.5 Acknowledgment of Continuing Obligation. The Company will, if the --------------------------------------- Holder exercises this Warrant in part, upon request of the Holder, acknowledge in writing the Company's continuing obligation to the Holder in respect of any rights to which the Holder shall continue to be entitled after such exercise in accordance with this Warrant; provided, that the failure of the Holder to make -------- any such request shall not affect the continuing obligation of the Company to the Holder in respect of such rights. 2.6 Termination of Warrant. If the Holder fails to exercise this Warrant ---------------------- during the Exercise Period, then this Warrant shall terminate and thereafter be null and void. Notwithstanding the preceding sentence, in the event that the Company repays and redeems the Debenture in full at any time during the Exercise Period, this Warrant shall remain in full force and effect until expiration of the Exercise Period, when it shall expire. -2- SECTION 3 Ownership of this Warrant. ------------------------- 3.1 Deemed Holder. The Company may deem and treat the person in whose ------------- name this Warrant is registered as the Holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer as provided in this Section 3. 3.2 Exchange, Transfer and Replacement. Subject to applicable federal and ---------------------------------- state securities laws, this Warrant and all rights hereunder are transferable in whole or in part upon the books of the Company by the Holder in person or by duly authorized attorney, and a new Warrant shall be made and delivered by the Company, of the same tenor as this Warrant but registered in the name of the transferee, upon surrender of this Warrant duly endorsed at said office or agency of the Company. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in case of loss, theft or destruction, an indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if the Holder of this -------- ------- Warrant is the original Holder, an affidavit of lost Warrant shall be sufficient for all purposes of this Section 3.2. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange, transfer or replacement. The Company shall pay all reasonable expenses, taxes (other than stock transfer taxes and income taxes) and other charges payable by it in connection with the preparation, execution and delivery of Warrant Shares pursuant to this Section 3.2. 3.3 Antidilution. ------------ (a) If at any time while all or any portion of this Warrant remains outstanding all or any portion of this Warrant shall be exercised subsequent to (i) any sales of shares of Common Stock or Common Stock Equivalent Shares of the Company at a price per share less than the Exercise Price per share then applicable to this Warrant, or (ii) any issuance of any security convertible into shares of Common Stock or Common Stock Equivalent Shares of the Company with a conversion price per share less than the Exercise Price per share then applicable to this Warrant, or (iii) any issuance of any option, warrant or other right to purchase shares of Common Stock or Common Stock Equivalent Shares of the Company at any Exercise Price per share less than the Exercise Price per share then applicable to this Warrant (except 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. (b) If all or any portion of this Warrant shall be exercised subsequent to any stock dividend, split-up, recapitalization, merger, consolidation, combination or exchange of shares, reorganization or liquidation of the Company occurring after the date hereof, as a result of which -3- such shares of any class shall be issued in respect of outstanding shares of Common Stock or Common Stock Equivalent Shares of the Company (or shall be issuable in respect of securities convertible into shares of Common Stock or Common Stock Equivalent) or upon exercise of rights (other than this Warrant) to purchase shares of Common Stock or Common Stock Equivalent Shares or shares of such Common Stock or Common Stock Equivalents shall be changed into the same or a different number of shares of the same or another class or classes, the Holder exercising this Warrant shall receive the aggregate number and class of shares which such Holder would have received if this Warrant had been exercised immediately before such stock dividend, split-up, recapitalization, merger, consolidation, combination or exchange of shares, reorganization or liquidation. SECTION 4 Special Agreements of the Company --------------------------------- The Company covenants and agrees that: 4.1 Reservation of Shares. The Company will reserve and set apart and ---------------------- have at all times, free from preemptive rights, a number of shares of authorized but unissued Common Stock or Common Stock Equivalent Shares deliverable upon the exercise of this Warrant or of any other rights or privileges provided for therein sufficient to enable the Company at any time to fulfill all its obligations thereunder. 4.2 No Impairment. The Company will not, by amendment of its Articles of ------------- Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, or any other similar voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this 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 against impairment due to such event. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on exercise of this Warrant above the Exercise Price then in effect, (b) will take all action that may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock, free from all taxes, liens and charges with respect to the issue thereof, on the exercise of this Warrant from time to time, and (c) will not consolidate with or merge into any other person or permit any such person to consolidate with or merge into the Company, unless such other person (or, in the case of a merger or consolidation in which the Company is the surviving entity, the person issuing the securities involved in such merger or consolidation) shall expressly assume in writing and will be bound by all the terms of this Warrant. 4.3 CFO's Certificate as to Adjustments. In each case of any adjustment ----------------------------------- or readjustment in the shares of Common Stock or Common Stock Equivalent Shares issuable on the exercise of this Warrant, the Chief Financial Officer of the Company will promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a -4- Exhibit 6 --------- certificate setting forth such adjustment or readjustment, the Exercise Price resulting therefrom, and the increase or decrease, if any, of the number of shares purchasable at such price upon exercise of this Warrant showing in detail the facts and computation upon which such adjustment or readjustment is based. The Company will forthwith mail a copy of each such certificate to each registered Holder of this Warrant, and will, on the written request at any time of the Holder of this Warrant, furnish to such Holder a like certificate setting forth the Exercise Price of the Warrant at the time in effect and showing how it was calculated. 4.4 Notices of Record Date. In the event the Company (a) takes a record ---------------------- of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend on, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) consolidates or merges into, or transfers all or substantially all of its assets to, another corporation, or (c) dissolves or liquidates (the events described in the foregoing clauses (b) and (c) being hereinafter referred to as a "Fundamental Change"), then and in each such event the Company will mail or - ------------------- cause to be mailed to the registered Holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such Fundamental Change is to be effected, and the time, if any to be fixed, as of which the holders of record of Common Stock or Common Stock Equivalent Shares shall be entitled to exchange their shares of Common Stock or Common Stock Equivalents for securities or other property, if any, deliverable on any Fundamental Change and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall also state that the action in question or the record date is subject to the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or a favorable vote of stockholders, if either is required. - --------------- Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any such action is to be taken or 20 days prior to the record date therefor, whichever is earlier. SECTION 5 Notices ------- Any notice or other document required or permitted to be given or delivered to the Holder or the Company shall be delivered, or sent by certified or registered mail, to the Holder or the Company at the address as set forth in Section 10.4 of the Debenture Purchase Agreement. -5- SECTION 6 Governing Law ------------- This Warrant shall be governed by, and construed and enforced in accordance with, the internal laws of the State of Delaware, without giving effect to its conflicts of laws provisions. SECTION 7 Binding Effect on the Company's Successor ----------------------------------------- This Warrant shall be binding upon any corporation or entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. [Balance of Page Left Blank Intentionally -- Signature Page Follows] -6- IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer under its corporate seal, attested by its duly authorized officer, and to be dated as of the date first hereinabove set forth. Dated: March 11, 1998 ATTEST: JAY JACOBS, INC. ___________________________________ By: _____________________________________ William L. Lawrence, Jr., Secretary Name: Rex L. Steffey Title: President and Chief Executive Officer ASSIGNMENT (TO BE EXECUTED BY THE REGISTERED HOLDER IF IT DESIRES AND IS PERMITTED TO TRANSFER THE WARRANT OF) JAY JACOBS, INC. FOR VALUE RECEIVED ___________________________________ hereby sells, assigns and transfers unto __________________________ the right to purchase [______%] of the number of shares of Common Stock or Common Stock Equivalent Shares covered by the within Warrant, and does hereby irrevocably constitute and appoint ________________________________________ Attorney to transfer the said Warrant on the books of the Company (as defined in said Warrant) with full power of substitution. The undersigned represents and warrants to the Company that this assignment has been effected in compliance with all applicable provisions of said Warrant and any applicable provisions of the Debenture Purchase Agreement referred to in such Warrant. Signature: __________________________(SEAL) Address: ________________________________ ________________________________ Dated: ___________________ In the presence of ___________________________ _____________________________________ (Witness) (Signature of Witness) NOTICE: The signature to the foregoing Assignment must correspond to the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. PURCHASE FORM (TO BE EXECUTED ONLY UPON EXERCISE OF WARRANT) The undersigned registered owner of this Warrant irrevocably exercises this Warrant for and purchases Common Stock or Common Stock Equivalent Shares, par value $.01 per share, of Jay Jacobs, Inc., a Washington corporation, purchasable with this Warrant, and herewith makes payment therefor: (circle the following as applicable) 1. By cash in the amount of $________. 2. By bank cashier's check in the amount of $_________. 3. By certified check in the amount of $_________. all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock or Common Stock Equivalent Shares hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to___________________________, whose address is _____________________________________ and, if such shares shall not include all of the shares issuable as provided in this Warrant that a new Warrant of like tenor and date for the balance of the shares issuable thereunder be delivered to the undersigned. Dated: ___________________________________ (Signature of Registered Owner) ___________________________________ (Street Address) ___________________________________ (City) (State) (Zip Code) EX-7 6 WARRANT TO ACQUIRE OF JAY JACOBS, INC. Exhibit 7 --------- THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER APPLICABLE STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO JAY JACOBS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO THE PROVISIONS OF RULE 144 OF THE ACT. WARRANT TO ACQUIRE 56,957 SHARES OF COMMON STOCK OR 570 COMMON STOCK EQUIVALENT SHARES OF JAY JACOBS, INC. March 11, 1998 THIS CERTIFIES THAT STRATEGIC ASSOCIATES, L.P., a limited partnership organized under the laws of the State of Delaware (the "Purchaser") or its --------- registered assigns (the Purchaser or its registered assign(s), as applicable, is referred to herein as the "Holder") is entitled to purchase, on the terms and ------ subject to the conditions hereinafter set forth, from JAY JACOBS, INC., a Washington corporation (the "Company"), at any time after the date hereof and on ------- or before 5:00 p.m., Seattle time, on the date that is five (5) years after the date hereof (the "Exercise Period"), that number of shares (the "Warrant --------------- ------- Shares") of common stock, par value $.01 per share, of the Company (the "Common ------ Stock") or the number of shares of preferred stock designated as common stock - ----- equivalent shares (the "Common Stock Equivalent Shares" or the "Common Stock ------------------------------ ------------ Equivalents"), as set forth in Section 2.1 hereof. The Company issued this - ----------- Warrant and a Debenture to the Purchaser pursuant to the Debenture Purchase Agreement, dated as of March 11, 1998, by and between the Company and the Purchaser and other parties identified therein (the "Debenture Purchase ------------------ Agreement"). This Warrant and the Debenture are not attached and each may be - --------- assigned or transferred separately. Capitalized words not defined herein shall have the meaning set forth in the Debenture Purchase Agreement. SECTION 1 Exercise Price -------------- The exercise price at which this Warrant may be exercised shall be $.01 per share of Common Stock or $1.00 per Common Stock Equivalent Share (the "Exercise -------- Price"), subject to any adjustment pursuant to Section 3.3. - ----- -1- SECTION 2 Exercise of Warrant, Etc. ------------------------- 2.1 Number of Shares for Which Warrant is Exercisable. This Warrant ------------------------------------------------- initially shall be exercisable for 56,957 shares of Common Stock or 570 Common Stock Equivalent Shares, subject to any adjustment pursuant to Section 3.3. 2.2 Procedure for Exercise of Warrant. The Warrant may be exercised in --------------------------------- whole or in part during the Exercise Period 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 in full, in cash, bank cashier's check or certified check payable to the order of the Company, of the Exercise Price payable in respect of the Warrant Shares being exercised. 2.3 Conversion. This Warrant is exercisable at any time during the ---------- Exercise Period at the option of the Holder. 2.4 Transfer Restriction Legend. Each certificate for Warrant Shares --------------------------- initially issued upon exercise of this Warrant, unless at the time of exercise such Warrant Shares are registered under the Act, shall bear the following legend (and any additional legend required by any securities exchange upon which such Warrant Shares may, at the time of such exercise, be listed) on the face thereof: "These securities have not been registered under the Securities Act of 1933, as amended, or under any state securities laws and may be offered, sold or transferred only if registered pursuant to the provisions of such laws, or if in the opinion of counsel satisfactory to the Company, an exemption from such registration is available." 2.5 Acknowledgment of Continuing Obligation. The Company will, if the --------------------------------------- Holder exercises this Warrant in part, upon request of the Holder, acknowledge in writing the Company's continuing obligation to the Holder in respect of any rights to which the Holder shall continue to be entitled after such exercise in accordance with this Warrant; provided, that the failure of the Holder to make -------- any such request shall not affect the continuing obligation of the Company to the Holder in respect of such rights. 2.6 Termination of Warrant. If the Holder fails to exercise this Warrant ---------------------- during the Exercise Period, then this Warrant shall terminate and thereafter be null and void. Notwithstanding the preceding sentence, in the event that the Company repays and redeems the Debenture in full at any time during the Exercise Period, this Warrant shall remain in full force and effect until expiration of the Exercise Period, when it shall expire. -2- SECTION 3 Ownership of this Warrant. ------------------------- 3.1 Deemed Holder. The Company may deem and treat the person in whose ------------- name this Warrant is registered as the Holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer as provided in this Section 3. 3.2 Exchange, Transfer and Replacement. Subject to applicable federal and ---------------------------------- state securities laws, this Warrant and all rights hereunder are transferable in whole or in part upon the books of the Company by the Holder in person or by duly authorized attorney, and a new Warrant shall be made and delivered by the Company, of the same tenor as this Warrant but registered in the name of the transferee, upon surrender of this Warrant duly endorsed at said office or agency of the Company. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in case of loss, theft or destruction, an indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if the Holder of this -------- ------- Warrant is the original Holder, an affidavit of lost Warrant shall be sufficient for all purposes of this Section 3.2. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange, transfer or replacement. The Company shall pay all reasonable expenses, taxes (other than stock transfer taxes and income taxes) and other charges payable by it in connection with the preparation, execution and delivery of Warrant Shares pursuant to this Section 3.2. 3.3 Antidilution. ------------ (a) If at any time while all or any portion of this Warrant remains outstanding all or any portion of this Warrant shall be exercised subsequent to (i) any sales of shares of Common Stock or Common Stock Equivalent Shares of the Company at a price per share less than the Exercise Price per share then applicable to this Warrant, or (ii) any issuance of any security convertible into shares of Common Stock or Common Stock Equivalent Shares of the Company with a conversion price per share less than the Exercise Price per share then applicable to this Warrant, or (iii) any issuance of any option, warrant or other right to purchase shares of Common Stock or Common Stock Equivalent Shares of the Company at any Exercise Price per share less than the Exercise Price per share then applicable to this Warrant (except 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. (b) If all or any portion of this Warrant shall be exercised subsequent to any stock dividend, split-up, recapitalization, merger, consolidation, combination or exchange of shares, reorganization or liquidation of the Company occurring after the date hereof, as a result of which -3- such shares of any class shall be issued in respect of outstanding shares of Common Stock or Common Stock Equivalent Shares of the Company (or shall be issuable in respect of securities convertible into shares of Common Stock or Common Stock Equivalent) or upon exercise of rights (other than this Warrant) to purchase shares of Common Stock or Common Stock Equivalent Shares or shares of such Common Stock or Common Stock Equivalents shall be changed into the same or a different number of shares of the same or another class or classes, the Holder exercising this Warrant shall receive the aggregate number and class of shares which such Holder would have received if this Warrant had been exercised immediately before such stock dividend, split-up, recapitalization, merger, consolidation, combination or exchange of shares, reorganization or liquidation. SECTION 4 Special Agreements of the Company --------------------------------- The Company covenants and agrees that: 4.1 Reservation of Shares. The Company will reserve and set apart and ---------------------- have at all times, free from preemptive rights, a number of shares of authorized but unissued Common Stock or Common Stock Equivalent Shares deliverable upon the exercise of this Warrant or of any other rights or privileges provided for therein sufficient to enable the Company at any time to fulfill all its obligations thereunder. 4.2 No Impairment. The Company will not, by amendment of its Articles of ------------- Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, or any other similar voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this 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 against impairment due to such event. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of stock receivable on exercise of this Warrant above the Exercise Price then in effect, (b) will take all action that may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock, free from all taxes, liens and charges with respect to the issue thereof, on the exercise of this Warrant from time to time, and (c) will not consolidate with or merge into any other person or permit any such person to consolidate with or merge into the Company, unless such other person (or, in the case of a merger or consolidation in which the Company is the surviving entity, the person issuing the securities involved in such merger or consolidation) shall expressly assume in writing and will be bound by all the terms of this Warrant. 4.3 CFO's Certificate as to Adjustments. In each case of any adjustment ----------------------------------- or readjustment in the shares of Common Stock or Common Stock Equivalent Shares issuable on the exercise of this Warrant, the Chief Financial Officer of the Company will promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a -4- certificate setting forth such adjustment or readjustment, the Exercise Price resulting therefrom, and the increase or decrease, if any, of the number of shares purchasable at such price upon exercise of this Warrant showing in detail the facts and computation upon which such adjustment or readjustment is based. The Company will forthwith mail a copy of each such certificate to each registered Holder of this Warrant, and will, on the written request at any time of the Holder of this Warrant, furnish to such Holder a like certificate setting forth the Exercise Price of the Warrant at the time in effect and showing how it was calculated. 4.4 Notices of Record Date. In the event the Company (a) takes a record ---------------------- of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend on, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) consolidates or merges into, or transfers all or substantially all of its assets to, another corporation, or (c) dissolves or liquidates (the events described in the foregoing clauses (b) and (c) being hereinafter referred to as a "Fundamental Change"), then and in each such event the Company will mail or - ------------------- cause to be mailed to the registered Holder of this Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such Fundamental Change is to be effected, and the time, if any to be fixed, as of which the holders of record of Common Stock or Common Stock Equivalent Shares shall be entitled to exchange their shares of Common Stock or Common Stock Equivalents for securities or other property, if any, deliverable on any Fundamental Change and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall also state that the action in question or the record date is subject to the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or a favorable vote of stockholders, if either is required. - --------------- Such notice shall be mailed at least 20 days prior to the date specified in such notice on which any such action is to be taken or 20 days prior to the record date therefor, whichever is earlier. SECTION 5 Notices ------- Any notice or other document required or permitted to be given or delivered to the Holder or the Company shall be delivered, or sent by certified or registered mail, to the Holder or the Company at the address as set forth in Section 10.4 of the Debenture Purchase Agreement. -5- SECTION 6 Governing Law ------------- This Warrant shall be governed by, and construed and enforced in accordance with, the internal laws of the State of Delaware, without giving effect to its conflicts of laws provisions. SECTION 7 Binding Effect on the Company's Successor ----------------------------------------- This Warrant shall be binding upon any corporation or entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. [Balance of Page Left Blank Intentionally -- Signature Page Follows] -6- IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer under its corporate seal, attested by its duly authorized officer, and to be dated as of the date first hereinabove set forth. Dated: March 11, 1998 ATTEST: JAY JACOBS, INC. ___________________________________ By: _____________________________________ William L. Lawrence, Jr., Secretary Name: Rex L. Steffey Title: President and Chief Executive Officer ASSIGNMENT (TO BE EXECUTED BY THE REGISTERED HOLDER IF IT DESIRES AND IS PERMITTED TO TRANSFER THE WARRANT OF) JAY JACOBS, INC. FOR VALUE RECEIVED ___________________________________ hereby sells, assigns and transfers unto __________________________ the right to purchase [______%] of the number of shares of Common Stock or Common Stock Equivalent Shares covered by the within Warrant, and does hereby irrevocably constitute and appoint ________________________________________ Attorney to transfer the said Warrant on the books of the Company (as defined in said Warrant) with full power of substitution. The undersigned represents and warrants to the Company that this assignment has been effected in compliance with all applicable provisions of said Warrant and any applicable provisions of the Debenture Purchase Agreement referred to in such Warrant. Signature: __________________________(SEAL) Address: ________________________________ ________________________________ Dated: ___________________ In the presence of ___________________________ _____________________________________ (Witness) (Signature of Witness) NOTICE: The signature to the foregoing Assignment must correspond to the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. PURCHASE FORM (TO BE EXECUTED ONLY UPON EXERCISE OF WARRANT) The undersigned registered owner of this Warrant irrevocably exercises this Warrant for and purchases Common Stock or Common Stock Equivalent Shares, par value $.01 per share, of Jay Jacobs, Inc., a Washington corporation, purchasable with this Warrant, and herewith makes payment therefor: (circle the following as applicable) 1. By cash in the amount of $________. 2. By bank cashier's check in the amount of $_________. 3. By certified check in the amount of $_________. all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock or Common Stock Equivalent Shares hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to_____________________________________, whose address is _____________________________________ and, if such shares shall not include all of the shares issuable as provided in this Warrant that a new Warrant of like tenor and date for the balance of the shares issuable thereunder be delivered to the undersigned. Dated: ___________________________________ (Signature of Registered Owner) ___________________________________ (Street Address) ___________________________________ (City) (State) (Zip Code) -----END PRIVACY-ENHANCED MESSAGE-----