EXHIBIT 10.1
EXECUTION COPY
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INVESTMENT AGREEMENT
DATED AS OF OCTOBER 14, 2004
BY AND BETWEEN
GADZOOKS, INC.
AND
EACH OF THE SEVERAL PURCHASERS NAMED IN SCHEDULE I
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INVESTMENT AGREEMENT
INVESTMENT AGREEMENT is made as of October 14, 2004, by and between
Gadzooks, Inc., a Texas corporation (the "Company"), and each of the several
purchasers listed on Schedule I (each, a "Purchaser"). Except as otherwise
indicated in this Agreement, capitalized terms used in this Agreement are
defined in Section 9.01.
RECITALS
On February 3, 2004, the Company filed a voluntary petition under chapter
11 of the Bankruptcy Code (the "Reorganization Case") with the United States
Bankruptcy Court for the Northern District of Texas (the "Bankruptcy Court").
On June 3, 2004, the United States Trustee in the Reorganization Case
appointed the Official Committee of Equity Security Holders to represent the
interests of holders of equity of the Company (the "Equity Committee").
As soon as reasonably practicable following the execution and delivery of
this Agreement, but no later than October 30, 2004, the Company will file the
Reorganization Plan and the Disclosure Statement with the Bankruptcy Court which
will provide for the transactions contemplated by this Agreement on the terms
and conditions set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which all parties hereby acknowledge, and in consideration of the
covenants and agreements contained in this Agreement, the parties to this
Agreement hereby agree as follows:
ARTICLE 1
THE TRANSACTIONS
1.01 Rights Offering. Pursuant to the Reorganization Plan, the
Company will offer non-transferable rights to purchase shares of New Common
Stock for an aggregate purchase price of $25,000,000 on the terms and conditions
specified in the Reorganization Plan (the "Rights Offering"). Each Purchaser
that is eligible to participate in the Rights Offering (other than pursuant to
this Agreement) will subscribe for and purchase no less than the lesser of (a)
the number of shares of New Common Stock underlying the rights distributed with
respect to 550,000 shares of Old Common Stock in the Rights Offering and (b) the
maximum number of shares of New Common Stock underlying the maximum number of
Rights allocable to such Purchaser in the Rights Offering (which, for the
avoidance of doubt, excludes any Standby Shares that such Purchaser is required
to purchase pursuant to Section 1.02), on the terms and conditions set forth in
the Rights Offering.
1.02. Standby Commitment to Purchase Standby Securities. On the
basis of the representations, warranties, covenants, and agreements set forth in
this Agreement and on the terms and subject to the conditions of this Agreement,
at the Standby Closing, each Purchaser, severally and not jointly, agrees to
purchase a
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number of Standby Securities from the Company equal to such Purchaser's Standby
Commitment Percentage multiplied by the aggregate number of Unsubscribed Shares,
and the Company agrees to issue and sell such number of Standby Securities to
each such Purchaser, at the Standby Purchase Price. The Company will give each
of the several Purchasers notice of the number of Unsubscribed Shares not less
than four Business Days before the Standby Closing Date. Each Purchaser will
determine the number of Standby Shares and Purchased Warrants that will comprise
the Standby Securities for such Purchaser; provided, that the sum of the number
of Standby Shares and Underlying Shares subject to the Purchased Warrants for
such Purchaser must equal such Purchaser's Recalculated Standby Commitment
Percentage multiplied by the number of Unsubscribed Shares. Each Purchaser will
notify the Company of such determination before the close of business on the
third Business Day before the Standby Closing Date. The exercise price of, and
the number of Underlying Shares subject to, the Purchased Warrants will be
subject to adjustment as provided in the Purchased Warrants.
1.03 Compensation Warrants. In consideration of the agreements of
the several Purchasers set forth in this Agreement, the Company agrees to issue
and sell to each of the several Purchasers as of the closing of the purchase and
sale of the Standby Securities (the "Standby Closing"), a warrant to purchase
shares of New Common Stock in substantially the form of Exhibit A (the
"Compensation Warrants"). The initial number of Underlying Shares subject to
Compensation Warrants issued to each Purchaser will be based on each Purchaser's
pro rata share of the Standby Securities as determined by the Standby Commitment
Percentage of each such Purchaser. The exercise price of, and the number of
shares of Underlying Shares subject to, the Compensation Warrants will be
subject to adjustment as provided in the Compensation Warrants.
1.04 The Standby Closing. The Standby Closing will take place at
10:00 a.m. (prevailing Central time), on the third Business Day after the last
of the conditions set forth in Articles 5 and 6 of this Agreement have been
satisfied or waived (other than those conditions that by their nature are to be
fulfilled at the Standby Closing, but subject to the fulfillment or waiver of
those conditions), but in no event earlier than three Business Days after the
closing of the Rights Offering, at the offices of Akin Gump ▇▇▇▇▇▇▇ ▇▇▇▇▇ &
▇▇▇▇, LLP, ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇ unless another time,
date, or place is agreed upon in writing by the Company and the Purchasers
holding at least a majority in dollar amount of Standby Funding Commitments (the
"Majority Purchasers"). The date on which the Standby Closing actually occurs
are referred to in this Agreement as the "Standby Closing Date."
1.05 Deliveries at the Standby Closing. At the Standby Closing:
(a) The Company will deliver to each Purchaser the Standby
Securities to be purchased by such Purchaser, registered in such
Purchaser's name;
(b) Each Purchaser will deliver to the Company the aggregate Standby
Purchase Price for the Standby Securities to be issued by the Company to
such
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Purchaser, by wire transfer of immediately available funds on the Standby
Closing Date to a bank account designated in writing by the Company at
least two Business Days prior to the Standby Closing Date; and
(c) All other documents required to be delivered by any party
pursuant to this Agreement will, to the extent not previously delivered,
be delivered by such party.
1.06 Defaulting Purchaser.
(a) If any Purchaser defaults in its obligation to purchase the
Standby Securities that it is obligated to purchase under this Agreement,
the non-defaulting Purchasers may, in their discretion, arrange for
themselves or another party or other parties to purchase such Standby
Securities on the terms and conditions contained in this Agreement. If
within five Business Days after such default by any Purchaser, the
Majority Purchasers (excluding any defaulting Purchaser) notify the
Company that the non-defaulting Purchasers have not arranged for the
purchase of such Standby Securities, then the Company will be entitled to
a further period of 30 days within which to procure another party or other
parties to purchase such Standby Securities on such terms. The term
"Purchaser" as used in this Agreement will include any Person substituted
under this Section 1.06 with the same effect as if such Person had
originally been a party to this Agreement with respect to such Standby
Securities.
(b) If, after giving effect to any arrangements for the purchase of
the Standby Securities of a defaulting Purchaser as provided in Section
1.06(a), Standby Securities of the defaulting Purchaser remain
unpurchased, then the Company will have the right to require each
non-defaulting Purchaser, severally and not jointly, to purchase (i) the
number of Standby Securities provided in Section 1.02 and, in addition,
(ii) its pro rata share (based on the Recalculated Standby Commitment
Percentages of the non-defaulting Purchasers) of the Standby Securities of
such defaulting Purchaser for which such arrangements have not been made;
provided that, the aggregate amount required to be purchased by such
non-defaulting Purchaser pursuant to clauses (i) and (ii) will not exceed
such Purchaser's Standby Funding Commitment. Nothing in this Agreement
will relieve any defaulting Purchaser from liability for its default. In
the event any non-defaulting Purchaser purchases Standby Securities of any
such defaulting Purchaser, the Standby Commitment Percentages of the
non-defaulting Purchasers will be automatically adjusted to give effect to
such purchases.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to each Purchaser to enter into this Agreement and
to consummate the Transactions, the Company hereby represents and warrants to
each Purchaser as follows:
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2.01 Organization and Qualification. The Company is a corporation
duly organized, validly existing, and in good standing under the Laws of the
State of Texas and, subject to the applicable Orders by the Bankruptcy Court,
has full corporate power and authority to conduct its business as currently
conducted, to own, use, and lease its Assets and Properties, and to consummate
the Transactions. The Company is duly qualified, licensed, or admitted to do
business as a foreign corporation and is in good standing in each jurisdiction
where the failure to be so qualified or in good standing would reasonably be
expected to result in a Material Adverse Effect.
2.02 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock
of the Company consists solely of 25,000,000 shares of Old Common Stock,
of which 9,174,000 shares are issued and outstanding, and 1,000,000 shares
of preferred stock, of which 25,000 shares have been designated as Series
A Junior Participating Preferred Stock, none of which is issued and
outstanding. All of the outstanding shares of capital stock of the Company
have been duly and validly issued and are fully paid and nonassessable. As
of the date of this Agreement, and except as contemplated in this
Agreement, there are no Derivative Securities of the Company outstanding
or Contracts by which the Company is or may become bound to issue
additional shares of capital stock other than (i) 2,800,000 shares of Old
Common Stock issuable upon conversion of the Company's convertible notes
and (ii) 1,549,032 shares of Old Common Stock issuable upon exercise of
options issued pursuant to the Company's stock option plans for employees
and directors. There are no preemptive rights or rights of first refusal
or similar rights that are binding on the Company permitting any Person to
subscribe for or purchase from the Company shares of its capital stock. As
of the Standby Closing Date and after giving effect to the Reorganization
Plan, all of the outstanding shares of New Common Stock will have been
duly and validly issued and will be fully paid and nonassessable and
issued in compliance with all applicable Law. As of the Standby Closing
Date and after giving effect to the Reorganization Plan, there will be no
outstanding Derivative Securities of the Company or Contracts by which the
Company is or may become bound to issue additional shares of capital stock
other than the Warrants and as provided in the Reorganization Plan As of
the Standby Closing Date and after giving effect to the Reorganization
Plan, there will no preemptive rights or rights of first refusal or
similar rights that are binding on the Company permitting any Person to
subscribe for or purchase from the Company shares of its capital stock. To
the knowledge of the Company there are no facts or circumstances that
could reasonably lead to the Company not being eligible for listing on
recognized interdealer quotation system immediately after the Standby
Closing Date.
(b) Upon issuance of the New Common Stock and payment of the Standby
Purchase Price in accordance with the terms of this Agreement and the
Right Offering, the shares so issued to the several Purchasers under this
Agreement and in the Rights Offering will be duly authorized, validly
issued, fully
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paid, and nonassessable, and free and clear of any adverse claims,
restrictions on transfer, and preemptive or similar rights. The Warrants
will, upon their issuance to the several Purchasers under the terms of
this Agreement (subject to entry of the applicable Orders by the
Bankruptcy Court), constitute the binding obligations of the Company,
enforceable against the Company in accordance with their terms except as
enforceability may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other similar Laws relating to
the enforcement of creditors' rights generally and by general principles
of equity. When issued upon the exercise of the Warrants and payment of
the exercise price thereof, the Underlying Shares will be duly authorized,
validly issued, fully paid, and nonassessable, and free and clear of any
adverse claims, restrictions on transfer, or statutory preemptive or
similar rights. Assuming issuance in accordance with the terms of the
Warrants, the Underlying Shares will be issued in compliance with all
applicable Law.
2.03 Authority Relative to this Agreement and the Operative
Agreements. The Company has full corporate power and authority to enter into
this Agreement and the Operative Agreements to which it is party and, subject to
the entry of the applicable Orders by the Bankruptcy Court, to perform its
obligations under this Agreement and under the Operative Agreements and to
consummate the Transactions. The execution, delivery, and performance of this
Agreement and the Operative Agreements to which the Company is a party by the
Company and the consummation by the Company of the Transactions have been duly
and validly authorized by the Board of Directors of the Company and, subject to
the entry of the applicable Orders by the Bankruptcy Court, no other action on
the part of the Company or any or its stockholders is necessary to authorize the
execution, delivery, and performance of this Agreement and the Operative
Agreements to which it is a party and the consummation by each of them of the
Transactions. This Agreement and the Operative Agreements to which the Company
or any Subsidiary is a party have been or will on the Standby Closing Date be
duly and validly executed and delivered by the Company or such Subsidiary, as
the case may be, and will, subject to the entry of the applicable Orders by the
Bankruptcy Court, constitute legal, valid, and binding obligations of the
Company or such Subsidiary, as the case may be, enforceable against it in
accordance with their respective terms, except as enforceability may be limited
by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or
other similar Laws relating to the enforcement of creditors' rights generally
and by general principles of equity.
2.04 Subsidiaries. Except as set forth in the SEC Documents, the
Company does not have any Subsidiaries or own any capital stock of, assets
comprising the business of, material obligations of, or any other equity or
other ownership interest in, any Person. Each Subsidiary is an entity duly
organized or formed, validly existing, and in good standing under the Laws of
its jurisdiction of formation and has full power and authority to conduct the
business conducted by it and to own, use, and lease its Assets and Properties.
Each Subsidiary is duly qualified, licensed, or admitted to do business as a
foreign entity and is in good standing in each jurisdiction where the failure to
be so qualified and in good standing would reasonably be expected to result in a
Material Adverse Effect. All of the outstanding equity interests
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of each Subsidiary have been duly authorized and validly issued, are fully paid
and nonassessable, and are owned, beneficially and of record, by the Company or
a Wholly-Owned Subsidiary free and clear of all Liens, except Permitted Liens.
There are no Derivative Securities of any Subsidiary outstanding or Contracts by
which any Subsidiary is or may become bound to issue additional shares of
capital stock or any other equity or ownership interest, and there are no
preemptive rights or Contracts to issue preemptive rights with respect to the
issuance or sale of any Subsidiary's shares of capital stock or any other equity
or ownership interest.
2.05 No Conflicts; Consents; Notices. The execution and delivery by
the Company of this Agreement do not, and the execution and delivery by the
Company and each of the Subsidiaries of the Operative Agreements to which any of
them is a party do not, and the performance by the Company and each of the
Subsidiaries of their respective obligations under this Agreement and such
Operative Agreements and the consummation of the Transactions do not, and at any
relevant time prior to the Standby Closing and at the Standby Closing, will not:
(a) conflict with or result in a violation or breach of any of the
terms, conditions, or provisions of the charter documents or bylaws (or
equivalent governing documents) of the Company or any of the Subsidiaries;
(b) subject to the entry of the applicable Orders by the Bankruptcy
Court, conflict with or result in a violation or breach of any term or
provision of any material Law or Order applicable to the Company, any of
the Subsidiaries, or any of their respective Assets and Properties; or
(c) subject to filings with and the entry of the applicable Orders
by the Bankruptcy Court, (i) conflict with or result in a material
violation or breach of; (ii) constitute (with or without notice or lapse
of time or both) a material default under; (iii) require the Company or
any Subsidiary to obtain any consent, approval, or action of, make any
filing with or give any notice to, any Person as a result or under the
terms of (other than any consent, approval, action, filing or notice that
was already obtained, given, or made); (iv) result in or give to any
Person any right of termination, cancellation, acceleration, or
modification in or with respect to; (v) result in or give to any Person
any additional rights or entitlement to increased, additional,
accelerated, or guaranteed payments (including bonus payments, retention
payments, success fees, or similar payments) under; or (vi) result in the
creation or imposition of any Lien (other than a Permitted Lien) upon the
Company or any Subsidiary or any of their respective material Assets and
Properties, in any such case under any material Contract or License to
which the Company or any Subsidiary is a party or by which any of their
respective material Assets and Properties is bound.
2.06 Governmental Approvals and Filings. Except for filings with and
the entry of the applicable Orders by the Bankruptcy Court, such other filings
as have been made prior to the date hereof and such additional filings as may be
required to be filed by the Company pursuant to Federal and state securities
laws relating to issuances and
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sales of securities, there is no material consent, approval, or action of,
filing with, or notice to, any Governmental or Regulatory Authority on the part
of the Company or any Subsidiary required as a prerequisite to the execution,
delivery, and performance of this Agreement or any of the Operative Agreements
to which any of them is a party or the consummation of the Transactions by them.
2.07 SEC Reports. Since January 31, 2002, except for the filing of
(a) a Quarterly Report on Form 10-Q for the fiscal quarter ended May 1, 2004
(the "May 2004 10-Q"), (b) a Quarterly Report on Form 10-Q for the fiscal
quarter ended August 28, 2004 (the "August 2004 10-Q"), and (c) to the extent
not filed, any other periodic reports (other than a Current Report on Form 8-K)
required to be filed by the Company with the SEC pursuant to the Exchange Act
between the date of this Agreement and the Standby Closing Date (the "Omitted
Filings"), the Company has filed in a timely manner all reports, schedules,
forms, statements, and other documents required to be filed by the Company with
the SEC pursuant to the reporting requirements of the Exchange Act, including
without limitation, all current reports on Form 8-K (all of the foregoing filed
prior to the date of this Agreement and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein being the "SEC Documents"). Each of the SEC Documents, as of
the respective dates on which they were filed (or, if amended or superseded by a
filing prior to the Standby Closing Date, on the date of such filing), did not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. Each SEC Document, as
it may have been subsequently amended by filings made by the Company with the
SEC prior to the date of this Agreement, complied in all material respects with
the requirements of the Exchange Act applicable to such SEC Document. There is
no material fact or circumstance, including financial and statistical data,
required to be disclosed pursuant to the reporting requirements of the Exchange
Act that has not been disclosed in writing to the several Purchasers.
2.08 ▇▇▇▇▇▇▇▇-▇▇▇▇▇ Certifications. The Chief Executive Officer and
the Chief Financial Officer of the Company have signed, and the Company has
furnished to the SEC, all certifications required by Sections 302 and 906 of the
▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act of 2002 and required to be included with periodic reports
under the Exchange Act, other than in respect of the May 2004 10-Q, the August
2004 10-Q, and the Omitted Filings. Such certifications contain no
qualifications or exceptions to the matters certified and have not been modified
or withdrawn. Neither the Company nor any of its officers has received notice
from any Governmental or Regulatory Authority questioning or challenging the
accuracy, completeness, form, or manner of filing or submission of such
certifications.
2.09 Financial Statements; Underlying Books and Records; Internal
Accounting Controls.
(a) The Company has provided the several Purchasers true and
complete copies of (i) the unaudited balance sheet of the Company as of
August 28, 2004 and the related unaudited statements of income and cash
flows
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for the seven months then ended, and (ii) the consolidated financial
statements of the Company contained in the SEC Documents (clauses(i) and
(ii) being, the "Financial Statements"). Except as described therein, the
Financial Statements complied in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto and fairly present, in accordance with GAAP, the
consolidated financial condition, results of operations, changes in
stockholders equity, and cash flow of the Company and the Subsidiaries as
of their respective dates and for the respective periods covered thereby,
except, in the case of unaudited Financial Statements, for the absence of
footnotes and except for year-end adjustments, which were not material in
amount.
(b) The Books and Records accurately and fairly reflect, in all
material respects, the transactions in, and dispositions of, the assets
of, liabilities of, and the results of operations of, the Company and the
Subsidiaries, on a consolidated and consolidating basis all to the extent
required by GAAP.
(c) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
2.10 Absence of Changes. Except as expressly contemplated by this
Agreement and by the Operative Agreements or the Reorganization Plan or
disclosed in the SEC Documents, there has not occurred since January 31, 2004
any of the following actions:
(a) any declaration, setting aside, or payment of any dividend or
other distribution in respect of the capital stock (or equity or other
ownership interests) of the Company or any Subsidiary (other than
dividends or distributions by a Subsidiary to the Company), or any direct
or indirect redemption, purchase, or other acquisition by the Company or
any Subsidiary of any such capital stock (or equity or other ownership
interests) of the Company or any Subsidiary;
(b) except for the execution, delivery, and performance by the
Company of this Agreement and the Operative Agreements, except for the
consummation of the Transactions, and except as expressly described in the
Reorganization Plan, any authorization, issuance, sale, or other
disposition by the Company or any Subsidiary of any shares of capital
stock (or equity or other ownership interests) of the Company or any
Subsidiary, or any modification or amendment of any right of any holder of
any outstanding shares of capital stock (or equity or other ownership
interests) of the Company or any Subsidiary;
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(c) other than in the ordinary course of business consistent with
past practice or as otherwise permitted by an Order of the Bankruptcy
Court: (i) any increase of salary, rate of commissions, or rate of
consulting fees of any current or former officer, director, holder of
capital stock or other equity or ownership interests, or employee or
consultant of the Company or any Subsidiary; (ii) any payment of
consideration of any nature whatsoever (other than salary, commissions, or
directors' or consulting fees) to any current or former officer, director,
holder of capital stock or other equity or ownership interests, or
employee or consultant of the Company or any Subsidiary; or (iii) any
adoption, entering into, amendment, modification, or termination (partial
or complete) of any Benefit Plan;
(d) any incurrence by the Company or any Subsidiary of Indebtedness
(other than incurrence of Indebtedness under the Credit Facility and the
Seasonal Credit Facility) or any purchase, cancellation, prepayment, or
complete or partial discharge in advance of a scheduled payment date with
respect to, or waiver of any right of the Company or any Subsidiary under,
any Indebtedness of or owing to the Company or any Subsidiary (except
pursuant to the Reorganization Plan or Order of the Bankruptcy Court);
(e) any material physical damage, destruction, or other casualty
loss (whether or not covered by insurance) affecting any of the Assets and
Properties of the Company or any Subsidiary in an aggregate amount
exceeding $250,000;
(f) any purchase of any Assets and Properties of any Person by the
Company or any Subsidiary or disposition of, or incurrence of a Lien
(other than a Permitted Lien) on, any Assets and Properties of the Company
or any Subsidiary, other than in the ordinary course of business of the
Company or any Subsidiary consistent with past practice and the terms of
this Agreement;
(g) except for modifications to store leases disclosed to the
Purchasers prior to the date of this Agreement, any amendment,
modification, termination (partial or complete), or granting of a waiver
under or giving any consent with respect to (i) any material Contract to
which the Company or any Subsidiary is bound, or to which any of their
Assets or Properties are subject (other than with respect to the Credit
Facility); (ii) any material License held by the Company or any
Subsidiary; or (iii) any material Intellectual Property of the Company or
the Subsidiaries;
(h) any capital expenditures or commitments for additions to Assets
and Properties of the Company or any Subsidiary constituting capital
assets in an aggregate amount exceeding $100,000;
(i) any change in the accounting or Tax methods or procedures of the
Company or any Subsidiary or any other transaction involving or
development
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adversely affecting in any material respect the Company or any Subsidiary
outside the ordinary course of business consistent with past practice;
(j) the entering into of any settlement by the Company or the
Subsidiaries of any material litigation affecting the Company or any
Subsidiary; or
(k) the entering into of any agreement or any commitment to do any
of the foregoing, including with respect to any Strategic Transaction not
otherwise restricted by the foregoing paragraphs, except as expressly
contemplated by this Agreement, the Operative Agreements, or the
Reorganization Plan.
2.11 No Undisclosed Liabilities. Except as disclosed in the SEC
Documents, there are no Liabilities of the Company or any Subsidiary, other than
Liabilities incurred in the ordinary course of business consistent with past
practice since January 31, 2004 that in the aggregate are not material to the
Company and the Subsidiaries, taken as a whole, but in any case that do not
relate to a material tort, or breach of contract.
2.12 Taxes. Except for Tax Returns required to be filed by the
Company with state Taxing Authorities by October 15, 2004 (the "State Returns"),
all material Tax Returns required to have been filed by or with respect to the
Company or any Subsidiary, or by or with respect to any affiliated,
consolidated, combined, unitary or other similar group of which the Company or
any Subsidiary is or was a member, have been filed timely, and any material
Taxes or other material amounts shown as due and owing on such Tax Returns have
been paid timely, except where the Company or any Subsidiary, as the case may
be, is contesting the payment of such taxes or other amounts in good faith.
There is no dispute or claim concerning any Tax liability of the Company or any
of its Subsidiaries either (a) claimed or raised or, to the knowledge of the
Company, threatened by any Taxing, Authority, or (b) of which the Company or
Subsidiary has received written notice.
2.13 Legal Proceedings. Except as disclosed in the SEC Documents and
except for the Reorganization Case or Actions or Proceedings relating to the
Reorganization Case, there are no material Actions or Proceedings pending or, to
the knowledge of the Company, threatened, against the Company or any of its
Affiliates or related to any of their respective Assets and Properties or that
seeks to prevent, enjoin, alter, challenge, or delay in any material respect the
Transactions, and neither the Company nor any Subsidiary has received notice, or
has knowledge, of any material Orders outstanding against the Company or any
Subsidiary except for those ordered by the Bankruptcy Court in the
Reorganization Case.
2.14 Compliance with Laws and Orders. Except as disclosed in the SEC
Documents, within the last 3 years neither the Company nor any Subsidiary is or
has been, or has received any notice that it is or has been, in material
violation of or in default under any Law or Order applicable to the Company or
any Subsidiary or any of their respective Assets and Properties.
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2.15 Benefit Plans; ERISA. All Benefit Plans comply in all material
respects and have been maintained and administered in material compliance with
ERISA, the Code, and all other Laws applicable to such Benefit Plans. Neither
the Company nor any ERISA Affiliate has incurred any material Liability pursuant
to ERISA or the penalty or excise tax provisions of the Code relating to the
Benefit Plans, and to the Company's Knowledge, no event, transaction or
condition has occurred or exists that could reasonably be expected to result in
the incurrence of any material Liability by the Company or any ERISA Affiliate,
or in the imposition of any material Lien on any of the Assets and Properties of
the Company or any Subsidiary pursuant to ERISA or to such penalty or excise tax
provisions of the Code. None of the Benefit Plans is or was subject to Part 3 or
Title I of ERISA or Title IV of ERISA and none of the Benefit Plans is or was a
"multiple employer plan" or a "multi-employer plan" (as defined in ERISA).
Neither the Company nor any Subsidiary has made any written representations to
any present or former director, officer, or employee of the Company or
Subsidiary promising or guaranteeing any employer payment or funding for the
continuation of medical, dental, life, or disability coverage for any period of
time beyond the end of the current plan year (except to the extent of coverage
required under Section 4980B of the Code). No Action or Proceeding with respect
to the administration or the investment of the assets of any of the Benefit
Plans (other than routine claims for benefits) is pending or to the Company's
Knowledge, threatened and neither the Company or any ERISA Affiliate (including
any employees with responsibility for employee benefits matters) has any
knowledge of any basis for any such Action or Proceeding.
2.16. Title. The Company or a Subsidiary is in possession of and has
good title to, or a valid leasehold interest in or valid rights under Contract
to use, all Assets and Properties used to conduct the business of the Company
and its Subsidiaries. The Assets and Properties of the Company and the
Subsidiaries that are owned by the Company or the Subsidiaries, as the case may
be are owned, free and clear of all Liens except for Permitted Liens. With
respect to the Assets and Properties that the Company or any Subsidiary leases,
such Assets and Properties are subject to binding and subsisting leases and the
Company is in compliance with such leases in all material respects.
2.17 Intellectual Property Rights. The Company owns or possesses
sufficient rights to use all Intellectual Property that is necessary to conduct
the business of the Company and the Subsidiaries as currently conducted, except
where the failure to currently own or possess such Intellectual Property would
not have, either individually or in the aggregate, a Material Adverse Effect.
The Company has not received any written notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
Intellectual Property being used by the Company or any Subsidiary that, either
individually or in the aggregate, if the subject of an unfavorable decision,
ruling, or finding, would have or would reasonably be expected to have a
Material Adverse Effect, and to the knowledge of the Company, none of the patent
rights owned or licensed by the Company is unenforceable or invalid.
2.18 Related Party Transactions. No transaction has occurred between
or among the Company and its Affiliates, officers, or directors or any Affiliate
of any
11
such officer or director that is required to be, or would be required to be,
disclosed in periodic or current reports of the Company under the Exchange Act
(assuming such reports were timely filed without extension of any due date) that
has not been disclosed in the SEC Documents or in writing to each of the
Purchasers.
2.19 Employees; Labor Relations. To the knowledge of the Company,
(a) there are no material controversies between the Company or any Subsidiary,
on the one hand, and any employee or consultant of the Company or any
Subsidiary, on the other hand, with respect to the employment or retention of
such employee or consultant; (b) no employee of the Company or any Subsidiary is
presently a member of a collective bargaining unit and there is currently no
attempt to organize for collective bargaining purposes any of the employees of
the Company or any Subsidiary that has been conveyed in writing; and (c) there
is currently no pending and since July 1, 2003 there has been no material unfair
labor practice complaint or sex or age discrimination claim has been brought
against the Company or any Subsidiary before the National Labor Relations Board
or any other Governmental or Regulatory Authority. Since July 1, 2003, there has
been no material work stoppage, strike, or other concerted action by employees
of the Company or any Subsidiary. The Company and each Subsidiary are in
compliance in all material respects with all applicable Laws relating to the
employment of labor, including those relating to wages, hours, and collective
bargaining. No executive officer of the Company, to the knowledge of the
Company, is in violation of any material term of any employment contract,
confidentiality, disclosure, or proprietary information agreement,
non-competition agreement or any other Contract or any restrictive covenant,
and, to the knowledge of the Company, the continued employment of each such
executive officer does not subject the Company or any of the Subsidiaries to any
Liability with respect to any of the foregoing matters.
2.20 Material Contracts. All Contracts to which the Company or any
Subsidiary is a party or by which they or their respective Assets and Properties
may be bound that are required to be filed as exhibits to the SEC Documents have
been so filed (the "Material Contracts"). The Material Contracts that have been
filed as exhibits are complete and correct copies of the documents of which they
purport to be copies, except for any portions of such documents that were
redacted under the regulations of the SEC pertaining to confidential treatment.
The Material Contracts are valid and in full force and effect as to the Company,
and, to the knowledge of the Company, to the other parties to the Material
Contracts. Except as otherwise disclosed in the SEC Documents, the Company is
not in violation of, or default under (and there does not exist any event or
condition that, after notice or lapse of time or both, would constitute such a
default under), the Material Contracts, except to the extent that such
violations or defaults, individually or in the aggregate, would not reasonably
be expected to (a) affect the validity of this Agreement, (b) result in a
Material Adverse Effect, or (c) impair the ability of the Company to consummate
the Transactions or perform fully on a timely basis any material obligation
which the Company has or will have under this Agreement. To the knowledge of the
Company, except as set forth in the SEC Documents, none of the other parties to
any Material Contract is in violation of or default under any Material Contract
in any material respect. The Company has not received any written notice of
12
cancellation or any other written communication threatening cancellation of any
Material Contract by any other party to any Material Contract.
2.21 Licenses. The Company and its Subsidiaries own, or validly
hold, all Licenses that are material to their respective business or operations.
Each such License is valid, binding and in full force and effect. Neither the
Company nor any Subsidiary is, or has received any notice that it is, in default
(or with the giving of notice or lapse of time or both, would be in default)
under any such material License.
2.22 Insurance. The Company has in full force and effect fire,
casualty, and liability insurance policies, with extended coverage, that the
Company reasonably believes is sufficient in amount (subject to reasonable
deductibles) to allow the Company to replace any of its Assets and Properties
that are material individually or in the aggregate and that might be damaged or
destroyed, to the extent and in the manner customary for companies in similar
business similarly situated.
2.23 Substantial Suppliers. Except (a) as set forth in the SEC
Documents and (b) with respect to Von Dutch Originals and the Company's private
label swimwear suppliers, since February 28, 2004 none of the five largest
suppliers to the Company by dollar volume has terminated, materially reduced, or
threatened in writing to terminate or materially reduce its provision of
products or services to the Company. To the knowledge of the Company, no such
supplier is threatened with bankruptcy or insolvency.
2.24 Brokers. Except for the fees and compensation payable to
Financo, Inc. and Glass & Associates, Inc. by the Company, the terms and amounts
of which have been disclosed in writing to the several Purchasers, neither the
Company nor any Subsidiary has any Liability to pay any fees, commissions or
other similar compensation to any broker, finder, investment banker, financial
advisor, or other similar Person in connection with the Transactions.
2.25 Certain Business Practices. None of the Company, any
Subsidiary, or, to the knowledge of the Company, any Affiliate of the Company,
has: (a) used any funds for contributions, gifts, entertainment, or other
expenses relating to political activity that was in any manner related to the
business or operations of the Company or any Subsidiary, that was illegal at
such time under any applicable Law; (b) directly or indirectly paid or delivered
any fee, commission, or other sum of money or item of property, however
characterized, to any finder, agent, or other Person acting on behalf of or
under the auspices of a governmental official or Governmental or Regulatory
Authority, in the United States or any other country, that was in any manner
related to the business or operations of the Company or any Subsidiary, that was
illegal at such time under any applicable Law; or (c) in violation of applicable
Law, done any of the following: made any payment to any customer or supplier of
the Company or any Subsidiary or any officer, director, holder of stock or other
equity or ownership interest, member, partner, employee, or agent of any such
customer or supplier for the sharing of fees or the rebating of charges, or
otherwise engaged in any other reciprocal practice, or made any other payment or
given any other consideration to any such
13
customer or supplier or any such officer, director, holder of stock or other
equity or ownership interest, member, partner, employee, or agent, in connection
with the business or operations of the Company.
2.26 Investment Company. The Company is not an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
2.27 Disclosure. No representation or warranty of the Company
contained in this Agreement, any Operative Agreement, the disclosure statement
used by the Company to solicit approval of the Reorganization Plan, or any
certificate furnished to any of the several Purchasers to comply with a
provision of this Agreement requiring such delivery (including the SEC
Documents) contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make such statements, in the light of the
circumstances under which they were made, not misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE SEVERAL PURCHASERS
Each of the several Purchasers hereby severally, and not jointly,
represents and warrants to the Company, with respect to such Purchaser only, as
follows:
3.01 Organization and Qualification of the Several Purchasers. Such
Purchaser is an entity duly organized and validly existing and in good standing
under the Laws of its jurisdiction of organization.
3.02 Authority of the Several Purchasers Relative to this Agreement
and the Operative Agreements. Such Purchaser has full power and authority under
its governing organizational documents to enter into this Agreement and the
Operative Agreements to which it is a party and to perform its obligations under
this Agreement and under the Operative Agreements and to consummate the
Transactions. The execution, delivery, and performance of this Agreement and the
Operative Agreements to which such Purchaser is a party and the consummation by
such Purchaser of the Transactions have been duly and validly authorized by such
Purchaser and no other proceedings on the part of such Purchaser are necessary
to authorize the execution, delivery, and performance by such Purchaser of this
Agreement and the Operative Agreements to which it is a party and the
consummation by such Purchaser of the Transactions. Subject to the entry of the
applicable Orders by the Bankruptcy Court, this Agreement and the Operative
Agreements constitute legal, valid, and binding obligations of such Purchaser
enforceable against such Purchaser in accordance with their respective terms,
except as enforceability may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium, or other similar Laws relating to the
enforcement of creditors' rights generally, and by general principles of equity.
3.03 No Conflicts by the Several Purchasers. The execution and
delivery by such Purchaser of this Agreement, and the execution and delivery by
such
14
Purchaser of the Operative Agreements to which it is a party, the performance by
such Purchaser of its obligations under this Agreement and such Operative
Agreements, and the consummation of the Transactions by such Purchaser do not,
and at any relevant time prior to the Standby Closing and at the Standby
Closing, will not:
(a) conflict with or result in a violation or breach of any of the
terms, conditions, or provisions of the governing organizational documents
of such Purchaser;
(b) conflict with or result in a violation or breach of any term or
provision of any material Law or Order applicable to such Purchaser, the
effect of which would reasonably be expected to result in the issuance of
an Order restraining, enjoining, or otherwise prohibiting or making
illegal the consummation of any of the Transactions; or
(c) conflict with or result in a violation or breach of; constitute
(with or without notice or lapse of time or both) a default under; require
such Purchaser to obtain any consent, approval, or action of, make any
filing with, or give any notice to, any Person as a result or under the
terms of (other than any consent, approval, action, filing, or notice that
was already obtained, given, or made) any Contract or License to which
such Purchaser is a party, the effect of which, could reasonably be
expected to result in the issuance of an Order restraining, enjoining, or
otherwise prohibiting or making illegal the consummation of any of the
Transactions.
3.04 Governmental Approvals and Filings by the Several Purchasers.
No material consent, approval, or action of, filing with, or notice to any
Governmental or Regulatory Authority on the part of such Purchaser is required
in connection with the execution, delivery, and performance of this Agreement or
the Operative Agreements to which it is a party or the consummation of the
Transactions (other than any consent, approval, action, filing, or notice as was
already obtained, given, or made).
3.05 Legal Proceedings of the Several Purchasers. There are no
Actions or Proceedings pending or, to the knowledge of such Purchaser,
threatened against, relating to, or affecting such Purchaser that could
reasonably be expected to result in the issuance of an Order restraining,
enjoining or otherwise prohibiting or making illegal the consummation of any of
the Transactions.
3.06 Purchase for Own Account. The Standby Shares, the Warrants, and
the Underlying Shares are being acquired for investment for such Purchaser's own
account, not as a nominee or agent, in the ordinary course of business, and not
with a view to the public resale or distribution thereof within the meaning of
the Securities Act, without prejudice, however, to such Purchaser's right at all
times to sell or otherwise dispose of all or any part of such securities in
compliance with applicable federal and state securities laws and as otherwise
contemplated by this Agreement. Such Purchaser also represents that it has not
been formed for the specific purpose of acquiring any of the Standby Shares, the
Warrants, or the Underlying Shares.
15
3.07 Accredited Investor Status. Such Purchaser is an "accredited
investor" within the meaning of Regulation D promulgated under the Securities
Act.
3.08 Restricted Securities. Such Purchaser understands that none of
the Warrants, the Standby Shares, or the Underlying Shares has been registered
under the Securities Act and such Purchaser will not sell, offer to sell,
assign, pledge, hypothecate, or otherwise transfer any of such securities unless
(a) pursuant to an effective registration statement under the Securities Act,
(b) such holder provides the Company with an opinion of counsel, in a reasonably
acceptable form, to the effect that a sale, assignment, or transfer of such
securities may be made without registration under the Securities Act, (c) such
holder provides the Company with reasonable assurances (in the form of seller
and broker representation letters) that such securities can be sold pursuant to
Rule 144 promulgated under the Securities Act ("Rule 144"); or (d) pursuant to
Rule 144(k) promulgated under the Securities Act following the applicable
holding period.
3.09 Legends. Such Purchaser agrees that the Warrants, the Standby
Shares, and the Underlying Shares will bear substantially the following legend:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR WITH ANY STATE
SECURITIES COMMISSION, AND MAY NOT BE TRANSFERRED OR DISPOSED OF BY
THE HOLDER IN THE ABSENCE OF A REGISTRATION STATEMENT THAT IS
EFFECTIVE UNDER THE ACT AND APPLICABLE STATE LAWS AND RULES, OR,
UNLESS, IMMEDIATELY PRIOR TO THE TIME SET FOR TRANSFER, SUCH
TRANSFER MAY BE EFFECTED WITHOUT VIOLATION OF THE ACT AND OTHER
APPLICABLE STATE LAWS AND RULES. NOTWITHSTANDING THE FOREGOING, THIS
WARRANT AND THE UNDERLYING SHARES MAY BE PLEDGED IN CONNECTION WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT
SECURED BY THESE SECURITIES."
In addition, such Purchaser agrees that the Company may place stop transfer
orders with its transfer agent with respect to the Warrants, Standby Shares, and
the Underlying Shares, as the case may be, in order to implement the
restrictions on transfer set forth in this Agreement. The legend set forth above
will be removed and the Company will issue a Warrant, Standby Shares, or
Underlying Shares, as the case may be, without such legend to the holder thereof
upon which it is stamped, if, unless otherwise required by state securities
laws, (i) such Warrants, Standby Shares, or Underlying Shares, as the case may
be, are registered for resale under the Securities Act; (ii) such holder
provides the Company with an opinion of counsel, in a generally acceptable form,
to the effect that a sale, assignment, or transfer of the Warrants, Standby
Shares, or Underlying Shares, as the case may be, may be made without
registration under the Securities Act and the transferee agrees to be bound by
the terms and conditions of this
16
Agreement; (iii) such holder provides the Company with reasonable assurances (in
the form of seller and broker representation letters) that the Warrants, Standby
Shares or Underlying Shares, as the case may be, can be sold pursuant to Rule
144 or (iv) pursuant to Rule 144(k) promulgated under the Securities Act
following the applicable holding period.
ARTICLE 4
PRE-CLOSING COVENANTS
4.01 Regulatory and Other Approvals.
(a) Prior to the Standby Closing, the Company, will, and will cause
the Subsidiaries to, proceed diligently and in good faith and use their
commercially reasonable efforts, as promptly as practicable, to (i) obtain
all consents, approvals, or actions of, to make all filings with and to
give all notices to, Governmental or Regulatory Authorities or any other
Person required of the Company or any Subsidiary as a result of the
Transactions; (ii) provide such other information and communications to
such Governmental or Regulatory Authorities or other Persons as may
reasonably be requested in order for the Company and the Subsidiaries to
obtain any such necessary consent, approval, or action; and (iii)
cooperate with the several Purchasers as promptly as practicable in
obtaining all consents, approvals, or actions of, making all filings with,
and giving all notices to Governmental or Regulatory Authorities referred
to in Section 4.01(b). The Company will provide prompt notification to the
several Purchasers when any such consent, approval, action, filing, or
notice referred to in clause (i) above is obtained, taken, made, or given,
as applicable, and will advise the several Purchasers of any
communications (and, unless precluded by Law, provide copies of any such
communications that are in writing) with any Governmental or Regulatory
Authority or other Person regarding any such consent, approval, action,
filing, or notice of the Transactions. Nothing in this Agreement will
preclude the Company and the Subsidiaries from terminating this Agreement
pursuant to Article 8 or taking any other actions expressly permitted
under this Agreement; provided that the fee payable pursuant to Section
8.02 is paid to the several Purchasers if and to the extent contemplated
by Section 8.02.
(b) Prior to the Standby Closing, each of the several Purchasers
will proceed diligently and in good faith and use their commercially
reasonable efforts, as promptly as practicable, to (i) obtain all
consents, approvals, or actions of, to make all filings with, and to give
all notices to, Governmental or Regulatory Authorities or any other Person
required of such Purchaser to consummate the Transactions; (ii) provide
such other information and communications to such Governmental or
Regulatory Authorities or other Persons as any such Governmental or
Regulatory Authorities or other Persons may reasonably request in order
for such Purchaser to obtain any such necessary consent, approval, or
action; and (iii) cooperate with the Company and the Subsidiaries as
promptly as practicable in obtaining all consents,
17
approvals, or actions of, making all filings with, and giving all notices
to, Governmental or Regulatory Authorities or other Persons referred to in
Section 4.01(a). Nothing in this Section 4.01(b) will preclude the several
Purchasers from terminating this Agreement pursuant to Article 8 or taking
any other actions expressly permitted under this Agreement.
4.02 Investigation by the Several Purchasers. From the date of this
Agreement through the Standby Closing Date, the Company will, and will cause the
Subsidiaries to:
(a) provide the several Purchasers and each of their respective
officers, employees, agents, counsel, accountants, financial advisors,
consultants, sources of financing, and other representatives
(collectively, "Agents") with full access, upon reasonable prior notice
and during normal business hours, to all officers, employees, agents, and
accountants of the Company and the Subsidiaries and their respective
Assets and Properties and Books and Records and will use commercially
reasonable efforts to cause such Persons to cooperate with the Purchasers
and their Agents in such consultations and in verifying such information;
and
(b) furnish the several Purchasers and their Affiliates and other
Agents with all such information and data (including copies of Contracts,
Benefit Plans, and other Books and Records) concerning the business and
operations of the Company and the Subsidiaries as the several Purchasers
or any of such other Agents reasonably requests in connection with such
investigation. Nothing contained in this Section 4.02 will affect the
survival of the representations, warranties, covenants, agreements, and
indemnities of the Company under this Agreement or the conditions to the
obligations of the several Purchasers under this Agreement. All
information disclosed under this Section 4.02 will be subject to the
Confidentiality Agreements.
4.03 Conduct of Business. From the date of this Agreement through
the Standby Closing Date, the Company will, and will cause the Subsidiaries to,
conduct business only in the ordinary course consistent with past practice and
consistent with the terms of this Agreement. Without limiting the generality of
the foregoing, except as expressly contemplated by this Agreement or the
Reorganization Plan or otherwise agreed to by the Purchasers holding at least
two-thirds in dollar amount of the Standby Funding Commitments (a "Two-Thirds
Majority"), the Company will, and will cause each of the Subsidiaries to:
(a) use its commercially reasonable efforts to (i) preserve intact
the present business organization and reputation of the Company and the
Subsidiaries; (ii) maintain the services of the present officers,
employees, and consultants of the Company and the Subsidiaries (subject to
dismissals and retirements in the ordinary course of business consistent
with past practice); (iii) maintain in all material respects the Assets
and Properties of the Company and the Subsidiaries in the same working
order and condition as of the date
18
hereof, ordinary wear and tear excepted; (iv) maintain in all material
respects all existing material relationships with customers, suppliers,
and other Persons with which the Company or any of the Subsidiaries has
material business relationships; (v) continue in all material respects all
current sales, marketing, and promotional activities relating to the
business and operations of the Company and the Subsidiaries; and (vi)
except for Contracts the Company determines to reject in accordance with
this Agreement, use commercially reasonable efforts to maintain all
material Contracts, Licenses, and Intellectual Property of the Company and
the Subsidiaries in full force and effect; and (vii) promptly notify the
several Purchasers in writing of any Material Adverse Change;
(b) except to the extent required by applicable Law, cause the Books
and Records to be maintained in the ordinary course of business consistent
with past practices;
(c) maintain in full force and effect substantially the same levels
of coverage as the insurance afforded under the policies currently in
effect;
(d) comply in all material respects with all Laws and Orders
applicable to the business and operations of the Company and the
Subsidiaries, and promptly following receipt thereof, give notice to the
several Purchasers (and, if permitted by Law, copies) of any notice
received from any Governmental or Regulatory Authority or other Person
alleging any material violation of any such Law or Order;
(e) administer each Benefit Plan, or cause each Benefit Plan to be
so administered, in all material respects in accordance with the
applicable provisions of the Code, ERISA, and all other applicable Law;
(f) timely file all material Tax Returns required to be filed by or
with respect to the Company or any Subsidiary, or by or with respect to
any affiliated, consolidated, combined, unitary or other similar group of
which the Company or any Subsidiary is a member, and timely pay, subject
to any valid extensions, any material Taxes or other material amounts
shown as due and owing on such Tax Returns, except where the Company or
any Subsidiary is contesting the payment of such taxes or other amounts in
good faith; and
(g) promptly notify the several Purchasers in writing of each
receipt by the Company or any Subsidiary (and furnish each of the several
Purchasers with copies) of any notice of investigation or administrative
proceeding by the IRS, the United States Department of Labor, the Pension
Benefit Guaranty Corporation, or other Person involving any Benefit Plan.
4.04 Certain Restrictions. From the date of this Agreement through
the Standby Closing Date, except as expressly contemplated by this Agreement or
the
19
Reorganization Plan or otherwise agreed to by a Two-Thirds Majority, the Company
will, and will cause the Subsidiaries to:
(a) refrain from amending the Certificate of Incorporation or
By-Laws (or similar governing document) of the Company or any of the
Subsidiaries or taking any action with respect to any such amendment or
any reorganization, liquidation, or dissolution;
(b) refrain from violating, breaching, or defaulting under, or
taking or failing to take any action that (with or without notice or lapse
of time or both) would constitute a material violation or breach of, or
default under, any Material Contract or Real Property Lease to which the
Company or any Subsidiary is a party or by which any of its respective
Assets and Properties are bound, including the termination or rejection
(whether pursuant to Section 365 of the Bankruptcy Code or otherwise) of
any Contract, except as expressly contemplated by this Agreement; and
(c) refrain from entering into any Contract or otherwise making any
commitment to do or engage in any of the foregoing.
4.05 Affiliate Transactions. Except as expressly contemplated by
this Agreement or the Reorganization Plan, from the date of this Agreement
through the Standby Closing Date, the Company will, and will cause the
Subsidiaries to, refrain from entering into any material Contract or amending or
modifying any existing Contract with any officer, director or Affiliate of the
Company (other than Contracts between the Company and any Wholly-Owned
Subsidiary or the Company or between two or more Wholly-Owned Subsidiaries of
the Company) or any Affiliate of any such officer or director, in each case
except with the consent of the Majority Purchasers.
4.06 Notice and Cure. The Company will, and will cause the
Subsidiaries to, disclose to the several Purchasers promptly in writing after
the Company or any of the Subsidiaries becomes aware of, and contemporaneously
provide the several Purchasers with a notice of, and true and complete copies of
any and all information or documents in their possession or under their control
relating to (collectively, a "Company Notice"), any event, transaction, or
circumstance that occurs or becomes known to the Company after the date of this
Agreement that causes or would be reasonably expected to cause any covenant or
agreement of the Company under this Agreement to be breached or that renders or
would be reasonably expected to render untrue any representation or warranty of
the Company contained in this Agreement as if the same were made on or as of the
date of such event, transaction, or circumstance. For purposes of determining
whether a breach exists with respect to any of the representations, warranties,
covenants or agreements set forth in this Agreement, any such written
supplemental or amended disclosure will be deemed to have been disclosed to the
Purchasers and incorporated into this Agreement as set forth in such written
disclosure, unless the Majority Purchasers terminate this Agreement pursuant to
Section 8.01(b)(i). Unless the Majority Purchasers terminate this Agreement as
provided in Section 8.01(b)(i) as a result of any written supplemental or
amended
20
disclosure, such supplemental or amended disclosure will be deemed to have been
accepted by the Purchasers and will not prevent the condition in Section 5.01
from being satisfied by the Company. The Company will, and will cause the
Subsidiaries to, use their respective commercially reasonable efforts to cure
before the Standby Closing Date, any material breach of any representation,
warranty, covenant, or agreement made by the Company in this Agreement.
4.07 Fulfillment of Conditions. The Company will use its
commercially reasonable efforts to and will cause the Subsidiaries to use their
commercially reasonable efforts to, satisfy each condition to the obligations of
the several Purchasers contained in this Agreement and will use commercially
reasonable efforts to refrain from taking any action that could reasonably be
expected to result in the nonfulfillment of any such condition. Each of the
several Purchasers will use its commercially reasonable efforts to satisfy each
condition to the obligations of the Company contained in this Agreement and will
use commercially reasonable efforts to refrain from taking any action that could
reasonably be expected to result in the nonfulfillment of any such condition or
a breach by the Company of any of its covenants under this Agreement.
4.08 Bankruptcy Actions. The Company will provide the several
Purchasers and their counsel with a reasonable opportunity to review and comment
upon the Reorganization Plan and all motions, pleadings, applications, and
supporting papers prepared by the Company and its Affiliates relating (directly
or indirectly), in such Purchaser's good faith determination, to the
Transactions (including forms of orders and notices to interested parties) prior
to the filing thereof in the Reorganization Case. The Company will use
commercially reasonable efforts to cause the Property and Asset leases of the
Company or any Subsidiary to be validly assumed under Section 365 of the
Bankruptcy Code pursuant to an Order of the Bankruptcy Court or the
Reorganization Plan. The Company will use commercially reasonable efforts to
validly assume the Material Contracts under Section 365 of the Bankruptcy Code
pursuant to an Order of the Bankruptcy Court or the Reorganization Plan.
4.09 Option Plans. The Company will take all necessary actions so
that any outstanding Derivative Securities held by any officer, director,
employee, or consultant of the Company or any Subsidiary, and any related stock
option plans, will be terminated and cancelled effective as of the Standby
Closing Date.
4.10 No Solicitation. Neither the Company nor any of its Affiliates,
representatives, officers, employees, directors, or agents will, directly or
indirectly: (a) solicit, initiate or encourage any inquiry, proposal or offer
from any Person relating to any Strategic Transaction with another Person (a
"Competing Transaction"); or (b) furnish any information with respect to,
discuss with, assist or participate in, or facilitate in any other manner any
effort or attempt by any Person to do or seek to do any Strategic Transaction;
provided however, nothing in this Section 4.10 will limit or restrict in any way
the Company from furnishing information that has already been provided to the
Purchasers to any Person that has requested such information in connection with
such Person's bona fide consideration of a proposal for a Competing Transaction
and from discussing the content of such information with such Person;
21
provided that the content of such discussions has also been provided to the
Purchasers and the Company has not violated this Section 4.10 with respect to
such Person or any of its Affiliates. This Section 4.10 will not prevent the
Company from communicating with its legal, accounting, and other professional
advisors or lenders for the purpose of facilitating the Transactions. The
Company will provide the several Purchasers with copies of all information
provided to any Person involved in a potential Competing Transaction and will
notify the several Purchasers immediately if any Person makes any bona fide
proposal, offer, inquiry, or contact to the Company or, to the Company's
knowledge, any other Person for the purpose of effecting a Competing
Transaction. The Company will notify the several Purchasers promptly if any
proposal regarding a Competing Transaction (or any inquiry or contact with any
Person with respect to any Competing Transaction) is made, and will advise the
several Purchasers of the contents of any such proposal for a Competing
Transaction (and, if in written form, provide the Committee with copies of such
proposal, and, if oral, a summary of all its material terms).
ARTICLE 5
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE SEVERAL PURCHASERS
The obligations of each of the several Purchasers under this Agreement are
subject to the fulfillment as of the Standby Closing of each of the following
conditions (all or any of which may be waived in writing by the Majority
Purchasers at their sole option, except for the conditions set forth in Section
5.05(a), which may only be waived in writing by all of the Purchasers at their
sole option):
5.01 Representations and Warranties. There must be no breach of any
representation or warranty made by the Company in this Agreement at and as of
the Standby Closing Date as though such representation or warranty were made at
and as of the Standby Closing Date, that is material to the Business or
Condition of the Company, in each case giving effect to any disclosures made by
the Company after the date of this Agreement in accordance with Section 4.06.
5.02 Performance. Each of the Company and its Subsidiaries must have
performed and complied in all material respects with each agreement, covenant,
and obligation required by this Agreement to be so performed or complied with by
the Company on or before the Standby Closing Date.
5.03 Order and Laws. (a) There must not be in effect on the Standby
Closing Date any Order or Law restraining, enjoining, or otherwise prohibiting
or making illegal the consummation of any of the Transactions and (b) there must
not be pending or threatened on the Standby Closing Date any Action or
Proceeding or any other action in which an unfavorable Order would (i) prohibit
the consummation of any of the Transactions or (ii) materially impair the
ability of the Company to conduct its business as and to the extent now
conducted or proposed to be conducted.
5.04 Consents and Approvals. All material consents, approvals, and
actions of, filings with, and notices to, any Governmental or Regulatory
Authority
22
necessary to permit the Company and each of the several Purchasers to perform
their respective obligations under this Agreement and the Operative Agreements
and to consummate the Transactions must have been duly obtained, made, or given,
must be in form and substance reasonably satisfactory to the Majority
Purchasers, must not be subject to the satisfaction of any condition that has
not been satisfied or waived, and must be in full force and effect as of the
Standby Closing, and all terminations or expirations of waiting periods imposed
by any Governmental or Regulatory Authority necessary for the consummation of
the Transactions must have occurred.
5.05 Reorganization Plan.
(a) The Reorganization Plan and Disclosure Statement must have been
filed with the Bankruptcy Court no later than October 30, 2004 and at the
time of filing must be in form and substance satisfactory to each
Purchaser at its sole and absolute option. No amendments, modifications or
supplements must have been made to the Reorganization Plan that adversely
affects the rights or obligations of any Purchaser after filing with the
Bankruptcy Court without obtaining the prior written approval of such
Purchaser, which approval will be given at the sole and absolute option of
such Purchaser.
(b) The Reorganization Plan must be effected under chapter 11 of the
Bankruptcy Code. The Company at all times prior to the effective date of
the Reorganization Plan must remain a debtor-in-possession, and there must
not have been appointed any trustee or examiner with respect to the
Company's business, operations, or management.
(c) The confirmation order (the "Confirmation Order") relating to
the Reorganization Plan, in a form providing for the effectuation of all
the Transactions in accordance with the terms and provisions of this
Agreement, must have been entered by the Bankruptcy Court in form and
substance satisfactory to the Majority Purchasers; at least ten days must
have passed since the entry of such Order; such Order must not be subject
to any stay, appeal, or motion for rehearing, reargument, reconsideration,
or revocation; and all conditions to the effectiveness of the
Reorganization Plan (or the occurrence of the Effective Date as defined in
the Reorganization Plan) must have been satisfied or duly waived in
accordance with the Reorganization Plan.
5.06 Operative Agreements Satisfactory; Deliveries Complete. Each of
the Operative Agreements must be in form and substance reasonably satisfactory
to the Majority Purchasers and their counsel. All securities, certificates,
instruments, and documents required by this Agreement, the Reorganization Plan,
or the Operative Agreements to have been delivered by the Company to any other
party to this Agreement at or prior to the Standby Closing, all other documents
relating to the Transactions as the Purchasers or their counsel may reasonably
request, and all actions required to have been taken by Company under this
Agreement or any of the Operative Agreements, must, in each case, have been
delivered by them at or prior to the Standby Closing.
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5.07 Credit Facilities; Post-Standby Closing Balance Sheet.
(a) The Company must have obtained, on terms and conditions and in
amounts reasonably satisfactory to the Majority Purchasers, financing to
repay in full all obligations of the Company under the Credit Facility
(which will be retired). The Company will have entered into a new credit
facility to fund the working capital requirements of the Company and the
Subsidiaries after the Standby Closing (the "New Credit Facility"), which
must be in full force and effect as of the Standby Closing and must not
have been amended or modified without obtaining the prior approval of the
Majority Purchasers, which approval will not be unreasonably withheld or
delayed.
(b) Immediately after the Standby Closing, the Company must have no
Indebtedness (other than under the Seasonal Credit Facility and the New
Credit Facility), and no capital stock or Derivative Securities
outstanding other than the Warrants and the New Common Stock, the
preferred stock and employee options authorized under the Reorganization
Plan.
5.08 Equity Incentive Plan. Effective as of the Standby Closing
Date, the Company must have adopted an equity incentive plan for directors,
employees, and consultants to the Company, in form and substance reasonably
satisfactory to the Majority Purchasers, and will cause to be made initial
grants thereunder as agreed by the Company and the Majority Purchasers before
the Standby Closing Date.
5.09 Good Standing and Tax Status. For the Company and each
Subsidiary, the Company must deliver to the Purchasers certificates in effect as
of the Standby Closing of existence, good standing and/or authority and tax
status in the jurisdictions in which the Company or such Subsidiary, as
applicable, is incorporated and in each jurisdiction where the Company or such
Subsidiary, as applicable, is qualified to do business.
5.10 Officer's Certificates. The Company must deliver to the
Purchasers a certificate dated as of the Standby Closing Date and executed by an
executive officer of the Company, attached to which are true and complete copies
of each of the certificate of incorporation of the Company as in effect as of
the Standby Closing Date, the bylaws of the Company as in effect as of the
Standby Closing Date and resolutions of the Company's Board of Directors
authorizing this Agreement and the Transactions, as in effect as of the Standby
Closing Date.
5.11 Legal Opinion. The Company must deliver to the Purchasers a
legal opinion of the Company's counsel covering the matters set forth in
Schedule 5.11.
5.12 Closing Certificate. The Company must have delivered to the
several Purchasers a certificate dated as of the Standby Closing Date and
executed by the chief executive officer and the chief financial officer of the
Company to the effect that the conditions set forth in this Article 5 have been
fulfilled.
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5.13 Expenses. Subject to Section 10.03, the Company must have
reimbursed the several Purchasers for all documented reasonable professional
fees and expenses incurred by or on behalf of the several Purchasers in
connection with the consummation of the Transaction; provided that should the
aggregate of such professional fees and expenses exceed $300,000, then such
reimbursement will be limited to $300,000 in the aggregate and prorated among
the several Purchasers according to their Standby Funding Commitments.
5.14 Stores Open. The Company must maintain at least 220 retail
stores open and in operation in the ordinary course of business, consistent with
past practice, unless otherwise consented to by the Majority Purchasers.
5.15 Rights Offering; Securities Law Compliance. The Rights Offering
must have been duly consummated in accordance with the Reorganization Plan and
the terms of this Agreement pursuant to the Rights Offering Registration
Statement. The Company must have received within one Business Day before the
Standby Closing Date a written confirmation from the SEC that the Company may
request acceleration of the effectiveness of a Resale Registration Statement as
of a time not more than five Business Days after the Standby Closing Date. The
Company must have made all other filings under all applicable Federal and state
securities laws necessary to consummate the Transactions in compliance with such
laws.
ARTICLE 6
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement are subject to the
fulfillment as of the Standby Closing of each of the following conditions (all
or any of which may be waived in writing by the Company at its sole option):
6.01 Representations and Warranties. There must be no breach of any
representation or warranty made by the several Purchasers in this Agreement at
and as of the Standby Closing Date as though such representation or warranty
were made at and as of the Standby Closing Date, that is material to the ability
of the Purchasers to perform their several obligations under this Agreement.
6.02 Performance. Each Purchaser must have performed and complied in
all material respects with each agreement, covenant, and obligation required by
this Agreement to be so performed or complied with by such Purchaser on or
before the Standby Closing Date.
6.03 Order and Laws. (a) There must not be in effect on the Standby
Closing Date any Order or Law restraining, enjoining, or otherwise prohibiting
or making illegal the consummation of any of the Transactions and (b) there must
not be pending or threatened on the Standby Closing Date any Action or
Proceeding or any other action in which an unfavorable Order is reasonably
likely to prohibit the consummation of any of the Transactions.
25
6.04 Regulatory Consents and Approvals. All material consents,
approvals, and actions of, filings with, and notices to, any Governmental or
Regulatory Authority necessary to permit the Company and each of the several
Purchasers to perform their respective obligations under this Agreement and the
Operative Agreements and to consummate the Transactions (a) must have been duly
obtained, made or given and must be in form and substance reasonably
satisfactory to the Company; (b) must not be subject to the satisfaction of any
condition that has not been satisfied or waived; and (c) must be in full force
and effect, and all terminations or expirations of waiting periods imposed by
any Governmental or Regulatory Authority necessary for the consummation of the
Transactions must have occurred.
6.05 Confirmation Order. The Confirmation Order, in a form providing
for the effectuation of all the Transactions in accordance with the terms and
provisions of this Agreement, must have been entered by the Bankruptcy Court in
a form reasonably satisfactory to the Company; at least ten days will have
passed since the entry of such Order; such Order, must not be subject to any
stay, appeal, or motion for rehearing, reargument, reconsideration, or
revocation; and all conditions to the effectiveness of the Reorganization Plan
(or the occurrence of the Effective Date as defined in the Reorganization Plan)
must have been satisfied or duly waived in accordance with the Reorganization
Plan.
6.06 Operative Agreements Satisfactory; Deliveries Complete. Each of
the several Purchasers must have executed and delivered each of the Operative
Agreements to which it is a party, and each of the Operative Agreements must be
in form and substance reasonably satisfactory to the Company and its counsel.
All documents and funds required by this Agreement or the Operative Agreements
to have been delivered by any of the several Purchasers to any other party to
this Agreement must have been delivered or taken by them at or prior to the
Standby Closing.
6.07 Closing Certificate. Each Purchaser will have delivered to the
Company a certificate dated as of the Standby Closing Date and executed by a
duly authorized officer of such Purchaser to the effect that the conditions
expressed in this Article 6 have been fulfilled by such Purchaser.
ARTICLE 7
CERTAIN ADDITIONAL COVENANTS
7.01 Further Assurances. At any time or from time to time after the
Standby Closing Date, the several Purchasers and the Company will execute and
deliver such other documents and instruments and take such other actions as the
Company or any of the several Purchasers may reasonably request to consummate
the Transactions.
7.02 Designated Directors. Subject to compliance with applicable
Law, the Company agrees that it will promptly take all necessary and desirable
actions within its control (including calling special board and stockholders
meetings) to, at the Standby Closing Date, (a) establish a seven-member Board of
Directors and (b) cause the
26
election to its Board of Directors of (i) five directors as will be designated
prior to the Standby Closing Date by the Equity Committee (the "EC Designated
Directors"), (ii) two directors designated by the management of the Company (the
"Management Designated Directors" and, together with the EC Designated
Directors, the "Designated Directors"). A majority of the EC Designated
Directors will meet the requirements for "independence" of any exchange or
interdealer quotation system upon which the New Common Stock is listed or
traded. At least one of the Management Designated Directors will meet the
requirements for "independence" of any exchange or interdealer quotation system
upon which the New Common Stock is traded or listed.
7.03 Primary Registration. The Company agrees to comply with each of
the following provisions.
(a) The Company will cause to be filed with the SEC, on or before
December 15, 2004 (the "Filing Deadline"); a registration statement on
Form S-1 under the Securities Act (the "Rights Offering Registration
Statement") relating to the offer and sale of the rights issued in the
Rights Offering and the New Common Stock underlying such rights (the
"Rights Securities") in accordance with the methods of distribution set
forth in the Rights Offering Registration Statement and Rule 415 under the
Securities Act.
(b) The Company will use commercially reasonable efforts to have
such Rights Offering Registration Statement declared effective by the SEC
as soon as practicable and will keep the Rights Offering Registration
Statement continuously effective, supplemented, and amended in order to
permit the prospectus included in the Rights Offering Registration
Statement to be lawfully delivered by the Company until such time as the
Rights Offering has been consummated. As used in this Agreement, except as
otherwise provided or unless the context otherwise requires, the term
"prospectus" refers to the prospectus included in a Registration Statement
at the time such Registration Statement is declared effective by the SEC,
as amended or supplemented by any prospectus supplement and by all other
amendments thereto, including post-effective amendments, and all material
incorporated by reference into such prospectus.
(c) The Company will comply with all applicable rules and
regulations of the SEC, and make available to its security holders, as
soon as reasonably practicable, an earnings statement complying with the
provisions of Section 11(a) of the Securities Act and covering the period
of at least 12 months, beginning with the first fiscal quarter beginning
after the effective date of the Rights Offering Registration Statement.
(d) All of the Company's expenses incident to the Rights Offering
Registration Statement, including all registration and filing fees, fees
and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, and fees and disbursements of
counsel for the Company and all independent certified public accountants,
underwriters
27
(excluding discounts and commissions), and other Persons retained by the
Company will be borne by the Company.
7.04 Resale Registration. The Company will comply with each of the
following provisions:
(a) The Company will cause to be filed with the SEC, on or before
the Filing Deadline, a resale registration statement on Form S-1 under the
Securities Act (the "Resale Registration Statement") relating to the offer
and sale of the Standby Shares, the Warrants, the Underlying Shares, and
all shares of New Common Stock acquired by the Purchasers in the Rights
Offering (the "Resale Securities") in accordance with the methods of
distribution set forth in the Resale Registration Statement and Rule 415
under the Securities Act.
(b) The Company will have such Resale Registration Statement
declared effective by the SEC as soon as practicable after the Standby
Closing, but in no event later than five Business Days after the Standby
Closing Date; and will keep the Resale Registration Statement continuously
effective, supplemented, and amended in order to permit the prospectus
included in the Resale Registration Statement to be lawfully delivered by
the several Purchasers until the earliest of (i) all of the Resale
Securities held by the several Purchasers have been sold, (ii) the date on
which all such Resale Securities become eligible to be sold to the public
through a broker, dealer, or market maker pursuant to Rule 144 (or any
similar provision then in force) during a single 90-day period, and (iii)
the two year anniversary of the effective date of the Resale Registration
Statement; provided, however such two year period will be extended for the
periods of time any Suspension is in effect pursuant to subsection (c),
(d) or (e) below.
(c) Notwithstanding the provisions of subsection (b) above, during
the period of the effectiveness of the Resale Registration Statement, the
Company, upon the happening of any pending corporate development, public
filing with the SEC or similar event, that, in the judgment of Company's
Board of Directors, renders it advisable to suspend use of the prospectus
contained in the Resale Registration Statement, may, for no more than 30
days, suspend use of such prospectus, upon delivery of a certificate in
writing to each Purchaser to the effect of the foregoing (which notice
will not disclose the content of any material non-public information and
will indicate the date of the beginning and end of the intended period of
suspension, if known). Upon receipt of such certificate, each Purchaser
will discontinue disposition of Resale Securities covered by the Resale
Registration Statement or related prospectus until copies of a
supplemented or amended prospectus are distributed to the Purchasers or
until the Purchasers are advised in writing by the Company that sales of
Resale Securities under the prospectus may be resumed, and have received
copies of any additional or supplemental filings that are incorporated or
deemed incorporated by reference in the prospectus. In the event of any
such suspension, the Company will use its commercially reasonable efforts
to cause
28
the use of the prospectus so suspended to be resumed as soon as possible
after delivery of such suspension certificate to the Purchasers. The
suspension and notice thereof described in this subsection (c) will be
held in confidence and will not be disclosed by the Purchasers, except as
required by applicable Law or at the request of any Governmental or
Regulatory Authority. The Company may not utilize the suspension in this
subsection (c) more than two times in any 12 month period.
(d) Notwithstanding the provisions of subsection (b) above, if
during the period of effectiveness of the Resale Registration Statement,
(i) the SEC or any other federal or state Governmental Authority requests
amendments or supplements to the Resale Registration Statement or the
related prospectus or requests additional information, (ii) the SEC or any
other federal or state Governmental Authority issues a stop order
suspending the effectiveness of the Resale Registration Statement or
initiates a proceeding for that purpose, or (iii) the Company receives a
notification with respect to the suspension of the qualification or
exemption from qualification of any of the Resale Securities for sale in
any jurisdiction or the initiation of any proceeding for such purpose,
then the Company will deliver a certificate in writing to each Purchaser
to the effect of the foregoing (which notice will not disclose the content
of any material non-public information and will indicate the date of the
beginning and end of the intended period of suspension, if known). Upon
receipt of such certificate, each Purchaser will discontinue disposition
of Resale Securities covered by the Resale Registration Statement or
related prospectus until copies of a supplemented or amended prospectus
are distributed to the Purchasers or until the Purchasers are advised in
writing by the Company that sales of Resale Securities under the
prospectus may be resumed and have received copies of any additional or
supplemental filings that are incorporated or deemed incorporated by
reference in the prospectus. In the event of any such suspension, the
Company will use its commercially reasonable efforts to cause the use of
the prospectus so suspended to be resumed as soon as possible after
delivery of such certificate to the Purchasers. The suspension and notice
thereof described in this subsection (d) will be held in confidence and
will not be disclosed by the Purchasers, except as required by applicable
Law or at the request of any Governmental or Regulatory Authority. A
suspension and notice certificate described in subsection (c) above or in
this subsection (d) are referred to as a "Suspension" and a "Suspension
Notice", respectively.
(e) The Company will deliver a Suspension Notice to each Purchaser
upon discovery of the occurrence of any event as a result of which, a
prospectus included in the Resale Registration Statement contains an
untrue statement of a material fact or omits to state any material fact
necessary to make the statements therein not misleading in light of the
circumstance under which they were made and will prepare, file, and
furnish to such Purchaser a supplement or amendment to such prospectus so
that, as thereafter delivered, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make
the statements therein not misleading in light of the
29
circumstance under which they were made and will prepare, file, and
furnish to such Purchaser a supplement or amendment to such prospectus so
that, as thereafter delivered, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make
the statements therein not misleading in light of the circumstance under
which they were made. Upon receipt of such Suspension Notice, each of the
several Purchasers will discontinue offers and sales of Resale Securities
under the Resale Registration Statement until such Purchaser receives
copies of a supplemented or amended prospectus that corrects the
misstatements or omissions referred to above and receives notice that any
post-effective amendment has become effective. If so directed by the
Company, each Purchaser will deliver to the Company or destroy all copies
of the prospectus included in the Resale Registration Statement current at
the time of receipt of any such notice. The Suspension and Suspension
Notice described in this subsection (e) will be held in confidence and
will not be disclosed by the Purchasers, except as required by applicable
Law or at the request of any Governmental or Regulatory Authority.
(f) The Company will pay to each of the several Purchasers that
beneficially owns shares of New Common Stock acquired by such Purchaser in
the Rights Offering or pursuant to Article I (each, a "Restricted Holder")
that cannot be sold in the public markets due to a Suspension, whether the
result of any voluntary or involuntary action or omission by the Company,
whether for reasons beyond the control of the Company, and whether
pursuant to operation of Law or as a result of any action or inaction by
the SEC (the "Restricted Securities"), the Liquidated Amount. For the
purposes of this Agreement, the "Liquidated Amount" means an amount
calculated as follows for each day that the Restricted Securities cannot
be sold in the public markets due to the operation of Section 7.04(d) or
(e):
X = [(P x 0.12) / 365] / S
Where:
X = the Liquidated Amount
P = the aggregate purchase price paid by all Restricted
Holders for Restricted Securities
S = the number of shares of Restricted Securities beneficially
owned by the Restricted Holder to whom Liquidated Amounts are
to be paid
Any Liquidated Amounts due will be payable in cash on the last Business
Day of each month during which any Restricted Securities cannot be sold in
the public markets due to a Suspension, and will be paid directly by the
Company to the Restricted Holders by wire transfer of immediately
available funds to an account designated by each Restricted Holder in
writing. The parties agree that damages to the Restricted Holders are not
susceptible to calculation and that the Liquidated Amounts constitute a
reasonable current estimate of the actual damages to the Restricted
Holders that will result from any inability to sell Restricted Securities
in the public markets due to a Suspension. The parties agree, therefore,
that the Liquidated Amounts will be paid as liquidated damages without the
necessity of establishing the existence or amount of actual damages.
30
(g) The Company will, if requested, prior to filing such Resale
Registration Statement or any amendment or supplement thereto, furnish to
the several Purchasers and each applicable managing underwriter, if any,
copies thereof, and thereafter furnish to the several Purchasers and each
such underwriter such number of copies of such Resale Registration
Statement (including each preliminary prospectus contained therein) as
such Purchasers or each such underwriter may reasonably request in order
to facilitate the sale of the Resale Securities.
(h) The Company will enter into customary agreements and take such
other actions as are reasonably required in order to expedite or
facilitate the sale of the Resale Securities covered by the Resale
Registration Statement in accordance herewith.
(i) The Company will give the several Purchasers, one counsel
acting on behalf of the several Purchasers and one accountant acting on
behalf of the several Purchasers, the timely and reasonable opportunity to
participate in the preparation by reviewing and commenting on such Resale
Registration Statement, each prospectus included therein or filed with the
SEC and each amendment or supplement to the foregoing items, and give each
of them such access to its Books and Records and such opportunities to
discuss the business of the Company with its officers and the independent
public accountants who have certified its financial statements (upon
reasonable advance notice and during normal business hours) as may be
reasonably necessary or advisable, in the opinion of each of such
Purchaser.
(j) The Company will comply with all applicable rules and
regulations of the SEC, and make available to its security holders, as
soon as reasonably practicable, an earnings statement complying with the
provisions of Section 11(a) of the Securities Act and covering the period
of at least twelve months, beginning with the first fiscal quarter
beginning after the effective date of the Registration Statement.
(k) All of the Company's expenses incident to the Resale
Registration Statement, including all registration and filing fees, fees
and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, and fees and disbursements of
counsel for the Company and all independent certified public accountants,
underwriters (excluding discounts and commissions), and other Persons
retained by the Company will be borne by the Company.
(l) Each Purchaser agrees to provide to the Company in connection
with any Registration Statement all information about such Purchaser and
its Affiliates as is required in order to permit the Company to comply
with the registration requirement of the Securities Act and to complete
the Registration Statement.
31
7.05 Reservation of Company Common Stock. The Company will reserve
and keep available at all times, free of preemptive rights, rights of first
refusal or similar rights, a sufficient number of shares of New Common Stock for
the purpose of enabling the Company to satisfy any obligation to issue the
Underlying Shares upon exercise of the Warrants. The number of shares so
reserved may be reduced by the number of Underlying Shares actually delivered in
connection with the exercise of the Warrants, and the number of shares of New
Common Stock so reserved will be increased or decreased, as applicable, to
reflect stock splits, stock dividends, stock combinations, other distributions,
or reclassifications and other adjustments in accordance with the terms of the
Warrants. In the event that the number of shares of New Common Stock so reserved
is insufficient for issuance upon exercise of the Warrants, the Company will
increase the number of shares of New Common Stock so reserved to cure such
deficiency and, if necessary, to obtain the approval of its stockholders
therefor, including the authorization of such additional number of shares of New
Common Stock as may be required in excess of the number so reserved. The Company
will take all actions as may be necessary to assure that such Underlying Shares
will be issued as provided in the applicable Warrants without violation of any
applicable Law or governmental regulation or any requirements of any securities
exchange or automated quotation system upon which the New Common Stock may be
listed or quoted, as the case may be.
7.06 Listing. The Company will use commercially reasonable efforts
to cause the New Common Stock to be listed for trading on a national stock
exchange or qualified for quotation on the Nasdaq Stock Market National Market
System; or, to the extent that the Company does not qualify for listing on a
national stock exchange or quotation on the Nasdaq Stock Market National Market
System, the Company will use commercially reasonable efforts to cause the
Company Common Stock to be qualified for quotation on the Nasdaq Stock Market
Small Cap Market System; or, to the extent that the Company does not qualify for
quotation of the Nasdaq Stock Market Small Cap Market System, the Company will
use commercially reasonable efforts to cause the Company Common Stock to be
eligible for quotation on the Nasdaq Stock Market OTC Bulletin Board and will
maintain its qualifications to have the Company Common Stock so listed or
quoted.
7.07 Indemnification.
(a) The Company agrees to indemnify and hold harmless to the
fullest extent permitted by law, each of the several Purchasers, each of
its directors, officers, employees, advisors, agents, and general or
limited partners (and the directors, officers, employees, advisors, and
agents of each such Person), their respective Affiliates and each Person
who controls (within the meaning of the Securities Act or the Exchange
Act) any of such Persons (collectively, the "Purchaser Indemnified
Parties") from and against any and all losses, claims, damages, expenses
(including reasonable costs of investigation and fees, disbursements and
other charges of counsel, any amounts paid in settlement effected with the
consent of the Company, which consent will not be unreasonably withheld or
delayed, and any costs incurred in enforcing the
32
indemnification obligations of the Company under this Agreement) or other
liabilities (collectively, "Losses") to which any such Purchaser
Indemnified Party may become subject under the Securities Act, Exchange
Act, any other Law, or otherwise, insofar as such Losses (or Actions or
Proceedings, whether commenced or threatened, in respect to such Losses)
result from or arise out of or are based upon (i) any untrue, or allegedly
untrue, statement of a material fact contained in a Registration
Statement, prospectus, or preliminary prospectus (as amended or
supplemented) or any document incorporated by reference in any of the
foregoing or resulting from or arising out of or based upon any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein (in the case of a
prospectus, in light of the circumstances under which they were made), not
misleading or (ii) any violation by the Company of the Securities Act,
Exchange Act, any other Law, or otherwise incident to any registration,
qualification, or compliance in connection with the offer or sale of
securities by the several Purchasers pursuant to a Registration Statement;
provided, however, that the Company will not be liable in any such case if
and to the extent any such Losses arise out of or are based on (1) any
untrue statement or allegedly untrue statement or omission or alleged
omission made in conformity with information furnished by a Purchaser
Indemnified Party in writing specifically for use in a Registration
Statement or prospectus, (2) the failure to deliver any required
prospectus, or (3) any untrue statement of a material fact or omission to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, in
any prospectus that is corrected in any subsequent prospectus that was
delivered to such Purchaser Indemnified Party before the pertinent sale or
sales by such Purchaser Indemnified Party. In any such case, the Company
will promptly reimburse each such Purchaser Indemnified Party for any
legal fees and expenses and any other Losses reasonably incurred in
connection with investigating, preparing, or defending any such Loss in
any Action or Proceeding. Such indemnity obligation will remain in full
force and effect regardless of any investigation made by or on behalf of
the Purchaser Indemnified Parties.
(b) Each Purchaser severally, and not jointly, agrees, to
indemnify and hold harmless to the fullest extent permitted by law, the
Company, each of its directors, officers, employees, advisors, agents (and
the directors, officers, employees, advisors, and agents of each such
Person), their respective Affiliates and each Person who controls (within
the meaning of the Securities Act or the Exchange Act) any of such Persons
(collectively, for each Purchaser, such Purchaser's "Company Indemnified
Parties") from and against any and all Losses to which any such Company
Indemnified Party may become subject under the Securities Act, or any Law,
or otherwise, insofar as such Losses (or Actions or Proceedings, whether
commenced or threatened, in respect of such Losses) result from or arise
out of or are based upon any untrue, or allegedly untrue, statement of a
material fact contained in a Registration Statement, prospectus or
preliminary prospectus (as amended or supplemented) or any
33
document incorporated by reference in any of the foregoing or resulting
from or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein (in the case of a prospectus, in light of
the circumstances under which they were made) not misleading, but only to
the extent such untrue statement or omission is contained in any
information furnished in writing by or on behalf of such Purchaser
Indemnified Party specifically for use in such Registration Statement or
prospectus. In any such case, each such Purchaser required to provide
indemnity pursuant to this Section 7.07(b) will promptly reimburse each
such Company Indemnified Party for any legal fees and expenses and any
other Losses reasonably incurred in connection with investigating,
preparing, or defending any such Loss in any Action or Proceeding. Such
indemnity obligation will remain in full force and effect regardless of
any investigation made by or on behalf of the Company Indemnified Parties;
provided, that the obligation to indemnify will be individual to each
Purchaser and will be limited in amount to the net proceeds received by
such Purchaser from the sale of securities pursuant to such Registration
Statement.
(c) Each of the several Purchasers agrees to give prompt written
notice to the Company after the receipt by such Purchaser of any written
notice of the commencement of any action, suit, proceeding, or
investigation or threat thereof made in writing for which a Purchaser
Indemnified Party intends to claim indemnification pursuant to this
Agreement; provided, however, that, the failure so to notify the Company
will not relieve the Company of any liability that it may have to the
Purchaser Indemnified Party under this Agreement unless and to the extent
the Company is materially prejudiced by such failure. If notice of
commencement of any such action is given to the Company as above provided,
the Company will be entitled to participate in and to assume the defense
of such action at its own expense, with counsel chosen by it and
reasonably satisfactory to such Purchaser Indemnified Party. The Purchaser
Indemnified Party will have the right to employ separate counsel in any
such action and participate in the defense of such action, but the fees
and expenses of such counsel will be paid by the Purchaser Indemnified
Party unless (i) the Company agrees to pay such fees and expenses; (ii)
the Company fails to assume the defense of such action with counsel
satisfactory to the Purchaser Indemnified Party in its reasonable
judgment; or (iii) the Purchaser Indemnified Party reasonably concludes
that there may be legal defenses available to it that are different from
or in addition to those available to the Company, or for other reasons
representation of both parties by the same counsel would be inappropriate
due to actual or potential conflicts of interest between them. In the case
of clauses (ii) and (iii) above, the Company will not have the right to
assume the defense of such action on behalf of such Purchaser Indemnified
Party unless, in the case of clause (iii) such parties are represented by
separate counsel engaged by the Company. The Company will not, without the
written consent of the Purchaser Indemnified Party, effect the settlement
or compromise of, or consent to the entry of any judgment with respect to,
any pending or threatened action or claim in respect of which
indemnification or contribution may be sought
34
under this Agreement (whether or not the Purchaser Indemnified Party is an
actual or potential party to such action or claim) unless such settlement,
compromise, or judgment (A) includes an unconditional release of the
Purchaser Indemnified Party from all liability arising out of such action
or claim and (B) does not include a statement as to, or an admission of,
fault, culpability, or a failure to act by or on behalf of any Purchaser
Indemnified Party. The rights afforded to any Purchaser Indemnified Party
under this Agreement will be in addition to any rights that such Purchaser
Indemnified Party may have at common law, by separate agreement, or
otherwise.
(d) The Company agrees to give prompt written notice to the
several Purchasers after the receipt by the Company of any written notice
of the commencement of any action, suit, proceeding, or investigation or
threat thereof made in writing for which a Company Indemnified Party
intends to claim indemnification pursuant to this Agreement; provided,
however, that, the failure so to notify the Purchasers will not relieve
the Purchasers of any liability that it may have to the Purchasers
Indemnified Party under this Agreement unless and to the extent the
Purchasers are materially prejudiced by such failure. If notice of
commencement of any such action is given to the several Purchasers as
above provided, the Purchasers will be entitled to participate in and to
assume the defense of such action at their own expense, with counsel
chosen by the Majority Purchasers and reasonably satisfactory to such
Company Indemnified Party. The Company Indemnified Party will have the
right to employ separate counsel in any such action and participate in the
defense of such action, but the fees and expenses of such counsel will be
paid by the Company Indemnified Party unless (i) the Purchasers agree to
pay the such fees and expenses; (ii) the Purchasers fail to assume the
defense of such action with counsel satisfactory to the Company
Indemnified Party in its reasonable judgment; or (iii) the Company
Indemnified Party reasonably concludes that there may be legal defenses
available to it that are different from or in addition to those available
to the Purchasers, or for other reasons representation of both parties by
the same counsel would be inappropriate due to actual or potential
conflicts of interest between them. In the case of clauses (ii) and (iii)
above, the Purchasers will not have the right to assume the defense of
such action on behalf of such Company Indemnified Party unless, in the
case of clause (iii) such parties are represented by separate counsel
engaged by the Company. The Purchasers will not, without the written
consent of the Company Indemnified Party, effect the settlement or
compromise of, or consent to the entry of any judgment with respect to,
any pending or threatened action or claim in respect of which
indemnification or contribution may be sought under this Agreement
(whether or not the Company Indemnified Party is an actual or potential
party to such action or claim) unless such settlement, compromise, or
judgment (A) includes an unconditional release of the Company Indemnified
Party from all liability arising out of such action or claim and (B) does
not include a statement as to, or an admission of, fault, culpability, or
a failure to act by or on behalf of any Company Indemnified Party. The
rights afforded to any Company Indemnified Party under
35
this Agreement will be in addition to any rights that such Company
Indemnified Party may have at common law, by separate agreement, or
otherwise.
7.08 No Takeover Defenses. Without the consent of a Two-Thirds
Majority, the Company will not: (a) adopt a stockholder rights plan or a
classified board; (b) prohibit stockholder action by written consent; (c)
authorize the issuance of "blank check" preferred stock that could be issued to
make materially more difficult a takeover attempt by increasing the number of
outstanding shares of the Company; (d) limit the rights of stockholders to call
special meetings of the stockholders of the Company, except as provided in the
Reorganization Plan; (e) establish advance notice requirements for Board
nominations or stockholder proposals; or (f) take any other measures that could
make the acquisition of Company Common Stock more onerous or costly for an
acquiror or that could materially impede the ability of the stockholders of the
Company to benefit from a change of control or change in the management or Board
of Directors of the Company. The Company will cause the termination of its
existing shareholder rights plan on or prior to the Standby Closing Date.
Notwithstanding the foregoing, the obligations of the Company pursuant to this
Section 7.08 will terminate on the first date after the Standby Closing Date on
which the New Common Stock owned by the several Purchasers represents less than
10% of the total outstanding shares of New Common Stock.
7.09 Mitigation of Structure Risk. To the extent reasonably
practical and as would not otherwise have a material adverse effect on the
Reorganization Plan or the Company, the Company will modify the Reorganization
Plan in a manner requested by the several Purchasers if the several Purchasers
reasonably determine that such modification would materially mitigate the risk
of adverse federal income tax consequences to the several Purchasers, the
Company, or any Subsidiary or the consequences of Section 16(b) under the
Exchange Act for any Purchaser.
7.10 Use of Proceeds. Proceeds of the Rights Offering and the
Transactions will be used by the Company to fund (a) working capital
requirements as set forth in the Reorganization Plan, (b) in order of priority,
the payment of Claims as provided in the Reorganization Plan and (c) authorized
and budgeted store refurbishment and working capital needs arising in the
ordinary course of business.
7.11 Survival of Representations, Warranties, Covenants, and
Agreements. None of the representations and warranties contained in this
Agreement or in any instrument delivered in connection with this Agreement will
survive the Standby Closing. Any covenant or agreement contained in this
Agreement or in any Operative Agreement that by its terms is to be performed in
whole or part after the Standby Closing will survive the Standby Closing and
continue in full force.
ARTICLE 8
TERMINATION OF THIS AGREEMENT
8.01 Termination. This Agreement may be terminated (with respect to
all parties to this Agreement) and the Transactions may be abandoned:
36
(a) at any time prior to the Standby Closing, by mutual written
consent of the Majority Purchasers, on the one hand, and the Company, on
the other hand;
(b) by the Majority Purchasers, upon written notice to the
Company, (i) if, on or before the expiration of ten Business Days
following the Purchasers' receipt of a Company Notice pursuant to Section
4.06, the Majority Purchasers have notified the Company in writing that
any event, transaction, or circumstance set forth in the amended or
supplemented disclosure in such Company Notice constitutes a breach by the
Company of any of the representations, warranties, covenants, or other
agreements contained in this Agreement, which breach individually or when
taken together with all other breaches set forth in Company Notices
previously delivered to the Majority Purchasers pursuant to Section 4.06,
constitutes an adverse change of fact or circumstance that is or would
reasonably be expected to be material to the Business or Condition of the
Company and the Company has failed to cure such breach resulting from such
event, transaction, or circumstance within five Business Days following
the Company's receipt of the Majority Purchasers' written notice of such
material breach; (ii) in the event of a material breach of any of the
representations, warranties, covenants, or other agreements contained in
this Agreement by the Company (unless, the breach results primarily from
an action or omission taken at the direction of the Majority Purchasers
after the date of this Agreement), which material breach has not been
cured by the Company within ten Business Days following written
notification of such material breach; (iii) if the Standby Closing has not
occurred on or before April 30, 2005 by reason of the failure of any
condition precedent under Article 5 (unless the failure results primarily
from a breach by any of the several Purchasers of any representation,
warranty, covenant, or other agreement contained in this Agreement); or
(iv) in the event any court of competent jurisdiction or any other
Governmental or Regulatory Authority (other than the Bankruptcy Court) has
issued a final and nonappealable Order permanently prohibiting the
Transactions;
(c) at any time prior to the Standby Closing, by the Company, upon
written notice to the Purchasers, (i) in the event of a material breach of
any of the representations, warranties, covenants, or other agreements
contained in this Agreement by any Purchaser, and if in the case of a
material breach of a covenant or an agreement, such Purchaser fails to
cure such breach within ten Business Days following written notification
of such breach to the several Purchasers by the Company; (ii) if the
Standby Closing has not occurred on or before April 30, 2005 by reason of
the failure of any condition precedent under Article 6 (unless the failure
results primarily from a breach by the Company of any representation,
warranty, covenant, or other agreement contained in this Agreement); or
(iii) in the event any court of competent jurisdiction or any other
Governmental or Regulatory Authority (other than the Bankruptcy Court) has
issued a final and nonappealable Order permanently prohibiting the
Transactions;
37
(d) at any time prior to the Standby Closing, by any Purchaser or
the Company if the Bankruptcy Court has issued an Order (including an
Order denying confirmation of the Reorganization Plan) that has become
final and nonappealable restricting or restraining in a material manner or
enjoining or otherwise prohibiting or making illegal the consummation of
any of the Transactions;
(e) by any Purchaser if the Reorganization Plan is not confirmed
by Order of the Bankruptcy Court confirming the Reorganization Plan
pursuant to Section 1129 of the Bankruptcy Code on or before February 28,
2005;
(f) at any time prior to the Standby Closing, by the Company if
(i) the Board of Directors of the Company has received a proposal to
engage in a Competing Transaction, other than a Competing Transaction with
all of the several Purchasers or their designees, that the Board of
Directors of the Company determines in its good faith judgment (A) to be
superior from a financial point of view to the holders of all Claims and
interests in the Reorganization Case, taking into account factors as the
Board of the Directors of the Company in good faith consider relevant,
including the form of consideration, execution risk, and certainty of
closing, and (B) to be reasonably capable of being completed, taking into
account all financial, regulatory, legal, and other aspects of such
Competing Transaction; (ii) in light of such Competing Transaction, the
Board of Directors of the Company has determined in good faith, after
consultation with outside counsel, that it is necessary for the Board of
Directors of the Company to withdraw or modify its approval or
recommendation of this Agreement and the Transactions in order to comply
with its obligations under applicable Law ; (iii) the Company has notified
the several Purchasers in writing of the determination described in clause
(ii) above, and taking into account any revised proposal made by the
several Purchasers within three Business Days following delivery of the
notices described in this clause (iii), the Competing Transaction remains
a superior transaction to the Transactions and the Board of Directors of
the Company has again made the determination referred to in clause (i)
above; and (iv) the Company has not breached its obligations under Section
4.10 prior to entering into such definitive agreement with respect to a
Competing Transaction;
(g) at any time prior to the Standby Closing Date, by the Majority
Purchasers, if (i) the Majority Purchasers inform the Company that any
domestic or international event or act or occurrence has materially
disrupted, or in their reasonable opinion will, in the immediate future,
materially disrupt, the market for the Company's securities; or (ii)
trading on the New York Stock Exchange or Nasdaq has been suspended, or
minimum or maximum prices for trading have been fixed, or maximum ranges
for prices for securities have been required by the New York Stock
Exchange or Nasdaq or by order of the SEC or any other Governmental or
Regulatory Authority; or (iii) a banking moratorium has been declared by a
Governmental or Regulatory Authority; or (iv) the United States becomes
engaged in hostilities or there is a material escalation of hostilities
38
involving the United States or there is a declaration of a national
emergency or war by the United States; or
(h) If, after giving effect to any arrangements for the purchase
of the Standby Securities of a defaulting Purchaser as provided in Section
1.06(a) and the exercise of the Company's right described in Section
1.06(b) to require non-defaulting Purchasers to purchase Standby
Securities of the defaulting Purchaser, Standby Securities allotted to a
defaulting Purchaser remain unpurchased, or if the Company does not
exercise its right pursuant to Section 1.06(b) to require non-defaulting
Purchasers to purchase Standby Securities of a defaulting Purchaser, then
this Agreement will thereupon automatically terminate, without liability
on the part of any non-defaulting Purchaser or the Company.
8.02 Termination Fee. If this Agreement is terminated by the
Majority Purchasers pursuant to Section 8.01(b)(i) and, within six months
following such termination, the Company consummates a Competing Transaction,
then the Company will pay to the several Purchasers, ratably in proportion to
their Standby Funding Commitments, within two Business Days following the date
of the consummation of such Competing Transaction, a termination fee of
$600,000. If the Company terminates this Agreement pursuant to Section 8.01(f),
then the Company will pay to the several Purchasers, ratably in proportion to
their Standby Funding Commitments, upon the consummation of a Competing
Transaction, a termination fee of $600,000. The parties agree that the fees
required to be paid pursuant to this Section 8.02 are an integral part of the
Transactions. If the Company fails to promptly pay the several Purchasers any
fee due under this Section 8.02, the Company will pay the costs and expenses
(including legal fees and expenses) in connection with any action, including the
filing of any lawsuit or other legal action, taken to collect payment, together
with interest on the amount of any unpaid fee at the publicly announced prime
rate of ▇▇▇▇▇ Fargo Bank, N.A. from the date such fee was first due.
8.03 Effect of Termination. If this Agreement is validly terminated
pursuant to Section 8.01, this Agreement will forthwith become null and void,
and there will be no liability or obligation on the part of the Company or any
Purchaser except that the provisions of Section 8.02 and Articles 9 and 10 will
continue to apply following any such termination. Nothing contained in this
Article 8 (except as provided in Section 8.01(h)) will relieve any party from
any liability for damages actually incurred as the result of any breach of this
Agreement, including consequential damages.
ARTICLE 9
DEFINITIONS
9.01. Definitions. The following terms, when used in this Agreement
with upper case initial letters, will have the following meanings:
"Actions or Proceedings" means any action, suit, proceeding, arbitration, or
Governmental or Regulatory Authority investigation or audit.
39
"Affiliate" means, as applied to any Person (a) any other Person directly or
indirectly controlling, controlled by, or under common control with, that
Person, (b) any other Person that owns or controls (i) 50% or more of any class
of equity securities of that Person or any of its Affiliates or (ii) 50% or more
of any class of equity securities (including any equity securities issuable upon
the exercise of any Derivative Security within 60 days of the relevant date) of
that Person or any of its Affiliates, or (c) any director, general partner,
executive officer, or Person performing similar functions. For the purposes of
this definition, "control" (including with correlative meanings, the terms
"controlling", "controlled by", and "under common control with") as applied to
any Person, means the possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of that Person, whether
through ownership of voting securities, by contract, or otherwise.
"Agreement" means this Investment Agreement, the Exhibits and the Schedules to
this Agreement, and the certificates and other documents delivered in connection
with this Agreement, in each case as amended, modified, or supplemented from
time to time in accordance with the terms of this Agreement.
"Assets and Properties" of any Person means all assets and properties of every
kind, nature, character, and description (whether real, personal, or mixed,
whether tangible or intangible, whether absolute, accrued, contingent, fixed, or
otherwise and wherever situated), including any goodwill related thereto,
operated, owned, or leased by such Person, including cash, cash equivalents,
Investment Assets, accounts and notes receivable, chattel paper, documents,
instruments, general intangibles, real estate, equipment, inventory, goods, and
Intellectual Property.
"Audit" includes any audit, assessment of Taxes, reassessment of Taxes, or
examination by any Taxing Authority or any judicial or administrative
proceedings or appeal of such proceedings.
"Bankruptcy Code" means the United States Bankruptcy Code, codified in title 11
of the United States Code, as amended.
"Benefit Plan" means any (a) "employee benefit plan" as defined in Section 3(3)
of ERISA and any other employee benefit plan, program, policy, or arrangement
(written or oral), maintained, established, or to which contributions have at
any time been made, by the Company, any Subsidiary or any predecessor or ERISA
Affiliate, within six years prior to the date of this Agreement under which any
employee, former employee, director, agent, or independent contractor of the
Company or any Subsidiary or any beneficiary thereof is covered, is eligible for
coverage, or has benefit rights or with respect to which the Company or any
Subsidiary has any Liability or any potential Liability and (b) any other
Contract, plan, or policy of the Company or any Subsidiary providing fringe
benefits, bonuses, deferred compensation, stock or stock options, performance
shares, stock appreciation rights, or similar Contract, plan or policy.
"Books and Records" means all files, documents, instruments, papers, books, and
records of the Company or the Subsidiaries relating to the Business or Condition
of the
40
Company, including financial statements, Tax Returns, letters from accountants,
budgets, pricing guidelines, ledgers, journals, deeds, title policies, minute
books, stock certificates and books, stock transfer ledgers, Contracts,
Licenses, customer lists, computer files and programs, retrieval programs,
operating data and plans, and environmental studies and plans.
"Business Day" means a day other than Saturday, Sunday, or any day on which
banks located in the State of Texas are authorized or obligated to close.
"Business or Condition of the Company" means the business, condition (financial
or otherwise), results of operations, cash flow, and Assets and Properties of
the Company and its Subsidiaries, taken as a whole.
"Claims" means any claim against the Company or its Affiliates, as "claim" is
defined in Bankruptcy Code Section 101(5).
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidentiality Agreements" means the confidentiality agreements between the
Company and each of the several Purchasers as in effect on the date of this
Agreement.
"Contract" will mean any License, evidence of Indebtedness, easement, mortgage,
indenture, security agreement, royalty agreement or other binding agreement,
arrangement, understanding, contract, or lease (whether written or oral).
"Credit Facility" means the Company's debtor-in-possession revolving credit
facility in effect on the date of this Agreement with ▇▇▇▇▇ Fargo Retail
Finance, LLC.
"Derivative Security" with respect to any Person means any security, right,
subscription, warrant, option, "phantom" stock right, or other Contract that
gives the right to (a) purchase or otherwise receive or be issued any shares of
capital stock or other equity or ownership interests of such Person or any
security of any kind convertible into or exchangeable or exercisable for any
shares of capital stock or other equity interests of such Person or (b) receive
any benefits or rights similar to any rights enjoyed by or accruing to the
holder of shares of capital stock or other equity or ownership interests of such
Person, including any rights to participate in the equity, income, or election
of directors or officers, (or similar functionaries) of such Person.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"ERISA Affiliate" means any entity treated as a single employer with the Company
or any Subsidiary under Section 414 of the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and any
successor statute.
41
"GAAP" means United States generally accepted accounting principles,
consistently applied.
"Governmental or Regulatory Authority" means any court, tribunal, arbitrator,
authority, agency, commission, official, or other instrumentality of the United
States, any foreign country, or any domestic or foreign state, county, city, or
other political subdivision, and includes any stock exchange, quotation service,
and the National Association of Securities Dealers and other self-regulatory
organizations.
"HSR Act" means the ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust Improvements Act of 1976.
"Indebtedness" of any Person means all obligations (including principal,
interest, premiums, penalties, and other amounts) of such Person (a) for
borrowed money; (b) evidenced by notes, bonds, debentures, or similar
instruments; (c) for the deferred purchase price of goods or services (other
than trade payables or accruals incurred in the ordinary course of business);
and (d) under capital leases that would be treated as long-term debt under GAAP;
and (e) in the nature of guarantees of the obligations described in clauses (a)
through (c) above of any other Person.
"Intellectual Property" means all trademarks and trademark rights, trade names
and trade name rights, service marks and service ▇▇▇▇ rights, internet domain
names, copyrights and copyright rights, copyrightable works, patents and patent
rights, brand names, trade dress, product designs, product packaging, business
and product names, logos, slogans, rights of publicity, trade secrets, customer
lists, inventions, processes, formulas, industrial models, processes, designs,
specifications, data, technology, methodologies, computer programs (including
all source codes), databases, and any other confidential and proprietary right
or information, whether or not subject to statutory registration, and all
related technical information, manufacturing, engineering, and technical
drawings, know-how, and all pending applications for and registrations of
patents, trademarks, service marks, and copyrights or any of the foregoing, and
the right to ▇▇▇ for past infringement, if any, in connection with any of the
foregoing, and all documents, disks, and other media on which any of the
foregoing is stored.
"Investment Assets" means all debentures, notes, and other evidences of
Indebtedness, stocks, securities (including rights to purchase and securities
convertible into or exchangeable for other securities), interests in joint
ventures and general and limited partnerships, mortgage loans, and other
investment or portfolio assets owned of record or beneficially.
"IRS" means the United States Internal Revenue Service.
"Law" means all laws, statutes, rules, regulations, ordinances, and other
pronouncements having the effect of law of the United States, any foreign
country, or any domestic or foreign state, county, city, or other political
subdivision or of any Governmental or Regulatory Authority.
"Leased Real Property" means all leasehold or subleasehold estates; oil, gas and
mineral rights; and other rights to use or occupy any land, buildings,
structures,
42
improvements, fixtures or other interest in real property held by the Company or
any of the Subsidiaries.
"Liabilities" means all Indebtedness, obligations, and other liabilities (and
contingencies that have become liabilities) of a Person, whether absolute,
accrued, contingent (or based upon any contingency), known or unknown, fixed or
otherwise, or whether due or to become due.
"Licenses" means all licenses, permits, certificates of authority,
authorizations, approvals, registrations, franchises, and similar consents
granted or issued by any Governmental or Regulatory Authority.
"Liens" means any mortgage, pledge, assessment, security interest, lease,
license, lien, adverse claim, levy, charge, joint ownership interest, or other
encumbrance of any kind, or any conditional sale Contract, title retention
Contract, or other Contract to give any of the foregoing.
"Material Adverse Change" and "Material Adverse Effect" means any change or
effect, as the case may be, arising from any fact, circumstance, or condition
that has had or would be reasonably expected to have or cause, a material
adverse change or effect on the Business or Condition of the Company, including
customer, supplier, or employee relationships.
"New Common Stock" means the common stock of the Company authorized to be issued
and outstanding under the Reorganization Plan.
"Old Common Stock" means the common stock, $.01 par value per share, of the
Company authorized prior to the effective date of the Reorganization Plan.
"Operative Agreements" means all of the instruments, agreements, certificates
and documents described to be executed and delivered by or on behalf of the
Company, the Subsidiaries or any of the several Purchasers pursuant to the terms
of this Agreement, including the Compensation Warrants, the Purchased Warrants,
and the certificates and all attachments thereto required under Article V.
"Order" means any writ, judgment, decree, injunction, or similar order of any
Governmental or Regulatory Authority or court (including any order entered in
connection with the Reorganization Case) (in each such case whether preliminary
or final).
"Owned Real Property" means all land, together with all buildings, structures,
improvements, and fixtures located thereon, and all easements and other rights
and interests appurtenant thereto including air and water rights owned by the
Company or any Subsidiary that are material to its business.
"Permitted Lien" means (a) any Lien for delinquent Taxes that are being
contested diligently and in good faith and for which appropriate reserves have
been established in accordance with GAAP; (b) any minor imperfection of title or
similar Lien that,
43
individually or in the aggregate with other such Liens, does not materially
impair the value of the property subject to such Lien or interfere with the use
of such property in the conduct of the business of the Company and the
Subsidiaries and that do not secure obligations for borrowed money; (c) any
statutory Lien arising in the ordinary course of business by operation of Law
with respect to a Liability that is not yet due or delinquent or that is being
contested in diligently and good faith by Company (including mechanics' liens);
(d) rights of way, regulations, easements, restrictions, covenants, consents,
reservations, encroachments, variations, mineral reservations, rights, licenses,
and other similar restrictions and regulations imposed by any Governmental or
Regulatory Authority, charges, encumbrances (whether or not recorded) on any
real property that (i) do not interfere materially with the ordinary conduct of
the business of the Company and (ii) do not materially impair the use of, or
access from and to, the applicable Real Property; and (e) Liens granted to
secure Indebtedness permitted to be incurred pursuant to, or Indebtedness
contemplated by, this Agreement or to secure Indebtedness under the Credit
Facility (which liens will be discharged as of the Standby Closing).
"Person" means any natural person, corporation, general partnership, limited
partnership, limited liability company or partnership, proprietorship, other
entity, trust, union, association, or Governmental or Regulatory Authority.
"Purchased Warrant" means the warrants in the form of Exhibit B, having an
initial exercise price per Underlying Share of $.001, that may be issued by the
Company to the several Purchasers at the Standby Closing.
"Real Property Leases" means all leases, subleases, licenses, concessions, and
other Contracts pursuant to which the Company or any Subsidiary holds any Leased
Real Property, including the right to all security deposits and other amounts
and instruments deposited by or on behalf of the Company or any Subsidiary
thereunder.
"Recalculated Standby Commitment Percentage" means the Standby Commitment
Percentage of a Purchaser divided by the total Standby Commitment Percentages of
non-defaulting Purchasers, pursuant to Section 1.06.
"Registrable Securities" means the Standby Shares, the shares of New Common
Stock acquired by the several Purchasers in the Rights Offering, and the
Underlying Shares issuable on exercise of the Warrants.
"Registration Statement" means collectively and individually, the Rights
Offering Registration Statement and the Resale Registration Statement.
"Reorganization Plan" means the plan of reorganization of the Company (as
amended from time to time as permitted under this Agreement) effecting the
Transactions.
"Seasonal Credit Facility" means a seasonal over-advance under the Credit
Facility or a new credit facility obtained by the Company to fund seasonal
working capital requirements of the Company as provided in the Reorganization
Plan.
44
"SEC" means the United States Securities and Exchange Commission or any
successor Governmental or Regulatory Authority administering the Federal
securities laws.
"Securities Act" means the Securities Act of 1933, as amended and any successor
statute.
"Standby Commitment Percentage" for any Purchaser means the percentage derived
by dividing (x) the Standby Funding Commitment of such Purchaser by (y)
$25,000,000.00.
"Standby Funding Commitment" for any Purchaser means the amount set forth on
Schedule I for such Purchaser, as such amount may be adjusted pursuant to
Section 1.06(b), except that such adjustment will not apply to Section 1.06(b).
"Standby Purchase Price" means for each Standby Common Share and each Underlying
Share subject to the Purchased Warrants, the exercise price for each right
issued in the Rights Offering.
"Standby Securities" means the Standby Shares and the Purchased Warrants that
are to be issued and sold by the Company to the several Purchasers at the
Standby Closing.
"Standby Shares" means the shares of New Common Stock that are to be issued and
sold by the Company to the several Purchasers at the Standby Closing pursuant to
this Agreement.
"Strategic Transaction" means with respect to the Company or any material
Subsidiary, any (a) merger, consolidation, or combination to which the Company
or any material Subsidiary is a party; (b) any sale or other disposition of any
capital stock or other equity or ownership interests of the Company or any
material Subsidiary (whether or not the Company or such material Subsidiary is
the transferor); (c) any tender offer (including a self-tender), exchange offer,
recapitalization, liquidation, dissolution, or similar transaction with respect
to the Company or any material Subsidiary; (d) any sale, dividend, distribution,
or other disposition of all or a material portion of the Assets and Properties
of the Company or any material Subsidiary; (e) any material investment in any
Indebtedness or securities issued by the Company or any material Subsidiary; or
(f) the entering into of any Contract, or the granting of any rights or
Derivative Securities, with respect to any of the foregoing.
"Subsidiary" means any Person in which the Company, directly or indirectly
through Subsidiaries or otherwise, beneficially owns at least fifty percent
(50%) of either the equity or other ownership interest in, or the voting control
of, such Person.
"Tax" or "Taxes" means all federal, state, local, or foreign net or gross
income, gross receipts, net proceeds, sales, use, ad valorem, value added,
franchise, bank shares, withholding, payroll, employment, excise, property,
deed, stamp, alternative or add-on minimum, environmental, or other taxes,
assessments, duties, fees, levies, or other governmental charges of any nature
whatever, whether disputed or not, together with any interest, penalties,
additions to tax, or additional amounts with respect thereto.
45
"Taxing Authority" means any governmental agency, board, bureau, body,
department, or authority of any United States federal, state, or local
jurisdiction or any foreign jurisdiction, having or purporting to have
jurisdiction with respect to any Tax.
"Tax Returns" means any and all returns, reports, and information statements
relating or with respect to Taxes that are required to be filed with the IRS or
any other Taxing Authority, whether domestic or foreign.
"Transactions" means the transactions contemplated by this Agreement and by the
Operative Agreements, as set forth in this Agreement and the Operative
Agreements.
"Treasury Regulations" means the regulations under the Code promulgated by the
United States Treasury Department.
"Underlying Shares" means the shares of New Common Stock, or such other
securities as provided pursuant to the terms of the Warrant, issuable on
exercise of the Warrants.
"Unsubscribed Shares" means the shares of New Common Stock that are not duly
subscribed for and paid for in the Rights Offering.
"Warrants" means the Compensation Warrants and the Purchased Warrants.
"Wholly-Owned Subsidiary" means a Subsidiary of which all of the outstanding
capital stock or other equity or ownership interests are owned by the Company or
another Wholly-Owned Subsidiary of the Company.
9.02 Rules of Construction.
(a) Unless the context of this Agreement otherwise requires, (i)
words of any gender include each other gender; (ii) words using the
singular or plural number also include the plural or singular number,
respectively; (iii) the terms "Article," "Exhibit," "Schedule," or
"Section" refer to the specified Article, Exhibit, Schedule, or Section of
this Agreement; and (iv) the phrases "ordinary course of business" and
"ordinary course of business consistent with past practice" refer to the
business and practice of the Company. The Exhibits and Schedules
identified in this Agreement are incorporated in this Agreement by
reference and made a part of this Agreement. All accounting terms used in
this Agreement and not expressly defined in this Agreement have the
meanings given to them under GAAP.
(b) When used in this Agreement, the phrase "to the knowledge of"
any Person, "to the best knowledge of" any Person or any similar phrase,
means (i) with respect to any Person who is an individual, the actual
knowledge of such Person; (ii) with respect to any Person other than the
Company, the actual knowledge of the directors, executive officers,
general partners, and other similar Persons in a similar position or
having similar powers and duties with such Person or its Affiliates; and,
(iii) with respect to the Company, the actual
46
knowledge of each individual who is an "officer" of the Company as such
term is defined in Rule 16a-1 promulgated under the Exchange Act.
(c) The headings used in this Agreement have been inserted for
convenience of reference only and do not define or limit the provisions of
this Agreement. The parties to this Agreement agree that this Agreement is
the product of negotiation between sophisticated parties and individuals,
all of whom were represented by counsel, and each of whom had an
opportunity to participate in, and did participate in, the drafting of
each provision of this Agreement. Accordingly, ambiguities in this
Agreement, if any, will not be construed strictly or in favor of or
against any party to this Agreement but rather will be given a fair and
reasonable construction without regard to the rule of contra proferentum.
Any reference to any federal, state, local, or foreign statute or law will
be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. The word "including"
will mean "including without limitation." The parties to this Agreement
intend that each representation, warranty, and covenant contained in this
Agreement will have independent significance. If any party to this
Agreement has breached any representation, warranty, or covenant contained
in this Agreement in any respect, the fact that there exists another
representation, warranty, or covenant relating to the same subject matter
(regardless of the relative levels of specificity) that such party has not
breached will not detract from or mitigate the fact that such party is in
breach of the first representation, warranty, or covenant.
(d) As used in this Agreement, the term "material" and derivations
of such term will have the same meaning ascribed to such term in the case
law interpreting the meaning of "material" under the Exchange Act.
ARTICLE 10
MISCELLANEOUS
10.01 Notices. All notices, requests, and other communications under
this Agreement must be in writing and will be deemed to have been duly given
only if delivered personally or by facsimile transmission against facsimile
confirmation or mailed by prepaid first class certified mail, return receipt
requested, or mailed by overnight courier prepaid, to the parties at the
following addresses or facsimile numbers:
If to the Company, to:
Gadzooks, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Facsimile: 972.662.4290
Attention: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
47
with a copy to (which copy will not constitute notice):
Akin Gump ▇▇▇▇▇▇▇ ▇▇▇▇▇ & ▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Facsimile: 214.969.4343
Attention: ▇▇▇▇▇▇▇ ▇▇▇▇▇
If to the several Purchasers, to their addresses set forth on Schedule I.
with a copy to (which copy will not constitute notice):
▇▇▇▇▇▇ & ▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Facsimile: 214.939.5849
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇▇
All such notices, requests and other communications will (a) if
delivered personally to the address as provided in this Section 10.01, be deemed
given upon delivery; (b) if delivered by facsimile transmission to the facsimile
number referenced in this Section 10.01, be deemed given upon facsimile
confirmation; (c) if delivered by mail in the manner described above to the
address as provided in this Section 10.01, be deemed given on the earlier of the
third Business Day following mailing or upon receipt; and (d) if delivered by
overnight courier to the address referenced in this Section 10.01, be deemed
given on the earlier of the first Business Day following the date sent by such
overnight courier or upon receipt (in each case regardless of whether such
notice, request, or other communication is received by any other Person to whom
a copy of such notice is to be delivered pursuant to this Section 10.01). Any
party from time to time may change its address, facsimile number, or other
information for the purpose of notices to that party by giving notice specifying
such change to each other party to this Agreement.
10.02 Entire Agreement. This Agreement and the Operative Agreements,
including the exhibits and schedules thereto, supersede all prior written, and
all prior or contemporaneous oral, discussions, negotiations, and Contracts
between the parties with respect to the subject matter of this Agreement and
thereof and contain the sole and entire agreement between the parties to this
Agreement with respect to the subject matter of this Agreement and thereof.
10.03 Expenses. Whether or not the Transactions are consummated, the
Company will pay upon demand and will hold each Purchaser that does not default
in its obligations under this Agreement harmless against liability for the
payment of: (a) stamp and other taxes which may be payable in respect of the
issuance, delivery, or acquisition of any shares of New Common Stock under this
Agreement (other than any
48
amounts due and payable in connection with the issuance of certificates
representing Standby Securities in a name other than that specified by each
purchaser), and (b) all documented reasonable professional fees and expenses
(including reasonable legal, accounting, consulting, travel, and other
third-party fees and expenses) incurred by or on behalf of any Purchaser in
connection with the Transactions (including in connection with performing due
diligence and preparing, negotiating and executing this Agreement and the
Operative Agreements), provided that should the aggregate of such professional
fees and expenses exceed $300,000, then such reimbursement will be limited to
$300,000 in the aggregate and prorated among the several Purchasers according to
their Standby Funding Commitments, unless this Agreement is terminated by the
Purchasers pursuant to and in accordance with Section 8.01(b)(i) or (ii), in
which event such reimbursement obligation will not be limited. Notwithstanding
the foregoing, if the Standby Closing does not occur and this Agreement is
terminated by the Company pursuant to and accordance with Section 8.01(c)(i),
then the Company will have no obligation to pay such professional fees and
expenses. Other than the foregoing, each of the parties to this Agreement will
bear its own costs and expenses incurred in connection with this Agreement, the
Operative Agreements and the Transactions. Within three Business Days following
the execution of this Agreement, the Company will file a motion in the
Bankruptcy Court seeking approval of the Company's expense reimbursement
obligations in Section 5.13 and the termination fee contained in Section 8.02,
and will diligently prosecute such motions so as to obtain a final,
non-appealable order from the Bankruptcy Court authorizing the expense
reimbursement obligations in Section 5.13 and the termination fee contained in
Section 8.02 within 35 days of filing such motion.
10.04 Waiver. No waiver by any party to this Agreement of any term
or condition of this Agreement or any default, misrepresentation, or breach of
warranty or covenant under this Agreement, whether intentional or not, will be
valid unless set forth in a written instrument duly executed by or on behalf of
the party waiving such term or condition. No such waiver, in any one or more
instances, will be deemed to be or construed to extend to any prior or
subsequent default, misrepresentations, or breach of warranty or covenant under
this Agreement or affect in any way any rights arising by virtue of any prior or
subsequent such default, misrepresentation, or breach of warranty or covenant.
All remedies, either under this Agreement or by Law or otherwise afforded, will
be cumulative and not alternative, except as specifically provided in this
Agreement.
10.05 Amendment. This Agreement may be amended, supplemented, or
modified only by a written instrument duly executed by or on behalf of each
Purchaser and the Company.
10.06 No Third Party Beneficiary. The terms and provisions of this
Agreement are intended solely for the benefit of each party to this Agreement
and their respective successors and permitted assigns, and it is not the
intention of the parties to this Agreement to confer third-party beneficiary
rights, and this Agreement does not confer any such rights, upon any other
Person, except as provided in Section 7.08.
49
10.07 No Assignment; Binding Effect. The Company may not assign any
right or interest or delegate any duties or obligations under this Agreement or
under any of the Operative Agreements (by operation of law or otherwise) without
the prior written consent of each Purchaser and any attempt to do so will be
void. Any Purchaser may assign any right or interest under this Agreement or
under any of the Operative Agreements to any Person that is not a competitor of
the Company, and may delegate its duties under this Agreement only with the
prior written consent of the Company, which will not be unreasonably withheld or
delayed. Subject to the first sentence of this Section 10.07, this Agreement is
binding upon, inures to the benefit of, and is enforceable by the parties to
this Agreement and their respective successors and permitted assigns.
10.08 Invalid Provisions. If any provision of this Agreement is held
to be illegal, invalid, or unenforceable under any present or future Law, and if
the rights or obligations of any party to this Agreement under this Agreement
will not be materially and adversely affected thereby, (a) such provision will
be fully severable, (b) this Agreement will be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part of this
Agreement, (c) the remaining provisions of this Agreement will remain in full
force and effect and will not be affected by the illegal, invalid, or
unenforceable provision or by its severance from this Agreement; and (d) in lieu
of such illegal, invalid, or unenforceable provision, there will be added
automatically as a part of this Agreement a legal, valid, and enforceable
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible (as determined by a court of competent
jurisdiction). Notwithstanding any rules of contract construction, (i) the
parties disclaim any implied duty of reasonableness or commercial reasonableness
in performing obligations under this Agreement; and (ii) the parties agree that
no court will, and that no party will request any court or tribunal to, supply
any term omitted from this Agreement.
10.09 Governing Law. This Agreement will be governed by and
construed in accordance with the internal Laws of the State of Texas, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of Texas or any other jurisdiction) that would cause the
application of the Laws of any jurisdiction other than the State of Texas.
10.10 Limited Recourse. Except as expressly set forth in this
Agreement, (a) the obligations and Liabilities of the parties under this
Agreement will be without recourse to any holder of stock or other ownership
interests or member of such party, or any of their respective general or limited
partners, Affiliates, directors, employees, officers, representatives, or agents
(in each case in their capacity as such, but only if such Person is not also a
party under this Agreement) and (b) no partner, member, or Affiliate of any
Purchaser (unless such Affiliate is also a Purchaser under this Agreement) has
made (or will be deemed to have made) any representations, warranties, or
covenants (express or implied) under or in connection with this Agreement.
50
10.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original and need not contain the
signatures of more than one party, but all of which together will constitute one
and the same instrument.
10.12 Press Releases and Public Announcements. No party to this
Agreement will issue any press release or make any public announcement relating
to the subject matter of this Agreement prior to the Standby Closing without the
prior approval of each of the Majority Purchasers and the Company, except that
each Purchaser will have the right to consent to the use or disclosure of such
Purchaser's name, except, in each case, as required by applicable Law or the
request of any Governmental or Regulatory Authority.
10.13 Absence of Understanding Between the Several Purchasers. The
determination of each Purchaser to purchase the New Common Stock and Warrants
pursuant to this Agreement has been made by such Purchaser independent of any
other Purchaser and independent of any statements or opinions as to the
advisability of such purchase or as to the properties, business, prospects, or
condition (financial or otherwise) of the Company or any of the Subsidiaries
that may have been made or given by any other Purchaser or by any agent or
employee of any other Purchaser. In addition, it is acknowledged by each of the
other Purchasers that such Purchaser has not acted as an agent of the other
Purchaser in connection with making its investment under this Agreement and such
Purchaser will not be acting as an agent of such other Purchaser in connection
with monitoring its investment under this Agreement. Nothing contained in this
Agreement, and no action by any Purchaser pursuant to this Agreement, will be
deemed to constitute the Purchasers as a group with respect to the U.S.
securities laws. Each Purchaser confirms that it has independently participated
in the negotiations of the transaction contemplated hereby with advice of
separate counsel and advisors.
51
IN WITNESS WHEREOF THIS AGREEMENT, the parties to this Agreement have
executed this Agreement on the date first written above.
THE COMPANY: GADZOOKS, INC.
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇▇
--------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇▇
Title: Chief Executive Officer
52
SEVERAL PURCHASERS:
GRYPHON MASTER FUND, L.P.
By: Gryphon Partners, L.P.,
its General Partner
By: Gryphon Management Partners,
L.P., its General Partner
By: Gryphon Advisors, L.L.C.,
its General Partner
By: /s/ ▇▇▇▇▇▇ ▇. Garden
-----------------------------
▇▇▇▇▇▇ ▇. Garden,
Authorized Agent
GSSF MASTER FUND, LP
By: Gryphon Special Situations Fund, LP,
its General Partner
By: GSSF Management Partners, LP,
its General Partner
By: GSSF, LLC, its General Partner
By: /s/ ▇▇▇▇▇▇ ▇. Garden
----------------------
▇▇▇▇▇▇ ▇. Garden,
Authorized Agent
PISCES CAPITAL MANAGEMENT LLC
On behalf of its affiliates and accounts
By: /s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
------------------
Name: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: Managing Member
53
▇▇▇▇▇▇▇▇ PARTNERS, L.P.
By: ▇▇▇▇▇▇▇▇ CAPITAL LLC,
Its General Partner
By: /s/ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
------------------------------
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇,
Member of the Management Board
MELLON HBV ALTERNATIVE
STRATEGIES, LLC
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
-------------------------
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: Managing Director
WS VENTURES MANAGEMENT, L.P.
as General Partner and/or agent and
attorney-in-fact for WS Opportunity
Fund, L.P.
WS Opportunity Fund (QP), L.P., and
WS Opportunity Fund International, Ltd.
By: WSV Management, LLC,
General Partner
By: /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
-------------------------
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Member
54
WS CAPITAL MANAGEMENT, L.P.,
as General Partner and/or agent and
attorney-in-fact for ▇▇▇▇▇▇
▇▇▇▇▇ Capital, L.P.,
▇▇▇▇▇▇ ▇▇▇▇▇ Capital (QP), L.P.,
▇▇▇▇▇▇ ▇▇▇▇▇ International Fund, Ltd.
By: WS Capital, LLC,
General Partner
By: /s/ G. ▇▇▇▇▇ ▇▇▇▇▇
----------------------
G. ▇▇▇▇▇ ▇▇▇▇▇, Member
LITESPEED MASTER FUND, LTD.
By: Litespeed Management L.L.C.
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
-------------------
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇,
Managing Partner
55
SCHEDULE I
SEVERAL PURCHASERS
STANDBY STANDBY
FUNDING COMMITMENT
PURCHASER ADDRESS FOR NOTICES COMMITMENT PERCENTAGE
--------- ------------------- ---------- ----------
Gryphon Master Fund, L.P. ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ $ 7,000,000 28%
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
GSSF Master Fund, LP ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ $ 2,000,000 8%
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Pisces Capital LP ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ $ 3,000,000 12%
▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇ Partners, L.P. ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ $ 3,000,000 12%
▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Mellon HBV Alternative ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ $ 3,000,000 12%
Strategies, LLC ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
WS Ventures Management, L.P. ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ $ 1,000,000 4%
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
WS Capital Management, L.P. ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ $ 4,000,000 16%
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Litespeed Master Fund, Ltd. ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ $ 2,000,000 8%
▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇
▇▇▇▇▇
Total Standby Funding $25,000,000 100%
Commitments /
Percentage
SCHEDULE 5.11
LEGAL OPINIONS
1. Company is validly existing and in good standing
2. Company has power and authority to execute, deliver and perform the
Agreement and the Operative Agreements
3. Due authorization for Agreement, Operative Agreements and Transactions
4. Enforceability of Agreement and Operative Agreements
5. New stock will be validly issued, fully paid and nonassessable
6. Warrants will be duly authorized and validly issued
7. Rights will be duly authorized and validly issued
8. Execution, delivery and performance of Agreement and Operative Agreements
do not violate applicable law, charter, bylaws
9. No consent, approval or authorization required in connection with, the
execution delivery and performance of Agreement and Operative Documents
10. Effectiveness of Registration Statement
11. Confirmation Order is a final order of the Bankruptcy Court of Plan of
Reorganization
EXHIBIT A
[FORM OF COMPENSATION WARRANT]
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR WITH ANY
STATE SECURITIES COMMISSION, AND MAY NOT BE TRANSFERRED OR DISPOSED OF BY THE
HOLDER IN THE ABSENCE OF A REGISTRATION STATEMENT THAT IS EFFECTIVE UNDER THE
ACT AND APPLICABLE STATE LAWS AND RULES, OR, UNLESS, IMMEDIATELY PRIOR TO THE
TIME SET FOR TRANSFER, SUCH TRANSFER MAY BE EFFECTED WITHOUT VIOLATION OF THE
ACT AND OTHER APPLICABLE STATE LAWS AND RULES. NOTWITHSTANDING THE FOREGOING,
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THIS WARRANT OR THE SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT.
GADZOOKS, INC.
WARRANT
Warrant No. ___ Dated_______, 2005
Gadzooks, Inc., a Texas corporation (the "Company"), hereby certifies
that, for value received, [INSERT NAME OF HOLDER] or its registered assigns
(including permitted transferees, the "Holder"), is entitled to purchase from
the Company on the terms and conditions set forth in this Warrant up to a total
of number of shares of Common Stock equal to the Warrant Number (as defined
below), as adjusted from time to time as provided in Section 9), at the Exercise
Price (as defined below), at any time and from time to time from and after the
date of this Warrant through and including _________, 201[2] (the "Expiration
Date"). This warrant (this "Warrant") is being issued pursuant to the Investment
Agreement, dated as of October [__], 2004, between the Company and the parties
named therein (the "Investment Agreement"). The right of the Holder to exercise
this Warrant is subject to the satisfaction of the following conditions set
forth in Section 4(a).
1. Definitions. Capitalized terms not defined in this Warrant have the
meanings given to them in the Investment Agreement. Other capitalized terms used
in this Warrant and not otherwise defined will have the meanings set forth
below:
"Affiliate" of any specified Person means any other Person, directly
or indirectly, controlling, controlled by, or under common control with such
specified Person. For purposes of this definition, "control" means the power to
direct the
1
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract, or otherwise.
"Common Stock" means the common stock of the Company, par value
$0.01 per share, as constituted on the Original Issue Date.
"Exercise Price" means an amount per share equal to the exercise
price per share of the rights to purchase Common Stock issued in the Rights
Offering, and is adjusted as provided below.
"Original Issue Date" means [___________], 2005.
"Other Security" or Other Securities" refers to any capital stock
(other than Common Stock) and other securities of the Company or any other
Person that the Holder of this Warrant at any time is entitled to receive, or
has received upon the exercise of this Warrant, in lieu of or in addition to
Common Stock, or that at any time may be issuable, or have been issued, in
exchange for or in replacement of Common Stock or Other Securities pursuant to
Section 9 of this Warrant or otherwise.
"Person" means any individual and any court or other federal, state,
local or other governmental authority or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof),
or other entity of any kind.
"Principal Market" means, with respect to the Common Stock or any
other security, the Nasdaq National Market, or, if the Common Stock or any other
security is not traded on the Nasdaq National Market, then the principal
securities exchange or trading market (including the over-the-market or any
"bulletin-board" based market) for the Common Stock or such other security.
"Warrant Number" means a number equal to [25% OF THE NUMBER OF
SHARES SUBJECT TO THE RIGHTS OFFERING].
"Warrant Shares" will mean shares of Common Stock and any Other
Securities and Distributed Property (as defined in Section 9(d)) issued or
issuable from time to time upon exercise of this Warrant.
"Weighted Average Price" means, for any security for any period (and
in the case of a single day, the first and last day in the period will be the
same day), the dollar volume-weighted average price for such security on the
Principal Market during the period beginning at 9:30 a.m., New York City Time,
on the first trading day of such period (or such other time as the Principal
Market publicly announces is the official open of trading), and ending at 4:00
p.m., New York City Time, on the last trading day of such period (or such other
time as the Principal Market publicly announces is the official close of
trading), as reported by Bloomberg Financial Markets ("Bloomberg") through its
"Volume-at-Price" functions (ignoring any trade of more than 30,000 shares of
such security pursuant to an individual transaction (subject to adjustment for
stock splits, stock dividends, stock combinations, and other similar
transactions involving such
2
security after the Original Issue Date)), or, if the foregoing does not apply,
the dollar volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such security
during the period beginning at 9:30 a.m., New York City Time, on the first
trading day of such period (or such other time as the Principal Market publicly
announces is the official open of trading), and ending at 4:00 p.m., New York
City Time, on the last trading day of such period (or such other time as the
Principal Market publicly announces is the official close of trading), as
reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the
highest closing bid price and the lowest closing ask price of any of the market
makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc., averaged for each trading day during such period. If the
Weighted Average Price cannot be calculated for such security for such period on
any of the foregoing bases, the Weighted Average Price of the Common Stock or
such security for such period will be the fair market value as mutually
determined by the Company and the holders of the Purchased Warrants representing
at least a majority of the Warrant Shares issuable upon exercise of the
Purchased Warrants then outstanding. If the Company and the holders of the
Purchased Warrants representing at least a majority of the shares of Common
Stock issuable upon exercise of the Purchased Warrants then outstanding are
unable to agree upon the fair market value of the Common Stock or other such
securities, then such dispute will be submitted by the Company promptly to an
independent, reputable investment banking firm selected by lot from a list of
such investment banks agreed to by the Company and the holders of the Purchased
Warrants representing at least two-thirds of the Warrant Shares issuable upon
exercise of the Purchased Warrants then outstanding. The Company will cause such
investment banking firm to make the determination and notify the Company and the
Holder of the results no later than two trading days from the time it receives
the dispute. Such investment banking firm's determination will be deemed
conclusive absent fraud or manifest error. All such determinations will be
appropriately adjusted for any stock dividend, stock split, stock combination,
or other similar transaction during any period during which the Weighted Average
Price is being determined.
2. Registration of Warrant. The Company will register this Warrant, upon
records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder of this Warrant from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner of this Warrant for the purpose of any exercise of this Warrant
or any distribution to the Holder, and for all other purposes, absent actual
notice to the contrary.
3. Registration of Transfers. The Company will register the transfer of
any portion of this Warrant in the Warrant Register, upon surrender of this
Warrant, with the Form of Assignment attached to this Warrant as Appendix A duly
completed and signed, to the Company at its address specified in this Warrant.
Upon any such registration and transfer, a new warrant in substantially the form
of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion
of this Warrant so transferred will promptly (and in any event within two
trading days) be issued to the transferee and a New Warrant evidencing the
remaining portion of this Warrant not so
3
transferred, if any, will be issued to the transferring Holder. The acceptance
of the New Warrant by the transferee will be deemed the acceptance by such
transferee of all of the rights and obligations of a "Holder" of a Warrant as
though named as a "Holder" of this Warrant in this Warrant.
4. Exercise and Duration of Warrant.
(a) This Warrant will be exercisable, in whole or in part, by the
registered Holder at any time and from time to time on and after the Original
Issue Date to and including the Expiration Date, subject to fulfillment of the
conditions set forth below. At 5:00 p.m., New York City time on the Expiration
Date, the portion of this Warrant not exercised prior to the Expiration Date
will be and become void and of no value.
(b) A Holder may exercise this Warrant by delivering to the Company
(i) an exercise notice, in the form attached to this Warrant as Appendix B (the
"Exercise Notice"), appropriately completed and duly signed and (ii) payment of
the Exercise Price for the number of Warrant Shares as to which this Warrant is
being exercised (as set forth in Section 4(c) below). The date such items are
received by the Company is an "Exercise Date." Execution and delivery of the
Exercise Notice will have the same effect as cancellation of the original
Warrant and issuance of a New Warrant evidencing the right to purchase the
remaining number of Warrant Shares.
(c) The Holder will pay the Exercise Price, at the sole election of
the Holder, (i) in cash, by certified bank check payable to the order of the
Company, or by wire transfer of immediately available funds in accordance with
the Company's instructions or (ii) by presenting and surrendering to the Company
this Warrant, in which event the Company will issue to the Holder the number of
Warrant Shares determined as follows:
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be issued to the Holder
upon such exercise;
Y = the number of Warrant Shares with respect to which this
Warrant is being exercised;
A = the Weighted Average Price per share of Common Stock on
the on the trading day immediately preceding the date of
the delivery of the Exercise Notice; and
B = the Exercise Price.
(d) If an exercise of this Warrant is to be made in connection with
a registered public offering or sale of the Company, such exercise may, at the
sole
4
election of the Holder, be conditioned on the consummation of the public
offering or sale of the Company, in which case such exercise will not be deemed
effective until the consummation of such transaction.
(e) Notwithstanding any other provision of this Warrant, in no event
will the Holder be entitled to exercise this Warrant for a number of Warrant
Shares in excess of that number of Warrant Shares that, upon giving effect to
such exercise, would cause the aggregate number of shares of Common Stock
beneficially owned by the Holder and its Affiliates to exceed 9.99% of the
outstanding shares of any class of equity securities of the Company following
such exercise. For purposes of this Section 4, the aggregate number of shares of
any class of equity securities of the Company beneficially owned by the Holder
and its Affiliates will include the number of shares of Common Stock issuable
upon exercise of this Warrant with respect to which the determination is being
made, but will exclude shares of Common Stock that would be issuable upon (i)
exercise of any remaining Warrants that are not exercisable by their terms
beneficially owned by the Holder and its Affiliates and (ii) exercise,
conversion, or exchange of the unexercised, unconverted, or unexchanged portion
of any other securities of the Company beneficially owned by the Holder and its
Affiliates subject to a limitation on conversion, exercise, or exchange
analogous to the limitation contained in this Section 4(e). Except as set forth
in the preceding sentence, for purposes of this Section 4(e), beneficial
ownership will be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and "class of equity
securities" will have the meaning of such term under Section 16(b) of the
Exchange Act. The foregoing provisions of this Section 4(e) will be interpreted
consistent with the intent of the Holder and the Company that beneficial
ownership of, an exercise of rights under, this Warrant will not subject the
Holder to Section 16 of the Exchange Act. For purposes of this Warrant, in
determining the number of outstanding shares of Common Stock the Holder may rely
on the number of outstanding shares of Common Stock as reflected in (1) the
Company's most recent Quarterly Report on Form 10-Q or Annual Report on Form
10-K, as the case may be, (2) a more recent public announcement by the Company,
or (3) any other notice by the Company or its transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written request of the
Holder, the Company will promptly, but in no event later than two trading days
following the receipt of such notice, confirm in writing to the Holder the
number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock will be determined after giving effect to the
conversion, exercise, or exchange of securities of the Company since the date as
of which such number of outstanding shares of Common Stock was publicly
reported.
5. Delivery of Warrant Shares.
(a) Upon exercise of this Warrant, the Company will promptly (and no
later than the third trading day after the Exercise Date) issue or cause to be
issued and deliver or cause to be delivered to the Holder, in such name or names
as the Holder may designate, a certificate for the Warrant Shares issuable upon
such exercise bearing an appropriate restrictive legend (only, and to the
extent, if such legend is required by applicable law). The Holder, or any Person
so designated by the Holder to
5
receive the Warrant Shares, will be deemed to have become holder of record of
such Warrant Shares as of the Exercise Date.
(b) This Warrant is exercisable either in its entirety or, from time
to time, for a portion of the number of Warrant Shares. Upon surrender of this
Warrant following one or more partial exercises, the Company will issue or cause
to be issued, at its expense, a New Warrant evidencing the right to purchase the
remaining number of Warrant Shares.
6. Charges, Taxes, and Expenses. Issuance and delivery of certificates for
Warrant Shares upon exercise of this Warrant will be made without charge to the
Holder for any issue or transfer tax, withholding tax, transfer agent fee, or
other incidental tax or expense in respect of the issuance of such certificates,
all of which taxes and expenses will be paid by the Company; provided, however,
that the Company will not be required to pay any tax which may be payable in
respect of any transfer involved in the registration of any certificates for
Warrant Shares or Warrant in a name other than that of the Holder. The Holder
will be responsible for all other tax liability that may arise as a result of
holding or transferring this Warrant or receiving Warrant Shares upon exercise
of this Warrant.
7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen, or
destroyed, the Company will promptly issue or cause to be issued in exchange and
substitution for and upon cancellation of this Warrant, or in lieu of and in
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
customary and reasonable indemnity, if requested.
8. Reservation of Warrant Shares. The Company covenants that it will at
all times reserve and keep available out of the aggregate of its authorized but
unissued and otherwise unreserved Warrant Shares, solely for the purpose of
enabling it to issue Warrant Shares upon exercise of this Warrant as provided in
this Warrant, the number of Warrant Shares which are then issuable and
deliverable upon the exercise of this entire Warrant, free from all taxes,
liens, claims and encumbrances with respect to the issuance of such Warrant
Shares and will not be subject to any pre-emptive rights or similar rights
(taking into account the adjustments and restrictions of Section 9). The Company
covenants that all Warrant Shares so issuable and deliverable will, upon
issuance and the payment of the applicable Exercise Price in accordance with the
terms of this Warrant, be duly and validly authorized, issued, fully paid, and
nonassessable, free from all taxes, liens, claims, and encumbrances. The Company
will take all such action as may be necessary to assure that such Warrant Shares
may be issued as provided in this Warrant without violation of any applicable
law or regulation, or of any requirements of any securities exchange or
automated quotation system upon which the Common Stock or the Other Securities
may be listed or quoted, as the case may be.
9. Adjustments. The Exercise Price and number of Warrant Shares issuable
upon exercise of this Warrant are subject to adjustment from time to time as set
forth in this Section 9.
6
(a) Stock Dividends and Distributions. If the Company, at any time
while this Warrant is outstanding, pays a dividend on its Common Stock payable
in additional shares of Common Stock or otherwise makes a distribution on any
class of capital stock that is payable in shares of Common Stock, then, in each
such case, the number of Warrant Share issuable on exercise of this Warrant will
be proportionately increased and the Exercise Price will be multiplied by a
fraction, (i) the numerator of which will be the number of shares of Common
Stock outstanding immediately prior to the opening of business on the day after
the record date for the determination of stockholders entitled to receive such
dividend or distribution and (ii) the denominator of which will be the number of
shares of Common Stock outstanding immediately after such event. Any adjustment
made pursuant to this Section 9(a) will become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution.
(b) Stock Splits. If the Company, at any time while this Warrant is
outstanding, (i) subdivides outstanding shares of Common Stock into a larger
number of shares, or (ii) combines outstanding shares of Common Stock into a
smaller number of shares, then, in each such case, the number of Warrant Shares
issuable on exercise of this Warrant will be proportionately increased or
decreased, as appropriate, the Exercise Price will be multiplied by a fraction,
(A) the numerator of which will be the number of shares of Common Stock
outstanding immediately before such event and (B) the denominator of which will
be the number of shares of Common Stock outstanding immediately after such
event. Any adjustment pursuant to this Section 9(b) will become effective
immediately after the effective date of such subdivision or combination.
(c) Reclassifications. A reclassification of the Common Stock (other
than any such reclassification in connection with a transaction to which Section
9(e) applies) into shares of any other class of capital stock will be deemed:
(i) a distribution by the Company to the holders of its Common
Stock of such shares of such other class of capital stock for the purposes and
within the meaning of this Section 9; and
(ii) if the outstanding shares of Common Stock are to be
changed into a larger or smaller number of shares of Common Stock as part of
such reclassification, such change will be deemed a subdivision or combination,
as the case may be, of the outstanding shares of Common Stock for the purposes
and within the meaning of Section 9(b).
(d) Other Distributions. If the Company, at any time while this
Warrant is outstanding, distributes to holders of securities of the same class
as the Warrant Shares (i) evidences of its indebtedness, (ii) any security
(other than a distribution of Common Stock covered by Section 9(a)), (iii)
rights or warrants to subscribe for or purchase any security, or (iv) any other
asset (in each case, "Distributed Property"), then, in each such case, the
Holder, on exercise of this Warrant, will be entitled to receive with respect to
each Warrant Share issuable under this Warrant as of the record date fixed for
such distribution, the greatest per share amount of Distributed Property
7
received by any holder of the same class of security as the Warrant Shares that
is to receive such Distributed Property or that a holder of any class of
security that is the same as the Warrant Shares that is to receive such
Distributed Property is entitled to receive, and the Exercise Price in effect
immediately prior to the record date fixed for determination of Persons entitled
to receive such distribution and the Exercise Price thereafter applicable will
be adjusted (effective on and after such record date) to equal the product of
such Exercise Price multiplied by a fraction, (A) the numerator of which will be
the Weighted Average Price per share of the Common Stock on such record date
less the then fair market value per share of the Distributed Property
distributed in respect of one outstanding share of Common Stock, together with
any other Warrant Shares that a Holder has become entitled to receive with
respect to one share of Common Stock subject to this Warrant after the Original
Issue Date, (which value, if the Distributed Property is other than cash or
marketable securities, will be as determined in the same manner as the Weighted
Average Price in the event of a dispute as to such amount) and (B) the
denominator of which will be the Weighted Average Price per share of the Common
Stock (and all other Warrant Shares that a Holder has become entitled to receive
with respect to one share of Common Stock subject to this Warrant after the
Original Issuance Date) on such record date.
(e) Fundamental Transactions. If, at any time while this Warrant is
outstanding, (i) the Company effects any merger or consolidation or similar
transaction of the Company with or into another Person, (ii) the Company effects
any sale of all or a majority of its assets or income or revenue generating
capacity in one or a series of related transactions, or (iii) there occurs any
merger or similar transaction of another Person into the Company whereby the
Warrant Shares are cancelled, converted, or reclassified into or exchanged for
other securities, cash, or property (in any such case, a "Fundamental
Transaction"), then, as a condition to the consummation of such Fundamental
Transaction, the Company will (or, in the case of any Fundamental Transaction in
which the Company is not the surviving Person, the Company will cause such other
Person to) execute and deliver to the Holder a written instrument providing
that:
(x) so long as any Warrant remains outstanding on such terms
and subject to such conditions as will be nearly equivalent as may be
practicable to the provisions set forth in this Warrant, each Warrant, upon the
exercise thereof at any time on or after the consummation of such Fundamental
Transaction, will be exercisable into, in lieu of Warrant Shares issuable upon
such exercise prior to such consummation, the securities or other property (the
"Substituted Property") that would have been received in connection with such
Fundamental Transaction by a holder of the number of Warrant Shares into which
such Warrant was exercisable immediately prior to such Fundamental Transaction
(without regard to any limitations on exercise), assuming such holder of Warrant
Shares:
(A) is not a Person with which the Company consolidated
or into which the Company merged or which merged into the Company or to which
such sale or transfer was made, as the case may be (a "Constituent Person"), or
an Affiliate of a Constituent Person; and
8
(B) failed to exercise such Holder's rights of election,
if any, as to the kind or amount of securities, cash, and other property
receivable in connection with such Fundamental Transaction (provided, however,
that if the kind or amount of securities, cash, or other property receivable in
connection with such Fundamental Transaction is not the same for each share of
Common Stock and each share constituting part of any class of Warrant Share held
immediately prior to such Fundamental Transaction by a Person other than a
Constituent Person or an Affiliate thereof and in respect of which such rights
of election will not have been exercised (a "Non-Electing Share"), then, for the
purposes of this Section 9(e), the kind and amount of securities, cash, and
other property receivable in connection with such Fundamental Transaction by
each Non-Electing Share will be deemed to be the kind and amount so receivable
per share by a plurality of the Non-Electing Shares); and
(y) the rights and obligations of the Company (or, in the
event of a transaction in which the Company is not the surviving Person, such
other Person) and the Holders in respect of Substituted Property will be as
nearly equivalent as may be practicable to the rights and obligations of the
Company and Holders in respect of Warrant Shares under this Warrant.
Such written instrument will provide for adjustments that, for
events subsequent to the effective date of such written instrument, will be as
nearly equivalent as may be practicable to the adjustments provided for in
Section 9. The above provisions of this Section 9(e) will similarly apply to
successive Fundamental Transactions.
(f) Calculations. All calculations under this Section 9 will be made
to the nearest cent or the nearest 1/1000th of a share, as applicable. The
number of shares of any class of capital stock outstanding at any given time
will not include shares owned or held by or for the account of the Company, and
the disposition of any such shares by the Company will be considered an issue or
sale of capital stock.
(g) Adjustments. Notwithstanding any provision of this Section 9, no
adjustment of the Exercise Price will be required if such adjustment is less
than $0.0001; provided, however, that any adjustments which by reason of this
Section 9(g) are not required to be made will be carried forward and taken into
account for purposes of any subsequent adjustment.
(h) Notice of Adjustments. Upon the occurrence of each adjustment
pursuant to this Section 9, the Company will promptly deliver to the Holder a
certificate executed by the Company's Chief Financial Officer setting forth, in
reasonable detail, the event requiring such adjustment and the method by which
such adjustment was calculated, the adjusted Exercise Price and the adjusted
number or type of Warrant Shares or other securities issuable upon exercise of
this Warrant (as applicable). The Company will retain at its office copies of
all such certificates and cause the same to be available for inspection at said
office during normal business hours by the Holder or any prospective purchaser
of the Warrant designated by the Holder.
9
(i) Notice of Corporate Events. If the Company (i) declares a
dividend or any other distribution of cash, securities, or other property in
respect of its Common Stock, including, without limitation, any granting of
rights or warrants to subscribe for or purchase any capital stock of the Company
or any subsidiary of the Company; (ii) authorizes, approves, or enters into any
agreement contemplating, or solicits stockholder approval for, any Fundamental
Transaction; or (iii) authorizes the voluntary dissolution, liquidation, or
winding up of the affairs of the Company, then the Company will deliver to the
Holder a notice describing the material terms and conditions of such transaction
at least 15 calendar days prior to the applicable record or effective date on
which a Person would need to hold any class of Warrant Shares in order to
participate in or vote with respect to such transaction, and the Company will
take all steps reasonably necessary in order to ensure that the Holder is given
the practical opportunity to exercise this Warrant prior to such time so as to
participate in or vote with respect to such transaction.
(j) Certain Events. If any event occurs of the type contemplated by
the provisions of this Section 9 that is not expressly provided for by such
provisions, then the Company's Board of Directors will make an appropriate
adjustment in the Warrant Exercise Price and the number of Warrant Shares
issuable upon exercise of this Warrant so as to protect the rights of the
holders of the Purchased Warrants; provided that no such adjustment will
increase the Warrant Exercise Price or decrease the number of Warrant Shares
issuable as otherwise determined pursuant to this Section 9.
10. Fractional Shares. The Company will not be required to issue or cause
to be issued fractional Warrant Shares upon the exercise of this Warrant. If any
fraction of a Warrant Share would, except for the provisions of this Section 10,
be issuable upon exercise of this Warrant, the Company will make a cash payment
to the Holder equal to (a) such fraction multiplied by (b) the Weighted Average
Price on the Exercise Date of one full Warrant Share.
11. Listing on Securities Exchanges. In furtherance and not in limitation
of any other provision of this Warrant, if the Company at any time lists any
Common Stock on any Principal Market, the Company will, at its expense,
simultaneously list the Warrant Shares (and maintain such listing) on such
Principal Market, upon official notice of issuance following the exercise of
this Warrant; and the Company will so list, register and maintain such listing
on any Principal Market any Other Securities, if and at the time that any
securities of like class or similar type will be listed on such Principal Market
by the Company.
12. Remedies. The Company stipulates that the remedies at law of the
Holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained in this Warrant or by an injunction against a violation of any of the
terms of this Warrant or otherwise.
10
13. Notices. Any and all notices or other communications or deliveries
hereunder (including without limitation any Exercise Notice) must be in writing
and must be mailed by certified mail, return receipt requested, or by a
nationally recognized courier service or delivered (in person or by facsimile),
against receipt to the party to whom such notice or other communication is to be
given. The address for such notices or communications will be as set forth in
the Investment Agreement entered into by and between the Company and the other
Persons named on Schedule I thereto. Any notice or other communication given by
means permitted by this Section 13 will be deemed given at the time of receipt.
14. Warrant Agent. The Company will serve as warrant agent under this
Warrant. Upon 30 days' notice to the Holder, the Company may appoint a new
warrant agent. Any Person into which any new warrant agent may be merged, any
Person resulting from any consolidation to which any new warrant agent will be a
party or any Person to which any new warrant agent transfers substantially all
of its corporate trust or shareholders services business will be a successor
warrant agent under this Warrant without any further act. Any such successor
warrant agent will promptly cause notice of its succession as warrant agent to
be mailed (by first class mail, postage prepaid) to the Holder at the Holder's
last address as shown on the Warrant Register.
15. Miscellaneous.
(a) This Warrant may be assigned by the Holder. The obligations of
the Company under this Warrant may not be assigned or delegated by the Company,
except to a successor in the event of a Fundamental Transaction that complies
with the terms of this Warrant. This Warrant will be binding on and inure to the
benefit of the parties to this Warrant and their respective successors and
assigns. Subject to the preceding sentence, nothing in this Warrant will be
construed to give to any Person other than the Company and the Holder any legal
or equitable right, remedy, or cause of action under this Warrant. This Warrant
may be amended only in writing signed by the Company and the Holder.
(b) The Company will not, by amendment of its governing documents or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue, or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms 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.
Without limiting the generality of the foregoing, the Company (i) will not
increase the par value of any Warrant Shares above the amount payable therefor
upon exercise thereof; (ii) will take all such action as may be reasonably
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable Warrant Shares upon the exercise of this Warrant,
free from all taxes, liens, claims and encumbrances; and (iii) will not close
its shareholder books or records in any manner that interferes with the timely
exercise of this Warrant.
11
(c) THIS WARRANT WILL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO CONFLICTS OF
LAWS PRINCIPLES THEREOF OR ANY OTHER PRINCIPLE THAT COULD REQUIRE THE
APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.
(d) The headings in this Warrant are for convenience only, do not
constitute a part of this Warrant and will not be deemed to limit or affect any
of the provisions of this Warrant.
(e) If any provision of this Warrant is held to be illegal, invalid,
or unenforceable under any present or future law or regulation, and if the
rights or obligations of the Holder and the Company under this Warrant will not
be materially and adversely affected thereby, (a) such provision will be fully
severable, (b) this Warrant will be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a part of this Warrant,
(c) the remaining provisions of this Warrant will remain in full force and
effect and will not be affected by the illegal, invalid, or unenforceable
provision or by its severance from this Agreement; and (d) in lieu of such
illegal, invalid, or unenforceable provision, there will be added automatically
as a part of this Warrant a legal, valid, and enforceable provision as similar
in terms to such illegal, invalid, or unenforceable provision as may be possible
(as determined by a court of competent jurisdiction).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
12
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
GADZOOKS, INC.
By:_________________________________
Name:
Title:
1
APPENDIX A
FORM OF ASSIGNMENT
(to be completed and signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________________ the right represented by the
within Warrant to purchase _____________ shares of Common Stock of Gadzooks,
Inc. to which the within warrant relates and appoints __________________________
attorney to transfer said right on the books of Gadzooks, Inc. with full power
of substitution in the premises.
Dated:____________ _________________________________
(Signature must conform in all respects to
name of Holder as specified on face of the
Warrant)
Address of Transferee:
__________________________
__________________________
__________________________
In the presence of:
________________________
1
APPENDIX B
FORM OF EXERCISE NOTICE
(To be executed by the Holder to exercise the right to purchase Warrant Shares
under the foregoing Warrant)
To: Gadzooks, Inc.
The undersigned is the Holder of Warrant No. 1 (the "WARRANT") issued by
Gadzooks, Inc., a Texas corporation (the "COMPANY"). Capitalized terms used in
this Notice of Exercise and not otherwise defined have the respective meanings
set forth in the Warrant.
1. The Warrant is currently exercisable to purchase a total of _________
Warrant Shares.
2. The undersigned Holder hereby exercises its right to purchase Warrant
Shares pursuant to the Warrant.
3. The Holder intends that payment of the Exercise Price will be made as
(check one):
Cash Exercise_______
Cashless Exercise_______
4. If the Holder has elected a Cash Exercise, the Holder will pay the sum of
$________ to the Company in accordance with the terms of the Warrant.
5. If the Holder has elected a Cashless Exercise, a certificate will be
issued to the Holder for the number of shares equal to the whole number
portion of the product of the calculation set forth below, which is
__________. The Company will pay a cash adjustment in respect of the
fractional portion of the product of the calculation set forth below in an
amount equal to the product of the fractional portion of such product and
the Weighted Average Price on the Exercise Day, which product is
_________.
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be issued to the Holder upon
such cashless exercise;
Y = the number of Warrant Shares with respect to which the Warrant
is being exercised;
A = the Weighted Average Price per share of Common Stock on the
Exercise Date; and
B = the Exercise Price.
6. Following receipt of this Exercise Notice, the Company will deliver to the
Holder Warrant Shares in accordance with the terms of the Warrant.
7. Following this exercise, the Warrant will be exercisable to purchase a
total of __________ Warrant Shares.
Dated: _________ Name of Holder:
(Print)_______________________
By:___________________________
Name:_________________________
Title:________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
EXHIBIT B
[FORM OF PURCHASED WARRANT]
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR WITH ANY
STATE SECURITIES COMMISSION, AND MAY NOT BE TRANSFERRED OR DISPOSED OF BY THE
HOLDER IN THE ABSENCE OF A REGISTRATION STATEMENT THAT IS EFFECTIVE UNDER THE
ACT AND APPLICABLE STATE LAWS AND RULES, OR, UNLESS, IMMEDIATELY PRIOR TO THE
TIME SET FOR TRANSFER, SUCH TRANSFER MAY BE EFFECTED WITHOUT VIOLATION OF THE
ACT AND OTHER APPLICABLE STATE LAWS AND RULES. NOTWITHSTANDING THE FOREGOING,
THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THIS WARRANT OR THE SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT.
GADZOOKS, INC.
WARRANT
Warrant No. ___ Dated_______, 2005
Gadzooks, Inc., a Texas corporation (the "Company"), hereby certifies
that, for value received, [INSERT NAME OF HOLDER] or its registered assigns
(including permitted transferees, the "Holder"), is entitled to purchase from
the Company on the terms and conditions set forth in this Warrant up to a total
of number of shares of Common Stock equal to the Warrant Number (as defined
below), as adjusted from time to time as provided in Section 9), at the Exercise
Price (as defined below), at any time and from time to time from and after the
date of this Warrant through and including _________, 201[5] (the "Expiration
Date"). This warrant (this "Warrant") is being issued pursuant to the Investment
Agreement, dated as of October [__], 2004, between the Company and the parties
named therein (the "Investment Agreement").
1. Definitions. The capitalized terms used in this Warrant and not
otherwise defined will have the meanings set forth below:
"Affiliate" of any specified Person means any other Person, directly
or indirectly, controlling, controlled by, or under common control with such
specified Person. For purposes of this definition, "control" means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract, or otherwise.
1
"Common Stock" means the common stock of the Company, par value
$0.01 per share, as constituted on the Original Issue Date.
"Exercise Price" means $.0001 per share, as such amount may be
adjusted from time to time pursuant to Section 9.
"Original Issue Date" means [___________], 2005.
"Other Security" or "Other Securities" refers to any capital stock
(other than Common Stock) and other securities of the Company or any other
Person that the Holder of this Warrant at any time is entitled to receive, or
has received upon the exercise of this Warrant, in lieu of or in addition to
Common Stock, or that at any time may be issuable, or have been issued, in
exchange for or in replacement of Common Stock or Other Securities pursuant to
Section 9 of this Warrant or otherwise.
"Person" means any individual and any court or other federal, state,
local or other governmental authority or corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or subdivision thereof),
or other entity of any kind.
"Principal Market" means, with respect to the Common Stock or any
other security, the Nasdaq National Market, or, if the Common Stock or any other
security is not traded on the Nasdaq National Market, then the principal
securities exchange or trading market (including the over-the-counter market or
any "bulletin-board" based market) for the Common Stock or such other security.
"Warrant Number" means _______.
"Warrant Shares" will mean shares of Common Stock and Other
Securities and Distributed Property (as defined in Section 9(d)) issued or
issuable from time to time upon exercise of this Warrant.
"Weighted Average Price" means, for any security for any period (and
in the case of a single day, the first and last day in the period will be the
same day), the dollar volume-weighted average price for such security on the
Principal Market during the period beginning at 9:30 a.m., New York City Time,
on the first trading day of such period (or such other time as the Principal
Market publicly announces is the official open of trading), and ending at 4:00
p.m., New York City Time, on the last trading day of such period (or such other
time as the Principal Market publicly announces is the official close of
trading), as reported by Bloomberg Financial Markets ("Bloomberg") through its
"Volume-at-Price" functions (ignoring any trade of more than 30,000 shares of
such security pursuant to an individual transaction (subject to adjustment for
stock splits, stock dividends, stock combinations, and other similar
transactions involving such security after the Original Issue Date)), or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30 a.m., New York City Time, on
the first trading day of such period (or such other time as the Principal Market
publicly announces is the official open of trading), and ending at 4:00
2
p.m., New York City Time, on the last trading day of such period (or such other
time as the Principal Market publicly announces is the official close of
trading), as reported by Bloomberg, or, if no dollar volume-weighted average
price is reported for such security by Bloomberg for such hours, the average of
the highest closing bid price and the lowest closing ask price of any of the
market makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc., averaged for each trading day during such period. If the
Weighted Average Price cannot be calculated for such security for such period on
any of the foregoing bases, the Weighted Average Price of the Common Stock or
such security for such period will be the fair market value as mutually
determined by the Company and the holders of the Purchased Warrants representing
at least a majority of the Warrant Shares issuable upon exercise of the
Purchased Warrants then outstanding. If the Company and the holders of the
Purchased Warrants representing at least a majority of the shares of Common
Stock issuable upon exercise of the Purchased Warrants then outstanding are
unable to agree upon the fair market value of the Common Stock or other such
securities, then such dispute will be submitted by the Company promptly to an
independent, reputable investment banking firm selected by lot from a list of
such investment banks agreed to by the Company and the holders of the Purchased
Warrants representing at least two-thirds of the Warrant Shares issuable upon
exercise of the Purchased Warrants then outstanding. The Company will cause such
investment banking firm to make the determination and notify the Company and the
Holder of the results no later than two trading days from the time it receives
the dispute. Such investment banking firm's determination will be deemed
conclusive absent fraud or manifest error. All such determinations will be
appropriately adjusted for any stock dividend, stock split, stock combination,
or other similar transaction during any period during which the Weighted Average
Price is being determined.
2. Registration of Warrant. The Company will register this Warrant, upon
records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder of this Warrant from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner of this Warrant for the purpose of any exercise of this Warrant
or any distribution to the Holder, and for all other purposes, absent actual
notice to the contrary.
3. Registration of Transfers. The Company will register the transfer of
any portion of this Warrant in the Warrant Register, upon surrender of this
Warrant, with the Form of Assignment attached to this Warrant as Appendix A duly
completed and signed, to the Company at its address specified in this Warrant.
Upon any such registration and transfer, a new warrant in substantially the form
of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion
of this Warrant so transferred will promptly (and in any event within two
trading days) be issued to the transferee and a New Warrant evidencing the
remaining portion of this Warrant not so transferred, if any, will be issued to
the transferring Holder. The acceptance of the New Warrant by the transferee
will be deemed the acceptance by such transferee of all of the rights and
obligations of a "Holder" of a Warrant as though named as a "Holder" of this
Warrant in this Warrant.
3
4. Exercise and Duration of Warrant.
(a) This Warrant will be exercisable, in whole or in part, by the
registered Holder at any time and from time to time on and after the Original
Issue Date to and including the Expiration Date. At 5:00 p.m., New York City
time on the Expiration Date, the portion of this Warrant not exercised prior to
the Expiration Date will be and become void and of no value.
(b) A Holder may exercise this Warrant by delivering to the Company
(i) an exercise notice, in the form attached to this Warrant as Appendix B (the
"Exercise Notice"), appropriately completed and duly signed and (ii) payment of
the Exercise Price for the number of Warrant Shares as to which this Warrant is
being exercised (as set forth in Section 4(c) below). The date such items are
received by the Company is an "Exercise Date." Execution and delivery of the
Exercise Notice will have the same effect as cancellation of the original
Warrant and issuance of a New Warrant evidencing the right to purchase the
remaining number of Warrant Shares.
(c) The Holder will pay the Exercise Price, at the sole election of
the Holder, (i) in cash, by certified bank check payable to the order of the
Company, or by wire transfer of immediately available funds in accordance with
the Company's instructions or (ii) by presenting and surrendering to the Company
this Warrant, in which event the Company will issue to the Holder the number of
Warrant Shares determined as follows:
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be issued to the Holder
upon such exercise;
Y = the number of Warrant Shares with respect to which this
Warrant is being exercised;
A = the Weighted Average Price per share of Common Stock on
the on the trading day immediately preceding the date of
the delivery of the Exercise Notice; and
B = the Exercise Price.
(d) If an exercise of this Warrant is to be made in connection with
a registered public offering or sale of the Company, such exercise may, at the
sole election of the Holder, be conditioned on the consummation of the public
offering or sale of the Company, in which case such exercise will not be deemed
effective until the consummation of such transaction.
(e) Notwithstanding any other provision of this Warrant, in no event
will the Holder be entitled to exercise this Warrant for a number of Warrant
Shares in
4
excess of that number of Warrant Shares that, upon giving effect to such
exercise, would cause the aggregate number of shares of Common Stock
beneficially owned by the Holder and its Affiliates to exceed 9.99% of the
outstanding shares of any class of equity securities of the Company following
such exercise. For purposes of this Section 4, the aggregate number of shares of
any class of equity securities of the Company beneficially owned by the Holder
and its Affiliates will include the number of shares of Common Stock issuable
upon exercise of this Warrant with respect to which the determination is being
made, but will exclude shares of Common Stock that would be issuable upon (i)
exercise of any remaining, Warrants that are not exerciseable by their terms
beneficially owned by the Holder and its Affiliates and (ii) exercise,
conversion, or exchange of the unexercised, unconverted, or unexchanged portion
of any other securities of the Company beneficially owned by the Holder and its
Affiliates subject to a limitation on conversion, exercise, or exchange
analogous to the limitation contained in this Section 4(e). Except as set forth
in the preceding sentence, for purposes of this Section 4(e), beneficial
ownership will be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and "class of equity
securities" will have the meaning of such term under Section 16(b) of the
Exchange Act. The foregoing provisions of this Section 4(e) will be interpreted
consistent with the intent of the Holder and the Company that beneficial
ownership of, an exercise of rights under, this Warrant will not subject the
Holder to Section 16 of the Exchange Act. For purposes of this Warrant, in
determining the number of outstanding shares of Common Stock the Holder may rely
on the number of outstanding shares of Common Stock as reflected in (1) the
Company's most recent Quarterly Report on Form 10-Q or Annual Report on Form
10-K, as the case may be, (2) a more recent public announcement by the Company,
or (3) any other notice by the Company or its transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written request of the
Holder, the Company will promptly, but in no event later than two trading days
following the receipt of such notice, confirm in writing to the Holder the
number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock will be determined after giving effect to the
conversion, exercise, or exchange of securities of the Company since the date as
of which such number of outstanding shares of Common Stock was publicly
reported.
5. Delivery of Warrant Shares.
(a) Upon exercise of this Warrant, the Company will promptly (and no
later than the third trading day after the Exercise Date) issue or cause to be
issued and deliver or cause to be delivered to the Holder, in such name or names
as the Holder may designate, a certificate for the Warrant Shares issuable upon
such exercise bearing an appropriate restrictive legend (only, and to the
extent, if such legend is required by applicable law). The Holder, or any Person
so designated by the Holder to receive the Warrant Shares, will be deemed to
have become holder of record of such Warrant Shares as of the Exercise Date.
(b) This Warrant is exercisable either in its entirety or, from time
to time, for a portion of the number of Warrant Shares. Upon surrender of this
Warrant following one or more partial exercises, the Company will issue or cause
to be issued,
5
at its expense, a New Warrant evidencing the right to purchase the remaining
number of Warrant Shares.
6. Charges, Taxes, and Expenses. Issuance and delivery of certificates for
Warrant Shares upon exercise of this Warrant will be made without charge to the
Holder for any issue or transfer tax, withholding tax, transfer agent fee, or
other incidental tax or expense in respect of the issuance of such certificates,
all of which taxes and expenses will be paid by the Company; provided, however,
that the Company will not be required to pay any tax which may be payable in
respect of any transfer involved in the registration of any certificates for
Warrant Shares or Warrant in a name other than that of the Holder. The Holder
will be responsible for all other tax liability that may arise as a result of
holding or transferring this Warrant or receiving Warrant Shares upon exercise
of this Warrant.
7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen, or
destroyed, the Company will promptly issue or cause to be issued in exchange and
substitution for and upon cancellation of this Warrant, or in lieu of and in
substitution for this Warrant, a New Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
customary and reasonable indemnity, if requested.
8. Reservation of Warrant Shares. The Company covenants that it will at
all times reserve and keep available out of the aggregate of its authorized but
unissued and otherwise unreserved Warrant Shares, solely for the purpose of
enabling it to issue Warrant Shares upon exercise of this Warrant as provided in
this Warrant, the number of Warrant Shares which are then issuable and
deliverable upon the exercise of this entire Warrant, free from all taxes,
liens, claims and encumbrances with respect to the issuance of such Warrant
Shares and will not be subject to any pre-emptive rights or similar rights
(taking into account the adjustments and restrictions of Section 9). The Company
covenants that all Warrant Shares so issuable and deliverable will, upon
issuance and the payment of the applicable Exercise Price in accordance with the
terms of this Warrant, be duly and validly authorized, issued, fully paid, and
nonassessable, free from all taxes, liens, claims, and encumbrances. The Company
will take all such action as may be necessary to assure that such Warrant Shares
may be issued as provided in this Warrant without violation of any applicable
law or regulation, or of any requirements of any securities exchange or
automated quotation system upon which the Common Stock or the Other Securities
may be listed or quoted, as the case may be.
9. Adjustments. The Exercise Price and number of Warrant Shares issuable
upon exercise of this Warrant are subject to adjustment from time to time as set
forth in this Section 9.
(a) Stock Dividends and Distributions. If the Company, at any time
while this Warrant is outstanding, pays a dividend on its Common Stock payable
in additional shares of Common Stock or otherwise makes a distribution on any
class of capital stock that is payable in shares of Common Stock, then, in each
such case, the number of Warrant Share issuable on exercise of this Warrant will
be proportionately
6
increased and the Exercise Price will be multiplied by a fraction, (i) the
numerator of which will be the number of shares of Common Stock outstanding
immediately prior to the opening of business on the day after the record date
for the determination of stockholders entitled to receive such dividend or
distribution and (ii) the denominator of which will be the number of shares of
Common Stock outstanding immediately after such event. Any adjustment made
pursuant to this Section 9(a) will become effective immediately after the record
date for the determination of stockholders entitled to receive such dividend or
distribution.
(b) Stock Splits. If the Company, at any time while this Warrant is
outstanding, (i) subdivides outstanding shares of Common Stock into a larger
number of shares, or (ii) combines outstanding shares of Common Stock into a
smaller number of shares, then, in each such case, the number of Warrant Shares
issuable on exercise of this Warrant will be proportionately increased or
decreased, as appropriate, and the Exercise Price will be multiplied by a
fraction, (A) the numerator of which will be the number of shares of Common
Stock outstanding immediately before such event and (B) the denominator of which
will be the number of shares of Common Stock outstanding immediately after such
event. Any adjustment pursuant to this Section 9(b) will become effective
immediately after the effective date of such subdivision or combination.
(c) Reclassifications. A reclassification of the Common Stock (other
than any such reclassification in connection with a transaction to which Section
9(e) applies) into shares of any other class of capital stock will be deemed:
(i) a distribution by the Company to the holders of its Common
Stock of such shares of such other class of capital stock for the purposes and
within the meaning of this Section 9; and
(ii) if the outstanding shares of Common Stock are to be
changed into a larger or smaller number of shares of Common Stock as part of
such reclassification, such change will be deemed a subdivision or combination,
as the case may be, of the outstanding shares of Common Stock for the purposes
and within the meaning of Section 9(b).
(d) Other Distributions. If the Company, at any time while this
Warrant is outstanding, distributes to holders of securities of the same class
as the Warrant Shares (i) evidences of its indebtedness, (ii) any security
(other than a distribution of Common Stock covered by Section 9(a)), (iii)
rights or warrants to subscribe for or purchase any security, or (iv) any other
asset (in each case, "Distributed Property"), then, in each such case, the
Holder, on exercise of this Warrant, will be entitled to receive with respect to
each Warrant Share issuable under this Warrant as of the record date fixed for
such distribution, the greatest per share amount of Distributed Property
received by any holder of the same class of security as the Warrant Shares that
is to receive such Distributed Property or that a holder of any class of
security that is the same as the Warrant Shares that is to receive such
Distributed Property is entitled to receive, and the Exercise Price in effect
immediately prior to the record date fixed for determination of Persons entitled
to receive such distribution and the Exercise Price
7
thereafter applicable will be adjusted (effective on and after such record date)
to equal the product of such Exercise Price multiplied by a fraction, (A) the
numerator of which will be the Weighted Average Price per share of the Common
Stock on such record date less the then fair market value per share of the
Distributed Property distributed in respect of one outstanding share of Common
Stock, together with any other Warrant Shares that a Holder has become entitled
to receive with respect to one share of Common Stock subject to this Warrant
after the Original Issue Date, (which value, if the Distributed Property is
other than cash or marketable securities, will be as determined in the same
manner as the Weighted Average Price in the event of a dispute as to such
amount) and (B) the denominator of which will be the Weighted Average Price per
share of the Common Stock (and all other Warrant Shares that a Holder has become
entitled to receive with respect to one share of Common Stock subject to this
Warrant after the Original Issuance Date) on such record date.
(e) Fundamental Transactions. If, at any time while this Warrant is
outstanding, (i) the Company effects any merger or consolidation or similar
transaction of the Company with or into another Person, (ii) the Company effects
any sale of all or a majority of its assets or income or revenue generating
capacity in one or a series of related transactions, or (iii) there occurs any
merger or similar transaction of another Person into the Company whereby the
Warrant Shares are cancelled, converted, or reclassified into or exchanged for
other securities, cash, or property (in any such case, a "Fundamental
Transaction"), then, as a condition to the consummation of such Fundamental
Transaction, the Company will (or, in the case of any Fundamental Transaction in
which the Company is not the surviving Person, the Company will cause such other
Person to) execute and deliver to the Holder a written instrument providing
that:
(x) so long as any Warrant remains outstanding on such terms
and subject to such conditions as will be nearly equivalent as may be
practicable to the provisions set forth in this Warrant, each Warrant, upon the
exercise thereof at any time on or after the consummation of such Fundamental
Transaction, will be exercisable into, in lieu of Warrant Shares issuable upon
such exercise prior to such consummation, the securities or other property (the
"Substituted Property") that would have been received in connection with such
Fundamental Transaction by a holder of the number of Warrant Shares into which
such Warrant was exercisable immediately prior to such Fundamental Transaction
(without regard to any limitations on exercise), assuming such holder of Warrant
Shares:
(A) is not a Person with which the Company consolidated
or into which the Company merged or which merged into the Company or to which
such sale or transfer was made, as the case may be (a "Constituent Person"), or
an Affiliate of a Constituent Person; and
(B) failed to exercise such Holder's rights of election,
if any, as to the kind or amount of securities, cash, and other property
receivable in connection with such Fundamental Transaction (provided, however,
that if the kind or amount of securities, cash, or other property receivable in
connection with such Fundamental
8
Transaction is not the same for each share of Common Stock and each share
constituting part of any class of Warrant Share held immediately prior to such
Fundamental Transaction by a Person other than a Constituent Person or an
Affiliate thereof and in respect of which such rights of election will not have
been exercised (a "Non-Electing Share"), then, for the purposes of this Section
9(e), the kind and amount of securities, cash, and other property receivable in
connection with such Fundamental Transaction by each Non-Electing Share will be
deemed to be the kind and amount so receivable per share by a plurality of the
Non-Electing Shares); and
(y) the rights and obligations of the Company (or, in the
event of a transaction in which the Company is not the surviving Person, such
other Person) and the Holders in respect of Substituted Property will be as
nearly equivalent as may be practicable to the rights and obligations of the
Company and Holders in respect of Warrant Shares under this Warrant.
Such written instrument will provide for adjustments that, for
events subsequent to the effective date of such written instrument, will be as
nearly equivalent as may be practicable to the adjustments provided for in
Section 9. The above provisions of this Section 9(e) will similarly apply to
successive Fundamental Transactions.
(f) Calculations. All calculations under this Section 9 will be made
to the nearest cent or the nearest 1/1000th of a share, as applicable. The
number of shares of any class of capital stock outstanding at any given time
will not include shares owned or held by or for the account of the Company, and
the disposition of any such shares by the Company will be considered an issue or
sale of capital stock.
(g) Adjustments. Notwithstanding any provision of this Section 9, no
adjustment of the Exercise Price will be required if such adjustment is less
than $0.0001; provided, however, that any adjustments which by reason of this
Section 9(g) are not required to be made will be carried forward and taken into
account for purposes of any subsequent adjustment.
(h) Notice of Adjustments. Upon the occurrence of each adjustment
pursuant to this Section 9, the Company will promptly deliver to the Holder a
certificate executed by the Company's Chief Financial Officer setting forth, in
reasonable detail, the event requiring such adjustment and the method by which
such adjustment was calculated, the adjusted Exercise Price and the adjusted
number or type of Warrant Shares or other securities issuable upon exercise of
this Warrant (as applicable). The Company will retain at its office copies of
all such certificates and cause the same to be available for inspection at said
office during normal business hours by the Holder or any prospective purchaser
of the Warrant designated by the Holder.
(i) Notice of Corporate Events. If the Company (i) declares a
dividend or any other distribution of cash, securities, or other property in
respect of its Common Stock, including, without limitation, any granting of
rights or warrants to subscribe for or purchase any capital stock of the Company
or any subsidiary of the Company; (ii)
9
authorizes, approves, or enters into any agreement contemplating, or solicits
stockholder approval for, any Fundamental Transaction; or (iii) authorizes the
voluntary dissolution, liquidation, or winding up of the affairs of the Company,
then the Company will deliver to the Holder a notice describing the material
terms and conditions of such transaction at least 15 calendar days prior to the
applicable record or effective date on which a Person would need to hold any
class of Warrant Shares in order to participate in or vote with respect to such
transaction, and the Company will take all steps reasonably necessary in order
to ensure that the Holder is given the practical opportunity to exercise this
Warrant prior to such time so as to participate in or vote with respect to such
transaction.
(j) Certain Events. If any event occurs of the type contemplated by
the provisions of this Section 9 that is not expressly provided for by such
provisions, then the Company's Board of Directors will make an appropriate
adjustment in the Warrant Exercise Price and the number of Warrant Shares
issuable upon exercise of this Warrant so as to protect the rights of the
holders of the Purchased Warrants; provided that no such adjustment will
increase the Warrant Exercise Price or decrease the number of Warrant Shares
issuable as otherwise determined pursuant to this Section 9.
10. Fractional Shares. The Company will not be required to issue or cause
to be issued fractional Warrant Shares upon the exercise of this Warrant. If any
fraction of a Warrant Share would, except for the provisions of this Section 10,
be issuable upon exercise of this Warrant, the Company will make a cash payment
to the Holder equal to (a) such fraction multiplied by (b) the Weighted Average
Price on the Exercise Date of one full Warrant Share.
11. Listing on Securities Exchanges. In furtherance and not in limitation
of any other provision of this Warrant, if the Company at any time lists any
Common Stock on any Principal Market, the Company will, at its expense,
simultaneously list the Warrant Shares (and maintain such listing) on such
Principal Market, upon official notice of issuance following the exercise of
this Warrant; and the Company will so list, register and maintain such listing
on any Principal Market any Other Securities, if and at the time that any
securities of like class or similar type will be listed on such Principal Market
by the Company.
12. Remedies. The Company stipulates that the remedies at law of the
Holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained in this Warrant or by an injunction against a violation of any of the
terms of this Warrant or otherwise.
13. Notices. Any and all notices or other communications or deliveries
hereunder (including without limitation any Exercise Notice) must be in writing
and must be mailed by certified mail, return receipt requested, or by a
nationally recognized courier service or delivered (in person or by facsimile),
against receipt to the party to
10
whom such notice or other communication is to be given. The address for such
notices or communications will be as set forth in the Investment Agreement
entered into by and between the Company and the Persons named on Schedule I
thereto. Any notice or other communication given by means permitted by this
Section 13 will be deemed given at the time of receipt.
14. Warrant Agent. The Company will serve as warrant agent under this
Warrant. Upon 30 days' notice to the Holder, the Company may appoint a new
warrant agent. Any Person into which any new warrant agent may be merged, any
Person resulting from any consolidation to which any new warrant agent will be a
party or any Person to which any new warrant agent transfers substantially all
of its corporate trust or shareholders services business will be a successor
warrant agent under this Warrant without any further act. Any such successor
warrant agent will promptly cause notice of its succession as warrant agent to
be mailed (by first class mail, postage prepaid) to the Holder at the Holder's
last address as shown on the Warrant Register.
15. Miscellaneous.
(a) This Warrant may be assigned by the Holder. The obligations of
the Company under this Warrant may not be assigned or delegated by the Company,
except to a successor in the event of a Fundamental Transaction that complies
with the terms of this Warrant. This Warrant will be binding on and inure to the
benefit of the parties to this Warrant and their respective successors and
assigns. Subject to the preceding sentence, nothing in this Warrant will be
construed to give to any Person other than the Company and the Holder any legal
or equitable right, remedy, or cause of action under this Warrant. This Warrant
may be amended only in writing signed by the Company and the Holder.
(b) The Company will not, by amendment of its governing documents or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue, or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms 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.
Without limiting the generality of the foregoing, the Company (i) will not
increase the par value of any Warrant Shares above the amount payable therefor
upon exercise thereof; (ii) will take all such action as may be reasonably
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable Warrant Shares upon the exercise of this Warrant,
free from all taxes, liens, claims and encumbrances; and (iii) will not close
its shareholder books or records in any manner that interferes with the timely
exercise of this Warrant.
(c) THIS WARRANT WILL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO CONFLICTS OF
LAWS PRINCIPLES THEREOF OR ANY OTHER PRINCIPLE THAT COULD REQUIRE THE
APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.
11
(d) The headings in this Warrant are for convenience only, do not
constitute a part of this Warrant and will not be deemed to limit or affect any
of the provisions of this Warrant.
(e) If any provision of this Warrant is held to be illegal, invalid,
or unenforceable under any present or future law or regulation, and if the
rights or obligations of the Holder and the Company under this Warrant will not
be materially and adversely affected thereby, (a) such provision will be fully
severable, (b) this Warrant will be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a part of this Warrant,
(c) the remaining provisions of this Warrant will remain in full force and
effect and will not be affected by the illegal, invalid, or unenforceable
provision or by its severance from this Agreement; and (d) in lieu of such
illegal, invalid, or unenforceable provision, there will be added automatically
as a part of this Warrant a legal, valid, and enforceable provision as similar
in terms to such illegal, invalid, or unenforceable provision as may be possible
(as determined by a court of competent jurisdiction).
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
GADZOOKS, INC.
By:________________________________
Name:
Title:
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APPENDIX A
FORM OF ASSIGNMENT
(to be completed and signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________________ the right represented by the
within Warrant to purchase _____________ shares of Common Stock of Gadzooks,
Inc. to which the within warrant relates and appoints __________________________
attorney to transfer said right on the books of Gadzooks, Inc. with full power
of substitution in the premises.
Dated:____________ ________________________
(Signature must conform in all respects
to name of Holder as specified on face
of the Warrant)
Address of Transferee:
___________________________
___________________________
___________________________
In the presence of:
________________________
1
APPENDIX B
FORM OF EXERCISE NOTICE
(To be executed by the Holder to exercise the right to purchase Warrant Shares
under the foregoing Warrant)
To: Gadzooks, Inc.
The undersigned is the Holder of Warrant No. 1 (the "WARRANT") issued by
Gadzooks, Inc., a Texas corporation (the "COMPANY"). Capitalized terms used in
this Notice of Exercise and not otherwise defined have the respective meanings
set forth in the Warrant.
1. The Warrant is currently exercisable to purchase a total of _________
Warrant Shares.
2. The undersigned Holder hereby exercises its right to purchase Warrant
Shares pursuant to the Warrant.
3. The Holder intends that payment of the Exercise Price will be made as
(check one):
Cash Exercise_______
Cashless Exercise_______
4. If the Holder has elected a Cash Exercise, the Holder will pay the sum of
$________ to the Company in accordance with the terms of the Warrant.
5. If the Holder has elected a Cashless Exercise, a certificate will be
issued to the Holder for the number of shares equal to the whole number
portion of the product of the calculation set forth below, which is
__________. The Company will pay a cash adjustment in respect of the
fractional portion of the product of the calculation set forth below in an
amount equal to the product of the fractional portion of such product and
the Weighted Average Price on the Exercise Day, which product is
_________.
X = Y [(A-B)/A]
where:
X = the number of Warrant Shares to be issued to the Holder upon
such cashless exercise;
Y = the number of Warrant Shares with respect to which the Warrant
is being exercised;
A = the Weighted Average Price per share of Common Stock on the
Exercise Date; and
B = the Exercise Price.
6. Following receipt of this Exercise Notice, the Company will deliver to the
Holder Warrant Shares in accordance with the terms of the Warrant.
7. Following this exercise, the Warrant will be exercisable to purchase a
total of __________ Warrant Shares.
Dated: _________ Name of Holder:
(Print)_____________________
By:_________________________
Name:_______________________
Title:______________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)