UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the thirteen week period ended August 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 333-44969-01
DESA HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2940760
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2701 Industrial Drive, Bowling Green, KY 42101
(Address of principal executive offices) (Zip Code)
(502) 781-9600
(Registrant's telephone number, including area code)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X ]
As of September 30, 1998, there were 15,548,692 shares of Registrant's Common
Stock, $.01 par value per share, and 90,604 shares of the Registrant's Nonvoting
Common Stock, $.01 par value per share, outstanding.
<PAGE>
<TABLE>
<CAPTION>
DESA HOLDINGS CORPORATION
FORM 10-Q
August 29, 1998
INDEX
Page
<S> <C> <C>
PART I Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - August 29, 1998 and February 28, 1998 3
Consolidated Statements of Income - Thirteen Weeks and Twenty-six 4
Weeks ended August 29, 1998 and August 30, 1997
Consolidated Statements of Stockholders' Equity (Deficit) 5
Consolidated Statements of Cash Flows - Twenty-six Weeks ended 6
August 29, 1998 and August 30, 1997
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 13
Results of Operations
PART II Other Information
Item 2. Changes in Securities 20
Item 4. Submission of Matters to a Vote of Securities Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
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<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Balance Sheets
(in thousands, except number of shares)
February 28 August 29
1998 1998
----------------------------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 794 $ 517
Accounts receivable, net 20,838 50,940
Inventories:
Raw materials 1,257 841
Work-in-process 8,908 10,583
Finished goods 30,191 47,395
--------------------------------
40,356 58,819
Deferred tax assets 3,730 4,156
Other current assets 1,440 2,086
--------------------------------
Total current assets 67,158 116,518
Property, plant and equipment:
Land 390 390
Buildings and improvements 5,241 5,273
Machinery and equipment 29,891 33,393
Furniture and fixtures 630 1,103
--------------------------------
36,152 40,159
Less accumulated depreciation 22,593 24,105
--------------------------------
13,559 16,054
Goodwill 63,430 82,574
Other assets 11,489 26,647
--------------------------------
Total assets $ 155,636 $ 241,793
================================
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 15,035 $ 38,930
Accrued interest 5,725 3,936
Other accrued liabilities 14,004 10,433
Income taxes payable 49 (3,782)
Current portion of long-term debt 5,250 6,000
--------------------------------
Total current liabilities 40,063 55,517
Long-term debt 261,105 322,952
Deferred tax liabilities 1,781 1,962
Other liabilities 433 641
--------------------------------
Total liabilities 303,382 381,072
Commitments
Series C redeemable preferred stock, $.01 par value; authorized--
40,000 shares; issued and outstanding-- 17,600 shares at February 28, 1998
and 18,850 shares at August 29, 1998 14,661 16,035
Stockholders' equity (deficit):
Common stock, $.01 par value; authorized-- 50,000,000 shares; issued and
outstanding-- 13,688,015 shares February 28, 1998 and 15,548,692 137 155
shares at August 29, 1998
Nonvoting common stock, $.01 par value; authorized-- 2,000,000
shares; issued and outstanding--90,604 shares at February 28, 1998
and August 29, 1998 1 1
Capital in excess of par value 85,926 97,984
Carryover predecessor basis adjustment (32,309) (32,309)
Retained earnings (deficit) (215,598) (220,044)
Cumulative other comprehensive income (564) (1,101)
--------------------------------
Total stockholders' equity (deficit) (162,407) (155,314)
--------------------------------
Total liabilities and stockholders' equity (deficit) $ 155,636 $ 241,793
================================
See accompanying notes
</TABLE>
3
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<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Income
(in thousands)
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
August 30 August 29 August 30 August 29
1997 1998 1997 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 65,635 $ 75,416 $ 90,389 $ 116,170
Cost of sales 41,398 50,332 58,058 79,941
---------------------------------------------------------------------------
Gross profit 24,237 25,084 32,331 36,229
Operating costs and expenses:
Selling 9,035 11,970 13,888 20,753
General and administrative 2,292 3,096 4,542 5,964
Other 753 1,272 1,672 2,138
---------------------------------------------------------------------------
12,080 16,338 20,102 28,855
---------------------------------------------------------------------------
Operating Profit 12,157 8,746 12,229 7,374
Interest expense 3,858 6,745 7,162 13,237
---------------------------------------------------------------------------
Income before provision for income taxes 8,299 2,001 5,067 (5,863)
Provision for Income Taxes 3,483 878 2,130 (2,620)
---------------------------------------------------------------------------
Net Income 4,816 1,123 2,937 (3,243)
Less dividends on preferred stock 0 551 0 1,078
---------------------------------------------------------------------------
Income (loss) available for common stockholders $ 4,816 $ 572 $ 2,937 $ (4,321)
===========================================================================
See accompanying notes
</TABLE>
4
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<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Cumulative
Nonvoting Capital in Carryover Retained Other Total
Common Common Excess of Predecssor Earnings Comprehensive Shareholders'
Stock Stock Par Value Adjustment (Deficit) Income Equity
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
February 28, 1998 $137 $1 $85,926 ($32,309) ($215,598) ($564) ($162,407)
Comprehensive income:
Net Income (3,243) (3,243)
Foreign currency
translation adjustment (537) (537)
---------
Comprehensive income (3,780)
---------
Accretion of preferred stock (125) (125)
Dividends on preferred stock (1,078) (1,078)
Issuance of common stock 18 12,058 12,076
------------------------------------------------------------------------------ ---------
Balance at
August 29, 1998 $155 $1 $97,984 ($32,309) ($220,044) ($1,101) ($155,314)
============================================================================== =========
See accompanying notes
</TABLE>
5
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<TABLE>
<CAPTION>
DESA Holdings Corporation
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Twenty-six Weeks Ended
August 30 August 29
1997 1998
-----------------------------
<S> <C> <C>
Operating activities
Net income $ 2,937 $ (3,243)
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation 1,357 1,512
Amortization 1,046 1,945
Deferred income taxes 0 (15)
Equity in undistributed earnings of joint venture (85) (78)
(Increase) decrease in operating assets:
Accounts receivable, net (35,176) (28,436)
Inventories (26,316) (14,558)
Other current assets (423) (529)
Increase (decrease) in operating liabilities:
Accounts payable 13,528 22,290
Accrued interest 485 (1,789)
Other accrued liabilities (445) (5,391)
Income taxes payable 275 (3,831)
Other liabilities 52 208
-------- --------
Net cash used in operating activities (42,765) (31,915)
-------- --------
Investing activities
Capital expenditures (2,860) (2,806)
Dividends received from joint venture 85 83
Net cash paid for acquisition of businesses 0 (39,635)
Other 120 (672)
-------- --------
Net cash used in investing activities (2,655) (43,030)
-------- --------
Financing activities Recapitalization transactions:
Increase in Working Capital Loan 0 33,722
Increase in revolving loan 47,576 0
Principal payments of Term Loans (6,855) (1,125)
Issuance of Common Stock 12 12,076
Increase in Acquisition Loans 0 30,000
-------- --------
Net cash provided by financing activities 40,733 74,673
Effect of exchange rates on cash (5) (5)
-------- --------
Decrease in cash and cash equivalents for the period (4,692) (277)
Cash and cash equivalents at beginning of period 5,058 794
-------- --------
Cash and cash equivalents at end of period $ 366 $ 517
======== ========
See accompanying notes
</TABLE>
6
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The interim consolidated financial statements for the periods presented
herein have not been audited by independent public accountants. In the opinion
of management of Desa Holdings Corporation (the "Company"), all adjustments
necessary to present fairly the results of operations for the periods have been
included. Interim results are not necessarily indicative of results for a full
year.
The unaudited consolidated financial statements have been prepared by
the Company in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations.
The consolidated balance sheet presented as of February 28, 1998 has
been derived from the consolidated financial statements that have been audited
by the Company's independent accountants. The consolidated financial statements
and notes thereto included herein should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Registration Statement on Form S-4 (SEC File No. 333-44969-01).
Other than a small amount of goodwill and a $2 million note payable,
the Company has no assets, operations or cash flows independent of Desa
International, Inc. ("Desa") and, accordingly, separate financial statements for
Desa have not been provided as management believes that such financial
statements are not material to an investor.
2. Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Desa, and all of its
wholly-owned subsidiaries, including Desa Industries of Canada, Inc., Desa
Europe B.V. and Heath Company Limited. All significant intercompany accounts and
transactions have been eliminated. Desa's 50% interest in a joint venture is
accounted for using the equity method.
7
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results can differ from those estimates.
3. Financing Arrangements
<TABLE>
<CAPTION>
Outstanding borrowings consist of the following (in thousands):
February 28, August 29,
1998 1998
---- ----
<S> <C> <C>
9 7/8% Senior Subordinated Notes Due 2007 (A) $130,000 $130,000
Term A Loan (B) 49,125 48,250
Term B Loan (C) 49,750 49,500
Working Capital Loan Commitment (D) 15,480 49,202
Acquisition Loan (E) 20,000 20,000
Acquisition B Loan (F) -- 30,000
Note payable related to acquisition of Heath/Zenith (G) 2,000 2,000
-------- --------
Total outstanding borrowings $266,355 $328,952
Less current portion of long-term debt 5,250 6,000
-------- --------
Total long-term debt $261,105 $322,952
======== ========
<FN>
(A) The Senior Subordinated Notes are payable on December 15, 2007 and
accrue interest at a rate of 9.875% per annum. Interest is payable
semi-annually on June 15 and December 15, commencing on June 15, 1998.
The Senior Notes can be redeemed prior to the mandatory redemption date
based upon the occurrence of certain events, as defined. Desa is the
issuer of the Senior Subordinated Notes, which are fully and
unconditionally guaranteed by the Company.
(B) The Term A Loan is payable in quarterly installments through November
26, 2003 and accrues interest at the prime rate plus 1.25% or LIBOR
plus 2.25% at the option of the Company. Interest is payable on a
quarterly basis under the prime rate option or at the end of each LIBOR
period. Once repaid, the Term A Loan may not be reborrowed. Term Loan
A, Term Loan B, the Working Capital Loan Commitment, the Acquisition
Loan and the Acquisition B Loan are all part of a credit facility
entered into by the Company and Desa with the lenders party thereto in
November 1997 (the "Credit Facility").
8
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(C) The Term B Loan is payable in quarterly installments through November
26, 2004, and accrues interest at the prime rate plus 1.625% or LIBOR
plus 2.625% at the option of the Company. Interest is payable on a
quarterly basis under the prime rate option or at the end of each LIBOR
period. Once repaid, the Term B Loan may not be reborrowed.
(D) The Working Capital Loan Commitment is payable at any time at the
option of the Company prior to November 26, 2003 and accrues interest
at the prime rate plus 1.25% or LIBOR plus 2.25%, at the option of the
Company. Interest is payable on a quarterly basis under the prime rate
option or at the end of each LIBOR period. The Company can utilize
letters of credit under the Working Capital Loan Commitment up to
$10,000,000. As of August 29, 1998, letters of credit of $9,008,218
were outstanding under the Working Capital Loan Commitment. Borrowings
are generally limited to specific percentages of eligible trade
receivables and inventory.
(E) The Acquisition Loan is payable in quarterly installments commencing in
February 2000 and extending through November 26, 2003 and accrues
interest, which is payable quarterly, at the prime rate plus 1.625% or
LIBOR plus 2.625% at the option of the Company. Once repaid, the
Acquisition Loan may not be reborrowed.
(F) The Acquisition B Loan has available borrowings of up to $30,000,000
and is payable in quarterly installments commencing in February 2000
and extending through November 26, 2003 and accrues interest, which is
payable quarterly, at the prime rate plus 1.625% or LIBOR plus 2.625%,
at the option of the Company. Once repaid, the Acquisition B Loan may
not be reborrowed. On August 19, 1998, the Acquisition B Loan was drawn
on to fund the Fireplace Manufacturers, Inc. and Universal Heating,
Inc. acquisitions. $30,000,000 was borrowed, of which $4,423,170 was
used to pay down the Working Capital Loan.
(G) The note payable is due on December 31, 2008 and accrues interest,
which is payable semi-annually beginning June 30, 1998, at a rate of
7.5% per annum. The Company may elect, upon written notice, to defer
any interest payments, in which event such interest payments shall
effectively convert to principal and accrue interest at a rate of 7.5%
per annum.
</FN>
</TABLE>
In accordance with the terms of the Working Capital Loan Commitment,
the ability of the Company to incur additional indebtedness is limited,
as defined. At August 29, 1998, the Company had the ability to incur
additional indebtedness of $16.8 million.
4. Stockholders' Equity (Deficit)
Effective March 1998, the Company established the 1998 Stock Option
Plan which terminates in ten years and provides for the issuance of incentive
options or nonqualified stock
9
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
options for up to 1,462,222 shares of common stock, $.01 par value per share, of
the Company ("Common Stock"). The stock options may be granted to key employees
or eligible non-employees, as defined, as determined by the Compensation
Committee of the Board of Directors, and the term of the options cannot exceed
ten years from the grant date, except for employees who own stock possessing
more than 10% of the combined voting power of all classes of stock of the
Company, for whom the term of the options is five years. The exercise price of
the incentive options must be equal to or greater than the fair market value of
the Common Stock on the date of grant, except for employees who own stock
possessing more than 10% of the combined voting power of all classes of stock,
for whom the exercise price cannot be less than 110% of the fair market value of
the Common Stock on the date of grant. The exercise price of the nonqualified
options is determined by the Compensation Committee of the Board of Directors.
Effective March and July of 1998, the Compensation Committee awarded
incentive stock options to purchase an aggregate of 187,750 shares of Common
Stock to certain key employees at an option price of $6.50 per share. These
options vest as follows: 5% at the end of year one, 10% at the end of year two,
60% at the end of year three, 80% at the end of year four and 100% at the end of
year five.
5. Segment Information
The Company is organized into two primary product categories: (a) zone
heating products, which includes indoor room heaters, hearth products and
outdoor heaters, and (b) specialty products, which include specialty tools and
home security products.
Corporate expenses include corporate headquarters staff, a modest
portion of the cost of certain support functions, including accounting,
management information systems, human resources and treasury and the
amortization of deferred financing costs.
Identifiable assets are those assets of the Company that are identified
with the operations in each product segment. Corporate assets include primarily
cash, deferred income taxes and deferred financing costs.
10
<PAGE>
DESA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Operational results and other financial data for the two business
segments for the periods ended August 30, 1997 and August 29, 1998 are presented
below (in thousands):
Zone
Heating Specialty General
Products Products Corporate Total
-------- -------- --------- -----
<S> <C> <C> <C> <C>
Thirteen weeks ended August 30, 1997
Net sales $ 54,119 $ 11,516 -- $ 65,635
Operating profit 11,054 1,947 (844) 12,157
Depreciation and amortization 1,125 53 251 1,429
Identifiable assets 111,667 31,181 6,621 149,469
Capital expenditures 901 72 -- 973
Thirteen weeks ended August 29, 1998
Net sales 42,479 32,937 -- 75,416
Operating profit 5,873 3,863 (990) 8,746
Depreciation and amortization 1,396 465 385 2,246
Identifiable assets 136,639 88,343 16,811 241,793
Capital expenditures 1,228 132 48 1,408
<CAPTION>
Zone
Heating Specialty General
Products Products Corporate Total
-------- -------- --------- -----
<S> <C> <C> <C> <C>
Twenty-six weeks ended August 30, 1997
Net sales $ 67,494 $ 22,895 -- $ 90,389
Operating profit 11,197 3,062 (2,030) 12,229
Depreciation and amortization 1,694 201 508 2,403
Identifiable assets 111,667 31,181 6,621 149,469
Capital expenditures 2,648 212 -- 2,860
Twenty-six weeks ended August 29, 1998
Net sales 52,148 64,022 -- 116,170
Operating profit 3,043 6,334 (2,003) 7,374
Depreciation and amortization 1,778 926 753 3,457
Identifiable assets 136,639 88,343 16,811 241,793
Capital expenditures 2,491 249 66 2,806
</TABLE>
11
<PAGE>
6. Acquisitions
On August 19, 1998, the Company consummated two acquisitions. The
Company acquired all of the outstanding stock of Fireplace Manufacturers, Inc.
("FMI"), which then merged into Desa, for a net cash purchase price of
$21,984,798. The Company also entered into non-compete agreements with certain
executives of FMI covering a three year period for aggregate payments of
$3,050,000. The Company also acquired certain of the assets of Universal
Heating, Inc. through Desa U.S. Inc., which then merged into Desa, for a cash
purchase price of $12,332,548, including non-compete payments of $1,998,000. The
Company financed the two acquisitions through borrowings of $25,891,500 under
the Credit Facility (Term Loan B) and the issuance of Common Stock for
$12,075,500. The cash purchase prices set forth above exclude an aggregate of
$600,000 in fees and expenses incurred in connection with both acquisitions.
The Company accounted for such acquisitions using the purchase method.
The following summarizes the fair value of the assets acquired and liabilities
assumed at August 19, 1998 for the two acquisitions (in thousands):
Current assets $ 5,080
Property, plant and equipment 1,202
Other assets 10,385
Non-compete agreements 5,048
Goodwill 18,837
Current liabilities (2,585)
-------
37,967
The following supplemental pro forma information is presented as if the
acquisitions had been completed as of March 2, 1997 and as of March 1, 1998:
<TABLE>
<CAPTION>
Twenty-six weeks ended
August 30, 1997 August 29, 1998
--------------- ---------------
(dollars in thousands)
<S> <C> <C>
Net Sales $ 135,143 $ 128,877
Income from operations before extraordinary item 14,079 8,446
Income before extraordinary item 700 (5,880)
Net income 424 (3,647)
</TABLE>
12
<PAGE>
DESA HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This quarterly report on Form 10-Q of Desa Holdings Corporation (the
"Company," which includes its consolidated subsidiaries unless the context
indicates otherwise) contains statements which constitute forward looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Those statements appear in a number of places in this report
and include statements regarding the strategies, plans, beliefs or current
expectations of the Company and its management and other statements that are not
historical facts. Readers are cautioned that any such forward looking statements
are not guaranties of future performance and involve risks and uncertainties,
and that actual results may differ materially from those set forth in such
forward looking statements as a result of various factors. Such factors include,
but are not limited to, the Company's vulnerability to adverse general economic
and industry conditions because of its leverage, the Company's ability to obtain
future financing on acceptable terms, the Company's ability to integrate
acquired companies and to complete acquisitions on satisfactory terms, the
demand and price for the Company's products relative to production costs, the
seasonality of the Company's business and uncertainties regarding the resolution
of Year 2000 problems. The Company undertakes no obligation to release publicly
the results of any revisions to these forward looking statements that may be
made to reflect errors or circumstances that occur after the date hereof.
The following discussion of the Company's results of operations and
financial condition for the thirteen and twenty-six week periods ending August
29, 1998 and August 30, 1997 should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto contained herein, as
well as for the fiscal year ended February 28, 1998 included in the Company's
Registration Statement on Form S-4 (SEC File No. 333-44969-01).
Overview
The Company is organized into two primary product categories: (a) zone
heating products, which includes indoor room heaters, hearth products and
outdoor heaters, and (b) specialty products, which include specialty tools and
home security products. The Company records sales upon shipment of products to
its customers. Net sales constitute gross sales net of an accrual for returns
and allowances and cash discounts.
Sales of the Company's zone heating products follow seasonal patterns
that affect the Company's results of operations. Demand for the Company's zone
heating products has been historically highest in the third quarter, as
consumers prepare for winter. Consequently, the Company's net sales and
operating profit have also been historically highest during the third quarter.
Management believes that the Company's results of operations will continue to
follow this pattern; there can be no assurance, however, that third quarter
results will always surpass those of the first and second quarters, or that any
improvement shown will be as great as that
13
<PAGE>
shown in previous years. In particular, unusually warm weather in the fall may
reduce demand for zone heating products.
The Company's net sales and operating profit of zone heating products
in the first half of its fiscal year may be adversely affected by warm weather
during the preceding winter, which can result in inventory carryover by the
Company's customers. Last winter was unusually warm and, consequently, net sales
and operating profit of zone heating products for the first two quarters of the
current fiscal year were lower than in similar periods in the previous fiscal
year.
Sales of the Company's specialty products do not follow a significant
seasonal pattern and are not affected by weather patterns. Historically, these
sales have followed a relatively level quarterly pattern.
Acquisitions
On August 19, 1998, the Company consummated the acquisitions of FMI and
the worldwide rights (except in China) to distribute Universal Heating, Inc.'s
and its affiliates ("UHI") indoor heating products. FMI is a Santa Ana,
California, based manufacturer of wood-burning metal fireplaces, decorative gas
appliances with refractory-lined fireboxes, direct vent gas fireplaces, and
related chimney flues. UHI, based in Yorba Linda, California, is a privately
held manufacturer of indoor gas heating products. The aggregate purchase price
for the acquisitions was $37,967,346 including non-compete payments. These
acquisitions were accounted for under the purchase method of accounting.
The Company financed these acquisitions with the proceeds of a
$25,891,500 advance under its senior credit facility and $12,075,500 of the
proceeds from the issuance of approximately 1,860,677 additional shares of the
Common Stock by the Company. The additional equity was sold to existing
stockholders of the Company at a per share price of approximately $6.49.
In August 1998, the Company became party to an agreement to negotiate
in good faith for the purpose of entering into a joint venture to manufacture
various products in China. Pursuant to the terms of the joint venture under
negotiation, UHI intends to contribute manufacturing facilities located in China
in exchange for a 60% interest in the joint venture and a preferred interest in
an additional $7 million of profits of the joint venture. The Company intends to
contribute $3 million in cash for a 40% interest in the joint venture, which
will be subordinate to UHI's $7 million preferred interest in profits. The
Company intends to finance its $3 million contribution to the joint venture
through indebtedness under the Credit Facility. There can be no assurance that
the joint venture will be formed or, if formed, formed on the terms described
above.
14
<PAGE>
Results of Operations
Thirteen Week Period Ended August 29, 1998 Compared to the Thirteen Week Period
Ended August 30, 1997
Net Sales. Net sales in the thirteen weeks ended August 29, 1998
("second quarter 1999") were $75.4 million, an increase of 15% or $9.8 million
compared to the thirteen weeks ended August 30, 1997 ("second quarter 1998").
Zone heating products had net sales of $42.5 million in second quarter 1999, a
decrease of 22% or $11.6 million from second quarter 1998. This decline reflects
primarily the effects of last winter's unusually warm weather and the related
customer carryover inventory of heating products. Specialty products had net
sales of $32.9 million in second quarter 1999, an increase of 186% or $21.4
million over second quarter 1998, primarily attributable to the acquisition of
Heath Company and its Heath/Zenith line of home security products
("Heath/Zenith") in February 1998 and a 17% growth in the traditional tool
business.
Cost of Sales. For second quarter 1999, cost of sales was $50.3
million, an increase of $8.9 million or 22% from second quarter 1998,
attributable to the higher net sales for the period. Cost of sales was 67% of
net sales in second quarter 1999 compared to 63% for second quarter 1998. This
increase is because of (i) proportionately higher sales of home security
products, which are sold at lower margins, and (ii) higher manufacturing
overhead per unit of zone heating products, which resulted from the
weather-related reduction in production of heating products.
Selling, General and Administrative Expenses. For second quarter 1999,
selling, general and administrative expenses were $16.3 million, an increase of
$4.3 million or 35% from second quarter 1998, primarily attributable to the net
sales increase. As a percentage of net sales, selling, general and
administrative expenses were 22% for second quarter 1999 compared to 18% in
second quarter 1998. This higher level is associated with an increase in selling
expenses for higher freight, advertising and warranty expenses associated with
the sales increase to the major home centers and higher amortization expenses
associated with the November 1997 recapitalization and the acquisitions of
Heath/Zenith, FMI and UHI.
Operating Profit. Operating profit was $8.7 million for second quarter
1999 compared to $12.2 million for second quarter 1998, a decline of 28%.
Operating profit attributable to zone heating products was $5.9 million for
second quarter 1999, down $5.2 million from second quarter 1998. This decline is
attributable to the decline in net sales of zone heating products and the
increased cost of goods sold associated with under absorbed factory overhead.
Specialty products operating profit was $3.9 million for the second quarter
1999, an increase of $1.9 million over second quarter 1998. This increase is
attributable to increased net sales of specialty products related primarily to
the acquisition of Heath/Zenith.
Interest Expense. Interest expense for second quarter 1999 was $6.7
million, an increase of $2.9 million or 75%, reflecting the November 1997
recapitalization and the acquisitions of FMI, UHI and Heath/Zenith.
15
<PAGE>
Income Tax. The provision for income taxes was 44% for second quarter
1999, comparable to 42% for second quarter 1998.
Net Income. Net income was $1.1 million for second quarter 1999
compared to net income of $4.8 million for second quarter 1998, a decline of
77%. This decline is attributable to the lower operating profit and higher
interest expense.
Twenty-six Week Period Ended August 29, 1998 Compared to the Twenty-six Week
Period Ended August 30, 1997
Net Sales. Net sales for the twenty-six weeks ended August 29, 1998
("year to date 1999") were $116.2 million, an increase of $25.8 million or 29%
compared to the twenty-six weeks ended August 30, 1997 ("year to date 1998").
Zone heating products had net sales of $52.1 million for the year to date 1999,
a decrease of 23% or $15.3 million from the year to date 1998. This decline
primarily reflects the effects of last winter's unusually warm weather and the
related customer carryover inventory on heating products. Specialty products had
net sales of $64.0 million for the year to date 1999, an increase of 180% or
$41.1 million from the year to date 1998, primarily attributable to the
acquisition of Heath/Zenith in February 1998 and a 15% increase in the
traditional tool business.
Cost of Sales. For the year to date 1999, cost of sales was $79.9
million, an increase of $21.9 million or 38% from the year to date 1998,
reflecting the higher sales. Cost of sales was 69% of net sales during the year
to date 1999 compared to 64% for the year to date 1998. This increase is because
of (i) proportionately higher sales of home security products, which are sold at
lower margins, and (ii) higher manufacturing overhead per unit of zone heating
products, which resulted from the weather-related reduction in production of
heating products.
Selling, General and Administrative Expenses. For the year to date
1999, selling, general and administrative expenses were $28.9 million, an
increase of $8.8 million or 44% over the year to date 1998, primarily
attributable to the net sales increase. As a percentage of net sales, selling,
general and administrative expenses were 25% for the year to date 1999 compared
to 22% for the year to date 1998. This higher level is associated with an
increase in selling expenses for higher freight, advertising and warranty
expenses associated with the sales increase to the major home centers and higher
amortization expenses associated with the November 1997 recapitalization and the
acquisitions of Heath/Zenith, FMI and UHI.
Operating Profit. Operating profit was $7.4 million for the year to
date 1999 as compared to $12.2 million for the year to date 1998, a decline of
40%. Operating profit attributable to zone heating products was $3.0 million for
the year to date 1999, down $8.2 million from the year to date 1998 . This
decline is attributable to the decline in net sales of zone heating products and
the increased cost of goods sold. Operating profit attributable to specialty
products was $6.3 million for the year to date 1999, an increase of $3.3 million
over the year to date 1998. This increase is attributable to increased net sales
of specialty products related primarily to the acquisition of Heath/Zenith.
16
<PAGE>
Interest Expense. Interest expenses for the year to date 1999 was $13.2
million an increase of $6.1 million from the year to date 1998, reflecting the
November 1997 recapitalization and the acquisitions of FMI, UHI and
Heath/Zenith.
Income Tax. The provision for income taxes was 44% for the year to date
1999, comparable to the rate of 42% for the year to date 1998.
Net Income. Net income for the year to date 1999 was a loss of $3.2
million compared to a profit of $2.9 million for the year to date 1998, a
decline of 210%. This decline is attributable to the lower operating profit and
higher interest expense.
Liquidity and Capital Resources
The Company's primary cash needs have been for working capital, capital
expenditures and debt service requirements. The Company's sources of liquidity
have been cash flows from operations and borrowings under its revolving credit
facilities. The Company's business is subject to a pattern of seasonal
fluctuation. The Company's needs for working capital and the corresponding debt
levels tend to peak in the second and third fiscal quarters. The amount of sales
generated during the second and third fiscal quarters generally depends upon a
number of factors, including the level of retail sales for heating products
during the prior fall and winter, weather conditions affecting the level of
sales of heating products, general economic conditions, and other factors beyond
the Company's control.
Net cash used in operating activities for the twenty-six weeks ended
August 29, 1998 was $31.9 million compared to net cash used a year ago of $42.8
million for the same period last year. This positive reduction of $10.9 million
reflects the lower inventory build up associated with the reduced production of
zone heating products.
Net cash used in investing activities was $43.0 million for the
twenty-six weeks ended August 29, 1998 compared to $2.7 million for the
twenty-six weeks ended August 30, 1997. This higher cash used for investing
activities reflects the acquisition of UHI and FMI. Net cash provided by
financing activities for the second quarter ended August 29, 1998 was $74.7
million compared to $40.7 million a year ago due to the issuance of Common Stock
and bank loans associated with the acquisitions of UHI and FMI.
The Credit Facility provides for commitments in an aggregate amount of
up to $225.0 million. Borrowings outstanding under the Credit Facility were
$197.0 million on August 29, 1998. Outstanding letters of credit and foreign
currency contracts established to facilitate merchandise purchases were $9.0
million and $4.2 million, respectively, on August 29, 1998. The Company had the
ability to incur additional indebtedness of $16.8 million at August 29, 1998
under the Credit Facility.
The Company expects that capital expenditures during fiscal 1999 will
be approximately $3.9 million. Capital expenditures are expected to be funded
from internally generated cash flows and by borrowings under the Credit
Facility.
17
<PAGE>
Management believes that cash flow from operations and availability
under the Credit Facility will provide adequate funds for the Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations. The Company's ability to fund its operations, make planned capital
expenditures, make scheduled debt payments, refinance indebtedness and remain in
compliance with all of the financial covenants under its debt agreements depends
on its future operating performance and cash flow, which in turn, are subject to
prevailing economic conditions and to financial, business and other factors,
some of which are beyond its control.
Year 2000
The Company is in the process of reviewing its computer and operational
systems to identify and determine the extent to which any such systems will be
vulnerable to potential errors and failures as a result of the "Year 2000"
problem. The Year 2000 problem is a result of computer programs being written
using two digits, rather than four digits, to identify years. The Year 2000
presents several risks to the Company: (i) that the Company's internal systems
may not function properly, (ii) that suppliers' computer systems may not
function properly and, consequently, deliveries of required parts may be
delayed, (iii) that customers' computer systems may not function properly and,
consequently, orders or payments for the Company's products may be delayed, and
(iv) that the Company's bank's computer systems could malfunction, disrupting
the Company's orderly posting of deposits, funds transfers and payments. The
occurrence of any one or more of these events could have a material adverse
effect on the Company's financial condition and results of operations. Except as
disclosed below, the Company does not have any contingency plans to address the
Year 2000 problem.
The Company has written all of its internal management information
systems ("MIS") applications, rather than buying applications from vendors, and
is in the process of testing those applications to identify those which require
modification to appropriately address the Year 2000 problem. Management believes
that the Company's MIS staff will be able to modify all such applications prior
to the Year 2000, although there can be no assurances that such modifications
will be timely completed. The expenses of the Company's efforts to identify and
address any Year 2000 problems are not expected to be material.
The Company has begun a program to identify critical parts and
materials suppliers to evaluate the extent of the Year 2000 risk to the
Company's continued timely receipt of parts and materials deliveries. Management
believes that such efforts will allow the Company to identify any risk of parts
or materials shortages and either to find alternative suppliers or to order
sufficient quantities of critical parts and materials prior to the Year 2000 so
as to avoid adverse effects on the Company's financial condition and results of
operations, although there can be no assurances that such efforts will be
successful.
The Company is also engaged in discussions with certain major customers
to ensure that electronic data interchange ("EDI") formats function properly
notwithstanding the advent of the Year 2000. EDI is the primary method by which
customers place orders for the Company's products. Such discussions are well
advanced, and management believes that transmission of orders from these major
customers will not be significantly affected by the advent of the Year 2000,
although there can
18
<PAGE>
be no assurances in this regard. Management does not, however, have sufficient
information regarding the internal systems of all of its customers to form an
opinion as to whether such customers will be able to timely place such orders or
to timely pay for products. The purchasing patterns of existing and potential
customers may be affected by Year 2000 problems that could cause unexpected
fluctuations in the Company's sales volumes.
19
<PAGE>
PART II Other Information
Item 2. Changes in Securities
On August 19, 1998, the Company issued approximately 1,849,043 shares
of Common Stock to existing stockholders, at a price of approximately$6.49 per
share. Such sales were exempt from registration under the Securities Act of
1933, as amended, pursuant to Rule 506 thereunder.
On August 28, 1998, the Company issued approximately 11,634 shares of
Common Stock to existing stockholders, at a price of approximately$6.49 per
share. Such sales were exempt from registration under the Securities Act of
1933, as amended, pursuant to Rule 506 thereunder.
Item 4. Submission of Matters to a Vote of Security Holders
On June 29, 1998, the holders of a majority of the Company's issued and
outstanding shares of Common Stock, by written consent, approved, as of March
19, 1998, the Company's 1998 Stock Option Plan relating options for officers and
employees of the Company and Desa to acquire up to an aggregate of 1,462,222
shares of Common Stock, such options to be granted by the Compensation Committee
of the Company's Board of Directors. As required by the Delaware General
Corporation Law, notice of such action by written consent was mailed to all of
the Company's stockholders on or about July 7, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Desa Holdings Corporation 1998 Stock Option Plan
10.2 Desa Holdings Corporation Stockholders Agreement
dated as of November 26, 1997 among the Company and
the persons named therein
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the period for
which this report is made.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DESA HOLDINGS CORPORATION
By:
Dated: October 9, 1998 /s/ Robert H. Elman
Robert H. Elman
Chairman and Chief Executive Officer
Dated: October 9, 1998 /s/ Edward G. Patrick
Edward G. Patrick
Vice President of Finance and Treasurer
(Principal Financial Officer)
Dated: October 9, 1998 /s/ Scott M. Nehm
Scott M. Nehm
Vice President and Controller
(Chief Accounting Officer)
21
EXHBIBIT 10.1
=================================================================
DESA HOLDINGS CORPORATION
1998 STOCK OPTION PLAN
=================================================================
<PAGE>
DESA HOLDINGS CORPORATION
1998 STOCK OPTION PLAN
TABLE OF CONTENTS
Page
1. PURPOSE 1
2. ADMINISTRATION OF THE PLAN 1
3. STOCK SUBJECT TO THE PLAN 3
4. AUTHORITY TO GRANT OPTIONS 3
5. WRITTEN OPTION AGREEMENT 4
6. ELIGIBILITY 4
7. OPTION PRICE 4
8. DURATION OF OPTIONS 5
9. RESTRICTIONS ON EXERCISE OF OPTIONS 6
10. EXERCISE OF OPTIONS 7
11. NON-TRANSFERABILITY OF OPTIONS 9
12. TERMINATION OF EMPLOYMENT OR INVOLVEMENT OF
OPTIONEE WITH THE COMPANY 9
13. REQUIREMENTS OF LAW, ETC. 10
14. LEGEND ON CERTIFICATES 11
15. NO RIGHTS AS STOCKHOLDER 11
16. NO EMPLOYMENT OBLIGATION 11
17. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE 11
18. AMENDMENT OR TERMINATION OF PLAN 14
19. CERTAIN RIGHTS OF THE COMPANY 15
20. TAX WITHHOLDING 15
21. EFFECTIVE DATE AND DURATION OF THE PLAN 16
(i)
<PAGE>
DESA HOLDINGS CORPORATION
1998 STOCK OPTION PLAN
1. PURPOSE
The purpose of this 1998 Stock Option Plan (the "Plan") is to encourage
directors, officers, consultants and and other key employees of DESA Holdings
Corporation (the "Company") and its Subsidiaries (as hereinafter defined) to
continue their association with the Company and its Subsidiaries by providing
opportunities for such persons to participate in the ownership of the Company
and in its future growth through the granting of stock options (the "Options")
which may be options designed to qualify as incentive stock options (within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended [the
"Code"]) (an "ISO"), or options not intended to qualify for any special tax
treatment under the Code (a "NQO"). The term "Subsidiary" as used in the Plan
means a corporation or other business organization of which the Company owns,
directly or indirectly through an unbroken chain of ownership, fifty percent
(50%) or more of the total combined voting power of all classes of stock,
partnership interests or other equity interests. As of the date of adoption of
this Plan, DESA International, Inc. is a Subsidiary.
2. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by a committee (the
"Committee") consisting of those directors of the Company who shall at any time
and from time to time be serving as members of the Compensation Committee of the
Board of Directors of the Company (the "Board"); provided that, (i) at any time
that Section 16 of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act") is applicable to the Company, the Committee shall be composed of
at least two (2) directors and each such director shall be a "Non-Employee
Director" within the meaning of Rule 16b-3 under the Exchange Act and, (ii) at
any time that Section 162(m) of the Code is applicable to the Company, each such
director shall be an "outside director" within the meaning of Section 162 of the
Code and the regulations thereunder.
(b) The Committee shall select one of its members as Chairman
and shall hold meetings at such times and places as it may
<PAGE>
determine. A majority of the Committee shall constitute a quorum. Acts of a
majority of the members of the Committee present at any meeting of the Committee
at which a quorum is present, or acts consented to or approved in writing by all
of the members of the Committee, shall be the valid acts of the Committee.
(c) The Committee shall from time to time determine to whom
Options shall be granted under the Plan, the type of Options granted, the number
of shares of Stock (as hereinafter defined) that may be purchased under each
such Option and the terms and conditions (including but not limited to vesting
provisions) of each such Option. The Committee shall from time to time report to
the Board the names of the persons to whom Options are granted, the type of
Options granted, the number of shares of Stock that may be purchased under each
such Option and the terms and conditions of each such Option.
(d) The Committee shall have the sole authority, in its
absolute discretion, to adopt, amend and rescind such rules and regulations as,
in its opinion, may be advisable in the administration of the Plan, and to
interpret the Plan, the rules and regulations, and the instruments evidencing
options granted under the Plan and to make all other determinations deemed
necessary or advisable for the administration of the Plan. All questions of
interpretation and application of the Plan, such rules and regulations, Options
granted under the Plan or instruments evidencing Options shall be subject to the
determination of the Committee, which shall be final, binding and conclusive on
all Optionees (as hereinafter defined).
(e) The powers and determinations of the Committee set forth
in the Plan (including but not limited to this Section) may be exercised or made
by the Committee or the Board, as the Board may from time to time direct in its
discretion, and references in the Plan, in rules or regulations under the Plan
or in instruments evidencing Options shall be understood to refer to the Board
in any such case.
(f) The Plan shall be administered in such a manner as to
permit those Options granted hereunder and designated under Section 4 as such to
qualify as incentive stock options as described in Section 422 of the Code
unless defined elsewhere.
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<PAGE>
3. STOCK SUBJECT TO THE PLAN
The total number of shares of stock which may be subject to Options
issued under the Plan (the "Option Pool") shall be 1,462,222 shares of the
Company's Common Stock, $.01 par value per share ("Stock"), from either
authorized but unissued shares or treasury shares; provided that the number of
shares stated in this Section 3 shall be subject to adjustment in accordance
with the provisions of Section 17. If any outstanding Option is surrendered or
expires or terminates for any reason or due to any cause (including but not
limited to the death or severance of employment of the Optionee), the shares of
Stock allocable to the unexercised portion of such Option may again be subject
to an Option under the Plan.
4. AUTHORITY TO GRANT OPTIONS
The Committee may determine, from time to time, which key employees of
the Company or any Subsidiary or other persons shall be granted Options under
the Plan, the terms and conditions (including but not limited to vesting
provisions) of the Options and whether an Option shall be an ISO or a NQO) and
the number of shares which may be purchased under the Option or Options;
provided, however, that if any person to whom a grant has been made fails to
execute and deliver to the Committee an Option Agreement within ten (10) days
after it is submitted to him or her, the Option so granted shall be voidable by
the Company at its election, without further notice to the Optionee. Without
limiting the generality of the foregoing, the Committee may from time to time
grant: (a) to such eligible employees as it shall determine, an Option or
Options to buy a stated number of shares of Stock under the terms and conditions
of the Plan, which Option or Options will if so designated at the time of grant
constitute an ISO; and (b) to such eligible directors, employees or other
persons as it shall determine an Option or Options to buy a stated number of
shares of Stock under the terms and conditions of the Plan, which Option or
Options shall constitute a NQO. Subject only to any applicable limitations set
forth elsewhere in the Plan, the number of shares of Stock to be covered by any
Option shall be as determined by the Committee.
-3-
<PAGE>
5. WRITTEN OPTION AGREEMENT
Each Option granted hereunder shall be embodied in a written option
agreement (the "Option Agreement") substantially in the form of Exhibit 1 or
Exhibit 2 attached hereto (or in such other form not inconsistent with the Plan
as the Committee may determine), which shall be signed by the Optionee and by
the Chairman of the Board, the President, the Chief Operating Officer, or the
Chief Financial Officer of the Company for and in the name and on behalf of the
Company. An Option Agreement pertaining to an ISO shall contain the restriction
on exercisability set forth in Section 9 and any Option Agreement for any
Option, whether ISO or NQO, may contain such other provisions not inconsistent
with the Plan as the Committee in its sole and absolute discretion shall
approve.
6. ELIGIBILITY
The persons who shall be eligible for grants of Options under the Plan
shall be directors, officers, employees and other persons, whether or not
employees, who render services of special importance to the management,
operation or development of the Company or a Subsidiary. ISOs shall not be
granted to any person who is not an employee of the Company or a Subsidiary. A
director, officer, employee or other person to whom an Option has been granted
under the Plan, and any successor to such person who may be eligible to exercise
such Option following the death of the employee, or permitted assignee of such
person under Section 11 of the Plan, is sometimes referred to herein as an
"Optionee".
7. OPTION PRICE
(a) Except as otherwise provided in this Section, the price at
which shares of Stock may be purchased pursuant to an Option shall be specified
by the Committee at the time the Option is granted, but shall in no event be
less than the par value of such shares and not less than one hundred percent
(100%) of the fair market value (as hereinafter defined) of the Stock on the
date the Option is granted. In the case of an employee who owns (or is
considered under Section 424(d) of the Code as owning) stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Subsidiary, the price at which shares of Stock may
be so purchased pursuant to an
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<PAGE>
ISO shall be not less than one hundred and ten percent (110%) of the fair market
value of the Stock on the date the ISO is granted.
(b) For purposes of the Plan, the "fair market value" of a
share of the Stock on any date specified herein, shall mean (i) the last
reported sales price, regular way, or, in the event that no sale takes place on
such date, the average of the reported closing bid and asked prices, regular
way, in either case (A) on the principal national securities exchange on which
the Stock is listed or admitted to trading, or (B) if not then listed or
admitted to trading on any national securities exchange, on the NASDAQ National
Market System; or (ii) if the Stock is not quoted on such National Market
System, (A) the average of the closing bid and asked prices on such date in the
over-the-counter market as reported by NASDAQ, or (B) if bid and asked prices
for the Stock on such date shall not have been reported through NASDAQ, the
average of the bid and asked prices for such date as furnished by any American
or New York Stock Exchange member firm regularly making a market in the Stock
selected for such purpose by the Committee; or (iii) if the Stock is not then
listed or admitted to trading on any national exchange or quoted in the
over-the-counter market, the fair value thereof determined in good faith by the
Committee as of a date which is within thirty (30) days of the date as of which
the determination is to be made.
8. DURATION OF OPTIONS
Subject to Section 12 of the Plan, the duration of any Option shall be
specified by the Committee in the Option Agreement, but no Option shall be
exercisable after the expiration of ten (10) years from the date as of which
such Option is granted. In the case of any employee who owns (or is considered
under Section 424(d) of the Code as owning) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or any Subsidiary, no ISO shall be exercisable after the expiration of
five (5) years from the date as of which such Option is granted. The Committee,
in its sole and absolute discretion, may extend any Option theretofore granted
subject to the aforesaid limits and may provide that an Option shall be
exercisable during its entire duration or during any lesser period of time.
-5-
<PAGE>
9. RESTRICTIONS ON EXERCISE OF OPTIONS
(a) Notwithstanding any other provision of the Plan, (i) at
any time that Section 16 of the Exchange Act is applicable to the Company no
Option shall be exercisable until at least six (6) months after the date on
which such Option is granted by the Committee and (ii) the aggregate fair market
value (determined as of the time the Option is granted) of the Stock with
respect to which ISOs may be exercisable for the first time by an Optionee
during any calendar year (under the Plan or any other incentive stock option
plan(s) of the Company or any Subsidiary) shall not exceed $100,000. Subject to
the foregoing, each Option may be exercised so long as it is valid and
outstanding from time to time, in part or as a whole, in such manner and subject
to such conditions as the Committee, in its sole and absolute discretion, may
provide in the Option Agreement.
(b) The Committee may from time to time restrict the exercise of any
Option by prohibiting such exercise at any time during which and for such period
of time as any Optionee is engaged in any activity determined by the Committee,
after consideration of the facts presented on behalf of the Company and the
Optionee, to be detrimental to the best interests of the Company and its
stockholders. The Committee shall notify the Optionee in writing of any such
determination and of the scope and duration of any such restriction. If the
Committee notifies an Optionee in writing that such Optionee is engaged or may
have engaged in such a detrimental activity and such Optionee has exercised or
attempts to exercise an Option after such notification but prior to a decision
of the Committee based on the consideration of all facts presented on behalf of
the Company and the Optionee, the Company shall not be required to recognize
such exercise until the Committee has made its decision and, in the event any
exercise shall have taken place, it shall be of no force and effect (and void ab
initio) if the Committee makes an adverse determination; provided, however, that
if the Committee finds in favor of the Optionee then the Optionee will be deemed
to have exercised such Option as of the date he or she originally gave written
notice of his or her attempt to exercise or actual exercise, as the case may be.
The decision of the Committee as to the detrimental nature of the Optionee's
activities shall be final, binding and conclusive.
-6-
<PAGE>
10. EXERCISE OF OPTIONS
(a) Options shall be exercised by the delivery of written
notice to the Company setting forth the number of shares of Stock with respect
to which the Option is to be exercised, accompanied by payment of the option
price for such shares, which payment shall be made, subject to the alternative
provisions of this Section, in cash or by such cash equivalents, payable to the
order of the Company in an amount in United States dollars equal to the option
price for such shares, as the Committee in its sole and absolute discretion
shall consider acceptable. Such notice shall be delivered in person to the Chief
Financial Officer or Treasurer of the Company or shall be sent by registered
mail, return receipt requested, to the Chief Financial Officer or Treasurer of
the Company, in which case delivery shall be deemed made on the date such notice
is deposited in the mail.
(b) Alternatively, at the discretion of the Committee and
subject to such rules as may be established by the Committee, payment of the
option price may be made through a so-called "cashless exercise" procedure,
under which:
(i) The Optionee delivers irrevocable instructions to a broker
to sell shares of Stock acquired upon exercise of the Option and to
remit promptly to the Company a sufficient portion of the sale proceeds
of such shares to pay the option price and any withholding tax
resulting from such exercise; or
(ii) A broker (A) transmits the option price to the Company in
cash or acceptable cash equivalents, either (I) against the Optionee's
notice of exercise and the Company's confirmation that it will deliver
to the broker stock certificates issued in the name of the broker for
at least that number of shares having the fair market value equal to
the option price or (II) as the proceeds of a margin loan to the
Optionee; or (B) agrees to pay the option price to the Company in cash
or acceptable cash equivalents upon the broker's receipt from the
Company of stock certificates issued in the name of the broker for at
least that number of shares having a fair market value equal to the
option price.
-7-
<PAGE>
The Optionee's written notice of exercise of an option pursuant to a "cashless
exercise" procedure must include the name and address of the broker involved, a
clear description of the procedure, and such other information or undertaking by
the broker as the Treasurer shall reasonably require.
(c) Alternatively, at the discretion of the Committee and
subject to such rules as may be established by the Committee, payment of the
option price may be made, in whole or in part, in shares of Stock owned by the
Optionee; provided, however, that the Optionee may not make payment in shares of
Stock that he acquired upon the earlier exercise of any ISO (or other "incentive
stock option"), unless and until he has held the shares until at least two (2)
years after the date the ISO (or such other incentive stock option) was granted
and at least one (1) year after the date the ISO (or such other incentive stock
option) was exercised. If payment is made in whole or in part in shares of
Stock, then the Optionee shall deliver to the Company in payment of the option
price of the shares in respect of which such Option is exercised:
(i) Certificates registered in the name of such Optionee
representing a number of shares of Stock legally and beneficially owned
by such Optionee, fully vested and free of all liens, claims and
encumbrances of every kind, with such certificates to be duly endorsed
or accompanied by stock powers duly endorsed in blank by the record
holder of the shares of Stock represented by such certificates; and
(ii) If the option price for the shares in respect of which
such Option is exercised exceeds the fair market value of the shares of
Stock represented by such certificates on the date of delivery of such
certificates, cash or such cash equivalents payable to the order to the
Company, in an amount in United States dollars equal to the amount of
such excess and otherwise as the Committee in its sole and absolute
discretion shall consider acceptable.
Notwithstanding the foregoing provisions of this Section, the Committee, in its
sole and absolute discretion, (A) may refuse to accept shares of Stock in
payment of the option price for the shares of Stock with respect to which such
Option is to be exercised and, in that event, any certificates representing
shares of Stock which were delivered to the Company with such written
-8-
<PAGE>
notice shall be returned to such Optionee together with notice by the Company to
such Optionee of the refusal of the Committee to accept such shares of Stock.
(d) As promptly as practicable after the receipt by the
Company of (i) written notice from the Optionee setting forth the number of
shares of Stock with respect to which such Option is to be exercised and (ii)
payment of the option price of such shares in the form required by the foregoing
provisions of this Section, the Company shall, subject to the provisions of
Section 13 of the Plan, cause to be delivered to such Optionee certificates
representing the number of shares with respect to which such Option has been so
exercised.
11. NON-TRANSFERABILITY OF OPTIONS
Options shall not be transferable by the Optionee otherwise than by
will or under the laws of descent and distribution and, during his or her
lifetime, shall be exercisable only by the Optionee. Options shall be null and
void and without effect upon any attempted assignment or transfer, except as
hereinabove provided, including without limitation any purported assignment,
whether voluntary or by operation of law, pledge, hypothecation or other
disposition contrary to the provisions hereof, or levy of execution, attachment,
trustee process or similar process, whether legal or equitable upon the Options.
Notwithstanding the foregoing, the Committee may, in its sole and absolute
discretion, permit the transfer of Options which are not ISOs to (a) members of
the Optionee's immediate family (consisting of parents, siblings, issue (natural
or adopted), in-laws, step-parents, step-children (natural or adopted) or
cousins or (b) trusts or other estate planning vehicles solely for the benefit
of the Optionee and such immediate family members of the Optionee or (c) limited
partnerships or limited liability companies whose only partners or members are
the Optionee and such immediate family members of such Optionee, subject to such
restrictions and conditions as the Committee may deem advisable or appropriate.
12. TERMINATION OF EMPLOYMENT OR INVOLVEMENT
OF OPTIONEE WITH THE COMPANY
For purposes of the Plan, employment by or involvement with (in the
case of an Optionee who is not an employee) the Company or
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a Subsidiary shall be considered employment by or involvement with the Company.
After the Optionee's termination of employment with or involvement with the
Company, the Option shall terminate as provided in the Option Agreement, and the
Option shall be vested only to the extent vested on the date of such termination
of employment.
13. REQUIREMENTS OF LAW, ETC.
(a) The Company shall not be required to transfer any Stock or
to sell or issue any shares upon the exercise of any Option if the transfer,
sale or issuance of such shares may result in a violation by the Optionee or the
Company of any provisions of any law, statute or regulation of any governmental
authority. Without limiting the generality of the foregoing, in connection with
the Securities Act of 1933, as amended (the "Securities Act") and any applicable
state securities or "blue sky" law (a "Blue Sky Law"), upon the proposed
transfer of Stock or the proposed exercise of any Option the Company shall not
be required to transfer or issue shares unless the Board has received evidence
or advice satisfactory to it to the effect that such transfer or issuance of
shares is pursuant to a registration statement in effect under the Securities
Act and applicable Blue Sky Laws or otherwise is subject to an exemption from
such registration. Any determination in this connection by the Board shall be
final, binding and conclusive. The Company shall not be obligated to take any
other action in order to cause the transfer of Stock or the exercise of an
Option to comply with any law or regulations of any governmental authority,
including, without limitation, the Securities Act or applicable Blue Sky Law.
(b) Notwithstanding any other provision of the Plan to the
contrary, the Company may refuse to permit a transfer of shares of the Stock or
of any Option if in the opinion of its legal counsel such transfer may violate
any federal or state securities laws or subject the Company to liability
thereunder. Any sale, assignment, transfer, pledge or other disposition of
shares of the Stock received upon exercise of any Option (or any other shares or
securities derived therefrom) or of any Option which is not in accordance with
the provisions of this Section shall be void and of no effect and shall not be
recognized by the Company.
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14. LEGEND ON CERTIFICATES
The Committee may cause any certificate representing shares of Stock
acquired upon exercise of an Option (and any other shares or securities derived
therefrom) to bear a legend to the effect that the securities represented by
such certificate have not been registered under the Securities Act or any
applicable Blue Sky Law, and may not be sold, assigned, transferred, pledged or
otherwise disposed of except in accordance with the Plan and applicable
agreements binding the holder and the Company or any of its stockholders.
15. NO RIGHTS AS STOCKHOLDER
No Optionee shall have any rights as a stockholder with respect to
shares covered by his or her Option until the date of issuance of a stock
certificate for such shares; except as otherwise provided in Section 17 of the
Plan, no adjustment for dividends or otherwise shall be made if the record date
therefor is prior to the date of issuance of such certificate.
16. NO EMPLOYMENT OBLIGATION
The granting of any Option shall not impose upon the Company or any
Subsidiary any obligation to employ or continue to employ any Optionee, or to
engage or retain the services of any person, and the right of the Company or any
Subsidiary to terminate the employment or services of any person shall not be
diminished or affected by reason of the fact that an Option has been granted to
him or her. The existence of any Option shall not be taken into account in
determining any damages relating to termination of employment or services for
any reason.
17. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE
(a) The existence of outstanding Options shall not affect in
any way the right or power of the Company or its stockholders to make or
authorize any or all any subdivisions, splits, combinations or consolidations of
shares of capital stock of the Company (including the Stock) or the payment of a
dividend in shares of the Stock or other securities of the Company, adjustments,
recapitalizations, reclassifications, reorganizations
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or other changes in the Company's capital structure or its business or any
merger or consolidation of the Company or any issue of bonds, debentures,
preferred or preference stock, whether or not convertible into or exchangeable
or exercisable for shares of the Stock or other securities, ranking prior to or
pari passu with the Stock or affecting the rights thereof, or warrants, rights
or options to acquire the same, or the dissolution or liquidation of the Company
or any sale or transfer of all or any part of its assets or business or any
other corporate act or proceeding, whether of a similar character or otherwise.
(b) Subject to the provisions of Section 17(d) of the Plan,
the number of shares of the Stock in the Option Pool (less the number of shares
theretofore delivered upon exercise of Options) and the number of shares of the
Stock covered by any outstanding Options and the price per share payable upon
exercise thereof (provided that in no event shall the option price be less than
the par value of such shares) shall be appropriately adjusted by the Board in
the event that the outstanding shares of the Stock are changed into or exchanged
for a different number or kind of shares or other securities of the Company or
of another corporation by reason of any reorganization, merger, consolidation,
recapitalization, reclassification, stock split, combination of shares, or
dividends payable in capital stock. The decision of the Board as to the
adjustment, if any, required by the provisions of this Section shall be final,
binding and conclusive.
(c) If the Company merges or consolidates with a wholly-owned
subsidiary for the purpose of reincorporating itself under the laws of another
jurisdiction, the Optionees will be entitled to acquire shares of the Stock of
the reincorporated Company upon the same terms and conditions as were in effect
immediately prior to such reincorporation (unless such reincorporation involves
a change in the number of shares or the capitalization of the Company, in which
case proportional adjustments shall be made as provided in this Section), and
the Plan, unless otherwise rescinded by the Board, will remain the Plan of the
reincorporated Company.
(d) Unless otherwise determined by the Board in its sole
discretion and except as otherwise provided in Section 17(c) of the Plan, if
while unexercised Options remain outstanding under the Plan (i) the Company is
merged or consolidated with another corporation or other entity, whether or not
the Company is the
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surviving entity, or (ii) the Company is liquidated or sells or otherwise
disposes of all or substantially all of its assets to another entity, or (iii)
there takes place a Change in Control (as hereinafter defined), or (iv) in other
circumstances in which the Board in its sole and absolute discretion deems it
appropriate for the provisions of this paragraph to apply, (A) the purchaser(s)
of the Company's assets or capital stock may, in his, her or its discretion,
deliver to the Optionee, to the extent that the right to purchase shares of the
Stock under the Option has vested, the same kind of consideration (less the
price per share payable upon exercise thereof) that is delivered to the holders
of the Stock as a result of such merger, consolidation, liquidation, sale,
disposition, Change in Control or other circumstances or (B) the Board may, in
its sole determination, cancel the Option, to the extent not theretofore
exercised, in exchange for consideration in cash or in kind, which consideration
in the case of (A) or (B) shall be equal in value to the value of those shares
of stock or other consideration the Optionee would have received had the Option
been exercised (to the extent it has vested and not been exercised) and no
disposition of the shares so acquired upon such exercise been made prior to such
merger, consolidation, liquidation, sale, disposition, Change in Control or
other circumstances, less the price per share payable upon exercise thereof.
Upon receipt of such consideration by the Optionee, the Option shall immediately
terminate and be of no further force and effect, including with respect to the
vested and unvested portion thereof. The value of the stock or other
consideration the Optionee would have received if the Option had been exercised
shall be determined in good faith by the Board. In addition, in the case of any
such merger, consolidation, liquidation, sale, disposition, Change in Control or
other circumstance, the Board may, in its sole discretion, accelerate the
vesting of the Option.
(e) For purposes of this Section, a "Change in Control" shall
be deemed to have occurred if any person, or any two or more persons acting as a
group, and all affiliates of such person or persons, who prior to such time
owned less than fifty percent (50%) of the then outstanding Common Stock of the
Company, shall acquire such additional shares of the Company's Common Stock in
one or more transactions, or series of transactions, such that following such
transaction or transactions, such person or group and affiliates beneficially
own fifty percent (50%) or more of the Company's Common Stock outstanding; and
"Common Stock" shall mean the Stock,
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<PAGE>
or if changed, the capital stock of the Company as it shall be constituted from
time to time entitling the holders thereof to share generally in the
distribution of all assets available for distribution to the Company's
stockholders after the distribution to any holders of capital stock with
preferential rights.
(f) Upon dissolution or liquidation of the Company, the Option
shall terminate, but the Optionee (if at such time in the employment of the
Company) shall have the right, immediately prior to such dissolution or
liquidation, to purchase shares of the Stock pursuant to the Option to the
extent such Option is then vested.
(g) No fraction of a share of Stock shall be purchasable or
deliverable upon the exercise of the Option, but in the event any adjustment
hereunder of the number of shares covered by the Option shall cause such number
to include a fraction of a share, such fraction shall be adjusted to the nearest
smaller whole number of shares.
(h) Except as expressly provided herein, the issue by the
Company of shares of Stock or other securities of any class or series or
securities convertible into or exchangeable or exercisable for shares of the
Stock or other securities of any class or series for cash or property or for
labor or services either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or obligations of
the Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number,
class or price of shares of the Stock then subject to outstanding Options.
18. AMENDMENT OR TERMINATION OF PLAN
The Board may, in its sole and absolute discretion, modify, revise or
terminate the Plan at any time and from time to time; provided, however, that
without the further approval of the holders of at least a majority of the
outstanding shares of Stock, the Board may not (a) may not materially increase
the benefits accruing to Optionees or grantees under the Plan or make any
"modifications" as that term is defined under Section 424(h)(3) (or its
successor) of the Code if such increase in benefits or modifications would
adversely affect the qualification of the Plan or any Options for "incentive
stock option" treatment under Section 422 of the Code;
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(b) may not change the aggregate number of shares of Stock which may be issued
under ISOs pursuant to the provisions of the Plan, except as provided in Section
17 of the Plan; (c) may not reduce the option price at which ISOs may be granted
to an amount less than the minimum amount defined by Section 7; or (d) may not
change the class of persons eligible to receive ISOs. Notwithstanding the
preceding sentence, the Board shall in all events have the power and authority
to make such changes in the Plan and in the regulations and administrative
provisions hereunder or in any outstanding Option as, in the opinion of counsel
for the Company, may be necessary or appropriate from time to time to enable any
STE-1 Option granted pursuant to the Plan to qualify as an incentive stock
option or such other form of stock option as may be defined under the Code, as
amended from time to time, so as to receive preferential federal income tax
treatment.
19. CERTAIN RIGHTS OF THE COMPANY
The Committee may, in its sole and absolute discretion, also require an
employee or other person, as a condition to receiving any Option, to enter into
a noncompetition agreement or other agreement in such form as the Committee may,
from time to time in its sole and absolute discretion, determine.
20. TAX WITHHOLDING
(a) To the extent required by law the Company shall withhold
income and other taxes with respect to any income recognized by an Optionee or
other person relating to any Options granted under this Plan. It shall be a
condition to the Optionee's receipt of any Options that the Optionee
acknowledges and agrees to the Company's withholding of taxes and further that
if the amount of any consideration payable to the Optionee is insufficient to
pay such taxes, upon the request of the Company the Optionee shall pay to the
Company an amount sufficient for the Company to satisfy tax withholding
requirements.
(b) Without limiting the foregoing, the Committee may in its
discretion permit any withholding obligation to be paid in whole or in part in
the form of Stock, by withholding from the shares to be issued upon exercise of
an NQO or by accepting delivery from the Optionee of shares of Stock already
owned by the Optionee in connection with withholding in respect of exercise of
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an NQO. The fair market value of the shares for such purposes shall be
determined exclusively by the Committee. However, an Optionee may not make any
such payment of withholding taxes in the form of shares of Stock previously
acquired by him or her pursuant to the exercise of any ISO unless and until such
shares shall have been held by him or her for at least two (2) years from the
date such option was granted and at least one (1) year from the date the option
was exercised. If payment of withholding taxes is made in whole or in part in
shares of Stock already owned by the Optionee, then the Optionee shall deliver
to the Company certificates registered in the name of the Optionee representing
shares of Stock legally and beneficially owned by such Optionee, fully vested
and free of all liens, claims and encumbrances of every kind, such certificates
to be duly endorsed or accompanied by stock powers duly endorsed in blank by the
record holder of the shares represented by such certificates.
21. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective and shall be deemed to have been
adopted as of March 19, 1998, subject only to ratification by the holders of a
majority of the outstanding shares of capital stock entitled to vote thereon
(voting as a single class) within twelve (12) months after such date. Unless the
Plan shall have terminated earlier, the Plan shall terminate on the tenth (10th)
anniversary of its effective date, and no Option shall be granted pursuant to
the Plan after the day preceding the tenth (10th) anniversary of its effective
date.
The Plan supersedes the 1997 Stock Option Plan of the Company, adopted
on November 26, 1997.
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EXHIBIT 1
to 1998 Stock Option Plan
Form of Stock Option Agreement
DESA Holdings Corporation
Stock Option Agreement
Specific Terms of the Option
Subject to the terms and conditions hereinafter set forth and the terms
and conditions of the DESA Holdings Corporation 1998 Stock Option Plan (the
"Plan"), DESA Holdings Corporation, a Delaware corporation (the "Company", which
term shall include, unless the context otherwise clearly requires, all
Subsidiaries [as defined in the Plan] of the Company) hereby grants the
following option (the "Option") to purchase Common Stock, par value, $0.01 per
share (the "Stock") of the Company:
A. Name of person to whom the Option is granted (the
"Optionee"): __________________________.
B. Date of grant of Option: _______________.
C. An Option for _______ shares of Stock.
D. Option Price (per share) payable upon exercise: $ _______.
E. Term of Option: Subject to Section 3 below, this Option
expires at 5:00 p.m. Central Time (Standard or Daylight
Savings, as applicable) _______________.
F. Exercise Schedule: Subject to the provisions of Section 3
below, this Option shall vest and become exercisable with
respect to the number of shares of the Stock and upon the
attainment of certain performance goals on or prior to the end
of certain performance periods, as shown on Schedule I
attached hereto and incorporated herein.
DESA HOLDINGS CORPORATION The undersigned hereby accepts
the grant of the Option on
all the terms set forth
herein and in the Plan:
By:_______________________ __________________________________
Title:_________________ (Signature of Optionee)
Date:___________________
Optionee's Address:
__________________________________
__________________________________
__________________________________
<PAGE>
OTHER TERMS OF THE OPTION
WHEREAS, the Compensation Committee (the "Committee") of the Board of
Directors of the Company has authorized the grant of this stock option pursuant
and subject to the terms of the Plan, a copy of which the Optionee acknowledges
has been delivered to the Optionee and is hereby incorporated herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the Company and the Optionee,
intending to be legally bound, covenant and agree as set forth on the first page
hereof and as follows:
1. Grant. Pursuant and subject to the Plan, the Company does hereby
grant to the Optionee a stock option (the "Option") to purchase from the Company
the number of shares of Stock set forth in Section C on the first page hereof
upon the terms and conditions set forth in the Plan and upon the additional
terms and conditions contained in this agreement (this "Option Agreement"). This
Option is a [incentive] [nonqualified] stock option and [is] [is not] intended
to qualify for special federal income tax treatment as an "incentive stock
option" pursuant to Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code").
2. Option Price. This Option may be exercised at the option price per
share of Stock set forth in Section D on the first page hereof, subject to
adjustment as provided herein and in the Plan.
3. Term and Exercisability of Option. This Option shall expire on the
earlier of (a) the date determined pursuant to Section E on the first page
hereof and (b) the date determined pursuant to Section 8 of the Plan, and shall
be exercisable prior to such expiration in accordance with and subject to the
terms and conditions set forth in the Plan (including but not limited to
Sections 9 and 10 of the Plan) and those terms and conditions, if any, set forth
in Section F on the first page hereof. If the Optionee's employment or
involvement with the Company is terminated for Cause (as defined in Schedule II
hereto) or the Optionee voluntarily terminates his or her employment or
involvement with the Company, at any time, for any reason or for no reason, in
either such case, (excluding a Resignation for Good Reason as
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defined in Schedule II to this Option Agreement) the Option hereby granted to
the Optionee shall terminate on the date of such termination of employment or
involvement. If the Optionee is terminated by the Company without Cause or the
Optionee resigns for Good Reason at any time, the Option shall terminate on the
date of such termination of employment or involvement with respect to the
unvested portion thereof, and with respect to the vested portion of the Option,
on the day which is three months after such termination of employment or
involvement. If the Optionee is terminated by the Company due to the death or
Disability (as defined in Schedule II) of the Optionee, the Option shall
terminate with respect to any unvested portion thereof on the date of such
termination of employment or involvement, and with respect to the vested portion
of the Option, on the 181st day after the date of such termination of employment
or involvement. If the Optionee dies before this Option has been exercised in
full, the personal representative of the Optionee may exercise this Option as
set forth in the preceding sentence.
4. Method of Exercise. To the extent that the right to purchase shares
of Stock has accrued hereunder, this Option may be exercised from time to time
by written notice to the Company substantially in the form attached hereto as
Exhibit A, stating the number of shares with respect to which this Option is
being exercised, and accompanied by payment in full of the option price for the
number of shares to be delivered, by means of payment acceptable to the Company
in accordance with Section 10 of the Plan. Subject to the Plan and to Section 7
hereof, as soon as practicable after its receipt of such notice, the Company
shall, without transfer or issue tax to the Optionee (or other person entitled
to exercise this Option), deliver to the Optionee (or other person entitled to
exercise this Option), at the principal executive offices of the Company or such
other place as shall be mutually acceptable, a certificate or certificates for
such shares out of theretofore authorized but unissued shares or treasury shares
of the Stock as the Company may elect; provided, however, that the time of such
delivery may be postponed by the Company for such period as may be required for
it with reasonable diligence to comply with any applicable requirements of law.
Payment of the option price may be made in cash or cash equivalents or otherwise
in accordance with Section 10 of the Plan. If the Optionee (or other person
entitled to exercise this Option) fails to pay for and accept delivery of all of
the shares specified in such notice upon
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<PAGE>
tender of delivery thereof, his or her right to exercise this Option with
respect to such shares not paid for may be terminated by the Company.
5. Forfeiture; Restrictions on Exercise. This Option may be subject to
forfeiture upon the occurrence of the events specified in Section 12 of the Plan
or Section 3 of this Option Agreement or restrictions on exercise upon the
occurrence of events specified in Section 9 of the Plan.
6. Nonassignability of Option Rights. This Option shall not be
assignable or transferable by the Optionee except as provided in Section 11 of
the Plan.
7. Compliance with Securities Act. The Company shall not be obligated
to sell or issue any shares of Stock or other securities pursuant to the
exercise of this Option unless the shares of Stock or other securities with
respect to which this Option is being exercised are at that time effectively
registered or exempt from registration under the Securities Act of 1933, as
amended, and applicable state securities laws. In the event shares or other
securities shall be issued which shall not be so registered, the Optionee hereby
represents, warrants and agrees that he or she will receive such shares or other
securities for investment and not with a view to their resale or distribution,
and will execute an appropriate investment letter satisfactory to the Company
and its counsel as a condition precedent to any exercise of this Option in whole
or in part.
8. Legends. The Optionee hereby acknowledges that the stock certificate
or certificates evidencing shares of the Stock or other securities issued
pursuant to any exercise of this Option will bear a legend setting forth the
restrictions on their transferability described in Section 6 hereof, in Section
14 of the Plan, and under any applicable agreements between the Optionee and the
Company or any of its stockholders.
9. Rights as Stockholder. The Optionee shall have no rights as a
stockholder with respect to any shares of the Stock or other securities covered
by this Option until the date of issuance of a certificate to him or her for
such shares or other securities. No adjustment shall be made for dividends or
other rights for which the record date is prior to the date such stock
certificate is issued.
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<PAGE>
10. Stockholders Agreement. The Optionee hereby agrees to and joins in
as a "Management Holder", and agrees to be bound as a "Management Holder" by the
terms and conditions of, the Stockholders Agreement, dated as of November 26,
1997, among the Company and the other persons named therein. The Optionee hereby
further acknowledges and agrees that the Option and the shares of the Stock
issuable upon exercise of the Option are and shall be subject to the terms and
provisions of said Stockholders Agreement, as the same may be amended or
modified from time to time in accordance with its terms.
11. Withholding Taxes. The Optionee hereby agrees, as a condition to
any exercise of this Option, to provide to the Company an amount sufficient to
satisfy its obligation to withhold certain federal, state and local taxes
arising by reason of such exercise (the "Withholding Amount") by (a) authorizing
the Company to withhold the Withholding Amount from his or her cash
compensation, or (b) remitting the Withholding Amount to the Company in cash;
provided, however, that to the extent that the Withholding Amount is not
provided by one or a combination of such methods, the Company in its sole and
absolute discretion may refuse to issue such shares of Stock or may withhold
from the shares of Stock otherwise deliverable upon exercise of this Option that
number of shares having a fair market value, on the date of exercise, sufficient
to eliminate any deficiency in the Withholding Amount.
12. Termination or Amendment of Plan. The Board of Directors of the
Company may in its sole and absolute discretion at any time terminate or from
time to time modify or amend the Plan as provided in Section 18 of the Plan, but
no such termination or amendment will adversely affect rights and obligations
under this Option without the consent of the Optionee.
13. Effect Upon Employment. Nothing in this Option or the Plan shall be
construed to impose any obligation upon the Company to employ or retain in its
employ, or continue its involvement with, the Optionee.
14. Time for Acceptance. Unless the Optionee shall evidence his or her
acceptance of this Option by execution of this Option
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<PAGE>
Agreement within ten (10) days after its delivery to him or her, the Option and
this Option Agreement shall at the option of the Company be null and void.
15. General Provisions.
(a) Amendment; Waivers. This Option Agreement, including the
Plan, contains the full and complete understanding and agreement of the parties
hereto as to the subject matter hereof and may not be modified or amended, nor
may any provision hereof be waived, except by a further written agreement duly
signed by each of the parties. The waiver by either of the parties hereto of any
provision hereof in any instance shall not operate as a waiver of any other
provision hereof or in any other instance.
(b) Binding Effect. This Option Agreement shall inure to the
benefit of and be binding upon the parties hereto and, to the extent provided
herein and in the Plan, their respective heirs, executors, administrators,
representatives, successors and assigns.
(c) Construction. This Option Agreement is to be construed in
accordance with the terms of the Plan. In case of any conflict between the Plan
and this Option Agreement, the Plan shall control. The titles of the sections of
this Option Agreement and of the Plan are included for convenience only and
shall not be construed as modifying or affecting their provisions. The masculine
gender shall include both sexes; the singular shall include the plural and the
plural the singular unless the context otherwise requires.
(d) Governing Law. This Option Agreement shall be governed by
and construed and enforced in accordance with the applicable laws of the United
State of America and the law (other than the law governing conflict of law
questions) of the State of Delaware except to the extent the laws of any other
jurisdiction are mandatorily applicable.
(e) Notices. Any notice in connection with this Option
Agreement shall be deemed to have been properly delivered if it is in writing
and is delivered in hand or sent by registered or certified mail, return receipt
requested, to the party addressed as follows, unless another address has been
substituted by notice so given:
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To the Optionee: To his or her address as
listed on the books of the Company.
To the Company: DESA Holdings Corporation
2701 Industrial Drive
Bowling Green, KY 42102,
Attention: Chairman of the Board
Copy to:
J.W. Childs Associates, L.P.
One Federal Street
Boston, MA 02110
Attention: Mr. Adam L. Suttin
Copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, MA 02109
Attention: Christopher Cabot, Esq.
16. Notice of ISO Stock Disposition. The Optionee shall notify the
Company promptly in the event that he or she sells, transfers, exchanges or
otherwise disposes of any shares of Common Stock issued upon exercise of an ISO,
before the later of (i) the second anniversary of the date of grant of the ISO
and (ii) the first anniversary of the date the shares were issued upon exercise
of the ISO.
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<PAGE>
Exhibit A to Stock Option Agreement
[FORM FOR EXERCISE OF STOCK OPTION]
DESA Holdings Corporation
[Address as specified in Section 15(e)
of the Option Agreement]
Re: Exercise of Option under DESA Holdings Corporation
1998 Stock Option Plan (the "Plan")
Gentlemen:
Please take notice that the undersigned hereby elects to
exercise the stock option granted to on
, 19___ by and to the extent of purchasing shares of Common
Stock, par value $.01 per share, of DESA Holdings Corporation (the "Company")
for the option price of $__________ per share, subject to the terms and
conditions of the Stock Option Agreement between and the Company dated as of
, 199 (the "Option Agreement") and the Plan.
The undersigned encloses herewith payment, in cash or in such other
property as is permitted under the Plan, of the option price for said shares. If
the undersigned is making payment of any part of the option price by delivery of
shares of Common Stock of the Company, he or she hereby confirms that he or she
has investigated and considered the possible income tax consequences to him or
her of making such payments in that form. The undersigned hereby agrees to
provide the Company an amount sufficient to satisfy the obligation of the
Company to withhold certain taxes, as provided in Section 11 of the Option
Agreement.
The undersigned hereby specifically confirms to the Company that he or
she shall hold said shares subject to all of the terms and conditions of said
Stock Option Agreement and the Plan.
Very truly yours,
Date (Signed by or
other party duly exercising
option)
<PAGE>
DESA HOLDINGS CORPORATION
1998 STOCK OPTION PLAN
SCHEDULE I
to Option Agreements
Option Vesting Schedule
Subject to the provisions of Section 3 of the Option Agreement to which
this Option Vesting Schedule is attached:
A. For purposes hereof, "EBITDA" means consolidated earnings of the
Company and its subsidiaries before interest, taxes, depreciation and
amortization and after deduction of all operating expenses, subject to
adjustment by the Board of Directors for extraordinary and non-recurring items,
all as calculated in accordance with generally accepted accounting principles
consistently applied, and as reflected in the Company's most recently available
audited consolidated financial statements for the immediately preceding fiscal
year and certified by an officer of the Company.
"Shares" means the number of shares of Stock set forth in paragraph C
of the Option Agreement to which this Option Vesting Schedule is attached.
"Target Period" means one of the fiscal years of the Company set forth
in Table A hereinbelow.
B. If the Company's EBITDA in any Target Period is equal to the Base
Target EBITDA for such period, the Option will vest and be exercisable with
respect to 6% of the Shares. If the Company's EBITDA in any Target Period is
equal to or greater than the Optimistic Target EBITDA for such period, the
Option will vest and be exercisable with respect to 20% of the Shares. If the
Company's EBITDA for any Target Period is between the Base Target and the
Optimistic Target EBITDA, then the percentage of the Shares with respect to
which the Option shall vest shall be determined according to a linear
extrapolation such that at the Base Target EBITDA the Option will vest for 6% of
the Shares and at the Optimistic Target EBITDA the Option will vest for 20% of
the Shares.
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<PAGE>
C. Notwithstanding the foregoing, (a) if (i) the Company's EBITDA for
the 2003 Target Period is equal to or greater than the Base Target EBITDA for
such period, and (ii) the Company's cumulative EBITDA for all five Target
Periods is equal to the cumulative Base Target EBITDA for such five-year period,
then the Option shall vest and be exercisable with respect 30% of the Shares (to
the extent not theretofore vested in accordance with this with Schedule I); (b)
if (i) the Company's EBITDA for the 2003 Target Period is equal to or greater
than the Base Target EBITDA for such period, and (ii) the Company's cumulative
EBITDA for all five Target Periods is equal to or greater than the cumulative
Optimistic Target EBITDA, then the Option shall vest and be exercisable with
respect to 100% of the Shares (to the extent not theretofore vested in
accordance with this with Schedule I); and (c) if (i) the Company's EBITDA for
the 2003 Target Period is equal to or greater than the Base Target EBITDA for
such period, and (ii) the Company's cumulative EBITDA for all five Target
Periods is between the cumulative Base Target EBITDA and the cumulative
Optimistic Target, then the percentage of the Shares with respect to which the
Option shall vest shall be determined according to a linear extrapolation such
that at the cumulative Base Target EBITDA the Option will vest for 30% of the
Shares and at the cumulative Optimistic Target EBITDA the Option will vest for
100% of the Shares (to the extent not theretofore vested in accordance with this
with Schedule I).
D. Notwithstanding the foregoing, if there shall occur a Change of
Control (as defined in the Plan) prior to the end of Fiscal Yr. 5, then the
Option shall vest and be exercisable, effective immediately prior to such Change
in Control, with respect to a percentage of the Shares reserved (but for this
paragraph) for vesting in any Target Period ending after the occurrence of such
Change in Control equal to the quotient (expressed as a percentage) of (i) the
number of Shares with respect to which the Option shall have theretofore vested,
divided by (ii) the maximum number of Shares with respect to which the Option
would have theretofore vested had the Company's EBITDA for each Target Period
ending prior to the occurrence of such Change in Control been equal to or
greater than the Optimistic Target EBITDA for the each such Target Period;
provided, however, that such percentage determined pursuant to this paragraph
shall be rounded down to the nearest tenth of a percent.
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<PAGE>
Table A
Optimistic Target
Base Target EBITDA EBITDA
Fiscal Year (millions) (Millions)
1999 [To be determined by [To be determined by
the Board of the Board of
Directors of the Directors of the
Company] Company]
2000 [To be determined by [To be determined by
the Board of the Board of
Directors of the Directors of the
Company] Company]
2001 [To be determined by [To be determined by
the Board of the Board of
Directors of the Directors of the
Company] Company]
2002 [To be determined by [To be determined by
the Board of the Board of
Directors of the Directors of the
Company] Company]
2003 [To be determined by [To be determined by
the Board of the Board of
Directors of the Directors of the
Company] Company]
Cumulative [To be determined by [To be determined by
the Board of the Board of
Directors of the Directors of the
Company] Company]
E. Notwithstanding the foregoing, provided that (i) Optionee shall
continue to be an employee, director or consultant of the Company or a
subsidiary, and (ii) the Company shall not have (a) merged or consolidated with
another corporation or other entity, whether or not the Company is the surviving
entity, or (b) liquidated or sold or otherwise disposed of all or substantially
all of its assets to another entity, or (c) been subject to a Change in Control
(as defined in the Plan), the Option shall vest and be exercisable, effective
immediately, nine (9) years and six (6) months from the date as of which such
Option was granted.
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<PAGE>
F. Notwithstanding the foregoing, in the event that the Realized Value
(defined below) of the Initial Shares (defined below) should equal or exceed the
amounts set forth in the following table in the time periods indicated, then the
unvested portion of the Option shall vest and be immediately exercisable:
Period Realized Value
11/26/97-2/29/00
3/1/00-2/28/01
3/1/01-2/28/02
3/1/02-2/28/03
G. "Initial Shares" means the shares of Common Stock of the Company
issued and outstanding at November 26, 1997 and beneficially owned by J.W.
Childs Equity Partners and affiliates (excluding JWC Equity Funding, Inc.).
"Realized Value" means the aggregate cash proceeds, net of reasonable
out-of-pocket fees and expenses (including but not limited to broker's fees and
underwriters discounts and commissions) actually received, from time to time, by
holders of the Initial Shares from (i) sale(s) or other disposition(s) of all or
a portion of the Initial Shares, or (ii) sales(s) or other dispositions(s) of
securities or other property received by such holders as proceeds of sale(s) or
other disposition(s) by holders of the Initial Shares of all or a portion of the
Initial Shares, or (iii) any combination of the foregoing clauses (i) and (ii).
H. Upon the Company's making an acquisition or disposition of any
material business or line of business, the EBITDA Targets set forth above for
Target Periods ending after the date of such transaction will be adjusted by the
Board of Directors of the Company to take into account the changes in EBITDA
expected as a result of such transaction.
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<PAGE>
DESA HOLDINGS CORPORATION
SCHEDULE II
Definitions Applicable to
Non-Qualified Stock Option Agreement
1. "Cause" The Company shall have "Cause" for termination of the
Optionee if any of the following has occurred:
(i) Optionee's conviction or admission of a felony or a crime
involving moral turpitude under the laws of any state in the United
States or the federal laws of the United States, or fraud,
misappropriation or embezzlement of the assets of the Company or any
subsidiary thereof;
(ii) If Optionee is party to a written employment agreement
with the Company or a subsidiary, the breach by Optionee of any
provision or covenant contained therein which breach, by the terms of
such agreement, constitutes "cause" for termination of Optionee's
employment thereunder;
(iii) If Optionee is not a party to a written employment
agreement with the Company or a subsidiary, (a) Optionee's continued
failure, whether willful, intentional or negligent, after written
notice, to perform his or her duties as an employee of the Company
(other than as a result of a Disability), or (b) Optionee's breach of
any duty or obligation of noncompetition or confidentiality owed by the
Optionee to the Company or any of its subsidiaries.
2. "Disability" If during the term of his or her Employment by the
Company, the Optionee shall become physically or mentally disabled to the extent
that he or she is, in the reasonable opinion of a recognized medical expert
selected by the Company, unable to continue the proper performance of his or her
duties for a continuous period of one hundred eighty (180) days, Optionee shall
be considered disabled.
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<PAGE>
3. "Resignation for Good Reason" The Optionee shall have "Good Reason"
for terminating his or her employment with the Company if, other than for Cause,
any of the following has occurred:
(i) If Optionee is a party to a written employment agreement
with the Company or any subsidiary, (a) the Company (or subsidiary, as
applicable) causes a material change in Optionee's duties as set forth
therein or assigns the Employee to duties materially inconsistent
therewith; (b) the Optionee is removed from, or not re-elect to, any
position(s) of employment set forth in such agreement; (c) there is a
reduction in the Optionee's salary or fringe benefits established in
such employment agreement; (d) an adverse change in the terms of
participation or benefits under a bonus plan established in conjunction
with such agreement (unless the Company provides benefits that are
substantially equivalent); or (d) there is any breach by the Company
(or a subsidiary, if applicable) of any term of such agreement, which
is not cured by within thirty (30) days after receipt of written notice
of such breach.
(ii) If Optionee is not party to a written employment
agreement with the Company or any subsidiary, the Optionee's base
salary has been reduced other than in connection with an
across-the-board reduction of employee compensation imposed by the
Board of Directors in response to negative financial results or other
adverse circumstances affecting the Company.
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<PAGE>
EXHIBIT 2
to 1998 Stock Option Plan
Form of Stock Option Agreement
DESA Holdings Corporation
Stock Option Agreement
Specific Terms of the Option
Subject to the terms and conditions hereinafter set forth and the terms
and conditions of the DESA Holdings Corporation 1998 Stock Option Plan (the
"Plan"), DESA Holdings Corporation, a Delaware corporation (the "Company", which
term shall include, unless the context otherwise clearly requires, all
Subsidiaries [as defined in the Plan] of the Company) hereby grants the
following option (the "Option") to purchase Common Stock, par value, $0.01 per
share (the "Stock"), of the Company:
A. Name of person to whom the Option is granted (the
"Optionee"): __________________________.
B. Date of grant of Option: _______________.
C. An Option for _______ shares of Stock.
D. Option price (per share) payable upon exercise: $ _______.
E. Term of Option: Subject to Section 3 below, this Option
expires at 5:00 p.m. Eastern Time (Standard or Daylight
Savings, as applicable) _______________.
F. Exercise Schedule: Subject to the provisions of Section 3
below, this Option shall vest and become exercisable with
respect to the number of shares of the Stock at the end of
certain periods, as shown on Schedule I attached hereto and
incorporated herein.
DESA HOLDINGS CORPORATION The undersigned hereby accepts the
grant of the Option on all the terms
set forth herein and in the Plan
By:_______________________ __________________________________
Title:____________________ (Signature of Optionee)
Date:___________________
Optionee's Address:
_________________________________
_________________________________
_________________________________
<PAGE>
OTHER TERMS OF THE OPTION
WHEREAS, the Compensation Committee (the "Committee") of the Board of
Directors of the Company has authorized the grant of this stock option pursuant
and subject to the terms of the Plan, a copy of which the Optionee acknowledges
has been delivered to the Optionee and is hereby incorporated herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the Company and the Optionee,
intending to be legally bound, covenant and agree as set forth on the first page
hereof and as follows:
1. Grant. Pursuant and subject to the Plan, the Company does hereby
grant to the Optionee a stock option (the "Option") to purchase from the Company
the number of shares of Stock set forth in Section C on the first page hereof
upon the terms and conditions set forth in the Plan and upon the additional
terms and conditions contained in this agreement (this "Option Agreement"). This
Option is a [incentive] [nonqualified] stock option and [is] [is not] intended
to qualify for special federal income tax treatment as an "incentive stock
option" pursuant to Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code").
2. Option Price. This Option may be exercised at the option price per
share of Stock set forth in Section D on the first page hereof, subject to
adjustment as provided herein and in the Plan.
3. Term and Exercisability of Option. This Option shall expire on the
earlier of (a) the date determined pursuant to Section E on the first page
hereof and (b) the date determined pursuant to Section 8 of the Plan, and shall
be exercisable prior to such expiration in accordance with and subject to the
terms and conditions set forth in the Plan (including but not limited to
Sections 9 and 10 of the Plan) and those terms and conditions, if any, set forth
in Section F on the first page hereof. If the Optionee's employment or
involvement with the Company is terminated for Cause (as defined in Schedule II
hereto) or the Optionee voluntarily terminates his or her employment or
involvement with the Company, at any time, for any reason or for no reason, in
either such case, (excluding a Resignation for Good Reason as
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<PAGE>
defined in Schedule II to this Option Agreement) the Option hereby granted to
the Optionee shall terminate on the date of such termination of employment or
involvement. If the Optionee is terminated by the Company without Cause or the
Optionee resigns for Good Reason at any time, the Option shall terminate on the
date of such termination of employment or involvement with respect to the
unvested portion thereof, and with respect to the vested portion of the Option,
on the day which is three months after such termination of employment or
involvement. If the Optionee is terminated by the Company due to the death or
Disability (as defined in Schedule II) of the Optionee, the Option shall
terminate with respect to any unvested portion thereof on the date of such
termination of employment or involvement, and with respect to the vested portion
of the Option, on the 181st day after the date of such termination of employment
or involvement. If the Optionee dies before this Option has been exercised in
full, the personal representative of the Optionee may exercise this Option as
set forth in the preceding sentence.
4. Method of Exercise. To the extent that the right to purchase shares
of Stock has accrued hereunder, this Option may be exercised from time to time
by written notice to the Company substantially in the form attached hereto as
Exhibit A, stating the number of shares with respect to which this Option is
being exercised, and accompanied by payment in full of the option price for the
number of shares to be delivered, by means of payment acceptable to the Company
in accordance with Section 10 of the Plan. Subject to the Plan and to Section 7
hereof, as soon as practicable after its receipt of such notice, the Company
shall, without transfer or issue tax to the Optionee (or other person entitled
to exercise this Option), deliver to the Optionee (or other person entitled to
exercise this Option), at the principal executive offices of the Company or such
other place as shall be mutually acceptable, a certificate or certificates for
such shares out of theretofore authorized but unissued shares or treasury shares
of the Stock as the Company may elect; provided, however, that the time of such
delivery may be postponed by the Company for such period as may be required for
it with reasonable diligence to comply with any applicable requirements of law.
Payment of the option price may be made in cash or cash equivalents or otherwise
in accordance with Section 10 of the Plan. If the Optionee (or other person
entitled to exercise this Option) fails to pay for and accept delivery of all of
the shares specified in such notice upon
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<PAGE>
tender of delivery thereof, his or her right to exercise this Option with
respect to such shares not paid for may be terminated by the Company.
5. Forfeiture; Restrictions on Exercise. This Option may be subject to
forfeiture upon the occurrence of the events specified in Section 12 of the Plan
or Section 3 of this Option Agreement or restrictions on exercise upon the
occurrence of events specified in Section 9 of the Plan.
6. Nonassignability of Option Rights. This Option shall not be
assignable or transferable by the Optionee except as provided in Section 11 of
the Plan.
7. Compliance with Securities Act. The Company shall not be obligated
to sell or issue any shares of Stock or other securities pursuant to the
exercise of this Option unless the shares of Stock or other securities with
respect to which this Option is being exercised are at that time effectively
registered or exempt from registration under the Securities Act of 1933, as
amended, and applicable state securities laws. In the event shares or other
securities shall be issued which shall not be so registered, the Optionee hereby
represents, warrants and agrees that he or she will receive such shares or other
securities for investment and not with a view to their resale or distribution,
and will execute an appropriate investment letter satisfactory to the Company
and its counsel as a condition precedent to any exercise of this Option in whole
or in part.
8. Legends. The Optionee hereby acknowledges that the stock certificate
or certificates evidencing shares of the Stock or other securities issued
pursuant to any exercise of this Option will bear a legend setting forth the
restrictions on their transferability described in Section 6 hereof, in Section
14 of the Plan, and under any applicable agreements between the Optionee and the
Company or any of its stockholders.
9. Rights as Stockholder. The Optionee shall have no rights as a
stockholder with respect to any shares of the Stock or other securities covered
by this Option until the date of issuance of a certificate to him or her for
such shares or other securities. No adjustment shall be made for dividends or
other rights for which the record date is prior to the date such stock
certificate is issued.
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<PAGE>
10. Stockholders Agreement. The Optionee hereby agrees to and joins in
as a "Management Holder", and agrees to be bound as a "Management Holder" by the
terms and conditions of, the Stockholders Agreement, dated as of November 26,
1997, among the Company and the other persons named therein. The Optionee hereby
further acknowledges and agrees that the Option and the shares of the Stock
issuable upon exercise of the Option are and shall be subject to the terms and
provisions of said Stockholders Agreement, as the same may be amended or
modified from time to time in accordance with its terms.
11. Withholding Taxes. The Optionee hereby agrees, as a condition to
any exercise of this Option, to provide to the Company an amount sufficient to
satisfy its obligation to withhold certain federal, state and local taxes
arising by reason of such exercise (the "Withholding Amount") by (a) authorizing
the Company to withhold the Withholding Amount from his or her cash
compensation, or (b) remitting the Withholding Amount to the Company in cash;
provided, however, that to the extent that the Withholding Amount is not
provided by one or a combination of such methods, the Company in its sole and
absolute discretion may refuse to issue such shares of Stock or may withhold
from the shares of Stock otherwise deliverable upon exercise of this Option that
number of shares having a fair market value, on the date of exercise, sufficient
to eliminate any deficiency in the Withholding Amount.
12. Termination or Amendment of Plan. The Board of Directors of the
Company may in its sole and absolute discretion at any time terminate or from
time to time modify or amend the Plan as provided in Section 18 of the Plan, but
no such termination or amendment will adversely affect rights and obligations
under this Option without the consent of the Optionee.
13. Effect Upon Employment. Nothing in this Option or the Plan shall be
construed to impose any obligation upon the Company to employ or retain in its
employ, or continue its involvement with, the Optionee.
14. Time for Acceptance. Unless the Optionee shall evidence his or her
acceptance of this Option by execution of this Option
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<PAGE>
Agreement within ten (10) days after its delivery to him or her, the Option and
this Option Agreement shall at the option of the Company be null and void.
15. General Provisions.
(a) Amendment; Waivers. This Option Agreement, including the
Plan, contains the full and complete understanding and agreement of the parties
hereto as to the subject matter hereof and may not be modified or amended, nor
may any provision hereof be waived, except by a further written agreement duly
signed by each of the parties. The waiver by either of the parties hereto of any
provision hereof in any instance shall not operate as a waiver of any other
provision hereof or in any other instance.
(b) Binding Effect. This Option Agreement shall inure to the
benefit of and be binding upon the parties hereto and, to the extent provided
herein and in the Plan, their respective heirs, executors, administrators,
representatives, successors and assigns.
(c) Construction. This Option Agreement is to be construed in
accordance with the terms of the Plan. In case of any conflict between the Plan
and this Option Agreement, the Plan shall control. The titles of the sections of
this Option Agreement and of the Plan are included for convenience only and
shall not be construed as modifying or affecting their provisions. The masculine
gender shall include both sexes; the singular shall include the plural and the
plural the singular unless the context otherwise requires.
(d) Governing Law. This Option Agreement shall be governed by
and construed and enforced in accordance with the applicable laws of the United
State of America and the law (other than the law governing conflict of law
questions) of the State of Delaware except to the extent the laws of any other
jurisdiction are mandatorily applicable.
(e) Notices. Any notice in connection with this Option
Agreement shall be deemed to have been properly delivered if it is in writing
and is delivered in hand or sent by registered or certified mail, return receipt
requested, to the party addressed as follows, unless another address has been
substituted by notice so given:
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<PAGE>
To the Optionee: To his or her address as
listed on the books of the Company.
To the Company: DESA Holdings Corporation
2701 Industrial Drive
Bowling Green, KY 42102,
Attention: Chairman of the Board
Copy to:
J.W. Childs Associates, L.P.
One Federal Street
Boston, MA 02110
Attention: Mr. Adam L. Suttin
Copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, MA 02109
Attention: Christopher Cabot, Esq.
16. Notice of ISO Stock Disposition. The Optionee shall notify the
Company promptly in the event that he or she sells, transfers, exchanges or
otherwise disposes of any shares of Common Stock issued upon exercise of an ISO,
before the later of (i) the second anniversary of the date of grant of the ISO
and (ii) the first anniversary of the date the shares were issued upon exercise
of the ISO.
-7-
<PAGE>
Exhibit A to Stock Option Agreement
[FORM FOR EXERCISE OF STOCK OPTION]
DESA Holdings Corporation
[Address as specified in Section 15(e)
of the Option Agreement]
Re: Exercise of Option under DESA Holdings Corporation
1998 Stock Option Plan (the "Plan")
Gentlemen:
Please take notice that the undersigned hereby elects to
exercise the stock option granted to on
, 19___ by and to the extent of purchasing shares of Common
Stock, par value $.01 per share, of DESA Holdings Corporation (the "Company")
for the option price of $__________ per share, subject to the terms and
conditions of the Stock Option Agreement between and the Company dated as of
, 199 (the "Option Agreement") and the Plan.
The undersigned encloses herewith payment, in cash or in such other
property as is permitted under the Plan, of the option price for said shares. If
the undersigned is making payment of any part of the option price by delivery of
shares of Common Stock of the Company, he or she hereby confirms that he or she
has investigated and considered the possible income tax consequences to him or
her of making such payments in that form. The undersigned hereby agrees to
provide the Company an amount sufficient to satisfy the obligation of the
Company to withhold certain taxes, as provided in Section 11 of the Option
Agreement.
The undersigned hereby specifically confirms to the Company that he or
she shall hold said shares subject to all of the terms and conditions of said
Stock Option Agreement and the Plan.
Very truly yours,
Date (Signed by or
other party duly exercising
option)
<PAGE>
DESA HOLDINGS CORPORATION
1998 STOCK OPTION PLAN
SCHEDULE I
to Option Agreements
Option Vesting Schedule
For purposes hereof, "Shares" means the number of shares of Stock set
forth in paragraph C of the Option Agreement to which this Option Vesting
Schedule is attached.
Subject to the provisions of Section 3 of the Option Agreement to which
this Option Vesting Schedule is attached, the Option shall become exercisable as
follows:
(1) With respect to 5% of the Shares, as the date which is one (1)
year after the date set forth in paragraph B of the Option
Agreement to which this Option Vesting Schedule is attached;
(2) With respect to 5% of the Shares, as the date which is two (2)
years after the date set forth in paragraph B of the Option
Agreement to which this Option Vesting Schedule is attached;
(3) With respect to 50% of the Shares, as the date which is three
(3) years after the date set forth in paragraph B of the
Option Agreement to which this Option Vesting Schedule is
attached;
(4) With respect to 20% of the Shares, as the date which is four
(4) years after the date set forth in paragraph B of the
Option Agreement to which this Option Vesting Schedule is
attached; and
(5) With respect to 20% of the Shares, as the date which is five
(5) years after the date set forth in paragraph B of the
Option Agreement to which this Option Vesting Schedule is
attached;
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<PAGE>
DESA HOLDINGS CORPORATION
SCHEDULE II
Definitions Applicable to
Non-Qualified Stock Option Agreement
1. "Cause" The Company shall have "Cause" for termination of the
Optionee if any of the following has occurred:
(i) Optionee's conviction or admission of a felony or a crime
involving moral turpitude under the laws of any state in the United
States or the federal laws of the United States, or fraud,
misappropriation or embezzlement of the assets of the Company or any
subsidiary thereof;
(ii) If Optionee is party to a written employment agreement
with the Company or a subsidiary, the breach by Optionee of any
provision or covenant contained therein which breach, by the terms of
such agreement, constitutes "cause" for termination of Optionee's
employment thereunder;
(iii) If Optionee is not a party to a written employment
agreement with the Company or a subsidiary, (a) Optionee's continued
failure, whether willful, intentional or negligent, after written
notice, to perform his or her duties as an employee of the Company
(other than as a result of a Disability), or (b) Optionee's breach of
any duty or obligation of noncompetition or confidentiality owed by the
Optionee to the Company or any of its subsidiaries.
2. "Disability" If during the term of his or her Employment by the
Company, the Optionee shall become physically or mentally disabled to the extent
that he or she is, in the reasonable opinion of a recognized medical expert
selected by the Company, unable to continue the proper performance of his or her
duties for a continuous period of one hundred eighty (180) days, Optionee shall
be considered disabled.
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<PAGE>
3. "Resignation for Good Reason" The Optionee shall have "Good Reason"
for terminating his or her employment with the Company if, other than for Cause,
any of the following has occurred:
(i) If Optionee is a party to a written employment agreement
with the Company or any subsidiary, (a) the Company (or subsidiary, as
applicable) causes a material change in Optionee's duties as set forth
therein or assigns the Employee to duties materially inconsistent
therewith; (b) the Optionee is removed from, or not re-elect to, any
position(s) of employment set forth in such agreement; (c) there is a
reduction in the Optionee's salary or fringe benefits established in
such employment agreement; (d) an adverse change in the terms of
participation or benefits under a bonus plan established in conjunction
with such agreement (unless the Company provides benefits that are
substantially equivalent); or (d) there is any breach by the Company
(or a subsidiary, if applicable) of any term of such agreement, which
is not cured by within thirty (30) days after receipt of written notice
of such breach.
(ii) If Optionee is not party to a written employment
agreement with the Company or any subsidiary, the Optionee's base
salary has been reduced other than in connection with an
across-the-board reduction of employee compensation imposed by the
Board of Directors in response to negative financial results or other
adverse circumstances affecting the Company.
-4-
EXHIBIT 10.2
DESA HOLDINGS CORPORATION
STOCKHOLDERS AGREEMENT
Dated as of November 26, 1997
<PAGE>
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (this "Agreement") is entered into as of
November 26, 1997, by and among Desa Holdings Corporation, a Delaware
corporation (the "Company"), those persons listed as the JWC Holders on the
signature pages hereof (the "JWC Holders"), those persons listed as the
Management Holders on the signature pages hereof (the "Management Holders") and
those persons listed as the Other Holders on the signature pages hereof (the
"Other Holders").
RECITALS
A. Concurrently with the execution and delivery of this Agreement, the
Company has issued certain shares of Common Stock (as hereinafter defined) and
certain warrants to acquire from the Company shares of Common Stock.
B. All of the Stockholders (as hereinafter defined), including (i)
those acquiring concurrently with the execution and delivery of this Agreement
certain shares of Common Stock and certain warrants to acquire from the Company
shares of Common Stock and (ii) those retaining at the date hereof certain
equity interests in the Company, desire to enter into this Agreement for the
purpose of regulating certain aspects of the Stockholders' relationships with
one another and with the Company.
AGREEMENT
In consideration of the foregoing recitals and the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement, the parties to this Agreement mutually agree as follows:
ARTICLE 1
1.1 Definitions. For the purposes of this Agreement, the following
terms shall be defined as follows:
The "1933 Act" shall mean the Securities Act of 1933, as amended, or
any successor federal statute thereto, and the rules and regulations of the SEC
promulgated thereunder, all as the same shall be in effect from time to time.
The "1934 Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor federal statute thereto, and the rules and regulations
of the SEC promulgated thereunder, all as the same shall be in effect from time
to time.
An "Affiliate" of a specified Person (a) shall mean (i) a Person who,
directly or indirectly, through one or more intermediaries, controls or is
controlled by or is under
<PAGE>
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common control with such specified Person, (ii) a director or executive officer
of such specified Person, (iii) a general partner of such specified Person if
such specified Person is a partnership, and (iv) a manager of such specified
Person if such specified Person is a limited liability company, and, (b) when
used with respect to the Company or any Subsidiary of the Company, shall include
any holder of capital stock or any officer or director of the Company or any
Subsidiary of the Company.
"Business Day" shall mean any day, other than a Saturday, Sunday or
legal holiday, on which banks in both New York, New York and Boston,
Massachusetts are permitted to be open for business.
"Common Stock" shall mean shares of Voting Common Stock or Nonvoting
Common Stock.
"Common Stock Equivalents" shall mean, as of any date, (a) all shares
of Common Stock outstanding as of such date and (b) all shares of Common Stock
that may be acquired as of such date pursuant to Vested Options.
The "Company" shall mean Desa Holdings Corporation, a Delaware
corporation, and its successors and assigns.
"Company Notice Period" shall have the meaning set forth in Section
2.4.
"Demand Registration" shall have the meaning set forth in Section 3.2.
"Dragalong Group" shall have the meaning set forth in Section 2.3.
"Election Period" shall have the meaning set forth in Section 4.17.
"Equity Partners Agreement" shall have the meaning set forth in Section
4.8.
"First Refusal Offer" shall have the meaning set forth in Section 2.4.
"First Refusal Offer Notice" shall have the meaning set forth in
Section 2.4.
"HMTF Attendee" shall have the meaning set forth in Section 2.5.
"HMTF Holders" shall mean HMTF Inc. and its officers, directors and
Affiliates, together with those persons whose names are set forth on Exhibit A
hereto and any spouse, children, parents or siblings (whether natural, step or
adopted) or trust solely for the benefit of one or more such persons and shall
also include Permitted Transferees of the HMTF Holders unless immediately prior
to such Transfer such transferee was a Management Holder, a JWC Holder or a UBS
Holder.
"HMTF Inc." shall mean Hicks, Muse, Tate & Furst Incorporated, a
Delaware corporation.
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"Holder" shall have the meaning set forth in Section 3.1.
"Initiating Stockholder" shall have the meaning set forth in Section
2.2.
"JWC Equity Funding" shall mean JWC Equity Funding, Inc., a Delaware
corporation.
"JWC Equity Partners" shall mean J.W. Childs Equity Partners, L.P., a
Delaware limited partnership.
"JWC Holders" shall have the meaning set forth in the preamble
preceding the recitals to this Agreement and shall also include (a) Permitted
Transferees of the JWC Holders (other than the Warrant Holders) unless
immediately prior to such Transfer such transferee was a Management Holder or an
Other Holder and (b) any Permitted Transferee in a Permitted Transfer permitted
under clause (k) of the definition of "Permitted Transfer" if, immediately prior
to such Transfer, such Permitted Transferee was a JWC Holder.
"JWC/UBS Holders Notice Period" shall have the meaning set forth in
Section 2.4.
"JWC Inc." shall mean J.W. Childs Associates, Inc., a Delaware
corporation.
"JWC L.P." shall mean J.W. Childs Associates, L.P., a Delaware limited
partnership.
"JWC Representative" shall have the meaning set forth in Section 4.8.
"Management Agreement" shall mean that Management Agreement dated as of
the date hereof among the Company, the Operating Company and JWC L.P.
"Management Holders" shall have the meaning set forth in the preamble
preceding the Recitals to this Agreement and shall also include (a) any
director, officer or management employee of the Company or any of its
Subsidiaries (other than JWC Holders or UBS Holders) who, with the written
consent of the Company and the JWC Representative, hereafter becomes a party to
this Agreement, (b) Permitted Transferees of the Management Holders, unless
immediately prior to such Transfer such transferee was a JWC Holder or an Other
Holder, and (c) any Permitted Transferees in a Permitted Transfer permitted
under clause (k) of the definition of "Permitted Transfer" herein if,
immediately prior to any such Transfer, such transferee was a Management Holder.
"Nonvoting Common Stock" shall mean shares of Nonvoting Common Stock,
par value $.01 per share, of the Company.
"Offered Securities" shall have the meaning set forth in Section 2.4.
"Operating Company" shall mean Desa International, Inc., a Delaware
corporation, in its capacity as a Subsidiary of the Company.
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"Other Holders" shall have the meaning set forth in the preamble
preceding the recitals to this Agreement and shall also include Permitted
Transferees of the Other Holders and any Permitted Transferee in a Permitted
Transfer permitted under clause (k) of the definition of "Permitted Transfer"
herein, unless immediately prior to any such Transfer such transferee was a
Management Holder or a JWC Holder.
"Participating Offerees" shall have the meaning set forth in Section
2.2.
"Participation Notice" shall have the meaning set forth in Section 2.2.
"Participation Securities" shall have the meaning set forth in Section
2.2.
"Permitted Transfer" shall mean:
(a) a Transfer of any Subject Securities between any JWC Holder or
UBS Holder or HMTF Holder or Management Holder who is a
natural person and such Stockholder's spouse, children,
parents or siblings (whether natural, step or by adoption) or
to a trust solely for the benefit of one or more of any of
such Persons, provided that with respect to any such Transfer,
the Stockholder retains, as trustee or by some other means,
the sole authority to vote such Subject Securities (including
any Common Stock that may be acquired pursuant to any Vested
Options);
(b) a Transfer of Subject Securities by a JWC Holder to JWC Inc.
or to the officers, employees or consultants of JWC Inc. or to
a corporation or corporations or to a partnership or
partnerships (or other entity for collective investment, such
as a fund) which is (and continues to be) controlled by,
controlling or under common control with JWC Inc.;
(c) a Transfer of Subject Securities (i) between or among the
Management Holders, (ii) between or among the JWC Holders,
(iii) between or among the UBS Holders, (iv) between or among
the HMTF Holders or (v) between or among the Warrant Holders;
(d) a Transfer of Subject Securities between any Stockholder who
is a natural person and such Stockholder's estate, executors,
legal representative, guardian or conservator, or the Transfer
of Subject Securities between the estate of any Stockholder
and such Stockholder's spouse, children, parents or siblings
(whether natural, step or by adoption) or to a trust solely
for the benefit of one or more of any of such Persons;
(e) (i) a bona fide pledge of Subject Securities by a JWC Holder
or a UBS Holder or an HMTF Holder to a bank or financial
institution or (ii) any pledge existing at the date hereof of
Subject Securities by a Management Holder;
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(f) a Transfer of Subject Securities between any Other Holder or
any JWC Holder and any Affiliate of such holder, provided that
such Affiliate (i) shall remain at all times an Affiliate of
such Stockholder and (ii) is an Accredited Investor at the
time of such transfer;
(g) a Transfer of Subject Securities between any Other Holder or
any JWC Holder and any shareholder, member, officer, director
or direct or indirect general or limited partner (or officer
or director of such general or limited partner) of such
holder;
(h) a Transfer of Subject Securities by a HMTF Holder to HMTF Inc.
or to the officers or employees of HMTF Inc. or to a
corporation or corporations or to a partnership or
partnerships (or other entity for collective investment, such
as a fund) which is (and continues to be) controlled by,
controlling or under common control with HMTF Inc.;
(i) a Transfer of Subject Securities by a UBS Holder to UBS
Capital or to the officers, employees or consultants of UBS
Capital or to a corporation or corporations or to a
partnership or partnerships (or other entity for collective
investment, such as a fund) which is (and continues to be)
controlled by, controlling or under common control with UBS
Capital;
(j) a Transfer of Warrants or Warrant Shares (each as defined in
the Tagalong/Dragalong Agreement) pursuant to the terms of
Article II of the Tagalong/Dragalong Agreement; and
(k) a Transfer by a JWC Holder or a UBS Holder of any of those
576,287.8200 shares of Voting Common Stock (with such number
of shares to be adjusted from time to time to reflect any
split or combination of shares of Common Stock) issued by the
Company to JWC Equity Funding on or about the date hereof.
No Permitted Transfer shall be effective unless and until the transferee of the
Subject Securities so transferred executes and delivers to the Company an
executed counterpart of this Agreement in accordance with Section 4.12 hereof.
"Permitted Transferee" shall mean any Person who shall have acquired
and who shall hold any Subject Securities pursuant to a Permitted Transfer.
"Person" means an individual, corporation, partnership, limited
liability company, trust, unincorporated association, government or any agency
or political subdivision thereof, or other entity.
"Preemptive Rights Notice" shall have the meaning set forth in Section
4.17.
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"Preferred Stock" shall mean shares of any class or series of preferred
stock of the Company, whether now authorized and existing or hereafter
authorized and existing.
"Public Float Date" shall mean the date on which shares of Common Stock
shall have been sold pursuant to one or more Public Offerings in which the
aggregate proceeds (before deducting underwriter discounts and commissions) to
the Company and the selling stockholders, if any, of such shares equal or exceed
$50 million.
A "Public Offering" shall mean the completion of a sale of shares of
Common Stock pursuant to a registration statement which has become effective
under the 1933 Act, excluding registration statements on Form S-4 or Form S-8 or
similar limited purpose forms.
"Registrable Securities" shall mean, as of any date, with respect to
any Stockholder, (a) all shares of Common Stock held by such Stockholder as of
such date and (b) all shares of Common Stock that may be acquired as of such
date by such Stockholder upon exercise of Vested Options; provided that, as to
any particular Registrable Securities, such securities shall cease to be
Registrable Securities when (i) a registration statement (other than a
registration statement on Form S-8) with respect to the sale or exchange of such
securities shall have become effective under the 1933 Act and such securities
shall have been disposed of in accordance with such registration statement, (ii)
a registration statement on Form S-8 with respect to such securities shall have
become effective under the 1933 Act, (iii) such securities shall have been sold
or acquired under a Rule 144 Transaction, or (iv) such securities have ceased to
be outstanding.
"Rule 144 Transaction" means a transfer of Common Stock (a) complying
with Rule 144 under the 1933 Act as such rule or a successor thereto is in
effect on the date of such transfer (but not including a sale other than
pursuant to a "brokers transaction" as defined in clauses (i) and (ii) of
paragraph (g) of Rule 144 as in effect on the date hereof) and (b) occurring at
a time when the Common Stock is registered pursuant to Section 12 of the 1934
Act.
"Sale Request" shall have the meaning set forth in Section 2.3.
"Schedule of Stockholders" shall refer to the Schedule of Stockholders
attached hereto as Exhibit B as from time to time amended pursuant to Section
4.2.
"Stockholder" shall mean any party hereto other than the Company,
including any Person who hereafter becomes a party to this Agreement pursuant to
Section 4.12 hereof.
"Stockholder Group" shall mean any of (a) the Other Holders (including
the HMTF Holders and the UBS Holders) taken as a group, (b) the JWC Holders
taken as a group, (c) the Management Holders taken as a group, (d) the HMTF
Holders taken as a group, and (e) the UBS Holders taken as a group. The Company
shall not in any case be deemed to be a member of any Stockholder Group (whether
or not the Company holds or repurchases any Common Stock Equivalents). Where
provisions of this Agreement contemplate that actions be taken or notices be
given by a Stockholder Group, actions taken or notices given by the holders
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of a majority of the Common Stock Equivalents held in the aggregate by a
Stockholder Group shall be deemed to be actions taken or notices given by such
Stockholder Group, and the other parties hereto are and will be entitled to rely
on any action so taken or any notice so given by such majority holders of a
Stockholder Group.
"Subject Securities" shall mean any Common Stock or Vested Options now
or hereafter held by any Stockholder.
"Subsidiary" with respect to any Person (the "parent") shall mean any
Person of which such parent, at the time in respect of which such term is used,
(a) owns directly or indirectly more than fifty percent (50%) of the equity or
beneficial interest, on a consolidated basis, or (b) owns directly or controls
with power to vote, indirectly through one or more Subsidiaries, shares of
capital stock or beneficial interest having the power to cast at least a
majority of the votes entitled to be cast for the election of directors,
trustees, managers or other officials having powers analogous to those of
directors of a corporation. Unless otherwise specifically indicated, when used
herein the term Subsidiary shall refer to a direct or indirect Subsidiary of the
Company.
"Tagalong/Dragalong Agreement" shall mean the Tagalong/Dragalong
Agreement of even date herewith among JWC Equity Funding, Inc. and the UBS
Holders.
"Third Party" means any Person other than the Company.
"Third Party Offer" shall have the meaning set forth in Section 2.4.
"Third Party Offeror" shall have the meaning set forth in Section 2.4.
"Transfer" shall mean to transfer, sell, assign, pledge, hypothecate,
give, grant or create a security interest in or lien on, place in trust (voting
or otherwise), assign an interest in or in any other way encumber or dispose of,
directly or indirectly and whether or not by operation of law or for value, any
of the Subject Securities.
"UBS Attendee" shall have the meaning set forth in Section 2.5.
"UBS Capital" shall mean UBS Capital LLC, a Delaware limited liability
company.
"UBS Holders" shall mean UBS Capital and shall also include Permitted
Transferees of UBS Capital (other than the Warrant Holders), unless immediately
prior to such Transfer such transferee was a Management Holder, a JWC Holder or
an HMTF Holder.
"Vested Options" shall mean, as of any date, options, warrants,
securities and other rights to acquire from the Company, by exercise,
conversion, exchange or otherwise, shares of Common Stock or securities
convertible into Common Stock, but only to the extent that such options,
warrants, securities and other rights are both, as of such date, (a) vested
under the terms thereof or under any plan, agreement or instrument pursuant to
which such options,
<PAGE>
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warrants, securities and other rights were issued, and (b) so exchangeable,
exercisable or convertible.
"Voting Common Stock" shall mean shares of Common Stock, par value $.01
per share, of the Company.
"Warrant Holders" shall mean the Persons, if any, to whom any of the
Warrants or Warrant Shares may be transferred in a Permitted Transfer pursuant
to clause (j) of the definition of "Permitted Transfer" contained herein and
shall also include Permitted Transferees of the Warrant Holders, unless
immediately prior to such Transfer such transferee was a Management Holder, a
JWC Holder, a UBS Holder or an HMTF Holder.
ARTICLE 2
Transferability and Voting
2.1 Restrictions on Transfers
(a) Without the written consent of the holders of a majority
of the Common Stock Equivalents at the time held by the JWC Holders, no
Management Stockholder shall Transfer all or any part of the Subject Securities
at the time held by such Management Stockholder to any Person other than in
accordance with the provisions of Section 2.3 or in accordance with and as a
Participating Offeree (as defined in Section 2.2 hereof) under the provisions of
Section 2.2 hereof. Without the written consent of the holders of a majority of
the Common Stock Equivalents at the time held by the JWC Holders, no Other
Holder shall Transfer all or any part of the Subject Securities at the time held
by such Other Holder to any Person other than in accordance with the provisions
of Section 2.3 or 2.4 hereof or in accordance with and as a Participating
Offeree under the provisions of Section 2.2 hereof. Without the written consent
of the holders of a majority of the Common Stock Equivalents at the time held by
the Other Holders, no JWC Holder shall Transfer all or any part of the Subject
Securities at the time held by such JWC Holder to any Person other than in
accordance with the provisions of Section 2.3 hereof or in accordance with and
as an Initiating Stockholder (as defined in Section 2.2 hereof) or a
Participating Offeree under the provisions of Section 2.2 hereof.
(b) The provisions of this Section 2.1 shall not apply to a
Transfer which is (i) a Permitted Transfer, (ii) pursuant to a Public Offering,
or (iii) after the Public Float Date, pursuant to a Rule 144 Transaction.
2.2 Tagalong. No Stockholder shall Transfer any Subject Securities to a
Third Party without complying with the terms and conditions set forth in this
Section 2.2, as applicable, provided that any Stockholder may be an Initiating
Stockholder (as defined below) under this Section 2.2 only if such Transfer is
permitted under Section 2.1(a).
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(a) Any Stockholder (the "Initiating Stockholder") desiring to
Transfer such Subject Securities shall give not less than 15 days prior written
notice of such intended Transfer to each other Stockholder ("Participating
Offerees") and to the Company. Such notice (the "Participation Notice") shall
set forth terms and conditions of such proposed Transfer, including the name of
the prospective transferee, the number of Common Stock Equivalents proposed to
be transferred (the "Participation Securities") by the Initiating Stockholder,
the purchase price per share proposed to be paid therefor and the payment terms
and type of Transfer to be effectuated. Within 10 days following the delivery of
the Participation Notice by the Initiating Stockholder to each Participating
Offeree and to the Company, each Participating Offeree shall, by notice in
writing to the Initiating Stockholder and to the Company, have the opportunity
and right to sell to the purchasers in such proposed Transfer (upon the same
terms and conditions as the Initiating Stockholder) up to that number of Subject
Securities representing Common Stock Equivalents at the time held by such
Participating Offeree that constitutes the same percentage of the aggregate
number of Common Stock Equivalents owned by such Participating Offeree as of the
date of such proposed Transfer as the number of Subject Securities representing
Common Stock Equivalents to be sold in such proposed Transfer by the Initiating
Stockholder (after giving effect to the provisions of this and the following
sentence) constitutes of the aggregate number of Common Stock Equivalents owned
as of the date of such proposed Transfer by the Initiating Stockholder. As
contemplated by the preceding sentence, the amount of Participation Securities
to be sold by an Initiating Stockholder and the amount of Subject Securities to
be sold by any Participating Offerees shall be adjusted to the extent necessary
to provide for sales by the Initiating Stockholder and Participating Offerees of
an aggregate number of Subject Securities (i) which is not greater than the
number of Participation Securities originally proposed to be transferred by the
Initiating Stockholder and (ii) such that the number of Subject Securities
representing Common Stock Equivalents at the time held by each Participating
Offeree to be sold in such proposed Transfer constitutes the same percentage of
the aggregate number of Common Stock Equivalents owned by such Participating
Offeree as of the date of such proposed Transfer as the number of Subject
Securities representing Common Stock Equivalents to be sold in such proposed
Transfer by the Initiating Stockholder (after giving effect to the provisions of
this Section 2.2) constitutes of the aggregate number of Common Stock
Equivalents owned as of the date of such proposed Transfer by the Initiating
Stockholder.
(b) At the closing of any proposed Transfer in respect of
which a Participation Notice has been delivered, the Initiating Stockholder,
together with all Participating Offerees so electing to sell Subject Securities
pursuant to this Section 2.2 shall deliver to the proposed transferee
certificates and/or other instruments representing the Subject Securities to be
sold, free and clear of all liens and encumbrances, together with stock or other
appropriate powers duly endorsed therefor, and shall receive in exchange
therefor the consideration to be paid or delivered by the proposed transferee in
respect of such Subject Securities as described in the Participation Notice.
(c) The provisions of this Section 2.2 shall not apply to (i)
any Transfer pursuant to a Public Offering or, following the Public Float Date,
pursuant to a Rule 144
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Transaction or (ii) any Permitted Transfer or (iii) any Transfers pursuant to
Section 2.3 or 2.4 hereof.
2.3 Dragalong.
(a) If, at the time a Sale Request (as hereinafter defined) is given,
both (i) the JWC Holders hold more Common Stock Equivalents than the UBS Holders
and (ii) JWC Holders holding at least a majority of Common Stock Equivalents at
the time held by such JWC Holders (the Dragalong Group) determine to sell or
exchange (in a sale or exchange of securities of the Company or in a merger,
consolidation or other business combination or any similar transaction), in one
or a series of bona fide arms-length transactions to an unrelated and
unaffiliated Third Party fifty percent (50%) or more of the Subject Securities
at the time held by them then, upon 30 days' prior written notice from the
Dragalong Group to the other Stockholders, which notice shall include reasonable
details of the proposed sale or exchange including the proposed time and place
of closing and the consideration to be received by the Stockholders (such notice
being referred to as the "Sale Request"), each other Stockholder shall be
obligated to, and shall, (i) sell, transfer and deliver, or cause to be sold,
transferred and delivered, to such Third Party an equivalent percentage of such
Stockholder's Subject Securities in the same transaction at the closing thereof
and shall (A) execute and deliver such agreements for the purchase of such
Subject Securities and other agreements, instruments and certificates as the
members of the Dragalong Group shall execute and deliver in connection with such
proposed transaction (provided that no Holder shall be required to make any
representations or warranties in connection with such sale or transfer other
than representations and warranties as to (x) such Holder's ownership of his or
its Subject Securities to be sold or transferred free and clear of all liens,
claims, and encumbrances, (y) such Holder's power and authority to effect such
transfer and (z) such matters pertaining to compliance with securities laws as
the transferee may reasonably require) and (B) deliver certificates and/or other
instruments representing such percentage of such Stockholder's Subject
Securities, together with stock or other appropriate powers therefor duly
executed, at the closing, free and clear of all claims, liens and encumbrances),
and each Stockholder shall receive upon the closing of such transaction the same
per share consideration (including terms of payment) to be paid or delivered by
the proposed transferee in respect of such Stockholder's Subject Securities as
shall be payable to the members of the Dragalong Group in respect of their
Subject Securities, and (ii) if stockholder approval of the transaction is
required, vote such Stockholder's Common Stock in favor thereof.
(b) The provisions of this Section 2.3 shall not apply to any
Transfer (i) pursuant to a Public Offering or (ii) pursuant to a Permitted
Transfer.
2.4 Right of First Refusal. If at any time prior to the Public Float
Date, any Other Holder shall receive a bona fide written offer (a "Third Party
Offer") from a Third Party (the "Third Party Offeror") to purchase any Subject
Securities and such Other Holder desires to accept such Third Party Offer, such
Other Holder shall, prior to accepting the Third Party Offer, offer (the "First
Refusal Offer") to sell such Subject Securities (the "Offered Securities") in
accordance with the procedures, and upon the terms, set forth below.
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(a) (i) The Other Holder shall send a written notice
of the First Refusal Offer (a "First Refusal
Offer Notice") to the Company, which First
Refusal Offer Notice shall state that such
Other Holder proposes to effect a sale to a
Third Party Offeror, the number and class or
type of Subject Securities subject to the
Third Party Offer and the name and address
of the Third Party Offeror, together with a
copy of all writings between the Third Party
Offeror and such Other Holder necessary to
establish the terms of the Third Party
Offer.
(ii) Subject to Section 2.4(b), the right of
first refusal may be exercised by the
Company by delivery of a written notice to
the Other Holder making the First Refusal
Offer within 20 days after receipt by the
Company of the applicable First Refusal
Offer Notice (the "Company Notice Period"),
which notice shall state the number of
Offered Securities the Company intends to
purchase pursuant to this paragraph (ii). If
the Company fails to respond to the Other
Holder making the First Refusal Offer within
the Company Notice Period, the failure shall
be deemed a rejection of the First Refusal
Offer.
(iii) If the Company has not exercised the right
of first refusal with respect to all of the
Offered Securities pursuant to this Section
2.4, the Other Holder shall send a First
Refusal Offer Notice to the JWC Holders, the
UBS Holders and the Management Holders
(other than the Other Holder making the
First Refusal Offer) with respect to those
Offered Securities as to which the Company
has not exercised its right of first
refusal. Subject to Section 2.4(b), the
right of first refusal may be exercised by
the JWC Holders, such UBS Holders and the
Management Holders, pro rata in accordance
with the respective Common Stock Equivalents
at the time held by the JWC Holders, such
UBS Holders and the Management Holders so
exercising their rights under this Section
2.4, by delivery of a written notice to the
Other Holder making the First Refusal Offer
within 20 days after receipt by the JWC
Holders, such UBS Holders and the Management
Holders of the applicable First Refusal
Offer Notice (the "JWC/UBS Holders Notice
Period"), which notice shall state the
number of Offered Securities each of the JWC
Holders, such UBS Holders and the Management
Holders intend to purchase pursuant to this
paragraph (iii). If the JWC Holders or such
UBS Holders or the Management Holders, as
the case may be, fail to respond to the
Other Holder making the First Refusal Offer
within the JWC/UBS Holders Notice Period,
the failure shall be deemed a rejection of
the First Refusal Offer by the JWC Holders
or such UBS Holders or the Management
Holders, as the case may be.
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(iv) The purchase of the Offered Securities by
the Company and/or the JWC Holders, such UBS
Holders and the Management Holders pursuant
to this Section 2.4 shall be effected at the
offices of JWC Equity Partners within 30
days after the expiration of the Company
Notice Period (or, if the JWC Holders or
such UBS Holders or the Management Holders
are exercising their right of first refusal
with respect to any of the Offered
Securities, within 30 days after the
expiration of the JWC/UBS Holders Notice
Period) on those terms and conditions of the
Third Party Offer. The price per Offered
Security payable by the Company and/or the
JWC Holders, such UBS Holders and the
Management Holders shall be equal to the
price per Offered Security set forth in the
Third Party Offer. The purchase price for
the Offered Securities purchased by the
Company and/or the JWC Holders, such UBS
Holders and the Management Holders shall be
paid by certified checks payable, or wire
transfer, to the Other Holder making the
First Refusal Offer against receipt of a
certificate or certificates representing
all Offered Securities so purchased,
properly endorsed for transfer to the
Company and/or the JWC Holders, such UBS
Holders and the Management Holders, as the
case may be.
(v) Any purchase of the Offered Securities by
the Company and/or the JWC Holders, such UBS
Holders and the Management Holders pursuant
to this Section 2.4 shall be conditioned (by
the Other Holder making the First Refusal
Offer) upon the Company's and/or the JWC
Holders', such UBS Holders' and the
Management Holders' exercising in the
aggregate the right of first refusal with
respect to all the Offered Securities.
(b) Notwithstanding anything to the contrary contained herein,
if the Company and/or the JWC Holders, such UBS Holders and the Management
Holders have not exercised the right of first refusal with respect to all of the
Offered Securities pursuant to this Section 2.4, then such Other Holder may
transfer to the Third Party Offeror on the terms and conditions of the Third
Party Offer all but not less than all of the Offered Securities; provided that
such sale is consummated within 45 days from the expiration of the JWC/UBS
Holders Notice Period; and provided further, that such Third Party Offeror shall
agree in writing in advance with the Company to be bound by and to comply with
all applicable provisions of this Agreement to the same extent as if such Third
Party Offeror were such Other Holder. If such sale is not consummated within
such 45-day period, the restrictions provided for in this Section 2.4 shall
again become effective, and no transfer of such Offered Securities may be made
thereafter without again offering the same to the Company and/or the JWC
Holders, such
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UBS Holders and the Management Holders in accordance with the terms and
conditions of this Agreement.
(c) The provisions of this Section 2.4 shall not apply to (i)
any Transfer pursuant to a Public Offering or, following a Public Offering,
pursuant to a Rule 144 Transaction or (ii) any Permitted Transfer or (iii) any
Transfers pursuant to Section 2.2 or 2.3 hereof.
2.5 Corporate Governance.
(a) The Company and each of the JWC Holders, the Other Holders
and the Management Holders shall take all action (including but not limited to
such Stockholder's voting, or executing proxies or written consents with respect
to, the Common Stock at the time held by such Stockholder as may be from time to
time requested by holders of a majority of the Common Stock Equivalents at the
time held by the JWC Holders) so that the Company's Board of Directors shall
include such number of members as may be from time to time designated by the
holders of a majority of the Common Stock Equivalents at the time held by the
JWC Holders (or the JWC Representative). The holders of a majority of the Common
Stock Equivalents at the time held by the JWC Holders (or the JWC
Representative) shall also be entitled to require that any member of the
Company's Board of Directors so designated pursuant to this Section 2.5 be
removed or replaced by another designee of the holders of a majority of the
Common Stock Equivalents at the time held by the JWC Holders (or the JWC
Representative), in which event the Company and each such Stockholder shall take
all action, including but not limited to such Stockholder's voting, or executing
written consents with respect to, the Common Stock at the time held by such
Stockholder as may be necessary to effect such removal or replacement.
(b) Notwithstanding the provisions of Section 2.5(a), the
Company and each of the JWC Holders, the Other Holders and the Management
Holders shall take all action, including but not limited to such Stockholder's
voting, or executing proxies or written consents with respect to, the Common
Stock at the time held by such Stockholder as may be from time to time requested
by holders of a majority of the Common Stock Equivalents at the time held by the
UBS Holders, so that the Company's Board of Directors shall include one (1)
member designated by the holders of a majority of the Common Stock Equivalents
at the time held by the UBS Holders which one (1) member shall initially be
Michael Greene; provided that the number of members of the Company's Board of
Director's that the UBS Holders shall be entitled to designate pursuant to this
Section 2.5(b) shall be permanently reduced from one (1) member to zero (0)
members at such time as the UBS Holders shall hold less than 770,000 shares of
Voting Common Stock (with such number of shares to be adjusted from time to time
to reflect any split or combination of shares of Common Stock). The holders of a
majority of the Common Stock Equivalents at the time held by the UBS Holders
shall also be entitled to require that any member of the Company's Board of
Directors so designated pursuant to this Section 2.5(b) be removed or replaced
by another designee of the holders of a majority of the Common Stock Equivalents
at the time held by the UBS Holders, in which event the Company and each such
Stockholder shall take all action, including but not limited to such
Stockholder's
<PAGE>
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voting, or executing written consents with respect to, the Common Stock at the
time held by such Stockholder as may be necessary to effect such removal or
replacement.
(c) Notwithstanding the provisions of Section 2.5(a) or
2.5(b), the Stockholders shall vote their shares of Common Stock to elect each
of Robert H. Elman and Terry G. Scariot to the Company's Board of Directors
until such person is no longer employed by the Company or any of its
Subsidiaries.
(d) The HMTF Holders shall have the right to have an
individual appointed by them (the "HMTF Attendee") in attendance at all regular
and special meetings of the Company's Board of Directors to observe, but not to
vote on any matters before the Board of Directors at, such meetings; provided,
however, that the HMTF Attendee shall recuse himself or herself from any such
meeting during the Board of Directors' discussions, deliberations and voting on
matters with respect to which the Board of Directors determines, in the good
faith exercise of its business judgment, the HMTF Attendee's presence presents a
conflict of interest. The HMTF Attendee shall be provided with all information
prepared and delivered to board members in general, at the same time and by the
same means as such information is provided to members of the board.
2.6 Restrictions on Other Agreements. Except as provided in Section 4.8
and clause (a) of the definition of "Permitted Transfer" herein, no Stockholder
shall grant any proxy or enter into or agree to be bound by any voting trust or
voting agreement with respect to any Subject Securities nor shall any
Stockholder enter into any stockholders agreements or arrangements of any kind
with any Person with respect to any of the Subject Securities on terms which
conflict with the provisions of this Agreement (whether or not such agreements
and arrangements are with other Stockholders or holders of Common Stock
Equivalents that are not parties to this Agreement), including, but not limited
to, agreements or arrangements with respect to the acquisition, disposition or
voting of Subject Securities inconsistent herewith.
2.7 Stockholder Action. Each Stockholder agrees that, in such
Stockholder's capacity as a stockholder of the Company, such Stockholder shall,
subject to delivery of the Sale Request pursuant to Section 2.3 hereof, vote, or
grant proxies relating to the Common Stock at the time held by such Stockholder
to vote, all of such Stockholder's Common Stock in favor of any sale or exchange
of securities of the Company or any merger, consolidation or other business
combination or any similar transaction pursuant to Section 2.3 hereof (other
than a transaction with an Affiliate) if, and to the extent that, approval of
the Company's stockholders is required in order to effect such transaction.
ARTICLE 3
Registration Rights
3.1 General. For purposes of this Article 3: (a) the terms "register",
"registered" and "registration" refer to a registration effected by preparing
and filing a registration
<PAGE>
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statement on Form S-1, S-2 or S-3 in compliance with the 1933 Act and the
declaration or ordering of effectiveness of such registration statement; and (b)
the term "Holder" means any Stockholder.
3.2 Demand and Piggyback Registration.
(a) Demand Registration.
(i) Subject to the provisions of this Agreement
(including Section 3.2(b), at any time after
the Public Float Date, upon the written
request of any UBS Holders requesting that
the Company effect the registration under
the 1933 Act of Registrable Securities,
which request shall specify in reasonable
detail the number of Registrable Securities
to be registered and the intended method of
distribution thereof, the Company shall use
its reasonable commercial efforts to
register under the 1933 Act (a "Demand
Registration") the Registrable Securities
which the Company has been requested to
register by such UBS Holders, all to the
extent requisite to permit the disposition
of such Registrable Securities in accordance
with the plan of distribution set forth in
the applicable registration statement. In
the case of such Demand Registration, such
UBS Holders must request registration of
Registrable Securities representing not less
than such number of Registrable Securities
the expected gross proceeds of which, on the
date of the aforementioned written request,
would equal at least $5 million unless such
registration request is for all remaining
Registrable Securities held by such UBS
Holders.
(ii) Registration Statement Form. Any Demand
Registration under this Section shall be on
Form S-3, if and to the extent that the
Company is eligible under the 1933 Act to
use such form at the time of the written
request for such Demand Registration.
(iii) Limitations on Demand Registration. Anything
herein to the contrary notwithstanding, the
Company shall not be required to effect more
than one (1) Demand Registration pursuant to
this Section.
(iv) Effective Registration Statement. Except as
otherwise provided in Section 3.2(a)(vii)
hereof, a Demand Registration requested
pursuant to this Section 3.2(a) shall not be
deemed to have been effected (A) unless a
registration statement with respect thereto
has become effective, (B) if after it has
become effective, such registration is
materially interfered with by any stop
order, injunction or similar order or
requirement of the Commission or other
governmental agency or court for any reason
<PAGE>
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not attributable to any UBS Holder and has
not thereafter become effective, or (C) if
the conditions to closing specified in the
underwriting agreement, if any, entered into
in connection with such registration are not
satisfied or waived, other than by reason of
a failure on the part of any UBS Holder.
(v) Selection of Underwriters. In the case of
such Demand Registration, the selection of
any managing and other underwriter(s) shall
be made by the Company, with the consent of
UBS Capital (which consent shall not be
unreasonably withheld).
(vi) Certain Requirements in Connection with
Registration Rights. In the case of such
Demand Registration, if the Holder has
determined to enter into one or more
underwriting agreements in connection
therewith, no Person may participate in such
Demand Registration unless such Person
agrees to sell his or its securities on the
basis provided in the underwriting
arrangements and completes all
questionnaires, powers of attorney,
indemnities, underwriting agreements and
other documents which are reasonable and
customary under the circumstances.
(vii) Certain Other Matters. Should a Demand
Registration not become effective due to the
failure of any of the UBS Holders requesting
such Demand Registration to perform its
obligations under this Agreement or the
inability of such UBS Holders to reach
agreement with the underwriters on price or
other customary terms for such transaction,
or in the event such UBS Holders withdraw or
do not pursue the request for such Demand
Registration (in each of the foregoing
cases, provided that at such time the
Company is in compliance in all material
respects with its obligations under this
Agreement), then such Demand Registration
shall be deemed to have been effected.
(b) Piggyback Registration. If at any time the Company
determines to register any Public Offering of any of the Common Stock
Equivalents for the account of any JWC Holder under the 1933 Act in connection
with the public offering of such securities or pursuant to a request for a
Demand Registration pursuant to Section 3.2(a) hereof, the Company shall, at
each such time, promptly give each Holder written notice of such determination
no later than 30 days before its intended filing with the SEC. Upon the written
request of any Holder received by the Company within 10 days after the giving of
any such notice by the Company, the Company shall use all commercially
reasonable efforts to cause to be registered under the 1933 Act all of the
Registrable Securities of such Holder that such Holder has requested be
registered. If the total amount of Registrable Securities that are to be
included by the Company in such registration exceeds the amount of securities
that the underwriters reasonably believe compatible with the success of the
offering, then the Company will include in such
<PAGE>
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registration only the number of securities which in the opinion of such
underwriters can be sold, in the following order:
(i) first, all securities of the Company to be
offered for the account of the Company; and
(ii) second, the Registrable Securities, pro rata
based on the number of Registrable
Securities held by each Holder seeking to
have Registrable Securities included in such
registration (including any UBS Holders
seeking to have Registrable Securities
included in such registration pursuant to a
Demand Registration requested under Section
3.2(a) hereof).
3.3 Obligations of the Company.
(a) Whenever required under Section 3.2 hereof to use all
commercially reasonable efforts to effect the registration of any Public
Offering Registrable Securities, the Company shall:
(i) prepare and file with the SEC a registration
statement with respect to such Registrable
Securities and use all commercially
reasonable efforts to cause such
registration statement to become and remain
effective, including, without limitation,
filing of post-effective amendments and
supplements to any registration statement or
prospectus necessary to keep the
registration statement current;
(ii) as expeditiously as reasonably possible,
prepare and file with the SEC such
amendments and supplements to such
registration statement and the prospectus
used in connection with such registration
statement as may be necessary to comply with
the provisions of the 1933 Act with respect
to the disposition of all securities covered
by such registration statement and to keep
each registration and qualification under
this Agreement effective (and in compliance
with the 1933 Act) by such actions as may be
necessary or appropriate for a period of 90
days after the effective date of such
registration statement (unless all
securities covered by such registration
statement are sooner disposed of), all as
requested by such Holder or Holders;
(iii) as expeditiously as reasonably possible
furnish to the Holders such numbers of
copies of a prospectus, including a
preliminary prospectus, in conformity with
the requirements of the 1933 Act, and such
other documents as they may reasonably
request in order to facilitate the
disposition of Registrable Securities owned
<PAGE>
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by them in accordance with the plan of
distribution provided for in such
registration statement;
(iv) as expeditiously as reasonably possible use
all commercially reasonable efforts to
register and qualify the securities covered
by such registration statement under such
securities or "blue sky" laws of such
jurisdictions as shall be reasonably
appropriate for the distribution of the
securities covered by the registration
statement, provided that the Company shall
not be required in connection therewith or
as a condition thereto to qualify to do
business or to file a general consent to
service of process in any such jurisdiction,
and further provided that (anything in this
Agreement to the contrary notwithstanding
with respect to the bearing of expenses) if
any jurisdiction in which the securities
shall be qualified shall require that
expenses incurred in connection with the
qualification of the securities in that
jurisdiction be borne by selling
stockholders, then such expenses shall be
payable by selling stockholders pro rata, to
the extent required by such jurisdiction;
(v) notify each seller of Registrable Securities
covered by such registration statement, at
any time when a prospectus relating thereto
is required to be delivered under the 1933
Act, upon discovery that, or upon the
happening of any event as a result of which,
the prospectus included in such registration
statement, as then in effect, includes an
untrue statement of a material fact or omits
to state any material fact required to be
stated therein or necessary to make the
statements therein not misleading in the
light of the circumstances under which they
were made (each Holder hereby covenanting
that, upon receipt of any such notice, it
shall forthwith cease using any such
prospectus unless and until it shall have
received from the Company a supplement to or
amendment of such prospectus as hereinafter
referred to in this Section 3.3(a)(v)), and
at the request of any such seller or Holder
promptly prepare to furnish to such seller
or Holder a reasonable number of copies of a
supplement to or an amendment of such
prospectus as may be necessary so that, as
thereafter delivered to the purchasers of
such securities, such prospectus shall not
include an untrue statement of a material
fact or omit to state a material fact
required to be stated therein or necessary
to make the statements therein not
misleading in the light of the circumstances
under which they were made;
(vi) otherwise use all commercially reasonable
efforts to comply with all applicable rules
and regulations of the SEC, and make
available to its security holders, as soon
<PAGE>
-19-
as reasonably practicable, an earnings
statement covering the period of at least 12
months but not more than 18 months,
beginning with the first full calendar month
after the effective date of such
registration statement, which earnings
statement shall satisfy the provisions of
Section 11(a) of the 1933 Act, and will
furnish to each such seller at least 2
Business Days prior to the filing thereof a
copy of any amendment or supplement to such
registration statement or prospectus and
shall not file any thereof to which any such
seller shall have reasonably objected,
except to the extent required by law, on the
grounds that such amendment or supplement
does not comply in all material respects
with the requirements of the 1933 Act or of
the rules or regulations thereunder;
(vii) provide and cause to be maintained a
transfer agent and registrar for all
Registrable Securities covered by such
registration statement from and after a date
not later than the effective date of such
registration statement; and
(viii) use all commercially reasonable efforts to
list all Registrable Securities covered by
such registration statement on any
securities exchange on which any class of
Registrable Securities is then listed.
(b) The Company will furnish to each Holder on whose behalf
Registrable Securities have been registered pursuant to this Agreement a signed
counterpart, addressed to such Holder, of (i) an opinion of counsel for the
Company dated the effective date of such registration statement, and (ii) a
so-called "cold comfort" letter signed by the independent public accountants who
have certified the Company's financial statements included in such registration
statement, and such opinion of counsel and accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in connection with underwritten public offerings of securities.
(c) If the Company at any time proposes to register any of its
securities under the 1933 Act subject to the piggyback registration rights of
the Holders under Section 3.2(b) hereof or pursuant to a Demand Registration
under Section 3.2(a) hereof, and such securities are to be distributed by or
through one or more underwriters, then the Company will make reasonable efforts,
if requested by any Holder of Registrable Securities who requests registration
of Registrable Securities in connection therewith pursuant to Section 3.2
hereof, to arrange for such underwriters to include such Registrable Securities
among the securities to be distributed by or through such underwriters.
(d) In connection with the preparation and filing of each
registration statement registering Registrable Securities under this Agreement,
the Company will give the Holders of Registrable Securities on whose behalf such
Registrable Securities are to be so registered and their underwriters, if any,
and their respective counsel and accountants the opportunity to
<PAGE>
-20-
participate in the preparation of such registration statement, each prospectus
included therein or filed with the SEC, and each amendment thereof or supplement
thereto, and will give each of them such access to its books and records and
such opportunities to discuss the business of the Company with its officers, its
counsel and the independent public accountants who have certified its financial
statements, as shall be reasonably necessary, in the opinion of such Holders or
such underwriters or their respective counsel, in order to conduct a reasonable
and diligent investigation within the meaning of the 1933 Act. Without limiting
the foregoing, each registration statement, prospectus, amendment, supplement or
any other document filed with respect to a registration under this Agreement
shall be subject to review and reasonable approval by the Holders registering
Registrable Securities in such registration and by their counsel.
3.4 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Article 3 that
each Holder shall furnish to the Company such information regarding such Holder,
the Registrable Securities held by such Holder, and the intended method of
disposition of such securities as the Company shall reasonably request and as
shall be required in connection with the action to be taken by the Company.
3.5 Expenses of Registration. All expenses incurred in connection with
a registration pursuant to Section 3.2 hereof (excluding underwriters' discounts
and commissions, which shall be borne by the Holders), including without
limitation all registration and qualification fees, printers' and accounting
fees, fees and disbursements of counsel for the Company, and the reasonable fees
and disbursements of one counsel for the selling Holders (which counsel shall be
selected by the holders of a majority of the Registrable Securities to be
included in such registration) shall be borne by the Company.
3.6 Underwriting Requirements. In connection with any registration of
Registrable Securities under this Agreement, the Holders shall, if requested by
the Company or the underwriters for any Registrable Securities included in such
registration, enter into an underwriting agreement with such underwriters for
such offering, such agreement to contain such representations and warranties by
the Company and such other terms and provisions as are customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, provisions relating to indemnification and contribution
provided, that no Holder shall be required to make any representations or
warranties, or provide any indemnity, with respect to any matter other than (x)
such Holder's ownership of his or its Subject Securities to be sold or
transferred free and clear of all liens, claims, and encumbrances and (y)
information regarding such Holder appearing in the registration statement,
preliminary or final prospectus or amendments or supplements thereto that has
been provided in writing by such Holder. The Holders on whose behalf Registrable
Securities are to be distributed by such underwriters shall be parties to any
such underwriting agreement, and the representations and warranties by, and the
other agreements on the part of, the Company to and for the benefit of such
underwriters shall be also made to and for the benefit of such Holders of
Registrable Securities. Such underwriting agreement shall comply with Section
3.7.
<PAGE>
-21-
3.7 Indemnification. In the event any Registrable Securities are
included in a registration statement pursuant to this Article 3:
(a) To the fullest extent permitted by law, the Company will
indemnify and hold harmless each Holder joining in a registration, any
underwriter (as defined in the 1933 Act) for it, and each Person, if any, who
controls such Holder or such underwriter within the meaning of the 1933 Act,
from and against any losses, claims, damages, expenses (including reasonable
attorneys' fees and expenses and reasonable costs of investigation) or
liabilities, joint or several, to which they or any of them may become subject
under the 1933 Act or otherwise, insofar as such losses, claims, damages,
expenses or liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based on any untrue or
alleged untrue statement of any material fact contained in such registration
statement including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements made therein not
misleading in light of the circumstances under which they were made or arise out
of any violation by the Company of any rule or regulation promulgated under the
1933 Act applicable to the Company and relating to action or inaction required
of the Company in connection with any such registration, provided that the
indemnity agreement contained in this Section 3.7(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable to anyone for any
such loss claim, damage, liability or action to the extent that it arises out of
or is based upon an untrue statement or omission made in connection with such
registration statement, preliminary prospectus, final prospectus or amendments
or supplements thereto in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
such Holder, underwriter or control person. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
Holder, underwriter or control person and shall survive the transfer of such
securities by such Holder.
(b) To the fullest extent permitted by law, each Holder
joining in a registration shall indemnify and hold harmless the Company, each of
its directors, each of its officers who has signed the registration statement,
each Person, if any, who controls the Company within the meaning of the 1933
Act, and each agent and any underwriter for the Company and any Person who
controls any such agent or underwriter and each other Holder and any Person who
controls such Holder (within the meaning of the 1933 Act) against any losses,
claims, damages or liabilities to which the Company or any such director,
officer, control person, agent, underwriter or other Holder may become subject,
under the 1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon an untrue statement of any
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, or arise out of or are based upon the omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or omission was made in such registration
statement,
<PAGE>
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preliminary or final prospectus, or amendments or supplements thereto, in
reliance upon and in conformity with written information furnished by such
Holder with respect to such Holder expressly for use in connection with such
registration, and such Holder shall reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, control
person, agent, underwriter or other Holder in connection with investigating or
defending any such loss, claim, damage, liability or action, provided that the
indemnity obligation of each such Holder hereunder shall be limited to and shall
not exceed the proceeds actually received by such Holder upon a sale of
Registrable Securities pursuant to a registration statement hereunder, and
provided, further that the indemnity agreement contained in this Section 3.7(b)
shall not apply to amounts paid in settlements effected without the consent of
such Holder (which consent shall not be unreasonably withheld). Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of the Company or any such director, officer, Holder, underwriter or
control person and shall survive the transfer of such securities by such Holder.
(c) Any Person seeking indemnification under this Section 3.7
will (i) give prompt notice to the indemnifying party of any claim with respect
to which it seeks indemnification, but the failure to give such notice will not
affect the right to indemnification hereunder (except to the extent the
indemnifying party is prejudiced by such failure), and (ii) unless in such
indemnified party's reasonable judgment a conflict of interest may exist between
such indemnified and indemnifying parties with respect to such claim, permit
such indemnifying party, and other indemnifying parties similarly situated,
jointly to assume the defense of such claim with counsel reasonably satisfactory
to the parties. In the event that the indemnifying parties cannot mutually agree
as to the selection of counsel, each indemnifying party may retain separate
counsel to act on its behalf and at its expense. The indemnified party shall in
all events be entitled to participate in such defense at its expense through its
own counsel. If such defense is not assumed by the indemnifying party, the
indemnifying party will not be subject to any liability for any settlement made
without its consent (but such consent will not be unreasonably withheld). No
indemnifying party will consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from all
liability in respect of such claim or litigation. An indemnifying party who is
not entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim, in which event the indemnifying party shall be obligated
to pay the reasonable fees and expenses of such additional counsel.
(d) If for any reason the foregoing indemnification is
unavailable to any party or insufficient to hold it harmless as and to the
extent contemplated by the preceding paragraphs of this Section 3.7, then each
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such loss, claim, damage expense or liability
in such proportion as is appropriate to reflect the relative benefits received
by the Company, on the one hand, and the applicable indemnified party, as the
case may be, on the
<PAGE>
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other hand, and also the relative fault of the Company and any applicable
indemnified party, as the case may be, as well as any other relevant equitable
considerations.
3.8 Rule 144. With a view to making available to the Holders and their
transferees the benefits of Rule 144 and Rule 144A under the 1933 Act and any
other rule or regulation of the SEC that may at any time permit a Holder to sell
securities of the Company to the public without registration, the Company agrees
to use all commercially reasonable efforts to take all action that may be
required as a condition to the availability after a public offering of Rule 144,
Rule 144A or such other rules or regulations, including without limitation to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144, at all times subsequent to 90 days after
the effective date of the first registration statement covering an underwritten
public offering filed by the Company;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act
(including, without limitation, under Section 13 or Section 15 of the 1934 Act);
and
(c) furnish to any Holder forthwith upon request a written
statement by the Company that it has complied with the reporting requirements of
Rule 144 (at any time after 90 days after the effective date of said first
registration statement filed by the Company), and of the 1933 Act and the 1934
Act (at any time after it has become subject to such reporting requirements), a
copy of the most recent annual or quarterly report of the Company, and such
other reports and documents so filed by the Company as may be reasonably
requested in availing any Holder of any rule or regulation of the SEC permitting
the selling of any such securities without registration.
3.9 Market Stand-Off Agreement. Each Stockholder agrees not to sell or
otherwise transfer or dispose of any Common Stock (or other securities) of the
Company at the time held by such Stockholder (other than securities included in
the applicable registration statement or shares purchased in the public market
after the effective date of registration) or any interest or future interest
therein during such period (not to exceed 180 days) as is mutually acceptable to
a majority in interest of Stockholders and the underwriter following the
effective date of the registration statement of the Company filed under the 1933
Act which includes securities of the Company to be sold to the public in an
underwritten offer.
ARTICLE 4
Certain Miscellaneous Other Provisions
4.1 Remedies. The parties to this Agreement acknowledge and agree that
the covenants of the Company and the Stockholders set forth in this Agreement
may be enforced in equity by a decree requiring specific performance. Without
limiting the foregoing, if any dispute arises concerning the sale or other
disposition of any of the securities of the Company subject to this Agreement or
concerning any other provisions hereof or the obligations of the
<PAGE>
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parties hereunder, the parties to this Agreement agree that an injunction may be
issued in connection therewith. Such remedies shall be cumulative and
non-exclusive and shall be in addition to any other rights and remedies the
parties may have under this Agreement or otherwise.
4.2 Entire Agreement; Amendment; Termination.
(a) This Agreement sets forth the entire understanding of the
parties, and supersedes all prior agreements and all other arrangements and
communications, whether oral or written, with respect to the subject matter
hereof.
(b) The Schedule of Stockholders may be amended in writing by
the Company to reflect changes in the composition of the Stockholders and
changes in their addresses or telecopy numbers that may occur from time to time
as a result of Permitted Transfers, Transfers permitted under Article 2 hereof
or issuances contemplated by Section 4.12. Amendments to the Schedule of
Stockholders reflecting Permitted Transfers, Transfers permitted under Article 2
hereof or issuances contemplated by Section 4.12 shall become effective when the
amended Schedule of Stockholders, and a copy of this Agreement as executed by
any new transferee or other new party hereto in accordance with Section 4.12,
are filed with the Company. Upon written request of any Stockholder, the Company
will promptly provide to such Stockholder a copy of the Schedule of Stockholders
as in effect at the date of such request therefor.
(c) Any other amendment to this Agreement shall be in writing
and shall require the written consent of (i) the Company, (ii) either the JWC
Representative or the holders of a majority of Common Stock Equivalents at the
time held by the JWC Holders, (iii) if adverse to the interests of the
Stockholder Group comprised of the Other Holders, Other Holders, both (A) the
holders of a majority of the Common Stock Equivalents at the time held by the
Other Holders and (B) the holders of a majority of the Common Stock Equivalents
at the time held by the UBS Holders, and (iv) if adverse to the interests of a
particular Stockholder or any Stockholder Group (other than the Stockholder
Group comprised of the Other Holders), that Stockholder or the holders of a
majority of the Common Stock Equivalents at the time held by that Stockholder
Group, as the case may be.
(d) Notwithstanding the foregoing provisions of this Section
4.2, this Agreement may be terminated at any time upon the written consent of
(i) the Company and (ii) the holders of a majority of the Common Stock
Equivalents at the time held by the Management Holders, the Other Holders and
the JWC Holders (or the JWC Representative), each voting separately as a group;
provided that the provisions of Sections 3.7 and 4.20 shall survive any
termination of this Agreement.
4.3 Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if the invalid or
unenforceable provision were omitted.
<PAGE>
-25-
4.4 Notices. All notices, consents and other communications required,
or contemplated under this Agreement shall be in writing and shall be delivered
in the manner specified herein or, in the absence of such specification, shall
be deemed to have been duly given (i) three (3) Business Days after mailing by
first class certified mail, postage prepaid, (ii) when delivered by hand, (iii)
upon confirmation of receipt by telecopy, or (iv) one day after sending by
overnight delivery service, to the respective addresses of the parties set forth
below:
For notices and communications to the Company:
c/o J.W. Childs Associates, L.P.
One Federal Street
Boston, MA 02110
Attention: John W. Childs
Telecopy: 617-753-1101
with a copy to:
Desa International, Inc.
2701 Industrial Drive
Bowling Green, KY 42102
Attention: President
Telecopy: 502-781-9807
For notices and communications to the Stockholders, to the
respective addresses set forth in the Schedule of
Stockholders.
With a copy in the case of the JWC Holders to:
Sullivan & Worcester LLP
One Post Office Square
Boston, MA 02109
Attention: Christopher Cabot, Esq.
Telecopy: 617-338-2880
By notice complying with the foregoing provisions of this Section 4.4, each
party shall have the right to change the mailing address or telecopy number for
future notices and communications to such party.
4.5 Binding Effect; Assignment. This Agreement shall binding upon and
inure to the benefit of the parties hereto and to their respective transferees,
successors, assigns, heirs and administrators, provided that the rights under
this Agreement may not be assigned except as expressly provided herein. No such
assignment shall relieve an assignor of its obligations hereunder.
<PAGE>
-26-
4.6 Termination. Without affecting any other provision of this
Agreement requiring termination of any rights in favor of any Stockholder,
Permitted Transferee or any other transferee of Subject Securities, the
provisions of Articles 2 and 3 (other than Section 3.7, which in any event shall
survive any termination of this Agreement or the termination of this Agreement
as to any Stockholder, Permitted Transferee or other transferee when such
Stockholder, Permitted Transferee or other transferee no longer owns any Subject
Securities) and Sections 4.17, 4.18 and 4.19 of this Agreement shall terminate
as to such Stockholder, Permitted Transferee or other transferee, when, pursuant
to and in accordance with this Agreement, such Stockholder, Permitted Transferee
or other transferee, as the case may be, no longer owns any Subject Securities.
4.7 Recapitalizations, Exchanges, etc. The provisions of this Agreement
shall apply, to the full extent set forth herein with respect to Common Stock
Equivalents and to any and all shares of capital stock of the Company or any
successor or assign of the Company (whether by merger, consolidation, sale of
assets or otherwise) which may be issued in respect of, in exchange for, or in
substitution of the Common Stock Equivalents, by reason of a stock dividend,
stock split, stock issuance, reverse stock split, combination, recapitalization,
reclassification, merger, consolidation or otherwise. Upon the occurrence of any
such events, amounts hereunder shall be appropriately adjusted.
4.8 JWC Representative. Each JWC Holder hereby designates and appoints
(and each Permitted Transferee of each such JWC Holder shall be deemed to have
so designated and appointed) John W. Childs and Adam L. Suttin, and each of them
acting singly, with full power of substitution (the "JWC Representative"), the
representative of each such Person to perform all such acts as are required,
authorized or contemplated by this Agreement to be performed by any such Person
and hereby acknowledges that the JWC Representative shall be the only Person
authorized to take any action so required, authorized or contemplated by this
Agreement by each such Person. Each such Person further acknowledges that the
foregoing appointment and designation shall be deemed to be coupled with an
interest and shall survive the death or incapacity of such Person. Each such
Person hereby authorizes (and each Permitted Transferee shall be deemed to have
authorized) the other parties hereto to disregard any notice or other action
taken by such Person pursuant to this Agreement except for the JWC
Representative. The other parties hereto are and will be entitled to rely on any
action so taken or any notice given by the JWC Representative and are and will
be entitled and authorized to give notices only to the JWC Representative for
any notice contemplated by this Agreement to be given to any such Person. A
successor to the JWC Representative may be chosen by the holders of a majority
of the Common Stock Equivalents at the time held by the JWC Holders, provided
that written notice thereof is given by the successor JWC Representative to the
Company, the Other Holders, the Management Holders and the other JWC Holders.
4.9 Action Necessary to Effectuate the Agreement. The parties hereto
agree to take or cause to be taken all such corporate and other action as may be
necessary to effect the intent and purposes of this Agreement.
4.10 Purchase for Investment; Legend on Certificate. Each Stockholder
acknowledges that all of the securities of the Company held by such Stockholder
are being (or have been)
<PAGE>
-27-
acquired for investment and not with a view to the distribution thereof and that
no transfer, hypothecation or assignment of any such securities (including the
Common Stock for which such securities may be exercisable or exchangeable or
into which such securities may be convertible) may be made except in compliance
with applicable federal and state securities laws. All the certificates or other
instruments representing any of such securities (including the Common Stock for
which such securities may be exercisable or exchangeable or into which such
securities may be convertible) which are now or hereafter held by any
Stockholder shall be subject to the terms of this Agreement and shall have
endorsed in writing, stamped or printed, thereon either of the following
legends:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
TERMS AND CONDITIONS OF A STOCKHOLDERS AGREEMENT DATED AS OF NOVEMBER
__, 1997, AS AMENDED FROM TIME TO TIME, A COPY OF WHICH IS ON FILE WITH
AND AVAILABLE FROM THE SECRETARY OF THE COMPANY."
or
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
PROVISIONS REGARDING THE VOTING OF SUCH SECURITIES AND CERTAIN TRANSFER
RESTRICTIONS SET FORTH IN THE STOCKHOLDERS AGREEMENT DATED AS OF
NOVEMBER __, 1997, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY AT
ITS PRINCIPAL EXECUTIVE OFFICES."
4.11 Effectiveness of Transfers. Any Subject Securities transferred by
a Stockholder (other than pursuant to an effective registration statement under
the 1933 Act or a Rule 144 Transaction) shall be held by the transferee thereof
pursuant to this Agreement. Such transferee shall, except as otherwise expressly
stated herein, have all the rights and be subject to all of the obligations of a
Stockholder under this Agreement automatically and without requiring any further
act by such transferee or by any parties to this Agreement. Without affecting
the preceding sentence, if such transferee is not a Stockholder on the dates of
such transfer, then such transferee, as a condition to such transfer, shall
confirm such transferee's obligations hereunder in accordance with Section 4.12
hereof. No Subject Securities shall be transferred on the Company's books and
records, and no transfer of thereof shall be otherwise effective, unless any
such transfer is made in accordance with the terms and conditions of this
Agreement, and the Company is hereby authorized by all of the Stockholders to
enter appropriate stop transfer notations on its transfer records to give effect
to this Agreement.
4.12 Additional Stockholders. Any Person acquiring any Subject
Securities (except for any acquisition thereof (a) in an offering registered
under the 1933 Act or (b) in a Rule 144 Transaction) shall on or before the
transfer or issuance to it of such Subject Securities, sign a counterpart
signature page hereto in form reasonably satisfactory to the Company and the JWC
Representative and shall thereby become a party to this Agreement; provided that
a transferee which is a pledgee and within the definition of a Permitted
Transferee shall not be obligated so to agree until foreclosure on its pledge.
The Company shall require each Person acquiring an
<PAGE>
-28-
option, warrant or other right to purchase shares of Common Stock under any
option or other equity participation plan to execute a counterpart signature
page hereto.
4.13 No Waiver. No course of dealing and no delay on the part of any
party hereto in exercising any right, power or remedy conferred by this
Agreement shall operate as a waiver thereof or otherwise prejudice such party's
rights, powers and remedies. No single or partial exercise of any rights, powers
or remedies conferred by this Agreement shall preclude any other or further
exercise thereof or the exercise of any other right, power or remedy.
4.14 Counterparts. This Agreement may be executed in two or more
counterparts each of which shall be deemed an original but all of which together
shall constitute one and the same instrument, and all signatures need not appear
on any one counterpart.
4.15 Headings, etc. All headings and captions in this Agreement are for
purposes of references only and shall not be construed to limit or affect the
substance of this Agreement. Words used in this Agreement, regardless of the
gender and number used, will be deemed and construed to include any other
gender, masculine, feminine, or neuter, and any other number, singular or
plural, as the context requires. As used in this Agreement, the words
"including", "includes" and "included" are not limiting, and the word "or" is
not exclusive. The words "this Agreement", "hereto", "herein", "hereunder",
"hereof", and words or phrases of similar import refer to this Agreement as a
whole, together with any and all Schedules and Exhibits hereto, and not to any
particular article, section, subsection, paragraph, clause or other portion of
this Agreement.
4.16 Governing Law. This Agreement shall be construed under and
governed by the substantive and procedural laws of the State of Delaware
applicable to a contract executed in and wholly performed within Delaware.
4.17 Preemptive Right Provisions. The Company hereby agrees, so long as
both (i) the Stockholders hold any of Common Stock Equivalents, and (ii) a
Public Offering shall not have occurred, as follows:
(a) Except as otherwise provided in Section 4.17(b) hereof, if
the Company proposes to issue or sell any shares of its capital stock or any
security convertible into, exchangeable or exercisable for or having rights to
purchase any shares of capital stock of the Company (the "Company Securities")
to any person, the Company shall deliver to the Stockholders at the time holding
any Subject Securities at least 20 days' prior written notice (the "Preemptive
Rights Notice") stating its desire to issue or sell such Company Securities. The
Preemptive Rights Notice must specify the class of and the amount of such
Company Securities that the Company desires so to issue or sell and the price,
payment terms and other material terms and conditions at and on which it is
willing to sell such Company Securities and the material terms, provisions and
conditions of such Company Securities. Within 10 days after the Company's
delivery of a Preemptive Rights Notice (the "Election Period"), each Stockholder
at the time holding any Subject Securities shall have the right to elect to
purchase, at the designated offering price and on other terms and conditions
specified in the Preemptive Rights Notice, up to that number of such Company
Securities so that, after giving effect to
<PAGE>
-29-
such purchase, such Stockholder shall continue to maintain in the aggregate his,
her or its same proportionate equity ownership of the Company as of the date of
the Preemptive Rights Notice. For purposes of determining the equity ownership
of the Company as of the date of the Preemptive Rights Notice under the
preceding sentence, each holder (including but not limited to each Stockholder)
of Vested Options shall be treated as though he, she or it had fully converted,
exchanged or exercised all Vested Options at the time held by him, her or it at
the then existing conversion, exchange or exercise price or ratio. Each
Stockholder at the time holding any Subject Securities may exercise his, her or
its rights under this Section 4.17(a) by delivering a notice to the Company
during the Election Period. Should such Stockholder elect to purchase any such
Company Securities pursuant to this Section 4.17(a), such Stockholder shall
purchase such Company Securities at the closing and on the closing date set
forth in the Preemptive Rights Notice.
(b) Exclusions. The provisions of Section 4.17(a) hereof shall
not apply to the issuance or sale of (i) Company Securities issued or issuable
to officers, directors or employees of the Company or any subsidiary of the
Company who are not affiliated with J.W. Childs Associates, L.P., (ii) shares of
capital stock of the Company Securities issued or issuable upon the exercise,
exchange or conversion of any Company Security or other securities, options,
warrants and other rights issued by the Company and outstanding as of the date
hereof, after giving effect to the closing of certain transactions that are
closing concurrently with the issuance of the Subject Securities pursuant to
this Agreement, (iii) shares of Common Stock issued or issuable in connection
with any pro rata stock split, stock dividend or recapitalization by or
reorganization of the Company, (iv) Company Securities issued or issuable as a
pro rata dividend on the Common Stock, (v) Company Securities issued or issuable
by the Company in connection with and as consideration for the acquisition of
another business or entity by the Company or any of its subsidiaries, and (vi)
Company Securities issued or issuable to any person or entity who (A) is neither
an Affiliate of JWC Equity Partners nor a financial buyer and (B) is either (I)
directly or indirectly through its subsidiaries a significant actual or
prospective supplier of goods to or customer of the Company or any of its
subsidiaries, to whom such Company Securities are issued or issuable for the
purpose of establishing or enhancing the business relationship between such
supplier or customer and the Company and its subsidiaries or (II) engaged in,
and having a principal business unit engaged in, manufacturing or marketing
tools, specialty tools, decorative, indoor, outdoor or other heating products,
lighting products, security products, home improvement or decorative products or
other accessories or products for the home.
4.18 Transactions with Affiliates. Other than the Management Agreement
and other agreements entered into on or prior to the date hereof and arms-length
agreements entered into in the ordinary course of business after the date hereof
on terms no less favorable to the Company than would be available in agreements
entered into with Persons who are not Affiliates of JWC Equity Partners, the
Company shall not enter into any transaction with any Affiliate of JWC Equity
Partners without the consent of the holders of a majority of the Common Stock
Equivalents at the time held in the aggregate by the Management Holders and the
Other Holders.
<PAGE>
-30-
4.19 Certain Covenants of the Company. The Company hereby agrees, for
the benefit of the UBS Holders and the HMTF Holders for so long as the Public
Float Date shall not have occurred, the Company will comply with and will cause
its subsidiaries to comply with the following covenants:
(a) Annual Statements. As soon as available and in any event
within 90 days after the close of each fiscal year of the Company ending after
the date of this Agreement, the Company will deliver to each of UBS Capital and
HMTF Inc. a balance sheet of the Company and its subsidiaries and statements of
income and of cash flows of the Company and its subsidiaries, audited by any
"big six" independent public accounting firm selected by the Company (or other
independent public accounting firm selected by the Company and reasonably
acceptable to the UBS Holders and the HMTF Holders), showing the financial
position of the Company and its subsidiaries as of the close of such fiscal year
and the results of the operations of the Company and its subsidiaries during
such fiscal year, all on a consolidated basis. Each of the financial statements
delivered pursuant to this Section 4.19(a) will be accompanied by a report,
without material qualification, of such accounting firm to the effect that such
financial statements have been prepared, except as may be otherwise noted
therein, in accordance with generally accepted accounting principles
consistently applied.
(b) Monthly Statements. Within 30 days after the end of each
of the first eleven months in each fiscal year of the Company, the Company will
deliver to each of UBS Capital and HMTF Inc. a consolidated unaudited balance
sheet of the Company and its subsidiaries and statements of income and of cash
flows of the Company and its subsidiaries as of the end of each such month, all
on a consolidated basis, with (i) a comparison of such month's results to the
budgeted results for such month and to the corresponding month of the prior
fiscal year and, (ii) a comparison of the results for the period from the
beginning of the then current fiscal year to the end of such month to the
budgeted results for such period and to the corresponding period of the prior
fiscal year, certified by the chief financial officer of the Company to be true
and correct in all material respects and to have been prepared, except as may be
otherwise noted therein, in accordance with generally accepted accounting
principles consistently applied, subject to normal year-end adjustments and the
addition of footnotes.
(c) Other Financial Information. The Company will deliver to
each of UBS Capital and HMTF Inc., within 90 days after the commencement of each
fiscal year, projected monthly balance sheets and statements of income for such
fiscal year prepared by management of the Company.
(d) Notice of Litigation, Defaults, Etc. The Company will
promptly give notice to each of UBS Capital and HMTF Inc. of any litigation or
administrative proceeding to which the Company or any of its subsidiaries may
hereafter become a party which has or, in the good faith business judgment of
senior management of the Company, is reasonably likely to have a material
adverse effect on the business, assets or financial condition of the Company and
its subsidiaries, taken as a whole. Promptly upon any executive officer of the
Company obtaining knowledge of any default with respect to indebtedness for
borrowed money involving in excess of $25,000,000 in principal amount, the
Company will furnish a notice to each of UBS Capital and HMTF Inc. specifying
the nature and period of existence and the action the
<PAGE>
-31-
Company or any of its subsidiaries has taken, is taking or proposes to take with
respect thereto. Promptly after the receipt thereof, the Company will provide
each of UBS Capital and HMTF Inc. copies of any reports as to adequacies in
accounting controls submitted by independent accountants with respect to the
Company and its subsidiaries.
(e) Other Information. From time to time upon the written
request of UBS Capital or HMTF Inc., the Company will furnish such information
regarding the business, affairs, prospects and financial condition of the
Company and its subsidiaries as the representatives of any UBS Holder or HMTF
Holder may reasonably request; provided that, upon the request and as a
condition to the delivery of such information, each of the UBS Holders and HMTF
Holders who is to receive such information shall execute and deliver a
confidentiality and nondisclosure agreement in form and substance reasonably
satisfactory to the Company. Each such representative shall have the right
during normal business hours to examine the financial books and records, and the
certificate of incorporation, bylaws, minutes of meetings of stockholders,
boards of directors and committees thereof, stockholders records and similar
corporate records, of the Company and its subsidiaries and to make copies, notes
and abstracts therefrom, all at such reasonable times and intervals as such UBS
Holder or HMTF Holder may reasonably request.
4.20 Confidentiality Covenant.
(a) Each of the UBS Holders and the HMTF Holders agrees to
keep confidential any information or materials provided by or on behalf of the
Company hereunder, except (i) as may be otherwise required by law and (ii) such
information and materials as (A) are or become generally available to the public
other than as a result of a disclosure in violation of this Agreement, (B) was
independently acquired or developed by such Stockholder without violating any of
its obligations under this Agreement, or (C) becomes available to such
Stockholder on a nonconfidential basis from a person who is not and was not to
such Stockholder's knowledge bound by a confidentiality obligation to the
Company, or is not and was not otherwise prohibited from transmitting such
information or materials to such Stockholder. Notwithstanding the foregoing,
each of the UBS Holders and the HMTF Holders shall have the right to disclose
such information or materials to any prospective purchaser of securities of the
Company owned by such Stockholder, provided that such prospective purchaser
shall have executed and delivered a confidentiality and nondisclosure agreement
in form and substance reasonably satisfactory to the Company.
(b) Each of the UBS Holders and HMTF Holders acknowledges that
securities laws prohibit any person who has received material non-public
information regarding the Company or its subsidiaries from purchasing or selling
securities of the Company or from communicating such information to any other
person under circumstances in which it is reasonably foreseeable that such
person is likely to purchase or sell such securities. Each of the UBS Holders
and HMTF Holders agrees that it will not, at any time that it has received
material non-public information regarding the Company or its subsidiaries,
purchase or sell securities of the Company in violation of such securities laws
or communicate such information to any other person under circumstances in which
it is reasonably foreseeable that such person is likely to purchase or sell such
securities in violation of such securities laws.
<PAGE>
-32-
[Signatures on Following Pages]
<PAGE>
Desa Holdings Corporation
Stockholders Agreement
Counterpart Signature Page
IN WITNESS WHEREOF, the parties have executed this Agreement as an
instrument under SEAL as of the date first set forth above.
THE COMPANY:
DESA HOLDINGS CORPORATION
By: /s/
Name:
Title:
[Stockholders]
<PAGE>
[Schedules of stockholders have not been
included and are available upon request]
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-END> AUG-29-1998
<CASH> 517
<SECURITIES> 0
<RECEIVABLES> 52,319
<ALLOWANCES> (1,379)
<INVENTORY> 58,819
<CURRENT-ASSETS> 116,518
<PP&E> 40,159
<DEPRECIATION> 24,105
<TOTAL-ASSETS> 241,793
<CURRENT-LIABILITIES> 55,517
<BONDS> 328,952
156
16,035
<COMMON> 0
<OTHER-SE> (155,470)
<TOTAL-LIABILITY-AND-EQUITY> 241,793
<SALES> 116,170
<TOTAL-REVENUES> 116,170
<CGS> 79,941
<TOTAL-COSTS> 79,941
<OTHER-EXPENSES> 28,855
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,237
<INCOME-PRETAX> (5,863)
<INCOME-TAX> (2,620)
<INCOME-CONTINUING> (3,243)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,243)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
