September 10, 1996
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: Krause's Furniture, Inc.
CURRENT REPORT ON FORM 8-K
Ladies and Gentlemen:
On behalf of Krause's Furniture, Inc., a Delaware corporation (the "Filing
Person"), we transmit herewith for filing under the Securities Act of 1934, as
amended, the Company's Current Report on Form 8-K, including the exhibits
thereto.
Please acknowledge receipt of this transmission by notifying the person
indicated in the "Notify" line in the submission header of the above-referenced
filing.
Very truly yours,
James L. Burns
Enclosures
cc: Robert G. Sharpe
Executive Vice President
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): August 26, 1996
Krause's Furniture, Inc.
(Exact name of registrant as specified in its charter)
Delaware 000-17868 77-0310773
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) ID Number)
200 North Berry Street, Brea, CA 92621-3903
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (714) 990-3100
N/A
(Former name or former address, if changed since last report)
<PAGE>
Item 1. Changes in Control of the Registrant.
On August 26, 1996, Krause's Furniture, Inc. (the "Company") received $17
million in equity and debt financing from existing stockholders of the Company
and from new investors including General Electric Capital Corporation ("GECC"),
Mr. Philip M. Hawley and certain trusts for the benefit of relatives of Mr.
Hawley. Mr. Hawley also became the Company's Chairman and Chief Executive
Officer.
Mr. Hawley is the former Chairman and Chief Executive Officer of Carter
Hawley Hale Stores.
The financing consists of equity and new subordinated debt, including:
o The purchase by GECC of (i) 5 million newly issued shares of Common
Stock, par value $.001 per share, at a purchase price of $1.00 per
share and (ii) the Company's $5 million 10% Subordinated Note, at a
purchase price of $5 million. As part of this transaction, GECC also
received warrants to purchase an additional 1.4 million shares of
Common Stock at a purchase price of $.001 per share.
o The purchase by new investors, including Mr. Hawley, and certain of
the Company's existing stockholders, including the Permal Group, of 4
million new shares of Common Stock at $1.00 per share.
o The exchange of $2,950,000 principal amount of existing promissory
notes of the Company, plus accrued interest, into 3,066,251 shares of
Common Stock.
In addition, substantially all of the Company's outstanding shares of
Convertible Preferred Stock were converted into approximately 1.17 million
shares of Common Stock. It is expected that the remaining outstanding shares of
Convertible Preferred Stock will be exchanged into approximately 60,000
additional shares of the Company's Common Stock.
For additional information concerning the financing, reference is made to
the Securities Purchase Agreement between the Company and GECC and the form of
Purchase Agreement among the Company and certain of the Company's stockholders.
Copies of the Agreements are filed herewith as Exhibits.
The shares of Common Stock acquired by GECC represent approximately 28.8%
of the outstanding shares of the Common Stock, or 31.2% on a fully-diluted
basis. In addition, as part of the GECC financing, certain of the Company's
stockholders have given GECC the right to direct the voting of their shares
under the circumstances set forth in the Stockholder's Agreement dated August
26, 1996. In effect, GECC may acquire voting control of the Company. A copy of
the Agreement is filed herewith as an Exhibit.
As part of the transaction the Company has entered into a Registration
Rights Agreement permitting GECC and the other new and existing stockholders who
participated in the financing to demand the registration of their shares under
the Securities Act of 1933 and to participate in offerings made by the Company
of its own shares, under the circumstances and subject to the conditions set
forth in the Registration Rights Agreement, a copy of which has been filed as an
Exhibit.
For additional information concerning the financing, see the Company's
press release, dated August 27, 1996, a copy of which is filed herewith as
Exhibit 99.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a)-(b) Not Applicable.
(c) Exhibits.
10.1 Form of Securities Purchase Agreement between the Company and
GECC dated as of August 26, 1996.
10.2 Form of $5,000,000 10% Subordinated Pay-In-Kind Note due August
31, 2001.
10.3 Form of Warrant to Purchase 1,400,000 shares of Common Stock.
10.4 Form of Securities Purchase Agreement between the Company and
Certain Stockholders dated as of August 26, 1996.
10.5 Form of Stockholders Agreement among the Company, GECC and certain
other stockholders of the Company dated as of August 26, 1996.
10.6 Form of Registration Rights Agreement among the Company and GECC
and certain other stockholders of the Company dated as of August
26, 1996.
10.7 Employment Agreement with Philip M. Hawley.
99 Form of Press Release of the Company dated August 27, 1996.
SIGNATURE
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.
Date: September 9, 1996
KRAUSE'S FURNITURE, INC.
By: /s/ Robert G. Sharpe
Name: Robert G. Sharpe
Title: Executive Vice President
SECURITIES PURCHASE AGREEMENT
BETWEEN
KRAUSE'S FURNITURE, INC.
AND
GENERAL ELECTRIC CAPITAL CORPORATION
Dated as of August 26, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
1. Purchase and Sale of the Securities...............................1
1.1. Authorization to Sell the
Securities...............................................1
1.2. Closing..................................................1
1.3. Deliveries at Closing....................................2
1.4. Cancellation of Certain Indebtedness.....................3
1.5. Definitions..............................................3
2. Representations and Warranties of the Company.....................3
2.1. Organization and Qualification...........................3
2.2. Due Authorization........................................4
2.3. Subsidiaries.............................................4
2.4. Sec Reports..............................................4
2.5. Financial Statements.....................................5
2.6. Actions Pending; Compliance with Laws....................5
2.7. Title to Properties; Insurance...........................6
2.8. Governmental Consents, etc...............................6
2.9. Holding Company Act and Investment Company Act...........6
2.10. Taxes....................................................6
2.11. Conflicting Agreements and Charter Provisions............7
2.12. Capitalization...........................................7
2.13. Issuance, Sale and Delivery of the Notes and the
Warrant..................................................8
2.14. Issuance, Sale and Delivery of the Common Stock..........8
2.15. Registration Under Exchange Act..........................8
2.16. ERISA....................................................9
2.17. Possession of Franchises, Licenses, etc..................9
2.18. Environmental and Other Regulations.....................10
2.19. Patents and Trademarks..................................10
2.20. Material Contracts and Obligations......................10
2.21 Books and Records.......................................11
2.22. Transactions with Related Parties.......................11
2.23. Brokers.................................................11
2.24. Accuracy of Information.................................11
2.25. Offering of Securities..................................12
2.26. Use of Proceeds.........................................12
2.27. Unlawful Use of Proceeds................................12
3. Representations and Warranties of the Purchaser..................13
3.1. Organization and Qualification..........................13
3.2. Due Authorization.......................................13
3.3. Conflicting Agreements and Other Matters................13
3.4. Acquisition for Investment..............................14
3.5. Brokers or Finders......................................14
3.6. Accredited Investor.....................................14
4. Registration, Exchange and Transfer of Notes.....................14
4.1. Authorized Denominations of Notes.......................14
4.2. The Note Register; Persons Deemed Owners................14
4.3. Issuance of New Notes Upon Exchange or Transfer.........15
4.4. Lost, Stolen, Damaged and Destroyed Notes...............15
5. Payment of Notes.................................................15
5.1. Home Office Payment.....................................15
5.2. Limitation on Interest..................................16
5.3. Interest................................................16
5.4. Business Day............................................16
6. Covenants of the Company.........................................16
6.1. Payment of the Notes....................................16
6.2. Financial Covenants.....................................17
6.3. Limitation on Senior Equity Securities..................18
6.4. Merger; Purchase and Sale of Assets.....................18
6.5. Compliance with Laws....................................19
6.6. Limitation on Agreements................................19
6.7. Preservation of Franchises and Existence................19
6.8. Insurance...............................................19
6.9. Payment of Taxes and Other Charges......................20
6.10. Effect of Certain Breaches..............................20
6.11. ERISA...................................................21
6.12. Financial Statements and Other Reports..................21
6.13. Inspection of Property..................................22
6.14. Rights of First Offer...................................23
6.15. Lost, Stolen, Damaged and Destroyed Stock Certifi-
cates...................................................24
6.16. Related Party Transactions..............................24
6.17 Operations in Accordance with Business Plan.............24
6.18 Best Efforts to Cause the Conversion of Preferred
Stock...................................................24
6.19. Notice of Breach........................................24
7. Restrictions on Transfer.........................................25
8. Events of Default and Remedies...................................25
8.1. Events of Default.......................................25
8.2. Acceleration of Maturity................................27
8.3. Other Remedies..........................................27
8.4. Conduct no Waiver; Collection Expenses..................28
8.5. Annulment of Acceleration...............................28
8.6. Remedies Cumulative.....................................28
8.7. Limitations.............................................29
9. Redemption..............................................29
9.1. Optional Redemption.....................................29
9.2. Mandatory Redemption....................................29
9.3. Procedures for Partial Redemption.......................29
9.4. Change in Control.......................................29
9.5. Redemption Procedures...................................30
10. Subordination of Notes...........................................30
10.1. Subordination of Notes to Senior Indebtedness...........30
10.2. Proofs of Claim of Holders of Senior Indebtedness;
Voting..................................................33
10.3. Rights of Holders of Senior Indebtedness
Unimpaired..............................................33
10.4. Effects of Event of Default.............................33
10.5. Company's Obligations Unimpaired........................34
10.6. Subrogation.............................................34
11. Interpretation..........................................34
11.1 Definitions.............................................34
11.2. Accounting Principles...................................40
12. Miscellaneous...........................................40
12.1. Payments................................................40
12.2. Severability............................................40
12.3. Specific Enforcement....................................40
12.4. Entire Agreement........................................41
12.5. Counterparts............................................41
12.6. Notices and Other Communications........................41
12.7. Amendments..............................................42
12.8. Cooperation.............................................42
12.9. Successors and Assigns..................................42
12.10. Expenses and Remedies...................................43
12.11. Survival of Representations and Warranties..............44
12.12. Transfer of Securities..................................44
12.13. Governing Law; Consent to Jurisdiction..................45
12.14. Term....................................................46
12.15. Publicity...............................................46
12.16. Signatures..............................................46
<PAGE>
THIS SECURITIES PURCHASE AGREEMENT, dated as of August 26, 1996 (this
"Agreement"), between KRAUSE'S FURNITURE, INC., a Delaware corporation
(including its predecessors, the "Company") and GENERAL ELECTRIC CAPITAL
CORPORATION, a New York corporation (the "Purchaser").
WHEREAS, the Purchaser wishes to purchase from the Company, and the Company
wishes to sell to the Purchaser, (i) 5,000,000 shares of the Company's Common
Stock par value $.001 per share (the "Common Stock"), at an aggregate purchase
price of $5,000,000, (ii) the Company's 10% Subordinated Pay-In-Kind Notes due
August 31, 2001 (including all securities issued in exchange or replacement
therefor or in respect of payments of interest thereon, herein referred to as
the "Notes", substantially in the form set forth on Exhibit A hereto), in the
initial aggregate principal amount of $5,000,000, and (iii) in connection with
the sale of the Notes, a warrant (the "Warrant" and, together with any warrants
issued upon any division thereof, the "Warrants") to purchase 1,400,000 shares
of Common Stock, having the terms and conditions set forth in the form of the
Warrant attached hereto as Exhibit B. The Common Stock, the Notes and the
Warrants are collectively referred to as the "Securities".
WHEREAS, in connection with the purchase and sale of the Securities, the
Purchaser, the Company and the stockholders listed on the signature pages
thereof, will enter into a Stockholders Agreement in substantially the form
attached hereto as Exhibit C (the "Stockholders Agreement").
WHEREAS, the Purchaser and the Company desire to provide for such purchase
and sale and to establish various rights and obligations in connection
therewith.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein set forth, the parties hereto agree as follows:
1. PURCHASE AND SALE OF THE SECURITIES.
1.1. Authorization to Sell the Securities. Subject to the terms and
conditions of this Agreement, the Company has duly authorized the issuance and
sale of the Securities.
1.2. Closing. The closing of the transactions contemplated hereby (the
"Closing") will take place at the offices of Fried, Frank, Harris, Shriver &
Jacobson, New York, New York, at 9:00 a.m. on the date of this Agreement or on
such other date as shall be mutually agreed by the Company and the Purchaser
(the "Closing Date").
1.3. Deliveries at Closing. At the Closing:
(i) Stroock & Stroock & Lavan
and Olimpia, Whelan & Lively, counsel to the Company, shall have delivered to
the Purchaser opinions dated the Closing Date with respect to the matters set
forth in Exhibit D hereto;
(ii) the Company shall have executed a registration
rights agreement in the form of Exhibit E hereto (the "Registration Rights
Agreement");
(iii) the Company shall have delivered to the Purchaser the Warrant
in the form of Exhibit B;
(iv) the Company shall have delivered to the Purchaser
stock certificates registered in the name of the Purchaser representing
5,000,000 shares of Common Stock;
(v) the Company shall have delivered to the
Purchaser Notes in such denominations as the Purchaser has requested, dated the
Closing Date and registered in the name of the Purchaser, in an initial
aggregate principal amount of $5,000,000;
(vi) the Purchaser shall have paid to
the Company $10,000,000 by wire transfer of immediately available funds of which
$5,000,000 shall represent the purchase price for the Common Stock and
$5,000,000 shall represent the purchase price for the Notes and the Warrant;
(vii) the Company shall have delivered evidence of cancellation of certain
indebtedness of the Company as described in Section 1.4 below;
(viii) the Company shall have delivered evidence of the conversion to
Common Stock of all shares of the Company's Preferred Stock, par value $.001 per
share (the "Preferred Stock"), which are designated as Series A Preferred Stock
("Series A Preferred Stock") outstanding immediately before Closing (and all
accrued but unpaid dividends thereon) such that as of the Closing Date no
Preferred Stock will remain outstanding;
(ix) concurrently with the Closing hereunder, Hawley
Group (as set forth on Schedule 1.3A attached hereto) shall have purchased from
the Company 1,000,000 shares of Common Stock for an aggregate purchase price of
$1,000,000, and the Other Investors (as set forth on Schedule 1.3B attached
hereto) shall have purchased from the Company 3,000,000 shares of Common Stock
for an aggregate purchase price of $3,000,000; and
(x) the employment agreement
between the Company and Philip M. Hawley, a copy which is attached as Exhibit F
hereto shall have been executed and delivered by the parties thereto and shall
be in full force and effect.
The Closing of the purchase and sale of the
Securities shall be deemed to have taken place in the State of New York.
1.4. Cancellation of Certain Indebtedness. On or before the Closing Date,
the Company shall enter into Cancellation and Exchange Agreements with (a) Edson
Investments Inc. ("Edson"), the holder of (i) a Demand Promissory Note issued by
the Company in the aggregate principal amount of $1,500,000, dated May 21, 1996
and (ii) a Demand Promissory Note issued by the Company in the aggregate
principal amount of $500,000, dated July 2, 1996, and (b) each holder (together
with Edson, each a "Note Holder") of Series 1996-I or Series 1996-II Convertible
Promissory Notes, which are currently outstanding in the aggregate principal
amount of $950,000, whereby such aforementioned indebtedness of the Company,
including any accrued and unpaid interest thereon, shall be cancelled in
exchange for shares of Common Stock. Each Note Holder shall receive the number
of shares of Common Stock equal to (x) the sum of (i) the aggregate principal
amount of indebtedness of the Company held by such Note Holder and (ii) any
accrued and unpaid interest thereon divided by (y) the Common Stock purchase
price of $1.00 per share.
1.5. Definitions. Certain capitalized terms used in this Agreement are
defined in Section 11 hereof.
2. Representations and Warranties of the Company. The Company represents
and warrants as follows:
2.1. Organization and Qualification. Each of the Company and its
Subsidiaries is a corporation duly organized and existing in good standing under
the laws of the jurisdiction in which it is incorporated and has the power to
own its respective property and to carry on its respective business as now being
conducted. Each of the Company and its Subsidiaries is duly qualified as a
foreign corporation to do business and in good standing in every jurisdiction in
which the nature of the respective business conducted or property owned by it
makes such qualification necessary and where the failure so to qualify would be
material to the Company or such Subsidiary, as the case may be.
2.2. Due Authorization. The execution and delivery of this Agreement, the
Stockholders Agreement, the Registration Rights Agreement, the Notes and the
Warrant and the issuance and sale of the Securities by the Company and
compliance by the Company with all the provisions of this Agreement, the
Stockholders Agreement, the Registration Rights Agreement, the Notes and the
Warrant (i) are within the corporate power and authority of the Company; (ii) do
not or will not require any approval or consent of the stockholders of the
Company, other than approvals and consents which have been duly obtained; and
(iii) have been authorized by all requisite corporate proceedings on the part of
the Company. This Agreement, the Stockholders Agreement, the Registration Rights
Agreement, the Notes and the Warrant have been duly executed and delivered by
the Company and constitute valid and binding agreements of the Company,
enforceable in accordance with their respective terms, except that (i) such
enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium
or other similar laws now or hereafter in effect relating to creditors' rights,
and (ii) the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceeding therefor may be brought. The Company has
furnished to the Purchaser true and correct copies of the Company's Certificate
of Incorporation and By-laws as in effect on the date of this Agreement.
2.3. Subsidiaries. The Subsidiaries of the Company, all of which are wholly
owned by the Company, together with their jurisdiction of incorporation, are as
set forth on Schedule 2.3 hereto.
2.4. SEC Reports. The Company and its predecessor have filed all proxy
statements, reports and other documents required to be filed by it under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), since December
31, 1993; and the Company has furnished the Purchaser copies of its Annual
Report on Form 10-K for the fiscal year ended December 31, 1993, and all proxy
statements and reports under the Exchange Act filed by the Company after such
date, each as filed with the Securities and Exchange Commission (the
"Commission") (collectively, the "SEC Reports"). Each SEC Report was in
compliance with the requirements of its respective report form and did not on
the date of filing contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading and as of the date hereof there is no fact not disclosed in
the SEC Reports which is material to the Company.
2.5. Financial Statements. The financial statements (including any related
schedules and/or notes) included in the SEC Reports have been prepared in
accordance with generally accepted accounting principles consistently followed
(except as indicated in the notes thereto) throughout the periods involved and
fairly present the consolidated financial condition, results of operations,
changes in stockholders' equity and cash flows of the Company and its
Subsidiaries as of the dates thereof and for the periods ended on such dates (in
each case subject, as to interim statements, to changes resulting from year-end
adjustments, which in the aggregate will not be material in amount or effect),
and the Company and its Subsidiaries have no material liabilities, contingent or
otherwise, not reflected in the Company's balance sheet as of January 28, 1996,
included in the SEC Reports or otherwise referred to in the SEC Reports or
otherwise disclosed to the Purchaser in writing prior to the date of this
Agreement, other than any such liabilities incurred in the ordinary course of
business since January 28, 1996. Since January 28, 1996, the Company and its
Subsidiaries have operated their respective businesses only in the ordinary
course and no event has occurred which has or is reasonably likely to have a
material adverse effect on the business, financial condition, operations,
results of operations, assets, liabilities or prospects of the Company or any of
its Subsidiaries (a "Material Adverse Effect"), other than changes disclosed or
referred to in the SEC Reports or otherwise disclosed to the Purchaser in
writing prior to the date of this Agreement.
2.6. Actions Pending; Compliance with Laws. There is no action, suit,
investigation or proceeding pending or, to the knowledge of the Company,
threatened by any public official or governmental authority, against the Company
or any of its Subsidiaries or any of their respective properties or assets by or
before any court, arbitrator or governmental body, department, commission,
board, bureau, agency or instrumentality, which questions the validity or
enforceability of, or seeks to enjoin or invalidate this Agreement, the
Stockholders Agreement, the Registration Rights Agreement or the Securities or
any action taken or to be taken pursuant hereto or thereto, or, except as set
forth in the SEC Reports or as otherwise disclosed to the Purchaser in writing,
which is reasonably likely to be material to the Company or any of its
Subsidiaries, and neither the Company nor any of its Subsidiaries is in default
in any material respect with respect to any judgment, order, writ, injunction,
decree or award.
2.7. Title to Properties; Insurance. The Company and each of its
Subsidiaries have good and valid title to, or, in the case of property leased by
any of them as lessee, a valid and subsisting leasehold interest in, their
respective properties and assets, free of all liens and encumbrances other than
those referred to in the financial statements of the Company (or the notes
thereto) for the year ended January 28, 1996, included in the SEC Reports,
except in each case for such defects in title and such other liens and
encumbrances which are disclosed in the SEC Reports or which do not in the
aggregate materially detract from the value to the Company and its Subsidiaries
of their respective properties and assets. The Company and its Subsidiaries
maintain insurance in such amounts (to the extent available in the public
market), including self-insurance, retainage and deductible arrangements, and of
such a character as is reasonable for companies engaged in the same or similar
business. All insurance policies of the Company and its Subsidiaries are
disclosed on Schedule 2.7.
2.8. Governmental Consents, etc. The Company is not required to obtain any
consent, approval or authorization of, or to make any declaration or filing
with, any governmental authority as a condition to or in connection with the
valid execution, delivery and performance of this Agreement, the Stockholders
Agreement, and the Registration Rights Agreement, the Notes and the Warrant and
the valid offer, issue, sale or delivery of the Securities, or the performance
by the Company of its obligations in respect thereof, except for any filings
required to effect any registration pursuant to the Registration Rights
Agreement and any filings required pursuant to state and federal securities laws
which will be timely made after the Closing hereunder.
2.9. Holding Company Act and Investment Company Act. Neither the Company
nor any Subsidiary is: (i) a "public utility company" or a "holding company," or
an "affiliate" or a "subsidiary company" of a "holding company," or an
"affiliate" of such a "subsidiary company," as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended, or (ii) a "public
utility," as defined in the Federal Power Act, as amended, or (iii) an
"investment company" or an "affiliated person" thereof or an "affiliated person"
of any such "affiliated person," as such terms are defined in the Investment
Company Act of 1940, as amended.
2.10. Taxes. The Company and each of its Subsidiaries have filed or caused
to be filed all tax returns which are required to be filed and have paid or
caused to be paid all taxes as shown on said returns and on all assessments
received by them to the extent that such taxes have become due, except taxes the
validity or amount of which is being contested in good faith by appropriate
proceedings and with respect to which adequate reserves have been set aside. The
federal income tax returns of the Company and its Subsidiaries have been
examined and reported on by the Internal Revenue Service (or closed by
applicable statutes) and all tax liabilities including additional assessments
have been satisfied for all fiscal years prior to and including the fiscal year
ended December 31, 1993, for the Company and its Subsidiaries and May 2, 1992
for Krause's Sofa Factory and its Subsidiaries. The Company and its Subsidiaries
have paid or caused to be paid, or have established reserves that the Company
reasonably believes to be adequate, for all federal income tax liabilities and
state income tax liabilities applicable to the Company or any of its
Subsidiaries for all fiscal years which have not been examined and reported on
by the taxing authorities (or closed by applicable statutes).
2.11. Conflicting Agreements and Charter Provisions. Neither the Company
nor any of its Subsidiaries is a party to any contract or agreement or subject
to any charter or bylaw provision or judgment or decree which has or is
reasonably likely to have a Material Adverse Effect. None of (i) the execution
and delivery of this Agreement, the Shareholders Agreement, the Registration
Rights Agreement, the Notes and the Warrant and the issuance of the Securities
and (ii) the fulfillment of and compliance with the terms and provisions hereof
and thereof and of the Securities will conflict with or result in a breach of
the terms, conditions or provisions of, or give rise to a right of termination
under, or constitute a default under, or result in any violation of, the
Certificate of Incorporation or By-laws of the Company or any Subsidiary or any
mortgage, agreement, instrument, order, judgment, decree, statute, law, rule or
regulation to which the Company or any Subsidiary or any of their respective
properties is subject. Neither the Company nor any of its Subsidiaries (i) is in
default under any outstanding indenture or other debt instrument or with respect
to the payment of principal of or interest on any outstanding obligation for
borrowed money, or (ii) is in default under any of their respective contracts or
agreements, or under any instrument by which the Company or any of its
Subsidiaries is bound which default, in the case of this clause (ii),
individually or in the aggregate with all other such defaults, would be material
to the Company or any of its Subsidiaries.
2.12. Capitalization. As of the date hereof, the authorized capital stock
of the Company consists of: (a) 35,000,000 shares of Common Stock, of which
4,120,810 shares are validly issued and outstanding, fully paid and
nonassessable; (b) warrants to purchase 185,701 shares of Common Stock which are
validly issued and outstanding, fully paid and nonassessable; (c) options to
purchase 191,614 shares of Common Stock which are validly issued and
outstanding, fully paid and nonassessable; and (d) 666,667 shares of Preferred
Stock, of which 117,694 shares of Series A Preferred Stock are validly issued
and outstanding, fully paid and nonassessable, and no other shares of Preferred
Stock are outstanding, as of the closing, 78,749 shares of such Series A
Preferred Stock shall be converted into shares of Common Stock. All of the
outstanding shares of Common Stock have been validly issued and are fully paid
and nonassessable. No class of capital stock of the Company is entitled to
preemptive rights. Except for the options and warrants listed above and letter
agreements providing for the grant to employees of options to purchase 15,000
shares of Common Stock, there are no outstanding options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, shares of any class of
capital stock of the Company, or contracts, commitments, understandings, or
arrangements by which the Company is or may become bound to issue additional
shares of its capital stock or options, warrants or rights to purchase or
acquire any shares of its capital stock. Since January 1, 1996, except for an
increase in the number of authorized shares of Common Stock from 8,333,333
shares to 35,000,000 shares, the Company has not changed the amount of its
authorized capital stock or subdivided or otherwise changed any shares of any
class of its capital stock, whether by way of reclassification,
recapitalization, stock split or otherwise, or issued or reissued, or agreed to
issue or reissue, any of its capital stock.
2.13. Issuance, Sale and Delivery of the Notes and the Warrant. When issued
and delivered by the Company, and paid for by the Purchaser, the Notes and the
Warrant will constitute valid and legally binding obligations of the Company
enforceable against it in accordance with their terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' and contracting parties' rights generally
and except as enforceability may be subject to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
2.14. Issuance, Sale and Delivery of the Common Stock. The shares of Common
Stock being issued to the Purchaser at the Closing are duly authorized and when
issued and delivered in accordance herewith will be, validly issued, fully paid
and nonassessable. The shares of Common Stock which will be issued upon exercise
of the Warrant have been authorized and reserved for issuance, and when issued
and delivered in accordance with the terms of the Warrant, will be validly
issued, fully paid and nonassessable.
2.15. Registration Under Exchange Act. The Company has not registered the
Notes or the Warrant as a class pursuant to Section 12 of the Exchange Act.
Neither the Notes nor the Warrant will be registered as such class and such
registration is not required except as otherwise required by the provisions of
the Registration Rights Agreement.
2.16. ERISA. No accumulated funding deficiency (as defined in Section 302
of ERISA and Section 412 of the Code), whether or not waived, exists with
respect to any Pension Plan (as defined in Section 11) (other than a
Multiemployer Plan (as defined below)). No liability to the PBGC has been, or is
reasonably likely to be, incurred with respect to any Pension Plan (other than a
Multiemployer Plan) by the Company, any of its Subsidiaries or any ERISA
Affiliate (as defined below) which is or would be materially adverse to the
Company, its Subsidiaries and any ERISA Affiliate. Neither the Company nor any
of its Subsidiaries and any ERISA Affiliate has incurred, or is reasonably
likely to incur, any withdrawal liability under Title IV of ERISA with respect
to any Multiemployer Plan which is or would be materially adverse to the
Company, its Subsidiaries and its ERISA Affiliates and if the Company, its
Subsidiaries and ERISA Affiliates, were to completely withdraw as of the date
hereof from each Multiemployer Plan in which they participate, the Company, its
Subsidiaries and its ERISA Affiliates would not incur any material withdrawal
liability under Title IV of ERISA. Neither the Company nor any of its
Subsidiaries has any obligation to provide post-retirement health benefits to
any employee or former employee. No fiduciary of any employee benefit plan (as
defined in Section 3(3) of ERISA) maintained or contributed to by the Company or
any of its subsidiaries, for the benefit of their respective employees (each an
"Employee Plan") has engaged or caused any Employee Plan to engage in any
transaction prohibited by Section 4975 of the Code or Section 406 of ERISA which
is reasonably likely to subject the Company or any Subsidiary or any entity the
Company or any Subsidiary has an obligation to indemnify to any tax or penalty
imposed under Section 4975 of the Code or Section 502 of ERISA. Each Employee
Plan has been maintained and administered in compliance with all applicable law
including ERISA and the Code in all material respects. An "ERISA Affiliate" for
purposes of this Section is any trade or business, whether or not incorporated,
which, together with the Company, is under common control, as described in
Section 414(b) or (c) of the Code, and the term "Multiemployer Plan" shall mean
any Pension Plan which is a "multiemployer plan" (as such term is defined in
Section 4001(a)(3) of ERISA).
2.17. Possession of Franchises, Licenses, Etc. The Company and its
Subsidiaries possess all franchises, certificates, licenses, permits and other
authorizations from governmental or political subdivisions or regulatory
authorities and all patents, trademarks, service marks, trade names, copyrights,
licenses and other rights, free from burdensome restrictions, that are necessary
in any material respect to the Company or any of its Subsidiaries for the
ownership, maintenance and operation of their respective properties and assets,
and neither the Company nor any of its Subsidiaries is in violation of any
thereof in any material respect.
2.18. Environmental and Other Regulations. The Company and its Subsidiaries
are in compliance with all applicable federal, state, local and foreign laws and
regulations relating to protection of the environment and human health, and are
in compliance in all material respects with all other applicable federal, state,
local and foreign laws and regulations, including, without limitation, those
relating to equal employment opportunity and employment safety. There are no
claims, notices, civil, criminal or administrative actions, suits, hearings,
investigations, inquiries or proceedings pending or, to the best knowledge of
the Company, threatened against the Company or any Subsidiary that are based on
or related to any environmental matters, including any disposal of hazardous
substances at any place, or the failure to have any required environmental
permits, and there are no past or present conditions that are likely to give
rise to any liability or other obligations of the Company or any Subsidiary
under any environmental laws.
2.19. Patents and Trademarks. Set forth on Schedule 2.19 is a true and
complete list of all patents, patent applications, trademarks, service marks,
trademark and service mark applications, trade names, copyrights and licenses
presently used by the Company or any Subsidiary or necessary for the conduct of
the business of the Company and its Subsidiaries as conducted and as proposed to
be conducted (the "Intellectual Property Rights"). The Company owns, or has the
right to use under the agreements or upon the terms described on Schedule 2.19,
all of the Intellectual Property Rights. To the best of the Company's knowledge,
the business conducted or proposed to be conducted by the Company and its
Subsidiaries does not infringe or violate any of the patents, trademarks,
service marks, trade names, copyrights, licenses, trade secrets or other
proprietary rights of any other person or entity. Except as set forth on
Schedule 2.19, to the Company's knowledge, no other Person has any right to or
interest in any inventions, improvements, discoveries or other confidential
information utilized by the Company or any Subsidiary in its business.
2.20. Material Contracts and Obligations. Schedule 2.20 sets forth a list
of the following agreements or commitments of any nature to which the Company or
any Subsidiary is a party or by which it is bound: (a) any agreement relating to
the Intellectual Property Rights, (b) all employment and consulting agreements,
and all employee benefit, bonus, pension, profit-sharing, stock option, stock
purchase and similar plans and arrangements, (c) all manufacturing, distributor
and sales representative agreements and all agreements with suppliers or
vendors, (d) all agreements or commitments which restrict the ability of the
Company or any Subsidiary or Affiliate to engage in any business or line of
business in any location, (e) all agreements or commitments relating to
Indebtedness or Guarantees of the Company or any Subsidiary and (f) any other
agreement or commitment which requires future payments by or to the Company or
any Subsidiary in excess of $50,000 or which is otherwise material to the
Company or any of its Subsidiaries. The Company has delivered or made available
to the Purchaser copies of all of the foregoing agreements and commitments. All
of such agreements and commitments are valid, binding and in full force and
effect, except that, with respect to parties to such agreements and commitments
other than the Company and its Subsidiaries, this representation is made only to
the best knowledge of the Company.
2.21. Books and Records. All the books, records and accounts of the Company
and its Subsidiaries are in all material respects true and complete, are
maintained in accordance with good business practice and all laws applicable to
its business, and accurately present and reflect in all material respects all of
the transactions therein described. The Company has previously delivered to the
Purchaser true and complete texts of all of the minutes relating to meetings of
the stockholders, board of directors and committees of the board of directors of
the Company and each Subsidiary for the past five years.
2.22. Transactions with Related Parties. Schedule 2.22 sets forth a true
and complete list of the amounts and other essential terms of any contract,
arrangement or transaction currently in effect or effected during the past five
years between the Company or any Subsidiary and any Related Party, other than
(i) arrangements for the payment of salary, including bonuses, for services
rendered to the Company, which arrangements have previously been disclosed to
the Purchaser, (ii) other arrangements with any such person which in the
aggregate do not involve more than $10,000 or (iii) as previously disclosed in
the SEC Reports.
2.23. Brokers. Neither the Company nor any Subsidiary has engaged any
finder, broker or investment adviser, and has no obligation to pay any fees, in
connection with the transactions contemplated hereby.
2.24. Accuracy of Information. None of the representations and warranties
of the Company contained herein or the information, documents or other materials
(other than projections) which have been furnished in writing by the Company or
any of its representatives to the Purchaser in connection with the transactions
contemplated by this Agreement contains any material misstatement of fact, or
omits any material fact required to be stated herein or therein or necessary to
make the statements herein and therein not misleading. All projections furnished
in writing by the Company (i) have been prepared by management of the Company
after a careful analysis of all material data, (ii) are based on reasonable
assumptions by management of the Company and (iii) represent the best estimate
by management of the Company, based upon current reasonable assumptions, as to
the financial performance of the Company and its Subsidiaries for the periods
indicated, but do not represent any guarantee or assurance of the future
financial results of the Company and its Subsidiaries.
2.25. Offering of Securities. Neither the Company nor any Person acting on
its behalf has offered any of the Securities or any similar securities of the
Company for sale to, solicited any offers to buy any of the Securities or any
similar securities of the Company from or otherwise approached or negotiated
with respect to the Company with any Person other than the Purchaser and other
"Accredited Investors" (as defined in Rule 501(a) under the Securities Act).
Neither the Company nor any Person acting on its behalf has taken or will take
any action (including, without limitation, any offering of any securities of the
Company under circumstances which would require the integration of such offering
with the offering of any of the Securities under the Securities Act and the
rules and regulations of the Commission thereunder) which could reasonably be
expected to subject the offering, issuance or sale of any of the Securities to
the registration requirements of Section 5 of the Securities Act.
2.26. Use of Proceeds. The proceeds of the sale of the Securities will be
used by the Company for the purpose of debt reduction and for general corporate
purposes.
2.27. Unlawful Use of Proceeds.
(a) The Company will not use any proceeds from the sale of the Notes to
purchase or carry any "Security", as defined in Section 3(a)(10) of the Exchange
Act, or for any other purpose which would result in any transaction contemplated
by this Agreement constituting a "purpose credit" within the meaning of
Regulation G issued by the Board of Governors of the Federal Reserve System (12
CFR Part 207), or which would involve a violation of Section 7 of the Exchange
Act or Regulation T, U or X of said Board of Governors (12 CFR Parts 220, 221
and 224, respectively).
(b) The Company does not intend to apply and will not apply any part of the
proceeds of the sale of the Notes in any manner which is unlawful or which would
involve a violation of any regulation of the United States Treasury Department,
including, without limitation, the Foreign Assets Control Regulations, the
Transactions Control Regulations, the Cuban Assets Control Regulations, the
Foreign Funds Control Regulations, the Iranian Assets Control Regulations, the
Iraqi Transactions Regulations, the Nicaraguan Trade Control Regulations, the
South African Transactions Regulations and the Libyan Sanctions Regulations.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
The Purchaser represents and warrants as follows:
3.1. Organization and Qualification. The Purchaser is a corporation duly
organized and existing in good standing under the laws of the jurisdiction of
its formation and has the power to own its respective property and to carry on
its respective business as now being conducted. The Purchaser is duly qualified
to do business and in good standing in every jurisdiction in which the nature of
the respective business conducted or property owned by it makes such
qualification necessary, except where the failure to so qualify would not
prevent consummation of the transactions contemplated hereby or have a material
adverse effect on the Purchaser's ability to perform its obligations hereunder.
3.2. Due Authorization. The Purchaser has all right, power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by the Purchaser and the
consummation by the Purchaser of the transactions contemplated hereby have been
duly authorized by all necessary action on behalf of the Purchaser. This
Agreement has been duly executed and delivered by the Purchaser and constitutes
a valid and binding agreement of the Purchaser enforceable in accordance with
its terms, except that (i) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors, rights, and (ii) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
3.3. Conflicting Agreements and Other Matters. Neither the execution and
delivery of this Agreement nor the performance by the Purchaser of its
obligations hereunder will conflict with, result in a breach of the terms,
conditions or provisions of, constitute a default under, or require any consent,
approval or other action by or any notice to or filing with any court or
administrative or governmental body pursuant to, the organizational documents or
agreements of the Purchaser or any mortgage, agreement, instrument, order,
judgment, decree, statute, law, rule or regulation to which the Purchaser or any
of its respective properties are subject.
3.4. Acquisition for Investment. The Purchaser is acquiring the Securities
being purchased by it for its own account for the purpose of investment and not
with a view to or for sale in connection with any distribution thereof, and the
Purchaser has no present intention or plan to effect any distribution thereof.
The Purchaser acknowledges that the Securities have not been registered under
the Securities Act and may be sold or disposed of in the absence of such
registration only pursuant to an exemption from such registration.
3.5. Brokers or Finders. No agent, broker, investment banker or other firm
or Person, including any of the foregoing that is an Affiliate of the Purchaser,
is or will be entitled to any broker's fee or any other commission or similar
fee from the Purchaser in connection with any of the transactions contemplated
by this Agreement that the Company will be responsible for pursuant to Section
12.10.
3.6. Accredited Investor. The Purchaser is an "accredited investor" within
the meaning of Rule 501 promulgated under the Securities Act.
4. Registration, Exchange and Transfer of Notes.
4.1. Authorized Denominations of Notes. The Notes are issuable only as
fully registered Notes in denominations of at least $100,000 and any integral
multiple thereof; provided, that Additional Notes (as defined below) may be
issued in fractional denominations as provided herein.
4.2. The Note Register; Persons Deemed Owners. The Company shall maintain,
at its office designated for notices in accordance with Section 12.6, a register
for the Notes (the "Note Register"), in which the Company shall record the name
and address of the person in whose name each Note has been issued and the name
and address of each transferee and prior owner of each Note. The Company may
deem and treat the person in whose name a Note is so registered as the holder
and owner thereof for all purposes and shall not be affected by any notice to
the contrary, until due presentment of such Note for registration of transfer as
provided in this Article 4.
4.3. Issuance of New Notes Upon Exchange or Transfer. Upon surrender for
exchange or registration of transfer of any Note at the office of the Company
designated for notices in accordance with Section 12.6, the Company shall
execute and deliver, at its expense, one or more new Notes of any authorized
denominations requested by the holder of the surrendered Note, each dated the
date to which interest has been paid on the Note so surrendered (or, if no
interest has been paid, the date of such surrendered Note), but in the same
aggregate unpaid principal amount as such surrendered Note, and registered in
the name of such person or persons as shall be designated in writing by such
holder. Every Note surrendered for registration of transfer shall be duly
endorsed, or be accompanied by a written instrument of transfer duly executed,
by the holder of such Note or by his attorney duly authorized in writing. The
Company may also condition the issuance of any new Note or Notes in connection
with a transfer by any person on the payment of a sum sufficient to cover any
stamp tax or other governmental charge imposed in respect of such transfer.
4.4. Lost, Stolen, Damaged and Destroyed Notes. At the request of any
Purchaser, the Company will issue, at its expense, in replacement of any Note or
Notes lost, stolen, damaged or destroyed, upon surrender of the mutilated
portions thereof, if any, a new Note or Notes of the same denominations and of
the same unpaid principal amounts and otherwise of the same tenor as the Note or
Notes so lost, stolen, damaged or destroyed.
5. PAYMENT OF NOTES.
5.1. Home Office Payment. The Company will pay to the Purchaser or any
transferee thereof all sums becoming due on the Notes including all sums which
become due on the Notes at the maturity thereof) at the address specified by the
Purchaser for such purpose in Schedule 5.1 hereto, or at the address specified
by such transferee, by wire transfer of immediately available funds, or at such
other address or by such other method as a Purchaser or transferee shall have
designated by notice to the Company, without presentment for notation of payment
and without surrender. Before selling or otherwise transferring any Note, the
Purchaser or transferee will make a notation thereon of the aggregate amount of
all payments of principal, if any, theretofore made, and of the date to which
interest has been paid.
5.2. Limitation on Interest. No provision of this Agreement or of any Note
shall require the payment or permit the collection of interest in excess of the
maximum rate which is permitted by law. If any such excess interest is provided
for herein or in any Note, or shall be adjudicated to be so provided for, then
the Company shall not be obligated to pay such interest in excess of the maximum
rate permitted by law, and the right to demand payment of any such excess
interest is hereby waived, any other provisions in this Agreement or in any Note
to the contrary notwithstanding.
5.3. Interest.
(a) Interest on the unpaid principal balance of each Note shall be payable
at a rate per annum (computed on the basis of a 360-day year of twelve 30-day
months) of 10.00%, due and payable (i) quarterly, on each November 30, February
28, May 31 and August 31 (each, a "Payment Date") after the date of the Notes
commencing with November 30, 1996 and (ii) on the date of any prepayment, on the
amount prepaid, until the Notes have been paid in full.
(b) Accrued interest on each Note is required to be paid in cash (in
accordance with Section 5.1 herein) on each Payment Date after August 31, 1998.
On each Payment Date prior to and including August 31, 1998, in lieu of payment
of interest in cash, the Company shall pay all interest in additional notes (the
"Additional Notes"), which shall be dated the applicable Payment Date, shall
bear interest from and after such date, shall mature on August 31, 2001 and
shall be governed by, and subject to the terms, provisions and conditions of,
this Agreement, except that interest shall accrue on each Additional Note from
the date of such Additional Note.
5.4. Business Day. Any payments in respect of any Note which are required
under this Agreement to be made on a day which is not a Business Day shall be
made on the next succeeding Business Day.
6. COVENANTS OF THE COMPANY. From the date hereof and as long as any of the
Notes remain outstanding:
6.1. Payment of the Notes. The Company shall pay the principal of and
interest on the Notes (including Additional Notes) on the dates and in the
manner provided in this Agreement and the Notes.
6.2. Financial Covenants. (a) The Company will not permit its Consolidated
Net Worth at any time to be less than the amounts set forth below for the fiscal
years indicated:
1996 $15,500,000
1997 $14,000,000
1998 $14,500,000
1999 $17,000,000
2000 $24,000,000
2001 $35,500,000
(b) The Company will not incur, create, assume or permit to exist any
Indebtednes if such Indebtedness would result in a ratio of Consolidated Total
Indebtedness to Consolidated Net Worth of more than the amounts set forth below
for the fiscal years indicated:
1996 No greater than 1.0
1997 No greater than 1.0
1998 No greater than .80
1999 No greater than .60
2000 No greater than .35
(c) The Company will not permit its Fixed Charge Ratio to be less than the
amounts set forth below for the fiscal years indicated:
1996 No less than .40
1997 No less than .70
1998 No less than 1.0
1999 No less than 1.3
2000 No less than 1.6
(d) The Company and its Subsidiaries will not make capital expenditures in
excess of the amounts set forth below for the fiscal years indicated:
1996 $3,000 000
1997 $7,500,000
1998 $7,000,000
1999 $4,000,000
2000 $4,000,000
Any amount not spent in any one fiscal year may be spent in a succeeding
fiscal year, subject to the Company's annual business plan.
6.3 Limitation on Senior Equity Securities. The Company will not issue any
equity securities or any rights, options, warrants or other securities which are
exercisable for, exchangeable for or convertible into shares of any class of
capital stock ranking senior as to dividends or upon liquidation to the Common
Stock.
6.4 Merger; Purchase and Sale of Assets. (a) The Company will not merge
with or into or consolidate with any other Person unless the Company is the
continuing or surviving entity and the shares of Common Stock then outstanding
remain unchanged and outstanding and represent at least a majority of the Voting
Securities of the surviving corporation, and immediately after the consummation
of such merger or consolidation the surviving corporation would not be in
violation of any covenant set forth in Section 6.2 hereof.
(b) The Company will not, and will not permit any Subsidiary to, in any
transaction or series of transactions, sell, lease or exchange any assets of the
Company and/or any Subsidiary representing in the aggregate more than 10% of the
Company's Consolidated Net Worth, except for sales of inventory in the ordinary
course of business and except for subleasing of vacant retail space on
arm's-length terms.
(c) The Company will not, and will not permit any Subsidiary to, in any
transaction or series of transactions, acquire (including pursuant to a merger
or consolidation) all or any substantial portion of the business or assets of
any Person (except for acquisitions in any fiscal year involving aggregate
consideration of less than 10% of the Company's Consolidated Net Worth as of the
commencement of such fiscal year) unless (i) such transaction or series of
transactions has been approved by the Board of Directors of the Company and (ii)
after giving effect to such transaction or series of transactions, the Company
would be in compliance with the covenants set forth in Section 6.2 hereof.
6.5. Compliance with Laws. The Company will, and will cause each Subsidiary
to, comply with all applicable statutes, rules, regulations and orders of all
governmental authorities, with respect to the conduct of its business and the
ownership of its properties, including without limitation, those relating to
protection of the environment and human health, equal employment opportunity,
employee safety, ERISA and international trade laws and regulations, and apply
for obtain and maintain all permits necessary for the conduct of its business
and the ownership of its properties.
6.6. Limitation on Agreements. Except for the provisions of any Senior
Indebtedness, the Company will not, and will not permit any Subsidiary to, enter
into any agreement, or any amendment, modification, extension or supplement to
any existing agreement, which contractually prohibits the Company from paying
interest on the Notes or redeeming the Notes.
6.7. Preservation of Franchises and Existence. The Company will (i)
maintain its corporate existence, rights and franchises in full force and
effect, and (ii) cause the Subsidiaries to maintain their respective corporate
existences, rights and franchises in full force and effect, provided that
nothing in this Section 6.7 shall prevent the Company or any Subsidiary from
discontinuing its operations in any particular state or at any particular
location or locations within the state, or prevent the corporate existence,
rights and franchises of any Subsidiary from being terminated if, in the opinion
of the Board of Directors of the Company, the preservation thereof is no longer
desirable in the conduct of the business of the Company and its Subsidiaries and
the loss thereof is not disadvantageous in any material respect to the holders
of Securities.
6.8. Insurance. The Company will, and will cause each of the Subsidiaries
to maintain, with insurers believed by the Company to be responsible, such
insurance, in such amounts and of such types as are customarily carried under
similar circumstances by companies engaged in the same or a similar business or
having similar properties similarly situated.
6.9. Payment of Taxes and Other Charges. The Company will pay or discharge,
and will cause each of the Subsidiaries to pay or discharge, before the same
shall become delinquent, (i) all taxes, assessments and other governmental
charges or levies imposed upon it or any of its properties or income (including,
without limitation, such as may arise under Sections 4062, 4063, or 4064 of
ERISA or any similar provision of law), and (ii) all claims or demands of
materialmen, mechanics, carriers, warehousemen, landlords and other like persons
which, in the case of either clause (i) or clause (ii), if unpaid, might result
in the creation of a material lien upon any of its properties, provided,
however, that the Company shall not be required to pay or discharge or cause to
be paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith pursuant to
appropriate proceedings.
6.10. Effect of Certain Breaches. In addition to the rights of the
Purchaser under the Stockholders Agreement, upon the occurrence of any Event of
Default under the Notes, then, and in each such case, the Board of Directors of
the Company shall take all necessary action to increase or decrease the size of
the Board of Directors and to appoint to the Board of Directors a number of
additional members (the "Additional Members") designated by the Purchaser that,
when added to any directors then in office designated solely by the Purchaser,
will result in directors designated by the Purchaser constituting a majority of
the entire Board of Directors. The holders of 66 2/3% in outstanding principal
amount of the Notes shall be entitled to designate the Additional Members of the
Board of Directors, and, for so long as such breach or Event of Default
continues, at each subsequent annual meeting the holders of 66 2/3% in
outstanding principal amount of the Notes shall be entitled to propose (and the
Board of Directors shall nominate and recommend) persons reasonably acceptable
to the Board of Directors as the Additional Members of the Board of Directors of
the Company. In the event of any vacancy arising by reason of the resignation,
death, removal or inability to serve of any Additional Member, the Purchaser
shall be entitled to designate a successor to fill such vacancy for the
remaining term of such director. At such times as such Event of Default shall
have been cured or waived, the rights of the holders of Notes under this Section
6.10 shall terminate (and the holders of the Notes shall cause such Additional
Directors to resign from the Board of Directors of the Company), subject to
revesting in the event of each and every subsequent event of the character
indicated above.
6.11. ERISA. Neither the Company nor any Subsidiary shall incur any
material liability with respect to retiree medical or death benefits or unfunded
benefits payable after termination of employment. All employee benefit plans and
arrangements maintained or contributed to by the Company, any Subsidiary or any
ERISA Affiliate shall be maintained in compliance in all material respects with
all applicable law, including any reporting requirements. With respect to any
plan maintained by or contributed to by the Company or any Subsidiary, neither
the Company nor any Subsidiary will fail to make any contribution due from it
under the terms of such plan or as required by law. Neither the Company nor any
ERISA Affiliate will permit a Pension Plan to incur an accumulated funding
deficiency (as such term is defined in Section 302 of ERISA or Section 412 of
the Code), whether or not waived, cause a lien or a security interest to attach
to any asset of the Company or any Subsidiary for the benefit of any Plan, or
incur any liability which would be material to the Company or any of its
Subsidiaries under Title IV of ERISA, including withdrawal liability (other than
the payment of premiums, none of which are overdue). Neither the Company nor any
Subsidiary, nor any other Person including any fiduciary, will engage in any
transaction prohibited by Section 406 of ERISA or Section 4975 of the Code which
is reasonably likely to subject the Company, any Subsidiary or any entity that
the Company or any Subsidiary has an obligation to indemnify to any tax or
penalty imposed under Section 4975 of the Code or Section 502 of ERISA.
6.12. Financial Statements and Other Reports.
(i) The Company will, as soon as practicable and in any event within 60
days after the end of each quarterly period (other than the last quarterly
period) in each fiscal year, furnish to the Purchaser statements of consolidated
net income and cash flows and a statement of changes in consolidated
stockholders' equity of the Company and its Subsidiaries for the period from the
beginning of the then current fiscal year to the end of such quarterly period,
and a consolidated balance sheet of the Company and its Subsidiaries as of the
end of such quarterly period, setting forth in each case in comparative form
figures for the corresponding period or date in the preceding fiscal year, all
in reasonable detail and certified by an authorized financial officer of the
Company, subject to changes resulting from year-end adjustments; provided,
however, that delivery pursuant to clause (iii) below of a copy of the Quarterly
Report on Form 10-Q of the Company for such quarterly period filed with the
Commission shall be deemed to satisfy the requirements of this clause (i);
(ii) it will, as soon as practicable and in any event within 100 days after
the end of each fiscal year, furnish to the Purchaser statements of consolidated
net income and cash flows and a statement of changes in consolidated
stockholders' equity of the Company and its Subsidiaries for such year, and a
consolidated balance sheet of the Company and its Subsidiaries as of the end of
such year, setting forth in each case in comparative form the corresponding
figures from the preceding fiscal year, all in reasonable detail and examined
and reported on by independent public accountants of recognized national
standing selected by the Company; provided, however, that delivery pursuant to
clause (iii) below of a copy of the Annual Report on Form 10-K of the Company
for such fiscal year filed with the Commission shall be deemed to satisfy the
requirements of this clause (ii);
(iii) it will, promptly upon transmission thereof, furnish to the Purchaser
copies of all such financial statements, proxy statements, notices and reports
as it shall send to its stockholders and copies of all such registration
statements (without exhibits), other than registration statements elating to
employee benefit or dividend reinvestment plans, and all such regular and
periodic reports as it shall file with the Commission;
(iv) it will, promptly after such package becomes available, furnish to the
Purchaser copies of all financial reporting packages prepared for management of
the Company; and
(v) it will promptly furnish to the Purchaser copies of any compliance
certificates furnished to lenders in respect of Indebtedness of the Company and
its Subsidiaries and, with reasonable promptness, furnish to the Purchaser such
other financial and other data of the Company and its Subsidiaries as the
Purchaser may reasonably request, including, but not limited to, operating
financial information for each retail store owned or operated by the Company or
any of its Subsidiaries.
Together with each delivery of financial statements required by clauses (i)
and (ii) above, the Company will deliver to the Purchaser a certificate of the
Chief Financial Officer, Treasurer or other financial officer of the Company
regarding compliance by the Company with the covenants set forth in Section 6.2.
6.13. Inspection of Property. The Company will permit representatives of
the Purchaser to visit and inspect, at the Purchaser's expense, any of the
properties of the Company and its Subsidiaries, to examine the corporate books
and make copies or extracts therefrom and to discuss the affairs, finances and
accounts of the Company and its Subsidiaries with the principal officers of the
Company, all at such reasonable times, upon reasonable notice and as often as
the Purchaser may reasonably request.
6.14. Rights of First Offer. In the event that the Company intends to sell
any debt securities or any shares of capital stock or securities convertible
into, exchangeable for or exercisable for debt securities or shares of capital
stock of the Company, other than pursuant to a registered public offering:
(i) the Company shall give the Purchaser written notice of its intent to
sell such securities, specifying the number thereof to be sold and the minimum
price and terms and conditions of such sale and offering to sell to the
Purchaser (or its designee), at such minimum price and on such terms and
conditions (to the extent reasonably applicable to the Purchaser), a percentage
of such securities equal to the percentage equity interest in the Company
represented by the shares of Common Stock and Warrants then owned by the
Purchaser (and its Affiliates), after giving effect to the conversion or
exercise of all outstanding securities of the Company which are then convertible
into or exercisable for equity securities, the conversion or exercise price of
which is less than the Current Market Price;
(ii) if the Purchaser (or its designee) shall not, within 30 days after
receipt of the notice given pursuant to clause (i) above accept such offer in
writing with respect to the securities specified in such notice, then the
Company shall be free to sell such securities at a price equal to or above the
minimum price and on other terms and conditions no less favorable to the Company
than those specified in such notice, at any time within 120 days of the
expiration of such 30-day period;
(iii) if the Company shall not have consummated the proposed sale within
120 days after the expiration of the 30-day period referred to in clause (ii)
above, then the Company may not thereafter sell such securities without
complying with the provisions of this Section 6.14; and
(iv) if the Purchaser (or its designee) shall accept such offer within 30
days after the notice given pursuant to clause (i) above, then the Purchaser (or
its designee) shall purchase the securities specified in such notice as promptly
as is reasonably practicable, but within no more than 60 days thereafter.
6.15. Lost, Stolen, Damaged and Destroyed Stock Certificates. Upon receipt
of evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any certificate for shares of Common Stock and in the case of
loss, theft or destruction, upon delivery of an indemnity satisfactory to the
Company (which, in the case of the Purchaser, may be an undertaking by the
Purchaser so to indemnify the Company), or, in the case of mutilation, upon
surrender and cancellation thereof, the Company will issue a new certificate of
like tenor for a number of shares of Common Stock equal to the number of shares
of such stock represented by the certificate lost, stolen, destroyed or
mutilated.
6.16. Related Party Transactions. The Company shall not, directly or
indirectly, and shall not permit any of its Subsidiaries to, directly or
indirectly, enter into, amend or terminate any contract, arrangement or
transaction with a Related Party, other than the payment of salary and benefits
pursuant to employment agreements entered into in the ordinary course of
business.
6.17. Operations in Accordance with Business Plan. The business and
operations of the Company and its Subsidiaries shall be conducted in all
material respects in accordance with the Company's annual business plan as
approved by the Board of Directors including the GECC Designee (as defined in
the Stockholders Agreement), except for such changes which shall have been
approved in accordance with Section 2.2(u) of the Stockholders Agreement.
6.18. Best Efforts to Cause the Conversion of Preferred Stock. The Company
covenants and agrees to use its reasonable best efforts following the Closing to
cause the remaining outstanding shares of such Series A Preferred Stock to be
converted into shares of Common Stock.
6.19. Notice of Breach. As promptly as practicable, and in any event not
later than ten Business Days after senior management of the Company becomes
aware of any breach by the Company of any provision of this Agreement,
including, without limitation, this Article 6, the Company shall provide the
Purchaser with written notice specifying the nature of such breach and any
actions proposed to be taken by the Company to cure such breach.
7. RESTRICTIONS ON TRANSFER. The Purchaser and its Affiliates will not,
directly or indirectly, sell, transfer, pledge, encumber or otherwise dispose of
(collectively, a "Transfer") any of the Securities, except for: (a) Transfers to
or between Affiliates who agree to be bound by the provisions of this Agreement;
(b) Transfers of Securities pursuant to the exercise of the registration rights
set forth in the Registration Rights Agreement; or (c) Transfers which comply
with the provisions of the Securities Act. The Company may require, in
connection with any Transfer pursuant to the preceding clause (c), an opinion of
counsel to the Purchase that such Transfer complies with the provisions of the
Securities Act.
8. EVENTS OF DEFAULT AND REMEDIES.
8.1. Events of Default. Each of the following shall constitute an Event of
Default with respect to the Notes (including any Additional Notes) under this
Agreement:
(a) Nonpayment of Principal of the Notes. If the Company fails to pay
the principal of, interest on or any other sum, if any, due on any Note, within
five days after the same becomes due and payable, whether at the maturity
thereof, on a dated fixed for a redemption, or otherwise; or
(b) Voluntary Bankruptcy and Insolvency Proceedings. If the Company or any
Subsidiary shall file a petition in bankruptcy or for reorganization or for an
arrangement or any composition, readjustment, liquidation, dissolution or
similar relief pursuant to the Federal Bankruptcy Code of 1978, as amended, or
under any similar present or future federal law or the law of any other
jurisdiction or shall be adjudicated a bankrupt or become insolvent, or consent
to the appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian, sequestrator (or other similar official) of the Company or
such Subsidiary or for all or any substantial part of its respective property,
or, the Company or any Subsidiary shall make an assignment for the benefit of
its creditors, or shall admit in writing its inability to pay its debts
generally as they become due, or shall take any corporate action, as the case
may be, in furtherance of any of the foregoing; or
(c) Adjudication of Bankruptcy. If a petition or answer shall be filed
proposing the adjudication of the Company or any Subsidiary as a bankrupt or its
reorganization or arrangement, or any composition, readjustment, liquidation,
dissolution or similar relief with respect to it pursuant to the Federal
Bankruptcy Code of 1978, as amended, or under any similar present or future
federal law or the law of any other jurisdiction applicable to the Company or
such Subsidiary, and the Company or any Subsidiary shall consent to or acquiesce
in the filing thereof, or such petition or answer shall not be discharged or
denied within 60 days after the filing thereof; or
(d) Receivership or Sequestration. If a decree or order is rendered by a
court having jurisdiction (i) for the appointment of a receiver or custodian or
liquidator or trustee or sequestrator or assignee (or similar official) in
bankruptcy or insolvency of the Company or any Subsidiary or of all or a
substantial part of its property, or for the winding-up or liquidation of its
affairs, and such decree or order shall have remained in force undischarged and
unstayed for a period of 60 days, or (ii) for the sequestration or attachment of
any property of the Company or any Subsidiary without its return to the
possession of the Company or such Subsidiary or its release from such
sequestration or attachment within 60 days thereafter; or
(e) Acceleration of Other Indebtedness. If default shall be made with
respect to any Indebtedness of the Company (other than the Notes) with the
result that Indebtedness in an aggregate amount of $100,000 or more has been
accelerated so that the same has become due and payable prior to the date on
which the same would otherwise have become due and payable, provided that such
acceleration is not rescinded within 10 days after the declaration thereof; or
(f) Judgment Default. A judgment or order for the payment of money in
excess of $100,000 shall be entered against the Company or any Subsidiary by any
court, and either (i) such judgment or order shall continue undischarged and
unstayed for a period of 60 days or (ii) enforcement proceedings shall have been
commenced upon such judgment or order; or
(g) Covenant Defaults. The Company shall have breached in any material
respect any of the covenants set forth in this Agreement and such breach
continues for 30 days after notice in writing by the holders to the Company; or
(h) Untrue or Incorrect Representation or Warranty. Any of the
representations and warranties of or with respect to the Company or any
Subsidiary contained in Article 2 hereof shall have been untrue in any material
respect on or as of the date made and the facts or circumstances to which such
representation or warranty relates shall not have been subsequently corrected to
make such representation or warranty no longer incorrect.
8.2. Acceleration of Maturity. If any Event of Default shall have occurred
and be continuing, the holders of 66-2/3% of the outstanding principal amount of
Notes may, by notice to the Company, declare the entire outstanding principal
balance of the Notes, and all accrued and unpaid interest thereon, to be due and
payable immediately, and upon any such declaration the entire outstanding
principal balance of the Notes, and said accrued and unpaid interest shall
become and be immediately due and payable, without presentment, demand, protest
or other notice whatsoever, all of which are hereby expressly waived, anything
in the Notes or in this Agreement to the contrary notwithstanding; provided that
if an Event of Default under clause (b), (c), or (d) of Section 8.1 with respect
to the Company shall have occurred, the outstanding principal amount of all of
the Notes, and all accrued and unpaid interest thereon, shall immediately become
due and payable, without any declaration and without presentment, demand,
protest or other notice whatsoever, all of which are hereby expressly waived,
anything in the Notes or this Agreement to the contrary notwithstanding; and
provided, further, that if an Event of Default under clause (a) of Section 8.1
shall have occurred and be continuing with respect to any Note, any holder of
one or more Notes in an aggregate outstanding principal amount of at least
$500,000 may, by notice to the Company, declare the entire outstanding principal
of such Notes and all accrued and unpaid interest thereon, to be due and payable
immediately, and upon any such declaration the entire outstanding principal of
such Notes and said accrued and unpaid interest shall become and be immediately
due and payable, without presentment, demand, protest or other notice
whatsoever, all of which are hereby expressly waived, anything in such Notes or
in this Agreement to the contrary notwithstanding.
8.3. Other Remedies. If any Event of Default shall have occurred and be
continuing, from and including the date of such Event of Default to but not
including the date such Event of Default is cured or waived, any holder may
enforce its rights by suit in equity, by action at law, or by any other
appropriate proceedings, whether for the specific performance (to the extent
permitted by law) of any covenant or agreement contained in this Agreement or
the Notes or in aid of the exercise of any power granted in this Agreement or
the Notes, and any holder may enforce the payment of any Note held by such
holder and any of its other legal or equitable rights. During the continuance of
any Event of Default, the Company shall pay interest on the outstanding
principal of the Notes and (to the extent legally enforceable) on any overdue
installment of interest, at the rate of 12.00% per annum, until such overdue
amount is paid or until such Event of Default is cured or waived.
8.4. Conduct no Waiver; Collection Expenses. No course of dealing on the
part of any holder, nor any delay or failure on the part of any holder to
exercise any of its rights, shall operate as a waiver of such right or otherwise
prejudice such holder's rights, powers and remedies. If the Company fails to
pay, when due, the principal or the premium, if any, or the interest on any
Note, the Company will pay to each holder, to the extent permitted by law, on
demand, all costs and expenses incurred by such holder in the collection of any
amount due in respect of any Note hereunder, including reasonable legal fees
incurred by such holder in enforcing its rights hereunder.
8.5. Annulment of Acceleration. If a declaration is made in accordance with
Section 8.2, then and in every such case, the holders of at least 66 2/3% of the
outstanding principal amount of the Notes may, by an instrument delivered to the
Company, annul such declaration and the consequences thereof, provided that at
the time such declaration is annulled:
(a) no judgment or decree has been entered for the payment of any monies
due on the Notes or pursuant to this Agreement;
(b) all arrears of interest on the Notes and all other sums payable on the
Notes and pursuant to this Agreement (except any principal of or interest on the
Notes which has become due and payable by reason of such declaration) shall have
been duly paid; and
(c) every other Event of Default shall have been duly waived or otherwise
made good or cured; provided, however, that only the Purchaser or an Affiliate
of the Purchaser (but not any transferee thereof other than an Affiliate of the
Purchaser) of the Note or Notes making the declaration permitted by the last
proviso of Section 8.2 may annul such declaration; and provided, further, that
no such annulment shall extend to or affect any subsequent Event of Default or
impair any right consequent thereon.
8.6. Remedies Cumulative. No right or remedy conferred upon or reserved to
the holders of Notes under this Agreement is intended to be exclusive of any
other right or remedy, and every right and remedy shall be cumulative and in
addition to every other right and remedy given hereunder or now and hereafter
existing under applicable law. Every right and remedy given by this Agreement or
by applicable law to the holders of Notes may be exercised from time to time and
as often as may be deemed expedient by the holders.
8.7. Limitations. Notwithstanding the foregoing provisions of this Article
8, the exercise of remedies by holders of Notes is subject to the provisions of
Article 10 hereof.
9. REDEMPTION.
9.1. Optional Redemption. The Company shall have the right, at its sole
option and election made in accordance with Section 9.5 to redeem the Notes,
including any Additional Notes, in whole or in part, in integral multiples of
not less than $250,000 at any time and from time to time, plus an amount equal
to all accrued and unpaid interest to and including the date of redemption, in
cash. Any such redemption shall reduce the Company's obligation under Section
9.2, beginning with the next succeeding Redemption Date (as defined in Section
9.2).
9.2. Mandatory Redemption. The Company shall on February 28 and on August
31, in each year commencing with the year 1999 and ending in the year 2001 (each
a "Redemption Date"), redeem Notes in the aggregate outstanding principal amount
of $1,015,335.75, at a redemption price equal to 100% of the principal amount of
the Notes to be redeemed, together with accrued and unpaid interest on such
Notes to and including such Redemption Date.
9.3 Procedures for Partial Redemption. If less than all Notes at the time
outstanding are to be redeemed, the aggregate principal amount to be redeemed
among the outstanding Notes; provided, however, that in the event that the
aggregate principal balance of the Notes then outstanding is $1,015,335.75 or
less, the Company shall be required to redeem all of such outstanding Notes if
it elects to redeem any such Notes.
9.4. Change in Control. In the event that there occurs a Change in Control,
any record holder of Notes, in accordance with the procedures set forth in
Section 9.5(b), may require the Company to redeem any or all of the Notes held
by such holder for, at such holder's option, an amount equal to principal amount
of such Notes, plus all accrued and unpaid interest on the Notes being redeemed
to and including the date of redemption, in cash.
9.5. Redemption Procedures. (a) Notice of any redemption of Notes pursuant
to Section 9.1 or 9.2 shall be mailed at least 30 but not more than 60 days
prior to the date fixed for redemption to each holder of Notes to be redeemed,
at such holder's address as it appears in the Note Register. In order to
facilitate the redemption of Notes, the Board of Directors may fix a record date
for the determination of Notes to be redeemed.
(b) Promptly following a Change in Control (but in no event more than five
Business Days thereafter), the Company shall mail to each holder of Notes, at
such holder's address as it appears on the transfer books of the Company, notice
of such Change in Control, which notice shall set forth each holder's right to
require the Company to redeem any or all Notes held by it. The Company shall
thereafter during a period of 90 days from the date of such notice (or the date
the Company was required to give such notice) redeem any Notes, in whole or in
part, at the option of the holder, upon at least five days' written notice to
the Company by such holder specifying (i) the principal amount of Notes to be
redeemed and (ii) the redemption date.
(c) On the date of any redemption being made pursuant to Section 9.1, 9.2
or 9.4 which is specified in a notice given pursuant to this Section .5, the
Company shall wire transfer to such holder the redemption price for the
principal amount of notes so redeemed, together with an amount equal to all
accrued and unpaid interest thereon to the date of redemption.
10. SUBORDINATION OF NOTES.
10.1. Subordination of Notes to Senior Indebtedness. The Indebtedness
evidenced by the Notes and all renewals and extensions thereof (collectively
called the "Junior Indebtedness") shall at all times be wholly subordinate and
junior in right of payment to any and all Senior Indebtedness of the Company
(including any claims by the holders of such Senior Indebtedness for interest
accruing after any assignment for the benefit of creditors by the Company or the
institution by or against the Company of any proceedings under the Bankruptcy
Code or any law for the relief of or relating to debtors, or any other claim by
such holders for any such interest which would have accrued in the absence of
such assignment or the institution of such proceedings) in the manner and with
the force and effect hereafter set forth:
(a) In the event of any liquidation, dissolution or winding up of the
Company, or of any execution, sale, receivership, insolvency, bankruptcy,
liquidation, readjustment, reorganization or other similar proceeding relative
to the Company or its property, all sums owing on all Senior Indebtedness of the
Company (including cash collateral and amounts not yet due and payable) shall
first be paid in full before any payment is made upon the Junior Indebtedness;
and in any such event any payment or distribution of any kind or character,
whether in cash, property, or securities which shall be made upon or in respect
of the Junior Indebtedness shall be paid over to the holders of the Senior
Indebtedness of the Company, pro rata, for application in payment thereof unless
and until such Senior Indebtedness shall have been paid or satisfied in full.
In case of any assignment for the benefit of creditors by the Company or in
case any proceedings under the Bankruptcy Code or any other law for the relief
of or relating to debtors are instituted by or against the Company, or in case
of the appointment of any receiver for the Company's business or assets, or in
case of any dissolution or winding up of the affairs of the Company, the Company
and any assignee, trustee in bankruptcy, receiver, debtor in possession or other
person or persons in charge are hereby directed to pay to the holders of the
Senior Indebtedness of the Company the full amount of such holders' claims
against the Company (including interest to the date of payment) before making
any payments to the holders of Junior Indebtedness, and insofar as may be
necessary for that purpose, the Purchaser hereby assigns and transfers to the
holders of Senior Indebtedness of the Company all rights to any payments,
dividends or other distributions. The Purchaser agrees not to file or join in
any petition to commence any proceeding under the Bankruptcy Code (or other law
for the relief of or relating to debtors) so long as any Senior Indebtedness of
the Company is outstanding.
(b) In the event that all or any part of the Junior Indebtedness is
declared or becomes due and payable because of the occurrence of any Event of
Default or otherwise than at the option of the Company (other than pursuant to
its terms at its final maturity), under circumstances when the foregoing clause
(a) shall not be applicable, the holders of the Junior Indebtedness shall be
entitled to payments only after there shall first have been paid in full all
Senior Indebtedness of the Company or payment shall have been provided therefor
in a manner satisfactory to the holders of such Senior Indebtedness.
(c) Upon the occurrence of an event which is, or with the lapse of time or
notice or both would be, an event which gives any holder of any Senior
Indebtedness of the Company the right to demand payment, cash collateral,
accelerate the maturity, or terminate any commitment to further extend credit,
no payment shall be made on any Junior Indebtedness if either:
(i) notice of such default in writing or by telegram has been given to the
Company by any holder of any Senior Indebtedness of the Company, provided that
judicial proceedings shall be commenced with respect to such default (x) within
180 days thereafter if such default consists of the nonpayment of principal,
interest, or any other sum due on such Senior Indebtedness, or (y) within 180
days after the earlier of (i) the giving of such notice or
(ii) the date on which such holder is entitled to institute judicial
proceedings, or
(ii) judicial proceedings shall be pending in respect of such
default. The holder of any portion of Senior Indebtedness of the Company shall
not be entitled to give notice pursuant to this clause (c) more than once with
respect to any default which was specified in such notice and which has
continued without interruption since the date such notice was given, nor shall
such holder be entitled to give a separate notice with respect to any default
not so specified which (to the knowledge of the holder giving notice) was
existing on the date such notice was given pursuant to this clause (c) and which
has continued without interruption from the date such notice was given. Upon
receipt of any notice from any holder of any Senior Indebtedness pursuant to
this clause (c), the Company shall forthwith send a copy thereof to each holder
of Junior Indebtedness and each holder of its Senior Indebtedness at the time
outstanding.
(d) All payments, cash, or noncash distributions made to the holders of
Junior Indebtedness which should have been made to the holders of Senior
Indebtedness of the Company shall be received and held by the former in trust
for the benefit of the latter, and the holders of Junior Indebtedness shall
forthwith remit such payments, cash, or noncash distributions to the holders of
the Senior Indebtedness of the Company, pro rata, in the form in which it was
received, together with such endorsements or documents as may be necessary to
effectively negotiate or transfer the same to the holders of the Senior
Indebtedness of the Company.
(e) Each holder of Senior Indebtedness of the Company is hereby authorized
by the Purchaser to:
(i) renew, compromise, extend, accelerate or otherwise change the time of
payment, or any other terms, of any Senior Indebtedness of the Company held by
such holder;
(ii) increase or decrease the rate of interest payable thereon or any part
thereof;
(iii) exchange, enforce, waive or release any security therefor;
(iv) apply such security and direct the order or manner of sale thereof in
such manner as such older may at its discretion determine; and/or
(v) release the Company or any guarantor of any Senior Indebtedness of the
Company from liability; all without notice to the Purchaser and any holder of
Junior Indebtedness and without affecting the subordination provided by this
Agreement.
10.2. Proofs of Claim of Holders of Senior Indebtedness; Voting. The
Purchaser undertakes and agrees for the benefit of each holder of Senior
Indebtedness of the Company to execute, verify, deliver and file any proofs of
claim relating to the Junior Indebtedness which any holder of such Senior
Indebtedness may at any time require in order to prove and realize upon any
rights or claims pertaining to the Junior Indebtedness and to effectuate the
full benefit of the subordination contained herein. Upon failure of the
Purchaser to file the required proof or proofs of claim prior to 30 days before
the expiration of the time to file claims in such proceeding, each holder of
Senior Indebtedness of the Company is hereby irrevocably appointed by the
Purchaser to be the Purchaser's agent to file the appropriate claim or claims
and if such holder of Senior Indebtedness elects at its sole discretion to file
such claim or claims (i) to accept or reject any plan of reorganization or
arrangement on behalf of the Purchaser, and (ii) to otherwise vote the
Purchaser's claim in respect of the Junior Indebtedness in any manner deemed
appropriate for the benefit and protection of the holders of the Senior
Indebtedness of the Company.
10.3. Rights of Holders of Senior Indebtedness Unimpaired. No right of any
holder of any Senior Indebtedness to enforce subordination as herein provided
shall at any time or in any way be affected or impaired by any failure to act on
the part of the Company or the holders of Senior Indebtedness, or by any
noncompliance by the Company with any of the terms, provisions and covenants of
this Agreement, regardless of any knowledge thereof that any such holder of
Senior Indebtedness may have or be otherwise charged with.
10.4. Effects of Event of Default. The Company agrees, for the benefit of
the holders of Senior Indebtedness, that in the event that a Note is declared
due and payable before its maturity because of the occurrence of an Event of
Default, (i) the Company will give prompt notice in writing of such happening to
the holders of Senior Indebtedness and (ii) all Senior Indebtedness shall
forthwith become immediately due and payable upon demand, regardless of the
expressed maturity thereof.
10.5. Company's Obligations Unimpaired. The provisions of this Article 10
are solely for the purpose of defining the relative rights of the holders of
Senior Indebtedness on the one hand, and the Purchaser on the other hand, and
nothing herein shall impair, as between the Company and the Purchaser, the
obligation of the Company which is unconditional and absolute, to pay the
principal, premium, if any, and interest on the Notes in accordance with this
Agreement and the terms of the Notes, nor shall anything herein prevent the
Purchaser from exercising all remedies otherwise permitted by applicable law or
under this Agreement or the Notes upon the occurrence of an Event of Default,
subject to the rights of the holders of Senior Indebtedness as herein provided
for.
10.6. Subrogation. Subject to the payment in full of Senior Indebtedness,
holders of the Notes shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of cash, property or
securities made on the Senior Indebtedness until the Notes shall be paid in
full; and, for the purposes of such subrogation, payments or distributions to
the holders of Senior Indebtedness of any cash, property or securities to which
any holder of Notes would be entitled except for the provisions of this
Agreement shall, as between the Company and its creditors other than the holders
of Senior Indebtedness and holders of the Notes, be deemed to be a payment by
the Company to or on account of the Notes, it being understood that the
provisions of this Agreement are and are intended solely for the purpose of
defining the relative rights of the holders of the Notes on the one hand, and
the holders of Senior Indebtedness, on the other hand. The purpose of this
Section 10.6 is to grant to holders of the Notes the same rights against the
Company with respect to the aggregate amount of such payments or distributions
as the holders of Senior Indebtedness would have against the Company if such
aggregate amount were considered overdue Senior Indebtedness.
11. Interpretation.
11.1 Definitions.
"Affiliate" and Associate" shall have the respective meanings ascribed to
such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act.
"beneficially own" with respect to any securities shall mean having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act), including pursuant to any agreement, arrangement or
understanding, whether or not in writing.
"Business Day" shall mean any day other than a Saturday, Sunday, or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Capitalized Lease" shall mean, with respect to any person, any lease or
any other agreement for the use of property which, in accordance with generally
accepted accounting principals, should be capitalized on the lessee's or user's
balance sheet.
"Capitalized Lease Obligation" of any person shall mean and include, as of
any date as of which the amount thereof is to be determined, the amount of the
liability capitalized or disclosed (or which should be disclosed) in a balance
sheet of such person in respect of a Capitalized Lease of such person
"Change in Control" shall mean:
(a) the acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more
than 30% of the combined voting power of the then outstanding Voting Securities
of the Company entitled to vote generally in the election of directors, but
excluding, for this purpose, any such acquisition by (i) the Company or any of
its subsidiaries, (ii) any employee benefit plan (or related trust) of the
Company or its subsidiaries, (iii) any corporation with respect to which,
following such acquisition, a majority of the combined voting power of the then
outstanding Voting Securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or indirectly, by
individuals and entities who were the beneficial owners of voting securities of
the Company immediately prior to such acquisition in substantially the same
proportion as their ownership, immediately prior to such acquisition, of the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors or (iv) GECC or an
Affiliate of GECC; or
(b) a reorganization, merger or consolidation, in each case, with respect
to which all or substantially all the individuals and entities who were the
respective beneficial owners of the voting securities of the Company immediately
prior to such reorganization, merger or consolidation do not, following such
reorganization, merger or consolidation beneficially own, directly or
indirectly, more than 50% of the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors of the
corporation resulting from such reorganization, merger or consolidation; or
(c) the sale or other disposition of a majority or more of the consolidated
assets or property of the Company and it Subsidiaries in one transaction or
series of related transactions, provided, however, that a "Change of Control" as
defined in either (b) or (c) above shall not include any transact on between
GECC or any Affiliate of GECC and the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Consolidated" or "consolidated," when used with reference to any financial
term in this Agreement (but not when used with respect to any tax return or tax
liability), shall mean the aggregate for two or more persons of the amounts
signified by such term for all such persons, with inter-company items eliminated
and, with respect to earnings, after eliminating the portion of earnings
properly attributable to minority interests, if any, in the capital stock of any
such person or attributable to shares of preferred stock of any such person not
owned by any other such person.
"Consolidated Net Worth" shall mean the consolidated stockholders' equity
of the Company and its Subsidiaries determined in accordance with generally
accepted accounting principles consistently applied (it being understood that
the Notes and any other Subordinated Indebtedness which is not subordinated to
the Notes shall not be treated as equity for this purpose).
"Consolidated Total Indebtedness" shall mean consolidated Indebtedness of
the Company and its Subsidiaries, determined in accordance with generally
accepted accounting principles consistently applied.
"Current Market Price", when used with reference to shares of Common Stock
or other securities for any given date, shall mean the closing price per share
of Common Stock or such other securities on such date and, when used with
reference to shares of Common Stock or other securities for any period, shall
mean the average of the daily closing prices per share of Common Stock or such
other securities for such period. The closing price for each day shall be the
last quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System or such other
system then in use, or, if on any such date the Common Stock or such other
securities are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock or such other securities selected by the Board of Directors
of the Company. If the Common Stock is listed or admitted to trading on a
national securities exchange, the closing price shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Common
Stock or such other securities are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Common Stock or such other securities are
listed or admitted to trading.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
"Event of Default" shall mean each of the happenings or circumstances
enumerated in Section 8.1.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any successor Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time. Reference
to a particular section of the Securities Exchange Act of 1934, as amended,
shall include reference to the comparable section, if any, of any such successor
Federal statute.
"Fixed Charge Ratio" shall mean the ratio of (a) the sum of earnings before
taxes, depreciation and amortization plus current operating lease expense plus
interest expense to (b) interest expense plus current operating lease expense of
the Company and its Subsidiaries on a consolidated basis determined in
accordance with generally accepted accounting principles consistently applied,
as measured at the last day of the most recently completed fiscal quarter.
"Guarantee" by any Person shall mean all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of any Person guaranteeing, or in effect guaranteeing,
any Indebtedness, dividend or other obligation of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, all obligations incurred through an agreement, contingent or
otherwise, by such Person: (i) to purchase such Indebtedness or obligation or
any property or assets constituting security therefor, (ii) to advance or supply
funds (x) for the purchase or payment of such Indebtedness or obligation, (y) to
maintain working capital or other balance sheet condition or otherwise to
advance or make available funds for the purchase or payment of such Indebtedness
or obligation, (iii) to lease property or to purchase securities or other
property or services primarily for the purpose of assuring the owner of such
Indebtedness or obligation of the ability of the primary obligor to make payment
of such Indebtedness or obligation, or (iv) otherwise to assure the owner of the
Indebtedness or obligation of the primary obligor against loss in respect
thereof. For the purposes of any computations made under this Agreement, a
Guarantee in respect of any Indebtedness for borrowed money shall be deemed to
be Indebtedness equal to the principal amount of the Indebtedness for borrowed
money which has been guaranteed, and a Guarantee in respect of any other
obligation or liability or any dividend shall be deemed to be Indebtedness equal
to the maximum aggregate amount of such obligation, liability or dividend.
"Indebtedness" shall mean, with respect to any person, (i) all obligations
of such person for borrowed money, or with respect to deposits or advances of
any kind, (ii) all obligations of such person evidenced by bonds, debentures,
notes or similar instruments, (iii) all obligations of such person under
conditional sale or other title retention agreements relating to property
purchased by such person, (iv) all obligations of such person issued or assumed
as the deferred purchase price of property or services (other than accounts
payable to suppliers and similar accrued liabilities incurred in the ordinary
course of business and paid in a manner consistent with industry practice), (v)
all Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any lien or security interest on property owned or acquired by such person
whether or not the obligations secured thereby have been assumed, but only to
the extent of such security, if such obligations have not been assumed, (vi) all
Capitalized Lease Obligations of such person, (vii) all Guarantees of such
person, (viii) all obligations (including but not limited to reimbursement
obligations) relating to the issuance of letters of credit for the account of
such person, (ix) all obligations arising out of foreign exchange contracts, and
(x) all obligations arising out of interest rate and currency swap agreements,
cap, floor and collar agreements, interest rate insurance, currency spot and
forward contracts and other agreements or arrangements designed to provide
protection against fluctuations in interest or currency exchange rates.
"outstanding" shall mean when used with reference to the Notes at a
particular time, all Notes theretofore issued as provided in this Agreement,
except (i) Notes theretofore reported as lost, stolen, damaged or destroyed, or
surrendered for transfer, exchange or replacement, in respect to which
replacement Notes have been issued, (ii) Notes theretofore paid in full, and
(iii) Notes theretofore canceled by the Company, except that, for the purpose of
determining whether holders of the requisite principal amount of Notes have made
or concurred in any waiver, consent, approval, notice or other communication
under this Agreement, Notes registered in the name of, or owned beneficially by,
the Company or any Subsidiary of any thereof, shall not be deemed to be
outstanding.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any
successor thereto.
"Pension Plan" shall mean any multiemployer plan or single employer plan,
as defined in Section 4001 of ERISA, that is subject to Title IV of ERISA, that
the Company, any Subsidiary or any ERISA Affiliate maintains or is or ever has
been obligated to contribute to for the benefit of employees or former employees
of the Company, any Subsidiary or any ERISA Affiliate.
"Person" shall mean any individual, firm, corporation, partnership or other
entity, and shall include any successor (by merger or otherwise) of such entity.
"Related Party" shall mean any officer, director or beneficial holder of 3%
or more of the outstanding shares of capital stock of the Company or any
Subsidiary, any spouse, former spouse, child, parent, parent of a spouse,
sibling or grandchild of any such officer, director or beneficial holder of the
Company or any Subsidiary, and any Affiliate or Associate of any of the
foregoing persons.
"Securities Act" shall mean the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Senior Indebtedness" shall mean and include, as of any date as of which
the amount thereof is to be determined, the principal of and premium, if any,
and interest due on any Indebtedness under the Loan and Security Agreement dated
as of January 20, 1995 and as amended on May 10, 1996, between Congress
Financial Corporation (Western) as lender and Krause's Sofa Factory, a
California corporation, and its wholly owned subsidiary, Castro Convertible
Corporation, a New York corporation, as borrowers (with the Company as Guarantor
pursuant to a Guarantee signed by the Company on January 20, 1995), and any
refinancing, refunding, replacement or extension thereof.
"Subordinated Indebtedness" shall mean all Indebtedness which is by its
terms subordinated to Senior Indebtedness.
"Subsidiary" of any Person means any corporation or other entity of which a
majority of the voting power or the Voting Securities or equity interest is
owned, directly or indirectly, by such Person.
"Voting Securities" of any Person shall mean at any time shares of any
class of capital stock of such Person which are then entitled to vote generally
in the election of directors.
11.2. Accounting Principles. The character or amount of any asset,
liability, capital account or reserve and of any item of income or expense
required to be determined pursuant to this Agreement, and any consolidation or
other accounting computation required to be made pursuant to this Agreement, and
the construction of any definition in this Agreement containing a financial
term, shall be determined or made, as the case may be, in accordance with
generally accepted accounting principles, to the extent applicable, unless such
principles are inconsistent with the express requirements of this Agreement.
References in this Agreement to a fiscal year refer to the period ending on the
last Sunday of January of the following calendar year as determined by the 52/53
retail fiscal year. (For example, 1996 fiscal year refers to the fiscal year
ending January 26, 1997.)
12. Miscellaneous.
12.1. Payments. The Company agrees that, so long as the Purchaser shall
hold any Securities, the Company will make all cash interest or dividend
payments thereon in immediately available funds in such manner as the Purchaser
may reasonably request in writing.
12.2. Severability. If any term, provision, covenant or restriction of this
Agreement or any exhibit hereto is held by a court of competent jurisdiction to
be invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement and such exhibits shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
It is hereby stipulated and declared to be the intention of the parties that
they would have executed the remaining terms, provisions, covenants and
restrictions without including any of such which may be hereafter declared
invalid, void or unenforceable.
12.3. Specific Enforcement. The Purchaser, on the one hand, and the
Company, on the other, acknowledge and agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction to
prevent breaches of the provisions of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
thereof having jurisdiction, this being in addition to any other remedy to which
they may be entitled at law or equity.
12.4. Entire Agreement. This Agreement (including the documents set forth
in the exhibits hereto) contains the entire understanding of the parties with
respect to the transactions contemplated hereby.
12.5. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more of the counterparts have been signed by
each party and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
12.6. Notices and other Communications. All notices, consents, requests,
instructions, approvals, financial statements, proxy statements, reports and
other communications provided for herein shall be in writing and shall be
delivered personally, by telecopy or sent by prepaid overnight courier service,
to:
THE COMPANY:
Krause's Furniture, Inc.
200 North Berry Street
Brea, CA 92621-3903
Attention: Philip M. Hawley
With a copy to:
Judith Lasker Krause's Furniture, Inc.
200 North Berry Street
Brea, CA 92621-3903
and
David Kaufman, Esq.
Stroock, Stroock & Lavan
Seven Hanover Square
New York, New York 10004
THE PURCHASER:
General Electric Capital Corporation
Equity Capital Group
260 Long Ridge Road
Stamford, CT 06927
Attention: Jeffrey H. Coats and
Attention: Counsel
With a copy to:
Warren de Wied, Esq.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
or to such other address as any party may, from time to time, designate in
a written notice given in a like manner.
12.7. Amendments. This Agreement may be amended as to the Purchaser and
their successors and assigns, and the Company may take any action herein
prohibited, or omit to perform any act required to be performed by it, if the
Company shall obtain the written consent of the Purchaser and/or such successors
and assigns who are the registered holders of not less than 66-2/3% of the
outstanding principal amount of the Notes, including the Additional Notes, then
held by the Purchaser and their successors or assigns. This Agreement may not be
waived, changed, modified, or discharged orally, but only by an agreement in
writing signed by the party or parties against whom enforcement of any waiver,
change, modification or discharge is sought or by parties with the right to
consent to such waiver, change, modification or discharge on behalf of such
party.
12.8. Cooperation. The Purchaser and the Company agree to take, or cause to
be taken, all such further or other actions as shall reasonably be necessary to
make effective and consummate the transactions contemplated by this Agreement.
12.9. Successors and Assigns. All covenants and agreements contained herein
shall bind and inure to the benefit of the parties hereto and their respective
successors and assigns. This Agreement may be assigned by the Purchaser to any
transferee of any Securities. This Agreement may not be assigned by the Company.
12.10. Expenses and Remedies. (a) The Company agrees to pay the Purchaser
for all reasonable outside legal and consulting fees of the Purchaser in
connection with this Agreement and the consummation of all transactions
contemplated hereby, and all costs and expenses relating to any future amendment
or supplement to this Agreement or any of the Securities (or any proposal by the
Company for such amendment or supplement) whether or not consummated or any
waiver or consent with respect thereto (or any proposal for such waiver or
consent) whether or not consummated, and all costs and expenses of the Purchaser
relating to the enforcement of this Agreement, the Registration Rights
Agreement, the Warrant or the Notes or any of the Securities.
(b) The Company further agrees to indemnify and save harmless the Purchaser
and its officers, directors, partners, employees, trustees and agents, each
person who controls the Purchaser within the meaning of the Securities Act or
the Exchange Act, from and against any and all costs, expenses, damages or other
liabilities resulting from any breach of this Agreement by the Company or any
legal, administrative or other proceedings arising out of the transactions
contemplated hereby (other than such costs, expenses, damages or other
liabilities resulting, directly or indirectly, (i) from the breach by the
Purchaser of any of its agreements contained herein, (ii) from the gross
negligence or willful misconduct of the Purchaser or any of its officers,
directors, partners, employees or agents, or any person who controls the
Purchaser within the meaning of the Securities Act or the Exchange Act or (iii)
from an ERISA violation resulting from any action or inaction by the Purchaser,
other than an ERISA violation resulting from a breach by the Company of this
Agreement); provided, however, that, if and to the extent that such
indemnification is unenforceable for any reason, the Company shall make the
maximum contribution to the payment and satisfaction of such indemnified
liability which shall be permissible under applicable laws.
(c) The indemnified party under this Section 12.10 will, promptly after the
receipt of notice of the commencement of any action against such indemnified
party in respect of which indemnity may be sought from the Company on account of
an indemnity agreement contained in this Section 12.10, notify the Company in
writing of the commencement thereof. The omission of any indemnified party so to
notify the Company of any such action shall not relieve the Company from any
liability which it may have to such indemnified party except to the extent the
Company shall have been prejudiced by the omission of such indemnified party so
to notify the Company, pursuant to this Section 12.10. In case any such action
shall be brought against any indemnified party and it shall notify the Company
of the commencement thereof, the Company shall be entitled to participate
therein and, to the extent that it may wish, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the Company to such indemnified party of its election so to assume the defense
thereof, the Company will not be liable to such indemnified party under this
Section 12.10 for any legal or other expense subsequently incurred by such
indemnified party in connection with the defense thereof nor for any settlement
thereof entered into without the consent of the Company; provided, however, that
(i) if the Company shall elect not to assume the defense of such claim or action
or (ii) if the indemnified party reasonably determines (x) that there may be a
conflict between the positions of the Company and of the indemnified party in
defending such claim or action or (y) that there may be legal defenses available
to such indemnified party different from or in addition to those available to
the Company, then separate counsel for the indemnified party shall be entitled
to participate in and conduct the defense, in the case of (i) and (ii) (x), or
such different defenses, in the case of (ii)(y), and the Company shall be liable
for any reasonable legal or other expenses incurred by the indemnified party in
connection with the defense.
12.11. Survival of Representations and Warranties. All representations and
warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
issuance and delivery of the Securities, regardless of any investigation made by
or on behalf of any party.
12.12. Transfer of Securities. (a) The Purchaser understands and agrees
that the Securities have not been registered under the Securities Act or the
securities laws of any state and that they may be sold or otherwise disposed of
only in one or more transactions registered under the Securities Act and, where
applicable, such laws or transactions as to which an exemption from the
registration requirements of the Securities Act and, where applicable, such laws
are available. The Purchaser acknowledges that, except as provided in the
Registration Rights Agreement, the Purchaser has no right to require the Company
to register the Securities. The Purchaser understands and agrees that each Note
or certificate representing the Securities shall bear legends substantially in
the form as follows:
"[THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE] [THIS NOTE HAS]
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS
OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS
OF SUCH ACT OR SUCH LAWS."
"THE TRANSFER OF [THE SECURITIES REPRESENTED BY THIS CERTIFICATE]
[THIS NOTE] IS RESTRICTED BY AN AGREEMENT ON FILE AT THE OFFICES OF THE
CORPORATION."
"IN ADDITION TO THE RESTRICTIONS SET FORTH IN THE SECURITIES PURCHASE
AGREEMENT BETWEEN KRAUSE'S FURNITURE, INC. AND GENERAL ELECTRIC CAPITAL
CORPORATION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE RESTRICTIONS SET FORTH IN THE STOCKHOLDERS AGREEMENT BY AND AMONG
KRAUSE'S FURNITURE, INC. AND THE STOCKHOLDERS PARTIES THERETO, A COPY OF
WHICH IS ON FILE IN THE OFFICES OF THE CORPORATION."
12.13 Governing Law; Consent to Jurisdiction. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES
HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY CONSENTS TO SUBMIT TO THE
EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED
STATES OF AMERICA, IN EACH CASE LOCATED IN THE COUNTY OF NEW YORK, FOR ANY
ACTION, PROCEEDING OR INVESTIGATION IN ANY COURT OR BEFORE ANY GOVERNMENTAL
AUTHORITY ("LITIGATION") ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED HEREBY (AND AGREES NOT TO COMMENCE ANY LITIGATION
RELATING THERETO EXCEPT IN SUCH COURTS), AND FURTHER AGREES THAT SERVICE OF ANY
PROCESS, SUMMONS, NOTICE OR DOCUMENT BY U.S. REGISTERED MAIL TO ITS RESPECTIVE
ADDRESS SET FORTH IN THIS AGREEMENT SHALL BE EFFECTIVE SERVICE OF PROCESS FOR
ANY LITIGATION BROUGHT AGAINST IT IN ANY SUCH COURT. EACH OF THE PARTIES HERETO
HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF
VENUE OF ANY LITIGATION ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY IN THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES
OF AMERICA, IN EACH CASE LOCATED IN THE COUNTY OF NEW YORK, AND HEREBY FURTHER
IRREVOCABLY AND UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY
SUCH COURT THAT ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM. EACH OF THE PARTIES IRREVOCABLY AND UNCONDITIONALLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHTS TO
TRIAL BY JURY IN CONNECTION WITH ANY LITIGATION ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
12.14. Term. This Agreement shall terminate on August 31, 2001, except that
Section 12.10 shall survive the termination of this Agreement.
12.15. Publicity. Each of the parties hereto agrees that it will make no
statement regarding the transactions contemplated hereby which is inconsistent
with the press release agreed to by the parties hereto. Notwithstanding the
foregoing, each of the parties hereto may, in document required to be filed by
it with the Commission or other regulatory bodies, make such statements with
respect to the transactions contemplated hereby as each may be advised is
legally necessary upon advice of its counsel.
12.16. Signatures. This Agreement shall be effective upon delivery of
original signature pages or facsimile copies thereof executed by each of the
parties hereto.
IN WITNESS WHEREOF, the Company and the Purchaser have caused this
agreement to be executed and delivered by their respective officers thereunto
duly authorized.
KRAUSE'S FURNITURE, INC.
BY:________________________________________
Name:
Title:
GENERAL ELECTRIC CAPITAL CORPORATION
BY:________________________________________
Name: Jeffrey H. Coats
Title: Managing Director/
Department Operations Manager
<PAGE>
SCHEDULE 1.3A
HAWLEY GROUP INCLUDES:
Shares of
Common Stock Purchased
Hawley Group
Allison Booth Hawley Trust 112,500
Caitlin Hale Hawley Trust I 112,500
Maureen Erin Hawley Trust I 112,500
Shannon Follen Hawley Trust I 112,500
Hawley Family Trust 500,000
Dr. Philip M. Hawley, Jr. 20,000
Philip M. Hawley 30,000
TOTAL 1,000,000
<PAGE>
SCHEDULE 1.3B
OTHER INVESTORS include:
Shares of Common Stock
Purchased
Other Investors
ATCO Holdings, Ltd. 400,000
Isaac Robert Souede 250,000
Jean R. Perrette 250,000
United Gulf Bank (B.S.C.)E.C. 225,000
ATCO Development, Inc. 100,000
Thomas M. DeLitto 25,000
Helopolis Inc. 100,000
Peter L. Rhulen 100,000
T. Michael Wallace 100,000
Carlton Securities N.V. 100,000
G Investment Partners 60,000
Sidney Kimmel 50,000
Zaxis Partners, L.P. 40,000
Hurly & Co. 35,000
Sanford J. Colen 20,000
Pollat, Evans & Co. Inc. 15,000
C. Redington Barrett, III 5,000
Quadra Appreciation Fund, Inc. 5,000
Peter w. Branagh & Ramona Y. Branagh
TTEES for the Branagh Revocable Trust 5,000
Permal Noscal, Ltd. 405,000
Fairmont Services Ltd. 400,000
Emmanuel Bagdjian 210,000
Gary Gladstein 100,000
TOTAL 3,000,000
THE TRANSFER OF THIS NOTE IS RESTRICTED BY AN AGREEMENT ON
FILE AT THE OFFICES OF THE CORPORATION.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY
STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION
REQUIREMENTS OF SUCH ACT OR SUCH LAWS.
KRAUSE'S FURNITURE, INC.
10.00% Subordinated Pay-In-Kind Note
due August 31, 2001
New York, NY
$5,000,000.00 August 26, 1996
KRAUSE'S FURNITURE, INC. (the "Company"), a Delaware corporation, for value
received, hereby promises to pay to GENERAL ELECTRIC CAPITAL CORPORATION
("GECC"), or registered assigns, the initial aggregate principal amount of FIVE
MILLION DOLLARS ($5,000,000.00) on August 31, 2001, with interest (computed on
the basis of a 360-day year of twelve 30- day months) on the unpaid balance of
such principal amount at the rate of 10.00% per annum from the date hereof, due
and payable (i) quarterly, on each November 30, February 28, May 31 and August
31 (each, a "Payment Date") after the date of the Notes commencing with November
30, 1996 and (ii) on the date of any prepayment, on the amount prepaid, until
the Notes have been paid in full. Accrued interest on each Note is required to
be paid in cash (in accordance with Section 5.1 of the Securities Purchase
Agreement dated as of August 26, 1996, as from time to time amended, between the
Company and GECC (the "Securities Purchase Agreement")) on each Payment Date
after August 31, 1998. On each Payment Date prior to and including August 31,
1998, in lieu of payment of interest in cash, the Company shall pay all interest
in additional notes (the "Additional Notes"), which shall be dated the
applicable Payment Date, shall bear interest from and after such date, shall
mature on August 31, 2001 and shall be governed by, and subject to the terms,
provisions and conditions of, the Securities Purchase Agreement, except that
interest shall accrue on each Additional Note from the date of such Additional
Note. Interest on this Note shall cease to accrue if (i) the holder of this Note
has been notified by the Company under Section 9.5 of the Securities Purchase
Agreement that this Note will be redeemed, and (ii) all amounts due under this
Note are paid to the holder of this Note on the redemption date specified in
such notice or such amounts are segregated and held in trust by the Company for
payment upon surrender of this Note in accordance with such notice. During the
continuance of any Event of Default (as defined in the Securities Purchase
Agreement), the Company shall pay interest on the outstanding principal of, and
any other amounts (other than interest), if any, due on the Notes and (to the
extent legally enforceable) on any overdue installment of interest, at the rate
of 12.00% per annum (computed on the same basis as above) until such overdue
amount is paid or until such Event of Default is cured or waived. All payments
on this Note shall be made in lawful money of the United States of America at
the address specified by the holder hereof for such purpose in Schedule 5.1 to
the Securities Purchase Agreement or by such method as may be designated by
notice to the Company, in the manner set forth in the Securities Purchase
Agreement.
The outstanding principal amount of ___________, and all accrued and unpaid
interest on this Note, shall be payable on August 31, 2001. This Note is subject
to redemption, in whole or in part, all as specified in the Securities Purchase
Agreement.
This Note is issued pursuant to the Securities Purchase Agreement. The
registered holder of this Note is entitled to the benefits of such Securities
Purchase Agreement and may enforce the agreements of the Company contained
therein and exercise the remedies provided for thereby or otherwise available in
respect thereof.
This Note is expressly subordinated to the extent and in the manner
provided in Section 10 of the Securities Purchase Agreement to all Senior
Indebtedness (as defined therein) of the Company.
This Note is a registered Note and, as provided in the Securities Purchase
Agreement, is transferable only upon surrender of this Note for registration of
transfer, duly endorsed, or accompanied by a written instrument of transfer duly
executed, by the registered holder hereof or his attorney duly authorized in
writing. The Company may treat the person in whose name this Note is registered
as the owner hereof for the purpose of receiving payment and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
In case an Event of Default shall occur and be continuing, the unpaid
balance of the principal, interest and any other amounts payable on this Note
may be declared and become due and payable in the manner and with the effect
provided in the Securities Purchase Agreement.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF
LAW. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY CONSENTS
TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK
AND OF THE UNITED STATES OF AMERICA, IN EACH CASE LOCATED IN THE COUNTY OF NEW
YORK, FOR ANY ACTION, PROCEEDING OR INVESTIGATION IN ANY COURT OR BEFORE ANY
GOVERNMENTAL AUTHORITY ("LITIGATION") ARISING OUT OF OR RELATING TO THIS NOTE
AND THE TRANSACTIONS CONTEMPLATED HEREBY (AND AGREES NOT TO COMMENCE ANY
LITIGATION RELATING THERETO EXCEPT IN SUCH COURTS), AND FURTHER AGREES THAT
SERVICE OF ANY PROCESS, SUMMONS, NOTICE OR DOCUMENT BY U.S. REGISTERED MAIL TO
ITS RESPECTIVE ADDRESS SET FORTH IN THIS NOTE SHALL BE EFFECTIVE SERVICE OF
PROCESS FOR ANY LITIGATION BROUGHT AGAINST IT IN ANY SUCH COURT. EACH OF THE
PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION TO
THE LAYING OF VENUE OF ANY LITIGATION ARISING OUT OF THIS NOTE OR THE
TRANSACTIONS CONTEMPLATED HEREBY IN THE COURTS OF THE STATE OF NEW YORK OR THE
UNITED STATES OF AMERICA, IN EACH CASE LOCATED IN THE COUNTY OF NEW YORK, AND
HEREBY FURTHER IRREVOCABLY AND UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR
CLAIM IN ANY SUCH COURT THAT ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE PARTIES IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
AND ALL RIGHTS TO TRIAL BY JURY IN CONNECTION WITH ANY LITIGATION ARISING OUT OF
OR RELATING TO THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY.
KRAUSE'S FURNITURE, INC
By:________________________
Name:
Title:
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN
VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF
THIS WARRANT.
No. of Shares of Common Stock: 1,400,000
WARRANT
To Purchase Shares of Common Stock of
KRAUSE'S FURNITURE, INC.
THIS IS TO CERTIFY THAT GENERAL ELECTRIC CAPITAL CORPORATION, or registered
assigns, is entitled, at any time prior to the Expiration Date (as hereinafter
defined), to purchase from KRAUSE'S FURNITURE, INC., a Delaware corporation (the
"Company"), 1,400,000 shares of Common Stock (as hereinafter defined and subject
to adjustment as provided herein), in whole or in part, at a purchase price of
$.001 per share, all on the terms and conditions and pursuant to the provisions
hereinafter set forth.
1. DEFINITIONS
As used in this Warrant, the following terms have the respective meanings
set forth below:
"Additional Shares of Common Stock" shall mean all shares of Common Stock
issued by the Company after the Closing Date, other than Warrant Stock.
"Business Day" shall mean any day that is not a Saturday or Sunday or a day
on which banks are required or permitted to be closed in the State of New York.
"Closing Date" shall mean August 26, 1996.
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency then administering the Securities Act and other federal
securities laws.
"Common Stock" shall mean (except where the context otherwise indicates)
the Common Stock, $.001 par value, of the Company as constituted on the Closing
Date, and any capital stock into which such Common Stock may thereafter be
changed, and shall also include (i) capital stock of the Company of any other
class (regardless of how denominated) issued to the holders of shares of Common
Stock upon any reclassification thereof which is not preferred as to dividends
or assets over any other class of stock of the Company and which is not subject
to redemption and (ii) shares of common stock of any successor or acquiring
corporation (as defined in Section 4.8) received by or distributed to the
holders of Common Stock of the Company in the circumstances contemplated by
Section 4.8.
"Convertible Securities" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable or
exercisable, with or without payment of additional consideration in cash or
property, for Additional Shares of Common Stock, either immediately or upon the
occurrence of a specified date or a specified event.
"Current Market Price" shall mean, in respect of any share of Common Stock
on any date herein specified, the closing price per share of Common Stock on
such date and, when used with reference to shares of Common Stock for any
period, shall mean the average of the daily closing prices per share of Common
Stock for such period. The closing price for each day shall be the last quoted
sale price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc., Automated Quotation System or such other system
then in use, or, if on any such date the Common Stock or such other securities
are not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in the
Common Stock selected by the Board of Directors of the Company. If the Common
Stock is listed or admitted to trading on a national securities exchange, the
closing price shall be the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Common Stock is not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
Reference to a particular section of the Exchange Act shall include reference to
the comparable section, if any, of such successor federal statute.
"Expiration Date" shall mean August 31, 2006.
"Holder" shall mean the Person in whose name this Warrant is
registered on the books of the Company maintained for such purpose. "Holders"
shall mean, collectively, each Holder of a Warrant, in the event of any division
of this Warrant.
"Majority Holders" shall mean the holders of Warrants
exercisable for in excess of 50% of the aggregate number of shares of Warrant
Stock then purchasable upon exercise of all Warrants.
"Other Property" shall have the meaning set forth in Section 4.8.
"Outstanding" shall mean, when used with reference to Common
Stock, at any date as of which the number of shares thereof is to be determined,
all issued shares of Common Stock, except shares then owned or held by or for
the account of the Company or any subsidiary thereof, and shall include all
shares issuable in respect of outstanding scrip or any certificates representing
fractional interests in shares of Common Stock. For the purposes of Sections
4.3, 4.4, 4.5, 4.6 and 4.7, Common Stock Outstanding shall include all shares of
Common Stock issuable in respect of options or warrants to purchase, or
securities convertible into, shares of Common Stock, the exercise or conversion
price of which is less than the Current Market Price as of any date on which the
number of shares of Common Stock Outstanding is to be determined.
"Permitted Issuances" shall mean issuances of shares of Common
Stock upon exercise of the warrants and options listed on Schedule 1.
"Person" shall mean any individual, firm, corporation,
partnership or other entity, and shall include any successor by merger or
otherwise of such entity.
"Restricted Common Stock" shall mean shares of Common Stock
which are, or which upon their issuance on the exercise of this Warrant would
be, evidenced by a certificate bearing the restrictive legend set forth in
Section 9.1(a).
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Transfer" shall mean any disposition of any Warrant or
Warrant Stock or of any interest in either thereof, which would constitute a
sale thereof within the meaning of the Securities Act.
"Transfer Notice" shall have the meaning set forth in Section 9.2.
"Warrants" shall mean this Warrant and all warrants issued
upon transfer, division or combination of, or in substitution for, any thereof.
All Warrants shall at all times be identical as to terms and conditions and
date, except as to the number of shares of Common Stock for which they may be
exercised.
"Warrant Price" shall mean $.001 per share of Common Stock.
"Warrant Stock" shall mean the shares of Common Stock
purchased by the holders of the Warrants upon the exercise thereof.
2. EXERCISE OF WARRANT
2.1. MANNER OF EXERCISE. At any time or from time to time from
and after the Closing Date and until 5:00 P.M., New York time, on the Expiration
Date, Holder may exercise this Warrant, on any Business Day, for all or any part
of the number of shares of Common Stock purchasable hereunder.
In order to exercise this Warrant, in whole or in part, Holder
shall deliver to the Company at its principal office at 200 North Berry Street,
Brea, CA 92621-3903 (i) a written notice of Holder's election to exercise this
Warrant, which notice shall specify the number of shares of Common Stock to be
purchased, (ii) payment of the Warrant Price and (iii) this Warrant. Such notice
shall be substantially in the form appearing at the end of this Warrant as
Exhibit A, duly executed by Holder. Upon receipt of the items specified in the
second preceding sentence, the Company shall execute or cause to be executed and
deliver or cause to be delivered to Holder a certificate or certificates
representing the aggregate number of full shares of Common Stock issuable upon
such exercise, together with cash in lieu of any fraction of a share, as
hereinafter provided. The stock certificate or certificates so delivered shall
be in such denomination or denominations as Holder shall request in the notice
and shall be registered in the name of Holder or, subject to Section 9, such
other name as shall be designated in the notice. This Warrant shall be deemed to
have been exercised and such certificate or certificates shall be deemed to have
been issued, and Holder or any other Person so designated shall be deemed to
have become a holder of record of such shares for all purposes, as of the date
the notice, together with the Warrant Price and this Warrant, are received by
the Company as described above. If this Warrant shall have been exercised in
part, the Company shall, at the time of delivery of the certificate or
certificates representing Warrant Stock, deliver to Holder a new Warrant
evidencing the right of Holder to purchase the unpurchased shares of Common
Stock called for by this Warrant, which new Warrant shall in all other respects
be identical with this Warrant, or, at the request of Holder, appropriate
notation may be made on this Warrant and the same returned to Holder.
Payment of the Warrant Price shall be made by certified or
official bank check.
2.2. PAYMENT OF TAXES. All shares of Common Stock issuable
upon the exercise of this Warrant shall be validly issued, fully paid and
nonassessable and without any preemptive rights. The Company shall pay all
expenses in connection with, and all taxes and other governmental charges that
may be imposed with respect to, the issue or delivery thereof.
2.3. FRACTIONAL SHARES. The Company shall not be required to
issue a fractional share of Common Stock upon exercise of this Warrant. As to
any fraction of a share which Holder would otherwise be entitled to purchase
upon such exercise, the Company shall pay a cash adjustment in respect of such
fraction in an amount equal to the same fraction of the Current Market Price per
share of Common Stock on the date of exercise.
3. TRANSFER, DIVISION AND COMBINATION
3.1. TRANSFER. Subject to compliance with Section 9, transfer
of this Warrant and all rights hereunder, in whole or in part, shall be
registered on the books of the Company to be maintained for such purpose, upon
surrender of this Warrant at the principal office of the Company referred to in
Section 2.1, together with a written assignment of this Warrant substantially in
the form of Exhibit B hereto duly executed by Holder and funds sufficient to pay
any transfer taxes payable upon the making of such transfer. Upon such surrender
and, if required, such payment, the Company shall, subject to Section 9, execute
and deliver a new Warrant or Warrants in the name of the assignee or assignees
and in the denomination specified in such instrument of assignment, and shall
issue to the assignor a new Warrant evidencing the portion of this Warrant not
so assigned, and this Warrant shall promptly be canceled. A Warrant, if properly
assigned in compliance with Section 9, may be exercised by a new Holder for the
purchase of shares of Common Stock without having a new Warrant issued.
3.2. DIVISION AND COMBINATION. Subject to Section 9, this
Warrant may be divided into multiple Warrants or combined with other Warrants
upon presentation hereof at the aforesaid office or agency of the Company,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued, signed by Holder. Subject to compliance with
Section 3.1 and with Section 9, as to any transfer which may be involved in such
division or combination, the Company shall execute and deliver a new Warrant or
Warrants in exchange for the Warrant or Warrants to be divided or combined in
accordance with such notice.
3.3. EXPENSES. The Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 3.
3.4. MAINTENANCE OF BOOKS. The Company agrees to maintain, at its aforesaid
office, books for the registration and the registration of transfer of the
Warrants.
4. ADJUSTMENTS
The number of shares of Common Stock for which this Warrant is
exercisable and/or the price at which such shares may be purchased upon exercise
of this Warrant, shall be subject to adjustment from time to time as set forth
in this Section 4. The Company shall give each Holder notice of any event
described below which requires an adjustment pursuant to this Section 4 at the
time of such event.
4.1. STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. If at any time the
Company shall:
(a) take a record of the holders of its Common Stock for the purpose of
entitling them to receive a dividend payable in, or other distribution of,
additional shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into a larger number
of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock,
Then the number of shares of Common Stock for which this warrant is exercisable
immediately after the occurrence of any such event shall be adjusted to equal
the number of shares of Common Stock which a record holder of the same number of
shares of Common Stock for which this warrant is exercisable immediately prior
to the occurrence of such event would own or be entitled to receive after the
happening of such event.
4.2. CERTAIN OTHER DISTRIBUTIONS. If at any time the Company
shall take a record of the holders of its Common Stock for the purpose of
entitling them to receive any dividend or other distribution of:
(a) cash,
(b) any evidences of its indebtedness, any shares of its stock or any
other securities or property of any nature whatsoever (other than cash,
Convertible Securities or Additional Shares of Common Stock), or
(c) any warrants or other rights to subscribe for or purchase any
evidences of its indebtedness, any shares of its stock or any other securities
or property of any nature whatsoever (other than cash, Convertible Securities or
Additional Shares of Common Stock),
then the number of shares of Common Stock for which this Warrant is exercisable
shall be adjusted to equal the product of the number of shares of Common Stock
for which this Warrant is exercisable immediately prior to such adjustment
multiplied by a fraction (A) the numerator of which shall be the Current Market
Price per share of Common Stock at the date of taking such record and (B) the
denominator of which shall be such Current Market Price per share of Common
Stock minus the amount allocable to one share of Common Stock of any such cash
so distributable and of the fair value (as determined in good faith by the Board
of Directors of the Company and supported by an opinion from an investment
banking firm of recognized national standing acceptable to the Majority Holders)
of any and all such evidences of indebtedness, shares of stock, other securities
or property or warrants or other subscription or purchase rights so
distributable. A reclassification of the Common Stock (other than a change in
par value, or from par value to no par value or from no par value to par value)
into shares of Common Stock and shares of any other class of stock shall be
deemed a distribution by the Company to the holders of its Common Stock of such
shares of such other class of stock within the meaning of this Section 4.2 and,
if the outstanding shares of Common Stock shall be changed into a larger or
smaller number of shares of Common Stock as a part of such reclassification,
such change shall be deemed a subdivision or combination, as the case may be, of
the outstanding shares of Common Stock within the meaning of Section 4.1.
4.3 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK
(a) If at any time the company shall (except as hereinafter
provided) issue or sell any additional shares of Common Stock, other than
permitted issuance, for consideration in an amount per additional share of
Common Stock less than the current market price, then the number of shares of
Common Stock for which this warrant is exercisable shall be adjusted to equal
the product obtained by multiplying the number of shares of Common Stock for
which this warrant is exercisable immediately prior to such issue or sale by a
fraction (a) the numerator of which shall be the number of shares of common
stock outstanding immediately after such issue or sale, and (b) the denominator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such issue or sale plus the number of shares which the aggregate
offering price of the total number of such additional shares of Common Stock
would purchase at the then current market price.
(b) The provisions of paragraph (a) of this Section 4.3 shall
not apply to any issuance of additional shares of Common Stock for which an
adjustment is provided under Section 4.1 or 4.2. no adjustment of the number of
shares of Common Stock for which this warrant shall be exercisable shall be made
under paragraph (a) of this Section 4.3 upon the issuance of any additional
shares of Common Stock which are issued pursuant to the exercise of any warrants
or other subscription or purchase rights or pursuant to the exercise of any
conversion or exchange rights in any convertible securities, if any such
adjustment shall previously have been made upon the issuance of such warrants or
other rights or upon the issuance of such convertible securities (or upon the
issuance of any warrant or other rights therefor) pursuant to Section 4.4 or
Section 4.5 herein.
4.4. ISSUANCE OF WARRANTS OR OTHER RIGHTS. If at any time the
Company shall take a record of the holders of its Common Stock for the purpose
of entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which the Company is the surviving
corporation) issue or sell, any warrants or other rights to subscribe for or
purchase any Additional Shares of Common Stock or any Convertible Securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Stock is issuable upon the
exercise of such Warrants or other rights or upon conversion or exchange of such
Convertible Securities shall be less than the Current Market Price in effect
immediately prior to the time of such issue or sale, then the number of shares
for which this Warrant is exercisable shall be adjusted as provided in Section
4.3 on the basis that the maximum number of Additional Shares of Common Stock
issuable pursuant to all such warrants or other rights or necessary to effect
the conversion or exchange of all such Convertible Securities shall be deemed to
have been issued and outstanding and the Company shall have received all of the
consideration payable therefor, if any, as of the date of the actual issuance of
the number of shares for which this Warrant is exercisable and such warrants or
other rights. No further adjustments shall be made upon the actual issue of such
Common Stock or of such Convertible Securities upon exercise of such warrants or
other rights or upon the actual issue of such Common Stock upon such conversion
or exchange of such Convertible Securities. Notwithstanding the foregoing, no
adjustment shall be required under this Section 4.4 solely by reason of the
issuance of stock purchase rights under a stockholder rights plan of the
Company, provided that the adjustments required by this Section 4.4 shall be
made if any "flip-in" or "flip-over" event shall occur under such stockholder
rights plan.
4.5. ISSUANCE OF CONVERTIBLE SECURITIES. If at any time the
Company shall take a record of the holders of its Common Stock for the purpose
of entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which the Company is the surviving
corporation) issue or sell, any Convertible Securities, whether or not the
rights to exchange or convert thereunder are immediately exercisable, and the
price per share for which Common Stock is issuable upon such conversion or
exchange shall be less than the Current Market Price in effect immediately prior
to the time of such issue or sale, then the number of shares for which this
Warrant is exercisable shall be adjusted as provided in Section 4.3 on the basis
that the maximum number of Additional Shares of Common Stock necessary to effect
the conversion or exchange of all such Convertible Securities shall be deemed to
have been issued and outstanding and the Company shall have received all of the
consideration payable therefor, if any, as of the date of actual issuance of
such Convertible Securities. No adjustment of the number of shares for which
this Warrant is exercisable shall be made under this Section 4.5 upon the
issuance of any Convertible Securities which are issued pursuant to the exercise
of any warrants or other subscription or purchase rights therefor, if any such
adjustment shall previously have been made upon the issuance of such warrants or
other rights pursuant to Section 4.4. No further adjustments of the number of
shares for which this Warrant is exercisable shall be made upon the actual issue
of such Common Stock upon conversion or exchange of such Convertible Securities
and, if any issue or sale of such Convertible Securities is made upon exercise
of any warrant or other right to subscribe for or to purchase any such
Convertible Securities for which adjustments of the number of shares for which
this Warrant is exercisable have been or are to be made pursuant to other
provisions of this Section 4, no further adjustments of the number of shares for
which this Warrant is exercisable shall be made by reason of such issue or sale.
4.6. SUPERSEDING ADJUSTMENT. If, at any time after any adjustment of the
number of shares of Common Stock for which this Warrant is exercisable shall
have been made pursuant to Section 4.4 or Section 4.5 as the result of any
issuance of warrants, rights or Convertible Securities,
(a) such warrants or rights, or the right of conversion or exchange in
such other Convertible Securities, hall expire, and all or a portion of such
warrants or rights, or the right of conversion or exchange with respect to all
or a portion of such other Convertible Securities, as the case may be, shall not
have been exercised, or
(b) the consideration per share for which shares of Common Stock are
issuable pursuant to such warrants or rights, or the terms of such other
Convertible Securities, shall be increased solely by virtue of provisions
therein contained for an automatic increase in such consideration per share upon
the occurrence of a specified date or event,
then for each outstanding Warrant such previous adjustment shall be
rescinded and annulled and the Additional Shares of Common Stock which were
deemed to have been issued by virtue of the computation made in connection with
the adjustment so rescinded and annulled shall no longer be deemed to have been
issued by virtue of such computation. Thereupon, a recomputation shall be made
of the effect of such rights or options or other Convertible Securities on the
basis of
(c) treating the number of Additional Shares of Common Stock or other
property, if any, theretofore actually issued or issuable pursuant to the
previous exercise of any such warrants or rights or any such right of conversion
or exchange, as having been issued on the date or dates of any such exercise and
for the consideration actually received and receivable therefor, and
(d) treating any such warrants or rights or any such other Convertible
Securities which then remain outstanding as having been granted or issued
immediately after the time of such increase of the consideration per share for
which shares of Common Stock or other property are issuable under such warrants
or rights or other Convertible Securities; whereupon a new adjustment of the
number of shares of Common Stock for which this Warrant is exercisable shall be
made, which new adjustment shall supersede the previous adjustment so rescinded
and annulled.
4.7. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS
SECTION. The following provisions shall be applicable to the making of
adjustments of the number of shares of Common Stock for which this Warrant is
exercisable provided for in this Section 4:
(a) COMPUTATION OF CONSIDERATION. To the extent that any Additional
Shares of Common Stock or any Convertible Securities or any warrants or other
rights to subscribe for or purchase any Additional Shares of Common Stock or any
Convertible Securities shall be issued for cash consideration, the consideration
received by the Company therefor shall be the amount of the cash received by the
Company therefor, or, if such Additional Shares of Common Stock or Convertible
Securities are offered by the Company for subscription, the subscription price,
or, if such Additional Shares of Common Stock or Convertible Securities are sold
to underwriters or dealers for public offering without a subscription offering,
the public offering price (in any such case subtracting any amounts paid or
receivable for accrued interest or accrued dividends and without taking into
account any compensation, discounts or expenses paid or incurred by the Company
for and in the underwriting of, or otherwise in connection with, the issuance
thereof). To the extent that such issuance shall be for a consideration other
than cash, then, except as herein otherwise expressly provided, the amount of
such consideration shall be deemed to be the fair value of such consideration at
the time of such issuance as determined in good faith by the Board of Directors
of the Company. In case any Additional Shares of Common Stock or any Convertible
Securities or any warrants or other rights to subscribe for or purchase such
Additional Shares of Common Stock or Convertible Securities shall be issued in
connection with any merger in which the Company issues any securities, the
amount of consideration therefor shall be deemed to be the fair value, as
determined in good faith by the Board of Directors of the Company, of such
portion of the assets and business of the nonsurviving corporation as such Board
in good faith shall determine to be attributable to such Additional Shares of
Common Stock, Convertible Securities, warrants or other rights, as the case may
be. The consideration for any Additional Shares of Common Stock issuable
pursuant to any warrants or other rights to subscribe for or purchase the same
shall be the consideration received by the Company for issuing such warrants or
other rights plus the additional consideration payable to the Company upon
exercise of such warrants or other rights. The consideration for any Additional
Shares of Common Stock issuable pursuant to the terms of any Convertible
Securities shall be the consideration received by the Company for issuing
warrants or other rights to subscribe for or purchase such Convertible
Securities, plus the consideration paid or payable to the Company in respect of
the subscription for or purchase of such Convertible Securities, plus the
additional consideration, if any, payable to the Company upon the exercise of
the right of conversion or exchange in such Convertible Securities. In case of
the issuance at any time of any Additional Shares of Common Stock or Convertible
Securities in payment or satisfaction of any dividends upon any class of stock
other than Common Stock, the Company shall be deemed to have received for such
Additional Shares of Common Stock or Convertible Securities a consideration
equal to the amount of such dividend so paid or satisfied.
(b) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by this
Section 4 shall be made whenever and as often as any specified event requiring
an adjustment shall occur, except that any adjustment of the number of shares of
Common Stock for which this Warrant is exercisable that would otherwise be
required may be postponed (except in the case of a subdivision or combination of
shares of the Common Stock, as provided for in Section 4.1) up to, but not
beyond the date of exercise if such adjustment either by itself or with other
adjustments not previously results in an increase or decrease of less than 1% of
the shares of Common Stock for which this Warrant is exercisable immediately
prior to the making of such adjustment. Any adjustment representing a change of
less than such minimum amount (except as aforesaid) which is postponed shall be
carried forward and made as soon as such adjustment, together with other
adjustments required by this Section 4 and not previously made, would result in
a minimum adjustment or on the date of exercise. For the purpose of any
adjustment, any specified event shall be deemed to have occurred at the close of
business on the date of its occurrence.
(c) FRACTIONAL INTERESTS. In computing adjustments under this Section 4,
fractional interests in Common Stock shall be taken into account to the nearest
1/100th of a share.
(d) WHEN ADJUSTMENT NOT REQUIRED. If the Company shall take a record of
the holders of its Common Stock for the purpose of entitling them to receive a
dividend or distribution or subscription or purchase rights and shall,
thereafter and before the distribution to stockholders thereof, legally abandon
its plan to pay or deliver such dividend, distribution, subscription or purchase
rights, then thereafter no adjustment shall be required by reason of the taking
of such record and any such adjustment previously made in respect thereof shall
be rescinded and annulled.
(e) ESCROW OF WARRANT STOCK. If after any property becomes
distributable pursuant to this Section 4 by reason of the taking of any record
of the holders of Common Stock, but prior to the occurrence of the event for
which such record is taken, Holder exercises this Warrant, any Additional Shares
of Common Stock issuable upon exercise by reason of such adjustment shall be
deemed the last shares of Common Stock for which this Warrant is exercised
(notwithstanding any other provision to the contrary herein) and such shares or
other property shall be held in escrow for Holder by the Company to be issued to
Holder when and to the extent that the event actually takes place, upon payment
of the Warrant Price. Notwithstanding any other provision to the contrary
herein, if the event for which such record was taken fails to occur or is
rescinded, then such escrowed shares shall be canceled by the Company and
escrowed property returned.
4.8. REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION
OR DISPOSITION OF ASSETS. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect of the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all its property,
assets or business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then Holder shall have the right thereafter to receive, upon
exercise of this Warrant and payment of the Warrant Price, the number of shares
of common stock of the successor or acquiring corporation or of the Company, if
it is the surviving corporation, and Other Property receivable upon or as a
result of such reorganization, reclassification, merger, consolidation or
disposition of assets by a holder of the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to such event. In case of
any such reorganization, reclassification, merger, consolidation or disposition
of assets, the successor or acquiring corporation (if other than the Company)
shall expressly assume the due and punctual observance and performance of each
and every covenant and condition of this Warrant to be performed and observed by
the Company and all the obligations and liabilities hereunder, subject to such
modifications as may be deemed appropriate (as determined by resolution of the
Board of Directors of the Company) in order to provide for adjustments of shares
of the Common Stock for which this Warrant is exercisable which shall be as
nearly equivalent as practicable to the adjustments provided for in this Section
4. For purposes of this Section 4.8, "common stock of the successor or acquiring
corporation" shall include stock of such corporation of any class which is not
preferred as to dividends or assets over any other class of stock of such
corporation and which is not subject to redemption and shall also include any
evidences of indebtedness, shares of stock or other securities which are
convertible into or exchangeable for any such stock, either immediately or upon
the arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Section 4.8 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.
4.9. OTHER ACTION AFFECTING COMMON STOCK. In case at any time
or from time to time the Company shall take any action in respect of its Common
Stock, other than any action described in this Section 4, then, unless such
action will not have a materially adverse effect upon the rights of the Holders,
the number of shares of Common Stock or other stock for which this Warrant is
exercisable shall be adjusted in such manner as may be equitable in the
circumstances.
5. NOTICES TO WARRANT HOLDERS
5.1. NOTICE OF ADJUSTMENTS. Whenever the number of shares of
Common Stock for which this Warrant is exercisable shall be adjusted pursuant to
Section 4, the Company shall forthwith prepare a certificate to be executed by
the chief financial officer of the Company setting forth, in reasonable detail,
the event requiring the adjustment and the method by which such adjustment was
calculated (including a description of the basis on which the Board of Directors
of the Company determined the fair value of any evidences of indebtedness,
shares of stock, other securities or property or warrants or other subscription
or purchase rights referred to in Section 4.2 or 4.7(a)), specifying the number
of shares of Common Stock for which this Warrant is exercisable and (if such
adjustment was made pursuant to Section 4.8) describing the number and kind of
any other shares of stock or Other Property for which this Warrant is
exercisable, after giving effect to such adjustment. The Company shall promptly
cause a signed copy of such certificate to be delivered to each Holder in
accordance with Section 13.2. The Company shall keep at its principal office
copies of all such certificates and cause the same to be available for
inspection at said office during normal business hours by any Holder or any
prospective purchaser of a Warrant designated by a Holder thereof.
5.2. NOTICE OF CORPORATE ACTION. If at any time
(a) the Company shall take a record of the holders of its Common Stock
for the purpose of entitling them to receive a dividend (other than a cash
dividend payable out of earnings or earned surplus legally available for the
payment of dividends under the laws of the jurisdiction of incorporation of the
Company) or other distribution, or any right to subscribe for or purchase any
evidences of its indebtedness, any shares of stock of any class or any other
securities or property, or to receive any other right, or
(b) there shall be any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation, or
(c) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 20 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, and (ii) in the case of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, at least 20 days' prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause also shall specify
(i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, the date on which the holders of Common Stock
shall be entitled to any such dividend, distribution or right, and the amount
and character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 13.2.
6. RIGHTS OF HOLDERS
6.1 NO IMPAIRMENT. The Company shall not by any action,
including, without limitation, amending its Certificate of Incorporation or
comparable governing instruments or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant, but will at all times in good faith assist in
the carrying out of all such terms and in the taking of all such actions as may
be necessary or appropriate to protect the rights of Holder against impairment.
Without limiting the generality of the foregoing, the Company will (a) not
increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the amount payable therefor upon such exercise
immediately prior to such increase in par value, (b) take all such action as may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable shares of Common Stock upon the exercise of
this Warrant, and (c) use its best efforts to obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Company to perform its obligations
under this Warrant.
Upon the request of Holder, the Company will at any time
during the period this Warrant is outstanding acknowledge in writing, in form
reasonably satisfactory to Holder, the continuing validity of this Warrant and
the obligations of the Company hereunder.
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR
APPROVAL OF ANY GOVERNMENTAL AUTHORITY
From and after the Closing Date, the Company shall at all
times reserve and keep available for issue upon the exercise of Warrants such
number of its authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of all outstanding Warrants. All
shares of Common Stock which shall be so issuable, when issued upon exercise of
any Warrant and payment therefor in accordance with the terms of such Warrant,
shall be duly and validly issued and fully paid and nonassessable, and not
subject to preemptive rights.
8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by the
Company to the holders of its Common Stock with respect to which any provision
of Section 4 refers to the taking of a record of such holders, the Company will
in each such case take such a record and will take such record as of the close
of business on a Business Day. The Company will not at any time, except upon
dissolution, liquidation or winding up of the Company, close its stock transfer
books or Warrant transfer books so as to result in preventing or delaying the
exercise or transfer of any Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
The Warrants and the Warrant Stock shall not be transferred,
hypothecated or assigned before satisfaction of the conditions specified in this
Section 9, which conditions are intended to ensure compliance with the
provisions of the Securities Act with respect to the Transfer of any Warrant or
any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by
the provisions of this Section 9.
9.1. RESTRICTIVE LEGEND. Except as otherwise provided in this Section 9,
each Warrant and each certificate for Warrant Stock initially issued upon the
exercise of a Warrant, and each certificate for Warrant Stock issued to any
subsequent transferee of any such certificate, shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"[This Warrant and the securities represented hereby] [The securities
represented by this Certificate] have not been registered under the Securities
Act of 1933, as amended, and may not be transferred in violation of such Act,
the rules and regulations thereunder or the provisions of [this Warrant] [that
certain Warrant dated August 26, 1996, a copy of which is on file at the
principal office of Krause's Furniture, Inc.]."
9.2. NOTICE OF PROPOSED TRANSFERS; REQUESTS FOR REGISTRATION.
Prior to any Transfer or attempted Transfer of any Warrants or any shares of
Restricted Common Stock, the holder of such Warrants or Restricted Common Stock
shall give ten days' prior written notice (a "Transfer Notice") to the Company
of such holder's intention to effect such Transfer, describing the manner and
circumstances of the proposed Transfer, and obtain from counsel to such holder
who shall be reasonably satisfactory to the Company, an opinion that the
proposed Transfer of such Warrants or such Restricted Common Stock may be
effected without registration under the Securities Act. After receipt of the
Transfer Notice and opinion, the Company shall, within five days thereof, notify
the holder of such Warrants or such Restricted Common Stock as to whether such
opinion is reasonably satisfactory and, if so, such holder shall thereupon be
entitled to Transfer such Warrants or such Restricted Common Stock, in
accordance with the terms of the Transfer Notice. Each certificate, if any,
evidencing such shares of Restricted Common Stock issued upon such Transfer and
each Warrant issued upon such Transfer shall bear the restrictive legend set
forth in Section 9.1, unless in the opinion of such counsel such legend is not
required in order to ensure compliance with the Securities Act. The holder of
the Warrants or the Restricted Common Stock, as the case may be, giving the
Transfer Notice shall not be entitled to Transfer such Warrants or such
Restricted Common Stock until receipt of notice from the Company under this
Section 9.2 that such opinion is reasonably satisfactory.
9.3. REGISTRATION RIGHTS. The holders of Warrants and Warrant Stock shall
have the registration rights set forth in the Registration Rights Agreement.
9.4. TERMINATION OF RESTRICTIONS. Notwithstanding the
foregoing provisions of this Section 9, the restrictions imposed by this Section
upon the transferability of the Warrants, the Warrant Stock and the Restricted
Common Stock and the legend requirements of Section 9.1 shall terminate as to
any particular Warrant or share of Warrant Stock or Restricted Common Stock (i)
when and so long as such security shall have been effectively registered under
the Securities Act and disposed of pursuant thereto or (ii) when the Company
shall have received an opinion of counsel reasonably satisfactory to it that
such shares may be transferred without registration thereof under the Securities
Act.
10. SUPPLYING INFORMATION
The Company shall cooperate with each Holder of a Warrant and
each holder of Restricted Common Stock in supplying such information as may be
reasonably necessary for such holder to complete and file any reports or forms
presently or hereafter required by the Commission as a condition to the
availability of an exemption from the Securities Act for the sale of any Warrant
or Restricted Common Stock.
11. LOSS OR MUTILATION
Upon receipt by the Company from any Holder of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and indemnity reasonably satisfactory
to it (it being understood that the written agreement of GE Capital shall be
sufficient indemnity), and in case of mutilation upon surrender and cancellation
hereof, the Company will execute and deliver in lieu hereof a new Warrant of
like tenor to such Holder; PROVIDED, in the case of mutilation, no indemnity
shall be required if this Warrant in identifiable form is surrendered to the
Company for cancellation.
12. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by
Holder to purchase shares of Common Stock, and no enumeration herein of the
rights or privileges of Holder hereof, shall give rise to any liability of such
Holder for the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
13. MISCELLANEOUS
13.1. NONWAIVER AND EXPENSES. No course of dealing or any
delay or failure to exercise any right hereunder on the part of Holder shall
operate as a waiver of such right or otherwise prejudice Holder's rights, powers
or remedies. If the Company fails to make, when due, any payments provided for
hereunder, or fails to comply with any other provision of this Warrant, the
Company shall pay to Holder such amounts as shall be sufficient to cover any
costs and expenses including, but not limited to, reasonable attorneys' fees,
including those of appellate proceedings, incurred by Holder in collecting any
amounts due pursuant hereto or in otherwise enforcing any of its rights, powers
or remedies hereunder.
13.2. NOTICE GENERALLY. Any notice, demand, request, consent,
approval, declaration, delivery or other communication hereunder to be made
pursuant to the provisions of this Warrant shall be sufficiently given or made
if in writing and either delivered in person with receipt acknowledged or sent
by registered or certified mail, return receipt requested, postage prepaid, or
by telecopy and confirmed by telecopy answerback, addressed as follows:
(a) If to any Holder or holder of Warrant Stock, at its last known
address appearing on the books of the Company maintained for such purpose.
(b) If to the Company at
200 North Berry Street
Brea, CA 92621-3903
Attention: Philip M. Hawley
Telecopy Number: (714) 990-3561
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder shall
be deemed to have been duly given or served on the date on which personally
delivered, with receipt acknowledged, telecopied and confirmed by telecopy
answerback, or three (3) Business Days after the same shall have been deposited
in the United States mail. Failure or delay in delivering copies of any notice,
demand, request, approval, declaration, delivery or other communication to the
person designated above to receive a copy shall in no way adversely affect the
effectiveness of such notice, demand, request, approval, declaration, delivery
or other communication.
13.3. REMEDIES. Each holder of Warrant and Warrant Stock, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under of this Warrant. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Warrant and hereby agrees to waive the defense in any action
for specific performance that a remedy at law would be adequate.
13.4. SUCCESSORS AND ASSIGNS. Subject to the provisions of
Sections 3.1, this Warrant and the rights evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and assigns of Holder. The provisions of this Warrant are intended to be for the
benefit of all Holders from time to time of this Warrant and, with respect to
Section 9 hereof, holders of Warrant Stock, and shall be enforceable by any such
Holder or holder of Warrant Stock.
13.5. AMENDMENT. This Warrant and all other Warrants may be
modified or amended or the provisions hereof waived with the written consent of
the Company and the Majority Holders, PROVIDED that no such Warrant may be
modified or amended to reduce the number of shares of Common Stock for which
such Warrant is exercisable or to increase the price at which such shares may be
purchased upon exercise of such Warrant (before giving effect to any adjustment
as provided therein) without the prior written consent of the Holder thereof,
provided however, that the foregoing shall not limit the operation of Section
4.6.
13.6. SEVERABILITY. Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Warrant.
13.7. HEADINGS. The headings used in this Warrant are for the convenience
of reference only and shall not, for any purpose, be deemed a part of this
Warrant.
13.8. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY AND UNCONDITIONALLY CONSENTS TO SUBMIT TO THE EXCLUSIVE JURISDICTION
OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES OF AMERICA, IN
EACH CASE LOCATED IN THE COUNTY OF NEW YORK FOR ANY ACTION, PROCEEDING OR
INVESTIGATION IN ANY COURT OR BEFORE ANY GOVERNMENTAL AUTHORITY ("LITIGATION")
ARISING OUT OF OR RELATING TO THIS WARRANT AND THE TRANSACTIONS CONTEMPLATED
HEREBY (AND AGREES NOT TO COMMENCE ANY LITIGATION RELATING THERETO EXCEPT IN
SUCH COURTS), AND FURTHER AGREES THAT SERVICE OF ANY PROCESS, SUMMONS, NOTICE OR
DOCUMENT BY U.S. REGISTERED MAIL TO ITS RESPECTIVE ADDRESS SET FORTH IN THIS
WARRANT SHALL BE EFFECTIVE SERVICE OF PROCESS FOR ANY LITIGATION BROUGHT AGAINST
IT IN ANY SUCH COURT. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF ANY LITIGATION
ARISING OUT OF THIS WARRANT OR THE TRANSACTIONS CONTEMPLATED HEREBY IN THE
COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES OF AMERICA, IN EACH CASE
LOCATED IN THE COUNTY OF NEW YORK, AND HEREBY FURTHER IRREVOCABLY AND
UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT
ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. EACH OF THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHTS TO TRIAL
BY JURY IN CONNECTION WITH ANY LITIGATION ARISING OUT OF OR RELATING TO THIS
WARRANT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and its corporate seal to be impressed hereon and attested by its Secretary or
an Assistant Secretary.
Dated: August 26, 1996
KRAUSE'S FURNITURE, INC.
By:
- -----------------------
Name:
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably exercises this
Warrant for the purchase of _____ Shares of Common Stock of KRAUSE'S FURNITURE,
INC. and herewith makes payment therefor, all at the price and on the terms and
conditions specified in this Warrant and requests that certificates for the
shares of Common Stock hereby purchased (and any securities or other property
issuable upon such exercise) be issued in the name of and delivered to
_____________ whose address is ________________ and, if such shares of Common
Stock shall not include all of the shares of Common Stock issuable as provided
in this Warrant, that a new Warrant of like tenor and date for the balance of
the shares of Common Stock issuable hereunder be delivered to the undersigned.
(Name of Registered Owner)
(Signature of Registered Owner)
(Street Address)
(City) (State)
(Zip Code)
NOTICE: The signature on this subscription must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby
sells, assigns and transfers unto the Assignee named below all of the rights of
the undersigned under this Warrant, with respect to the number of shares of
Common Stock set forth below:
NAME AND ADDRESS OF ASSIGNEE NO. OF SHARES OF COMMON STOCK
and does hereby irrevocably constitute and appoint ________________
attorney-in-fact to register such transfer on the books of KRAUSE'S FURNITURE,
INC. maintained for the purpose, with full power of substitution in the
premises.
Dated:_______________ Print Name:
Signature:
Witness:
NOTICE: The signature on this assignment must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
1. DEFINITIONS..............................................................1
2. EXERCISE OF WARRANT......................................................4
2.1. Manner of Exercise.................................................4
2.2. Payment of Taxes...................................................5
2.3. Fractional Shares..................................................5
3. TRANSFER, DIVISION AND COMBINATION.......................................5
3.1. Transfer...........................................................5
3.2. Division and Combination...........................................5
3.3. Expenses...........................................................6
3.4. Maintenance of Books...............................................6
4. ADJUSTMENTS..............................................................6
4.1. Stock Dividends, Subdivisions and
Combinations.......................................................6
4.2. Certain Other Distributions........................................6
4.3 Issuance of Additional Shares of Common Stock......................7
4.4. Issuance of Warrants or Other Rights...............................8
4.5. Issuance of Convertible Securities.................................9
4.6. Superseding Adjustment.............................................9
4.7. Other Provisions Applicable to Adjustments under this
Section...........................................................10
4.8. Reorganization, Reclassification, Merger,
Consolidation or Disposition of Assets............................12
4.9. Other Action Affecting Common Stock...............................13
5. NOTICES TO WARRANT HOLDERS........................................14
5.1. Notice of Adjustment..............................................14
5.2. Notice of Corporate Action........................................14
6. RIGHTS OF HOLDERS.......................................................15
6.1. No Impairment.....................................................15
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK;
REGISTRATION WITH APPROVAL OF ANY
GOVERNMENTAL AUTHORITY..................................................16
8. TAKING OF RECORD: STOCK AND WARRANT TRANSFER BOOKS......................16
9. RESTRICTIONS ON TRANSFERABILITY.........................................16
9.1. Restrictive Legend................................................16
9.2. Notice of Proposed Transfers; Requests for Registration...........17
9.3. Registration Rights...............................................17
9.4. Termination of Restrictions.......................................17
10.SUPPLYING INFORMATION...................................................18
11.LOSS OR MUTILATION......................................................18
12.LIMITATION OF LIABILITY.................................................18
13.MISCELLANEOUS...........................................................18
13.1 Nonwaiver and Expenses............................................18
13.2. Notice Generally..................................................19
13.3. Remedies..........................................................19
13.4. Successors and Assigns............................................19
13.5. Amendment.........................................................20
13.6. Severability......................................................20
13.7. Headings..........................................................20
13.8. Governing Law.....................................................20
SIGNATURES.................................................................21
EXHIBITS...................................................................22
Exhibit A - Subscription Form..............................................22
Exhibit B - Assignment Form................................................23
<PAGE>
WARRANT
To Purchase Shares of Common Stock of
KRAUSE'S FURNITURE, INC.
No. of Shares of Common Stock: 1,400,000
<PAGE>
PURCHASE AGREEMENT
THIS AGREEMENT is made as of the 26th day of August, 1996, between
Krause's Furniture, Inc. (the "Company"), a Delaware corporation, with its
principal offices at 200 North Berry Street, Brea, California 92621-3903 and the
purchaser whose name and address is set forth on the signature page hereof (the
"Purchaser").
IN CONSIDERATION of the mutual covenants contained in this Agreement,
the Company and the Purchaser agree as follows:
SECTION 1. Authorization of Sale of the Common Stock. Subject to the
terms and conditions of this Agreement, the Company has authorized the sale of
at least 7,000,000 shares of its Common Stock, par value $.001 per share (the
"Common Stock"), at a purchase price of U.S. $1.00 per share.
SECTION 2. Agreement to Sell and Purchase the Common Stock. At the
Closing (as defined in Section 3), the Company will sell to the Purchaser, and
the Purchaser will buy from the Company, upon the terms and conditions set forth
herein, the aggregate number of shares of Common Stock shown below:
Number of Shares Aggregate
of Common Stock Purchase Price
The Company proposes to enter into substantially this same form of purchase
agreement with certain other investors (the "Other Purchasers") and expects to
complete sales of shares of Common Stock to them. The Purchaser and the Other
Purchasers are hereinafter sometimes collectively referred to as the
"Purchasers," and this Agreement and the agreements executed by the Other
Purchasers are hereinafter sometimes collectively referred to as the "Purchase
Agreements." In addition, the Company also proposes to enter into a Securities
Purchase Agreement with General Electric Capital Corporation ("GECC") pursuant
to which GECC shall agree to acquire (i) five million shares of the Company's
Common Stock par value $.001 per share (the "Common Stock"), at an aggregate
purchase price of $5,000,000, (ii) the Company's 10% Subordinated Pay-In-Kind
Notes due August 31, 2001 (the "Notes"), in the initial aggregate principal
amount of $5,000,000 and (iii) in connection with the sale of the Notes, a
warrant (the "Warrant") to purchase 1,400,000 shares of Common Stock (the
"Securities Purchase Agreement"). The Purchase Agreements and the Securities
Purchase Agreement are hereinafter sometimes collectively referred to as the
"Agreements."
SECTION 3. The Closing. The closing (the "Closing") of the purchase and
sale of the Common Stock and the other transactions contemplated hereunder shall
take place at the offices of Fried, Frank, Harris, Shriver & Jacobson, New York,
New York, at 9:00 a.m. local time on or before August 26, 1996, or such later
date as the parties hereto may agree (the "Closing Date").
3.1. Delivery of the Common Stock at the Closing. Within thirty (30)
business days of the Closing, the Company shall deliver to the Purchaser one or
more stock certificates registered in the name of the Purchaser, or in such
nominee name(s) as designated by the Purchaser, representing the number of
shares of Common Stock set forth in Section 2 above. The name(s) in which the
stock certificates are to be registered are set forth in the Stock Certificate
Questionnaire attached hereto as Appendix I. The Company's obligation to
complete the issuance and sale of the Common Stock and deliver such stock
certificate(s) to the Purchaser at the Closing shall be subject to the following
conditions: (a) concurrent closing of the transactions contemplated by the
Securities Purchase Agreement; (b) completion of the purchases and sales
pursuant to the Purchase Agreements with the Purchaser and the Other Purchasers
of at least 7,000,000 shares of Common Stock at a purchase price of U.S. $1.00
per share; (c) receipt by the Company of (i) New York Clearing House (next day)
funds in the full amount of the purchase price for the Common Stock being
purchased hereunder and/or (ii) if all or part of the purchase price for any
Common Stock is being paid by the exchange and cancellation of any promissory
notes evidencing outstanding indebtedness of the Company, and any interest
accrued and payable thereon, as referred to in subsection 3.2 hereto, an
Agreement of Cancellation and Exchange Relating to Certain Notes in
substantially the form of Exhibit A attached hereto (the "Cancellation and
Exchange Agreement"), relating to such promissory notes, as executed by the
Purchaser, together with the promissory notes referred to therein, provided that
the aggregate purchase price received by the Company under clauses (i) and (ii)
shall be at least $7,000,000; (d) certain of the Purchasers and GECC shall have
entered into a Stockholders Agreement in substantially the form of Exhibit B
attached hereto (the "Stockholders Agreement"); and (e) the accuracy in all
material respects of the representations and warranties made by the Purchasers
and the fulfillment in all material respects of those undertakings of the
Purchasers to be fulfilled prior to the Closing. The Purchaser's obligation to
accept delivery of such stock certificate(s) and to pay for the Common Stock
evidenced thereby shall be subject to the following conditions: (w) concurrent
closing of the transactions contemplated pursuant to the Securities Purchase
Agreement; (x) completion of the purchases and sales pursuant to the Purchase
Agreements with the Purchaser and the Other Purchasers of 7,000,000 shares of
Common Stock at a purchase price of U.S. $1.00 per share; (y) the Company shall
have entered into a Registration Rights Agreement in substantially the form of
Exhibit C attached hereto; and (z) the accuracy in all material respects of the
representations and warranties made by the Company herein and the fulfillment in
all material respects of those undertakings of the Company to be fulfilled prior
to Closing.
3.2. Cancellation of Certain Indebtedness. On or before the Closing Date,
the Company shall enter into a Cancellation and Exchange Agreements with (a)
Edson Investments Inc. ("Edson"), the holder of (i) a Demand Promissory Note in
the aggregate principal amount of $1,500,000, issued to it by the Company, dated
May 21, 1996, and (ii) a Demand Promissory Note in the aggregate principal
amount of U.S. $500,000, dated July 2, 1996, and (b) each holder (together with
Edson, each a "Note Holder") of Series 1996-I or Series 1996-II Convertible
Promissory Notes, which are currently outstanding in the aggregate principal
amount of $950,000, whereby such aforementioned indebtedness of the Company,
including any interest accrued and payable thereon, shall be canceled in
exchange for shares of Common Stock. Each Note Holder shall receive the number
of shares of Common Stock equal to (x) the sum of (i) the aggregate principal
amount of indebtedness of the Company held by such Note Holder and (ii) any
interest accrued and payable thereon divided by (y) the Common Stock purchase
price of U.S. $1.00 per share.
SECTION 4. Representations, Warranties and Covenants. The Company hereby
represents and warrants to, and covenants with, the Purchaser as follows:
4.1. Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of Delaware and
has all requisite corporate power and authority to conduct its business as
currently conducted. The Company is qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the failure to
so qualify would have a material adverse effect on the operations of the Company
and its subsidiaries, taken as a whole.
4.2. Authorized Capital Stock. As of the date hereof, the authorized
capital stock of the Company consists of: (a) thirty-five million (35,000,000)
shares of Common Stock, of which four million one hundred twenty thousand eight
hundred and ten (4,120,810) shares are validly issued and outstanding, fully
paid and nonassessable, and warrants to purchase one hundred eighty-five
thousand seven hundred and one shares (185,701) of Common Stock and options to
purchase one hundred ninety-one thousand six hundred and fourteen (191,614)
shares of Common Stock are validly issued and outstanding, fully paid and
nonassessable; and (b) six hundred and sixty-six thousand six hundred and
sixty-seven (666,667) shares of Preferred Stock, par value $.001 per share,
designated as Series A Preferred Stock (two hundred thousand (200,000) shares)
and Series B Preferred Stock (forty-four thousand four hundred and forty-four
(44,444) shares), of which one hundred seventeen thousand six hundred and
ninety-four (117,694) shares of Series A Preferred Stock are validly issued and
outstanding, fully paid and nonassessable and no shares of Series B Preferred
Stock are outstanding.
4.3. Due Execution, Delivery and Performance of the Agreements. The
Company's execution, delivery and performance of the Agreements, issuance of the
Common Stock, and execution, delivery and performance of the Stockholders
Agreement (a) have been duly authorized under Delaware law by all requisite
corporate action by the Company, and (b) will not violate any law or the
Certificate of Incorporation or Bylaws of the Company or any provision of any
indenture, mortgage, agreement, contract or other instrument to which the
Company is a party or by which the Company or any of its properties or assets is
bound as of the date hereof, or result in a breach of or constitute (upon notice
or lapse of time or both) a default under any such indenture, mortgage,
agreement, contract or other instrument or result in the creation or imposition
of any lien, security interest, mortgage, pledge, charge or other encumbrance,
of any nature whatsoever, upon any properties or assets of the Company. Upon
their execution and delivery, and assuming the valid execution thereof by the
respective Purchasers, the Agreements will constitute valid and binding
obligations of the Company, enforceable in accordance with their respective
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors' and
contracting parties' rights generally and except as enforceability may be
subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
4.4. Issuance, Sale and Delivery of the Common Stock. When issued and
delivered by the Company and paid for by the Purchasers, the Common Stock will
be duly authorized, validly issued, fully paid and nonassessable.
SECTION 5. Representations, Warranties and Covenants of the Purchaser. (a)
The Purchaser represents and warrants to, and covenants with, the Company that:
(i) the Purchaser is knowledgeable, sophisticated and experienced in making, and
is qualified to make, decisions with respect to investments in shares presenting
an investment decision like that involved in the purchase of the Common Stock,
including investments in securities issued by the Company, and has requested,
received, reviewed and considered all information it deems relevant in making an
informed decision to purchase the shares of Common Stock; (ii) the Purchaser is
acquiring the number of shares of Common Stock set forth in Section 2 above in
the ordinary course of its business and for its own account for investment (as
defined for purposes of the Hart-Scott-Rodino Antitrust Improvement Act of 1976
and the regulations thereunder) only and with no present intention of
distributing any of such shares of Common Stock or any arrangement or
understanding with any other persons regarding the distribution of such shares
of Common Stock, subject to its right to resell the shares of Common Stock as
provided in the following clause (iii); (iii) the Purchaser will not offer, sell
or otherwise transfer any shares of Common Stock except (A) to Krause's
Furniture, Inc., (B) pursuant to a registration statement which has been
declared effective under the Securities Act of 1933, as amended (the "Securities
Act"), or (C) in accordance with Rule 144 under the Securities Act or pursuant
to another available exemption from the registration requirements of the
Securities Act (which shall be confirmed in an opinion of counsel acceptable in
form and substance to the Company if the Company so requests) and, in each case,
in accordance with the applicable securities laws of any state of the United
States or any other applicable jurisdiction; (iv) the purchase of shares of
Common Stock by the Purchaser either (A) is being funded solely out of an
insurance company general investment account which exclusively supports either
(1) contracts not issued to any "employee benefit plan" as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), which is subject to Title 1 of ERISA or any "plan" within the meaning
of Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"),
or (2) policies which constitute "guaranteed benefit policies" under Section
401(b)(2) of ERISA, or as to which no such plan or plans maintained by any
employer and its affiliates has an interest as a contractholder (as measured by
the amount of reserves arising from the contract held by the plan or plans,
determined under Section 807(d) of the Code) which exceeds 10% of the total
liabilities of the general account; (B) is not being funded with the assets of
any (1) "employee benefit plan" within the meaning of Section 3(3) of ERISA
which is subject to Title 1 of ERISA, (2) "plan" within the meaning of Section
4975 of the Code or (3) entity deemed to hold "plan assets" within the meaning
of 29 C.F.R ss. 25103-101 of any such employee benefit plan or plans; or (C) is
not a prohibited transaction within the meaning of Section 406 of ERISA or
Section 4975 of the Code because the Purchaser has an exemption from such
prohibited transaction rules for the purchase and holding of the Common Stock;
(v) the Purchaser will not, directly or indirectly, offer, sell, pledge,
transfer or otherwise dispose of (or solicit any offers to buy, purchase or
otherwise acquire or take a pledge of) any shares of Common Stock except in
compliance with the Securities Act and the rules and regulations promulgated
thereunder; (vi) the Purchaser has completed or caused to be completed the Stock
Certificate Questionnaire, attached hereto as Appendix I, and the answers
thereto are true and correct to the best knowledge of the Purchaser as of the
date hereof; (vii) the Purchaser has, in connection with its decision to
purchase the number of shares of Common Stock set forth in Section 2 above,
relied solely upon the representations and warranties of the Company contained
herein; (viii) the Purchaser is an "accredited investor" within the meaning of
Rule 501(a)(1), (2) or (3) under the Securities Act; (ix) the Purchaser
understands that the shares of Common Stock will contain a legend to the
following effect:
"THIS SECURITY HAS BEEN ACQUIRED BY THE HOLDER FOR THE PURPOSE OF
INVESTMENT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH ANY
DISTRIBUTION. THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
'SECURITIES ACT'), OR ANY STATE SECURITIES LAWS AND NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, SOLD
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. THE HOLDER OF THIS SECURITY, BY ITS
ACCEPTANCE HEREOF, REPRESENTS, ACKNOWLEDGES AND AGREES FOR THE BENEFIT
OF THE COMPANY THAT: (I) IT HAS ACQUIRED A 'RESTRICTED' SECURITY WHICH
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT; (II) IT WILL NOT
OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO KRAUSE'S
FURNITURE, INC., (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS
BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, OR (C) IN ACCORDANCE
WITH RULE 144 UNDER THE SECURITIES ACT OR PURSUANT TO ANOTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
(WHICH SHALL BE CONFIRMED IN AN OPINION OF COUNSEL ACCEPTABLE IN FORM
AND SUBSTANCE TO THE ISSUER OF THIS SECURITY IF THE ISSUER SO REQUESTS)
AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF
ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION;
AND (III) IT WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY
ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS SET
FORTH IN (II) ABOVE;"
and (x) if the Purchaser has entered into the Stockholders Agreement, the
Purchaser understands that the stock certificates representing the shares of
Common Stock issued and sold hereby will contain a legend to the following
effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AS SET FORTH IN THE STOCKHOLDERS AGREEMENT,
DATED AS OF AUGUST 26, 1996, AS FROM TIME TO TIME AMENDED, A COPY OF
WHICH MAY BE OBTAINED FROM KRAUSE'S FURNITURE, INC."
(b) The Purchaser further represents and warrants to, and covenants with,
the Company that (i) the Purchaser has full right, power, authority and capacity
to enter into this Agreement and to consummate the transactions contemplated
hereby and has taken all necessary action to authorize the execution, delivery
and performance of this Agreement, and (ii) upon the execution and delivery of
this Agreement, this Agreement shall constitute a valid and binding obligation
of the Purchaser enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' and contracting
parties rights generally and except as enforceability may be subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
SECTION 6. Survival of Representations, Warranties and Agreements.
Notwithstanding any investigation made by any party to this Agreement, all
covenants, agreements, representations and warranties made by the Company and
the Purchaser herein and in the stock certificates for the Common Stock
delivered pursuant hereto shall survive the execution of this Agreement, the
delivery to the Purchaser of shares of Common Stock being purchased and the
payment therefor.
SECTION 7. Broker's Fee. Each of the parties hereto hereby represents that,
on the basis of any actions and agreements by it, there are no brokers or
finders entitled to compensation in connection with the sale of the Common Stock
to the Purchaser.
SECTION 8. Notices. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by first-class
registered or certified airmail, telecopier, or nationally recognized overnight
express courier postage prepaid, and shall be deemed given when so mailed or if
telecopied, when receipt is acknowledged, and shall be delivered as addressed as
follows:
(a) if to the Company, to:
Krause's Furniture, Inc.
200 North Berry Street
Brea, California 92621-3903
Attention: Robert G. Sharpe,
Executive Vice President
Telecopier: (510) 460-6205
with a copy so mailed to:
Stroock & Stroock & Lavan
Seven Hanover Square
New York, New York 10004-9686
Attention: David Kaufman, Esq.
Telecopier: (212) 806-6006
or to such other person at such other place as the
Company shall designate to the Purchaser in writing; and
(b) if to the Purchaser, at its address or telecopier number as
set forth at the end of this Agreement, or at such other
address or addresses as may have been furnished to the Company
in writing.
SECTION 9. Changes. This Agreement may not be modified or amended except
pursuant to an instrument in writing signed by the Company and the Purchaser.
SECTION 10. Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent holders of the securities purchased hereunder.
SECTION 11. Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
SECTION 12. Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
SECTION 13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 14. Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
SECTION 15. Entire Agreement. This Agreement is intended by the parties as
a final expression of their agreement and intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
KRAUSE'S FURNITURE, INC.
By: _______________________________
Name: Robert G. Sharpe
Title: Executive Vice President
Print or Type:
Name of Purchaser:
-----------------------------------
Name of Individual representing
Purchaser:
-----------------------------------
Title of Individual representing
Purchaser:
-----------------------------------
Signature by:
Individual representing Purchaser:
-----------------------------------
Address: __________________________
Telephone: ________________________
Telecopier: _______________________
<PAGE>
Appendix I
KRAUSE'S FURNITURE, INC.
STOCK CERTIFICATE QUESTIONNAIRE
Pursuant to Section 3 of the Agreement, please provide us with the
following information:
1. The exact name that your shares
of Common Stock are to be
registered in (this is the name
that will appear on your stock
certificate(s)). You may use a
nominee name if appropriate: ______________________
2. The relationship between the
Purchaser of the Common Stock
and the Registered Holder listed
in response to item 1 above: _______________________
3. The mailing address of the
Registered Holder listed in
response to item 1 above: ______________________
4. The Social Security Number or
Tax Identification Number of the
Registered Holder listed
in response to item 1 above: ______________________
5. If the Registered Holder is not
the same as the Purchaser signing
the Agreement, the Purchaser hereby
represents and warrants to the
Company that the Purchaser
has full legal right, power and
authority to bind the Registered
Holder as the purchaser under
the Agreement and to make all
representations, warranties,
covenants and agreements of the
Purchaser on behalf of each
Registered Holder listed above
including, without limitation,
that the Registered Holder is an
accredited investor under Rule
501(a) under the Securities Act.
<PAGE>
Exhibit A
AGREEMENT OF CANCELLATION AND EXCHANGE
RELATING TO CERTAIN NOTES
The undersigned, the holder (the "Note Holder") of that certain [DESCRIBE
NOTE] (the "Specified Notes"), issued by KRAUSE'S FURNITURE, INC., a Delaware
corporation (the "Company"), hereby agrees to the cancellation of the Specified
Notes in exchange for _________ shares of the Company's Common Stock, par value
$.001 per share (the "Common Stock"), and hereby waives and relinquishes all of
its respective rights with respect thereto. Concurrently herewith, the Note
Holder hereby (i) delivers to the Company (a) an executed Purchase Agreement,
dated as of August __, 1996, between the Company and the Note Holder as
purchaser, pursuant to which the Company shall issue the Common Stock to the
Note Holder in exchange for the cancellation of the Specified Notes and for
payment of any interest accrued and payable thereon and (b) for cancellation,
the original Specified Notes representing indebtedness in the aggregate
principal amount of $___________; and (ii) agrees that the number of shares of
Common Stock issued to the Note Holder constitutes full payment for the
cancellation of the indebtedness of the Company represented by the Specified
Notes and any interest accrued and payable thereon.
[NOTE HOLDER]
By: _________________________________
Name:
Title:
Dated: As of August __, 1996
<PAGE>
STOCKHOLDERS AGREEMENT
by and among
KRAUSE'S FURNITURE, INC.
and
THE STOCKHOLDERS LISTED ON
THE SIGNATURE PAGES HEREOF
Dated as of August 26, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
Section 1. Definitions.....................................................1
Section 2. Corporate Governance............................................6
2.1. Board of Directors.........................................6
2.2. Certain Actions Requiring Consent of GECC Designee.........8
2.3. Management................................................10
2.4. Directors' Indemnification................................11
2.5. Expenses..................................................12
2.6. Cooperation...............................................12
2.7. Voting....................................................12
Section 3. Restrictions on Transfers of Stock.............................12
Section 4. Rights of First Offer..........................................13
Section 4A. Hawley Trust Stock Rights of First Offer......................14
Section 5. Tag-Along Rights...............................................16
Section 6. Conflicting Agreements.........................................16
Section 7. Legend.........................................................17
Section 8. Representations and Warranties.................................18
Section 9. Duration of Agreement..........................................19
Section 10. Further Assurances............................................19
Section 11. Amendment and Waiver..........................................19
Section 12. Severability..................................................20
Section 13. Entire Agreement..............................................20
Section 14. Successors and Assigns........................................20
Section 15. Counterparts..................................................20
Section 16. Remedies......................................................20
Section 17. Notices and Other Communications..............................20
Section 18. Governing Law; Consent to Jurisdiction........................21
Section 19. Descriptive Headings..........................................22
Section 20. Construction..................................................22
<PAGE>
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (this "Agreement") is made as of August 26,
1996 by and among KRAUSE'S FURNITURE, INC., a Delaware corporation (the
"COMPANY") and each of the stockholders of the Company listed on the signature
pages hereof (each, a "STOCKHOLDER" and collectively, the "STOCKHOLDERS").
W I T N E S S E T H :
WHEREAS, pursuant to a Securities Purchase Agreement between the Company
and General Electric Capital Corporation ("GECC") dated the date hereof (the
"SECURITIES PURCHASE AGREEMENT"), GECC is purchasing from the Company 5,000,000
shares of the Company's Common Stock, par value $.001 per share (the "COMMON
STOCK"), for an aggregate purchase price of $5,000,000, the Company's 10%
Subordinated Pay-in-Kind Notes due August 31, 2001, as described in the
Securities Purchase Agreement (the "NOTES"), in the initial principal amount of
$5,000,000, and, in connection with the Notes, a warrant (the "WARRANT") to
purchase 1,400,000 shares of Common Stock;
WHEREAS, concurrently with such purchase by GECC, (i) Hawley Group is
purchasing 1,000,000 shares of Common Stock for an aggregate purchase price of
$1,000,000, (ii) Other Investors are purchasing 3,000,000 shares of Common Stock
for an aggregate purchase price of $3,000,000 and (iii) Edson Investments Inc.
("EDSON") and certain other holders of indebtedness of the Company are
exchanging such indebtedness for shares of Common Stock, as more fully described
in the Securities Purchase Agreement;
WHEREAS, it is a condition to the consummation of the foregoing
transactions that the parties hereto enter into this Stockholders Agreement, and
the parties hereto deem it to be in their best interests to enter into this
Agreement establishing and setting forth their agreement with respect to certain
rights and obligations associated with ownership of shares of capital stock of
the Company.
Section 1. DEFINITIONS. AS USED HEREIN, THE FOLLOWING TERMS SHALL HAVE THE
FOLLOWING MEANINGS (CAPITALIZED TERMS USED HEREIN AND NOT DEFINED HEREIN SHALL
HAVE THE MEANINGS ASSIGNED TO SUCH TERMS IN THE SECURITIES PURCHASE AGREEMENT):
"AFFILIATE" and "ASSOCIATE" have the meanings ascribed to such terms in
Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
"BENEFICIALLY OWN" with respect to any securities shall mean having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Exchange Act), including pursuant to any agreement, arrangement or
understanding, whether or not in writing.
"BOARD" has the meaning assigned to it in Section 2.1.
"BY-LAWS" means the By-laws of the Company as in effect on the date hereof,
as they may be amended from time to time hereafter.
"CAPITALIZED LEASE" shall mean, with respect to any person, any lease or
any other agreement for the use of property which, in accordance with generally
accepted accounting principals, should be capitalized on the lessee's or user's
balance sheet.
"CAPITALIZED LEASE OBLIGATION" of any person shall mean and include, as of
any date as of which the amount thereof is to be determined, the amount of the
liability capitalized or disclosed (or which should be disclosed) in a balance
sheet of such person in respect of a Capitalized Lease of such person.
"CERTIFICATE" means the Certificate of Incorporation of the Company as in
effect on the date stated hereof, as it may be amended from time to time
hereafter.
"COMMON STOCK EQUIVALENTS" means rights, options, scrip, warrants or other
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock.
"COMPANY" has the meaning assigned to it in the first paragraph hereof.
"CURRENT MARKET PRICE", when used with reference to shares of Common Stock
for any given date, shall mean the closing price per share of Common Stock on
such date. The closing price for each day shall be the last quoted sale price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System or such other system then in use, or,
if on any such date the Common Stock or such other securities are not quoted by
any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the Common Stock or
such other securities selected by the Board of Directors of the Company. If the
Common Stock is listed or admitted to trading on a national securities exchange,
the closing price shall be the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Common Stock or such other
securities are not listed or admitted to trading on the New York Stock Exchange,
as reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Common Stock or such other securities are listed or admitted to
trading.
"EMPLOYMENT AGREEMENT" shall mean the Employment Agreement dated as of the
date hereof between the Company and Philip M. Hawley ("HAWLEY").
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended,
or any successor Federal statute, and the rules and regulations of the omission
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Exchange Act of 1934, as amended, shall
include reference to the comparable section, if any, of any such successor
Federal statute.
"FULLY DILUTED" shall mean, when used with reference to the Common Stock,
at any date as of which the number of shares thereof is to be determined, (i)
all shares of Common Stock outstanding at such date and (ii) all shares of
Common Stock issuable in respect of vested options or warrants to purchase, or
securities convertible into, exercisable for or exchangeable for, shares of
Common Stock outstanding on such date, the conversion, exercise or exchange
price of which is less than the Current Market Price.
"GROUP" has the meaning assigned such term for purposes of Rule 13d-5 under
the Exchange Act.
"GUARANTEE" by any Person shall mean all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of any Person guaranteeing, or in effect guaranteeing,
any Indebtedness, dividend or other obligation of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, all obligations incurred through an agreement, contingent or
otherwise, by such Person: (i) to purchase such Indebtedness or obligation or
any property or assets constituting security therefor, (ii) to advance or supply
funds (x) for the purchase or payment of such Indebtedness or obligation, (y) to
maintain working capital or other balance sheet condition or otherwise to
advance or make available funds for the purchase or payment of such Indebtedness
or obligation, (iii) to lease property or to purchase securities or other
property or services primarily for the purpose of assuring the owner of such
Indebtedness or obligation of the ability of the primary obligor to make payment
of such Indebtedness or obligation, or (iv) otherwise to assure the owner of the
Indebtedness or obligation of the primary obligor against loss in respect
thereof. For the purposes of any computations made under this Agreement, a
Guarantee in respect of any Indebtedness for borrowed money shall be deemed to
be Indebtedness equal to the principal amount of the Indebtedness for borrowed
money which has been guaranteed, and a Guarantee in respect of any other
obligation or liability or any dividend shall be deemed to be Indebtedness equal
to the maximum aggregate amount of such obligation, liability or dividend.
"HAWLEY GROUP" shall mean those Persons listed on Schedule A attached
hereto.
"HAWLEY TRUSTS" shall mean the Hawley Group other than Philip M. Hawley and
Dr. Philip M. Hawley, Jr.
"INDEBTEDNESS" shall mean, with respect to any person, (i) all obligations
of such person for borrowed money, or with respect to deposits or advances of
any kind, (ii) all obligations of such person evidenced by bonds, debentures,
notes or similar instruments, (iii) all obligations of such person under
conditional sale or other title retention agreements relating to property
purchased by such person, (iv) all obligations of such person issued or assumed
as the deferred purchase price of property or services (other than accounts
payable to suppliers and similar accrued liabilities incurred in the ordinary
course of business and paid in a manner consistent with industry practice), (v)
all Indebtedness of others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any lien or security interest on property owned or acquired by such person
whether or not the obligations secured thereby have been assumed, but only to
the extent of such security, if such obligations have not been assumed, (vi) all
Capitalized Lease Obligations of such person, (vii) all Guarantees of such
person, (viii) all obligations (including but not limited to reimbursement
obligations) relating to the issuance of letters of credit for the account of
such person, (ix) all obligations arising out of foreign exchange contracts, and
(x) all obligations arising out of interest rate and currency swap agreements,
cap, floor and collar agreements, interest rate insurance, currency spot and
forward contracts and other agreements or arrangements designed to provide
protection against fluctuations in interest or currency exchange rates.
"OTHER INVESTORS" shall mean those Persons listed on Schedule B attached
hereto.
"PERMAL GROUP" shall mean those Persons listed on Schedule C attached
hereto.
"PERMITTED TRANSFER" shall mean any Transfer (i) by an individual
Stockholder to such Stockholder's spouse, former spouse, child, parent, parent
of a spouse, sibling or grandchild (collectively, "RELATIVES") or to or among a
trust of which there are no principal beneficiaries other than one or more
Relatives of such Stockholder; (ii) from a Relative of an individual Stockholder
to another Relative of that individual Stockholder or to that individual
Stockholder; (iii) by any Stockholder to any of its Affiliates or partners; or
(iv) by an Individual Stockholder pursuant to laws of descent or survivorship.
"PERSON" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivisions thereof.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement,
dated as of the date hereof, between the Company and the stockholders listed on
the signature page thereto as it may be amended from time to time.
"RELATED PARTY" shall mean any officer, director or beneficial holder of 3%
or more of the outstanding shares of capital stock of the Company or any
Subsidiary, any Relative of any such officer, director or beneficial holder of
the Company or any Subsidiary, and any Affiliate or Associate of any of the
foregoing persons.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"SELL" as to any Stock, shall mean to sell, or in any other way directly or
indirectly transfer (including by operation of law, by merger or consolidation,
or sale of securities of a holding company), assign, distribute or otherwise
dispose of, such Stock in a bona fide transaction for value; and the terms
"SALE" and "SOLD" shall have meanings correlative to the foregoing. A Permitted
Transfer shall not constitute a Sale for purposes of this Agreement.
"STOCK" means (i) any shares of Common Stock and (ii) any Common Stock
Equivalents (including, without limitation, the Common Stock issuable upon
conversion, exercise or exchange thereof), in each case, whether owned on the
date hereof or acquired hereafter.
"STOCKHOLDER" and "STOCKHOLDERS" have the meanings assigned to such terms
in the first paragraph hereof; PROVIDED that any transferee of Stock pursuant to
a Permitted Transfer shall be treated as a Stockholder for purposes of this
Agreement and shall be entitled to the benefits of, and shall be bound by, the
provisions of this Agreement.
"STOCKHOLDER'S GROUP" shall mean, with respect to any Stockholder who is a
member of the Hawley Group or the Permal Group, either the Hawley Group or the
Permal Group, as the case may be.
"SUBSIDIARY" means with respect to any Person, (i) any corporation,
partnership or other entity of which shares of capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other similar managing body of such corporation, partnership or
other entity are at the time owned by such Person, or (ii) the management of
which is otherwise controlled, directly or indirectly, through one or more
intermediaries by such Person.
"TRANSFER" as to any Stock, means to Sell, or in any other way directly or
indirectly transfer, assign, distribute, pledge, encumber or otherwise dispose
of, either voluntarily or involuntarily, and whether or not for value.
"VOTING SHARES" means shares of any class of capital stock of the Company
the holders of which are generally entitled to vote in the election of members
of the Board.
Section 2. CORPORATE GOVERNANCE.
2.1. BOARD OF DIRECTORS.
(a) MEMBERS. Subject to the provisions of Section 6.10 of the Securities
Purchase Agreement, the Board of Directors of the Company (the "BOARD") shall
consist of six members, of whom one shall be designated by GECC (such person so
designated, and any successor thereto, being referred to herein as the "GECC
DESIGNEE"); one shall be designated by Permal Group (such person so designated,
and any successor thereto, being referred to herein as the "PERMAL DESIGNEE");
one shall be Hawley; and three shall be selected by the vote of the GECC
Designee, the Permal Designee and Hawley (the "JOINT DESIGNEES"). At each
meeting of the stockholders of the Company held for the purpose of electing
directors, the Stockholders (other than the Hawley Trusts) shall take such
action as shall be necessary to cause the GECC Designee, the Permal Designee,
Hawley and the Joint Designees (or any successor to any such person designated
in accordance with paragraph (b) of this Section) to be elected as directors
(including, in the case of GECC and Permal Group, causing their respective
designees on the Board to nominate, and recommend to the stockholders of the
Company the election of, the GECC Designee, the Permal Designee, Hawley and the
Joint Designees to the Board and opposing, and causing their respective
designees on the Board to oppose, any proposal to remove GECC Designee, Permal
Designee, Hawley or any Joint Designee at each meeting of the stockholders of
the Company at which the election or removal of members of the Board is on the
agenda), and shall take no action which would diminish the prospects of the GECC
Designee, the Permal Designee, Hawley or any Joint Designee being elected to the
Board or increase the prospects of any GECC Designee, Permal Designee, Hawley or
any Joint Designee being removed from the Board. The Company shall take all
necessary action to reduce the size of the Board to the extent required by the
first sentence of this paragraph and shall cause the current members of the
Board to resign from office as necessary to implement the provisions of the
first sentence of this paragraph.
(b) VACANCIES. Each of the GECC Designee and Permal Designee shall hold
office until his death, resignation or removal or until his successor shall have
been duly elected and qualified. If any GECC Designee shall cease to serve as a
director of the Company for any reason, the vacancy resulting thereby shall be
filled by another person designated by GECC. If any Permal Designee shall cease
to serve as a director of the Company for any reason, the vacancy resulting
thereby shall be filled by another person designated by Permal Group. If Hawley
shall cease to serve as a director of the Company, GECC and Permal Group shall
cause their respective designees on the Board and the Joint Designees to take
all necessary action to elect a successor to Hawley to fill the vacancy
resulting thereby. In the event that at any time there exist vacancies on the
Board such that there is either no GECC Designee or no Permal Designee, no
action may be taken by the Board until such vacancy is filled. GECC and Permal
Group agree to use their best efforts to designate successors to fill any such
vacancies as promptly as practicable.
(c) REMOVAL. No GECC Designee may be removed from office except by GECC and
no Permal Designee may be removed from office except by Permal Group. GECC shall
have the right to remove any GECC Designee, and Permal Group shall have the
right to remove any Permal Designee, with or without cause, at any time.
(d) QUORUM REQUIREMENTS. Subject to Section 2.2, the quorum which shall be
required for action to be taken by the Board (other than an adjournment of any
meeting of the Board) shall be the GECC Designee, the Permal Designee and
Hawley. Directors participating by telephone conference in any meeting of the
Board shall be considered in determining whether a quorum of directors is
present.
(e) COMMITTEES. The Company shall cause the GECC Designee and the Permal
Designee to be appointed to each of the committees of the Board as may be
requested at any time or from time to time by GECC or Permal Group, as the case
may be.
(f) CHAIRMAN OF THE BOARD. Hawley shall serve as Chairman of the Board for
as long as he is Chief Executive Officer. GECC and Permal Group presently intend
to continue to nominate Hawley to serve as a director and Chairman of the Board
after Hawley retires as Chief Executive Officer, provided that Hawley shall not
be obligated to accept such nomination.
(g) BOARD AND COMMITTEE MEETINGS. The Company shall hold regular meetings
of its Board on at least a quarterly basis. The Company agrees, and shall cause
its By-laws to be amended to the extent necessary to provide, that the GECC
Designee shall have the right, upon reasonable notice, to call meetings of the
Board and of each committee of the Board on which he or she is a member.
(h) DURATION. The right of each of GECC and Permal Group to designate
directors pursuant to this Section shall continue only for so long as GECC and
its Affiliates or Permal Group, as the case may be, beneficially owns at least
2,000,000 shares of Common Stock.
2.2 CERTAIN ACTIONS REQUIRING CONSENT OF GECC DESIGNEE. Notwithstanding any
other provision of this Agreement, for so long as GECC is entitled to designate
a GECC Designee to serve on the Board, without the approval, at a meeting of the
Board or a committee thereof duly called and held, of the GECC Designee, the
Company shall not, directly or indirectly, and shall not permit any of its
Subsidiaries to, directly or indirectly, take any of the following actions
(except to the extent any such action is specifically authorized under this
Agreement, the Securities Purchase Agreement, the Registration Rights Agreement
or an annual business plan previously approved by the GECC Designee in
accordance with this Section):
(a) merge with or into or consolidate with any other Person;
(b) voluntarily liquidate, dissolve or wind up or file any voluntary
petition in bankruptcy or for receivership or make any assignment for the
benefit of creditors;
(c) in any transaction or series of transactions, acquire (including
pursuant to a merger or consolidation) all or any substantial portion of the
business or assets of any Person;
(d) enter or commit to enter into any joint venture or partnership or
establish any non-wholly-owned subsidiaries or otherwise make any debt or equity
investment in any Person (other than extensions of credit in the ordinary course
of business);
(e) expand into new lines of business (it being understood that "new lines
of business" do not include the conduct in additional states in the United
States of the business conducted by the Company and its Subsidiaries as of the
date of this Agreement);
(f) assign to any other Person any rights of the Company under this
Agreement, the Registration Rights Agreement or the Securities Purchase
Agreement;
(g) in any transaction or series of transactions, sell, lease or exchange
any assets of the Company and/or any Subsidiary, except for sales of inventory
in the ordinary course of business and subleasing of vacant retail space on
arm's-length terms;
(h) adopt or change any material accounting policy of the Company or any of
its Subsidiaries, except as required by generally accepted accounting
principles;
(i) create, incur, assume or suffer to exist any Indebtedness other than
Indebtedness under the Loan and Security Agreement dated as of January 20, 1995
between the Company and Congress Financial Corporation (Western), as amended to
the date of this Agreement, including premium (if any), and interest thereon,
and other Indebtedness not to exceed in the aggregate $100,000 at any time
outstanding;
(j) mortgage, encumber, create, incur or suffer to exist, liens on its
assets (other than liens on assets under Indebtedness outstanding as of the date
hereof and materialmen's, mechanics' and other similar liens arising for work
performed in the ordinary course of business which are not overdue for more than
30 days);
(k) pay, declare or set aside any sums for the payment of, any dividends,
or make any distribution on, any shares of its capital stock or redeem,
repurchase or otherwise acquire any outstanding shares of its capital stock or
any other of its outstanding securities or Indebtedness (except for Indebtedness
(other than indebtedness to any Related Party, excluding indebtedness for
expenses incurred in the ordinary course of business on behalf of the Company
and its Subsidiaries) to the extent it becomes due in accordance with its
terms);
(l) make or commit to make (with respect to the Company and all of its
Subsidiaries taken together) during any calendar year any capital expenditure or
capital expenditures in an amount in excess of $50,000;
(m) issue or sell any shares of capital stock or rights, options, warrants
or other securities exercisable for, exchangeable for or convertible into shares
of capital stock of the Company or any of the Company's Subsidiaries, other than
upon the exercise of options or warrants outstanding on the date of this
Agreement or previously approved in accordance with this Section, or grant,
amend or terminate any stock appreciation right or other stock-based award;
(n) enter into, adopt, amend or terminate any employment or consulting
agreement, or hire or retain any person who will report directly to the Chief
Executive Officer or to whom the Company shall pay total compensation
(including, without limitation, compensation in the form of benefits) in excess
of $110,000 per year, or enter into, adopt, amend or terminate any employee
benefit plan, policy or arrangement, except as required by law or generally
accepted accounting principles;
(o) amend its Certificate or By-laws, including, without limitation, any
change in the number of directors comprising its Board of Directors, or adopt,
amend, redeem or terminate any shareholder rights plan or similar plan or
arrangement;
(p) amend, modify or waive an provision of this Agreement, the Securities
Purchase Agreement, the Registration Rights Agreement or the agreements
ancillary thereto, or become a party to any agreement which by its terms
restricts the Company's or any of its Subsidiaries', or any Stockholder's,
performance of the terms of any of such agreements;
(q) change its independent certified accountants or actuaries;
(r) register any securities under the Securities Act or grant any
registration rights therefor;
(s) enter into, amend or terminate, or waive any material rights of the
Company and its Subsidiaries under, any contract, arrangement or transaction
involving consideration in excess of $50,000 or which is otherwise material to
the Company or any of its Subsidiaries;
(t) enter into, amend or terminate any contract, arrangement or transaction
with a Related Party, other than the payment of salary and benefits pursuant to
employment arrangements entered into in the ordinary course of business in
compliance with this Agreement;
(u) enter into, adopt, amend (whether by agreement or by conduct of the
business), except as required by law or generally accepted accounting
principles, or terminate any annual business plan;
(v) take any action require by law to be approved by the Board; or
(w) agree or otherwise commit to take any of the actions set forth in the
foregoing subparagraphs (a) through (v).
2.3. MANAGEMENT.
(a) CHIEF EXECUTIVE OFFICER. Subject to the provisions of this Agreement
and the Employment Agreement, Hawley shall be the Chief Executive Officer of the
Company. In the event of the death, resignation, removal or other termination of
Hawley's services as Chief Executive Officer, any successor Chief Executive
Officer (and any successor(s) thereto) shall be selected by GECC.
(b) APPOINTMENT OF MANAGEMENT. Subject to Section 2.2 hereof, all members
of management of the Company (other than the Chief Executive Officer) shall be
designated by, their compensation shall be determined by, and they may be
removed, promoted or demoted by, the Chief Executive Officer of the Company;
PROVIDED, however, that the designation of, setting of compensation for, or
removal, promotion or demotion of, any person who will report directly to the
Chief Executive Officer or earn total compensation (including benefits) from the
Company and its Subsidiaries of $110,000 or more per year shall be subject to
the prior approval of the Board.
2.4. DIRECTORS' INDEMNIFICATION.
(a) The Company shall obtain and cause to be maintained in effect, with
financially sound insurers, a policy of directors' and officers' liability
insurance covering the GECC Designee, the Permal Designee, Hawley and the Joint
Designees (and their respective successors) in an amount of at least $15,000,000
or such other amount the Board shall specify (as such amount shall be increased
from time to time at the request of GECC).
(b) The Certificate, By-laws and other organizational documents of the
Company and each of its Subsidiaries shall at all times, to the fullest extent
permitted by law, provide for indemnification of, advancement of expenses to,
and limitation of the personal liability of, the members of the Board and the
members of the boards of directors or other similar managing bodies of each of
the Company's Subsidiaries and such other persons, if any, who, pursuant to a
provision of such Certificates, By-laws or other organizational documents,
exercise or perform any of the powers or duties otherwise conferred or imposed
upon members of the Board or the boards of directors or other similar managing
bodies of each of the Company's Subsidiaries. Such provisions may not be
amended, repealed or otherwise modified in any manner adverse to any member of
the Board or any member of the boards of directors or other similar managing
bodies of any of the Company's Subsidiaries, until at least six years following
the termination of this Agreement.
(c) Each of the GECC Designee, the Permal Designee, Hawley and the Joint
Designees is intended to be a third-party beneficiary of the obligations of the
Company pursuant to this Section 2.4, and the obligations of the Company
pursuant to this Section 2.4 shall be enforceable by the GECC Designee, the
Permal Designee, Hawley and the Joint Designees.
2.5. EXPENSES. The Company shall pay the reasonable out-of-pocket expenses
incurred by each of the GECC designee, the permal designee and the joint
designees in connection with performing his or her duties, including without
limitation the reasonable out-of-pocket expenses incurred by such person
attending meetings of the board or any committee thereof or meetings of any
board of directors or other similar managing body (and any committee thereof) of
any subsidiary of the Company.
2.6. COOPERATION. Each stockholder (other than the Hawley Trusts) shall vote all
of its voting shares and shall take all other necessary or desirable actions
within its control (including, without limitation, attending all meetings in
person or by proxy for purposes of obtaining a quorum, executing all written
consents in lieu of meetings and voting to remove members of the board, as
applicable), and the company shall take all necessary and desirable actions
within its control (including, without limitation, calling special board and
stockholder meetings and voting to remove members of the board, as applicable),
to effectuate the provisions of Section 2.1.
2.7. VOTING. Each stockholder which is included in the permal group agrees that,
at each meeting of stockholders and in each action by written consent in lieu of
a meeting, such stockholder shall vote (or act by consent with respect to) all
voting shares over which such stockholder has voting authority in the same
manner that the voting shares held by GECC are voted with respect to each matter
subject to the vote or consent of stockholders of the Company. GECC shall
provide each such stockholder with reasonable advance notice in order for such
stockholder to comply with its obligations under this Section 2.7. Upon the
request of GECC, such stockholder shall execute an irrevocable proxy authorizing
designees of GECC to vote all voting shares over which such stockholder has
voting authority in the manner prescribed in this section. The provisions of
this Section 2.7 shall be amended to the satisfaction of GECC such that,
notwithstanding anything in this agreement to the contrary, GECC shall have only
such voting rights set forth in this Section 2.7 with respect to voting shares
owned by each stockholder in the Permal group only to the extent that such
voting rights do not cause GECC and the company to be considered members of a
"controlled group of corporations" or "under common control" within the meaning
of Sections 414(b) or (c) of the Code, or to be considered under "common
control" within the meaning of Section 4001(a)(14) of ERISA.
SECTION 3. RESTRICTIONS ON TRANSFERS OF STOCK.
(a) Notwithstanding anything to the contrary contained herein, no
Stockholder shall Transfer any Stock, except for Sales and Permitted Transfers.
The Company shall not reflect on its books any Sale of Stock, unless (a) the
Sale is pursuant to an effective registration statement under the Securities Act
and under any applicable state securities or blue sky laws, or (b) the Selling
Stockholder shall have furnished the Company with evidence reasonably
satisfactory to the Company that no such registration is required because of the
availability of an exemption from registration under the Securities Act and
under applicable state securities or blue sky laws. A written opinion of counsel
of recognized standing to the effect set forth in clause (b) of the preceding
sentence shall satisfy the requirements of such clause.
(b) Any Transfer or attempted Transfer of Stock in violation of any
provision of this Agreement shall be void, and the Company shall not record such
Transfer on its books or treat any purported transferee of such Stock as the
owner of such Stock for any purpose.
Section 4. RIGHTS OF FIRST OFFER. In the event that any stockholder intends to
sell any stock other than pursuant to a registered public offering and other
than sales on NASDAQ or a national securities exchange of shares which, when
aggregated with all other sales by such stockholder and any other members of
such stockholder group from and after the date of this agreement, would
represent not more than 1,000,000 shares of common stock in the aggregate:
(i) The stockholder intending to transfer such stock (the "PROPOSING
SELLER") shall give each other Stockholder (each an "OFFEREE") written notice of
its intent to Sell such Stock, specifying the number of securities to be sold
and the minimum price and terms and conditions of such sale and offering to Sell
to such Offeree, at such minimum price and on such terms and conditions, its pro
rata share of such Stock (based on the number of shares of Common Stock
beneficially owned by each Offeree on a Fully Diluted basis); PROVIDED that any
Offeree may, by written notice to the Proposing Seller, elect to purchase, in
addition to its pro rata share of such Stock, all or any portion of the Stock
(if any) with respect to which any other Offeree fails to exercise its right of
first offer under this Section 4, and such additional Stock shall be pro-rated
among such Offerees in the manner described above to the extent such additional
Stock is oversubscribed;
(ii) if any Offeree shall not, within 15 days after receipt of the notice
given pursuant to clause (i) above, accept such offer in writing with respect to
the Stock specified in such notice, then the Proposing Seller shall be free to
sell the Stock specified in the notice to such Offeree (but only those
securities covered by the notice of intention to sell which no other Offeree
shall have agreed to purchase) at a price equal to or above the minimum price
and on other terms and conditions no less favorable to the Proposing Seller than
those specified in such notice, at any time within 90 days of the expiration of
such 15-day period;
(iii) if the Proposing Seller shall not have consummated the proposed
Transfer within 90 days after the expiration of the 15-day period referred to in
clause (ii) above, then the Proposing Seller may not thereafter Transfer such
Stock without complying with the provisions of this Section 4; and
(iv) if any Offeree shall accept such offer within 15 days after the notice
given pursuant to clause (i) above, then such Offeree shall purchase the Stock
specified in such notice as promptly as is reasonably practicable, but in any
event within 45 days after the notice given pursuant to clause (i) above or such
later date as the Proposing Seller may designate within the 90-day period
referred to in clause (iii) above.
Section 4A. HAWLEY TRUST STOCK RIGHTS OF FIRST OFFER. If any of the Hawley
Trusts intends to sell any stock covered by a shelf registration statement (as
defined in the Registration Rights Agreement):
(i) the Hawley Trust intending to transfer such stock (the "HAWLEY TRUST
SELLER") shall give the Company and GECC written notice (the "HAWLEY TRUST
SELLER Notice") of its intent to Sell such Stock, specifying the number of
securities to be sold and the minimum price and terms and conditions of such
sale, and offering to Sell to the Company and GECC, at such minimum price and on
such terms and conditions. The Company shall provide a copy of any Hawley Trust
Seller Notice to each Stockholder within two days after receipt by it of the
Hawley Trust Seller Notice. The Company shall have the right to purchase all or
any part of such Stock by giving a written notice to the Hawley Trust Seller and
GECC within two days after receipt by it of the Hawley Trust Seller Notice,
specifying the number of shares of such Stock to be so purchased by the Company;
(ii) if the Company elects to purchase none of, or less than all, the Stock
that is the subject of the proposed Transfer by the Hawley Trust Seller, then
GECC shall have the right to purchase any or all of the available Stock by
giving a written notice to the Hawley Trust Seller and the Company within seven
days after receipt by it of the Hawley Trust Seller Notice (the "Notice
Period"); PROVIDED THAT any other Stockholder (each, an "Electing Stockholder")
may, by written notice to GECC prior to the expiration of the Notice Period
elect to purchase its pro rata share of the available Stock, and any such
Electing Stockholder may elect to purchase, in addition to its pro rata share of
the available Stock, all or any portion of the Stock (if any) with respect to
which GECC or any other Stockholder fails to exercise its right under this
Section 4A, and such additional Stock shall be pro-rated among such Electing
Stockholders in the manner described above to the extent such additional Stock
is oversubscribed;
(iii) GECC shall act as agent for the Electing Stockholders in connection
with any exercise by an Electing Stockholder of its rights under this Section
and the Hawley Trust Seller shall not be obligated to deal with any Stockholder
other than GECC in connection with any purchase and sale under this Section 4A;
PROVIDED THAT GECC shall have no liability to the Hawley Trust Seller if GECC
fails to purchase any Stock which GECC disclosed in writing to the Hawley Trust
Seller at the time of delivery of GECC's election to purchase was being
purchased by GECC solely as agent for one or more Electing Stockholders; and
GECC shall have no liability to any other Stockholder for any act or omission by
GECC under this Section 4A;
(iv) if the Company and GECC fail to elect to purchase all the Stock
specified in the Hawley Trust Seller Notice, then the Hawley Trust Seller shall
be free to sell, pursuant to a Shelf Registration Statement, the portion of such
Stock as to which no election to purchase has been made by the Company or GECC
at a price equal to or above the minimum price and on other terms and conditions
no less favorable to the Hawley Trust Seller than those specified in the Hawley
Trust Seller Notice, at any time within 90 days of the expiration of the
seven-day period referred to in clause (ii) above;
(v) if the Hawley Trust Seller shall not have consummated the proposed
Transfer within 90 days after the expiration of the seven-day period referred to
in clause (ii) above, then the Hawley Trust Seller may not thereafter Transfer
such Stock without complying with the provisions of this Section 4A;
(vii) any Electing Stockholder shall provide to GECC all funds required,
and shall execute and deliver to GECC all documents reasonably requested by
GECC, in connection with the purchase by GECC of any Stock as agent for such
Electing Stockholder, and GECC shall deliver certificates representing the Stock
acquire by such Electing Stockholder to such Stockholder promptly following the
consummation of any purchase under this Section 4A and the satisfaction by such
Electing Stockholder of his obligations under this clause (vii).
Section 5. TAG-ALONG RIGHTS.
(a) If GECC or any member of Permal Group, whether acting alone or in
concert with any other Stockholder (collectively, the "SELLING STOCKHOLDERS")
pursuant to a common plan, understanding or arrangement, shall enter into an
agreement to Selll or otherwise vpropose to Sell to anyi Person or Group (other
than pursuant to a registered public offering) (such Person or Group, the
"TAG-ALONG TRANSFEREE"), in one transaction or a series of related transactions,
any Stock, such that immediately following the consummation of such Sale, the
Selling Stockholders would have Sold to such Person or Group in the aggregate
Stock representing in excess of 3,000,000 shares of Stock (a "TAG-ALONG SALE")
(such number of shares of Stock being referred to herein as the "TAG-ALONG
NUMBER"), then each of the other Stockholders (each a "TAG-ALONG OFFEREE") shall
have the right to participate in such Tag-Along Sale by selling a number of
shares of Common Stock equal to such Stockholder's Proportionate Share, as part
of the Tag-Along Sale by the Selling Stockholders, on the same terms as those
applicable to the Tag-Along Sale (except that, if the Tag-Along Sale involves
Common Stock Equivalents, the economic terms of such Sale shall be appropriately
adjusted to reflect that the Tag-Along Offerees are selling Common Stock).
"Proportionate Share" means, with respect to each Stockholder, a number of
shares of Common Stock which bears the same ratio to the number of shares of
Common Stock beneficially owned by such Stockholder on a Fully Diluted basis as
the Tag-Along Number bears to the number of shares of Common Stock beneficially
owned by the Selling Stockholders on a Fully Diluted basis.
(b) The Selling Stockholders shall provide to each Tag-Along Offeree
written notice of any Tag-Along Sale (the "TAG-ALONG NOTICE"), not more than 45
and not less than 15 days prior to the Tag-Along Sale, setting forth the terms
of the Tag-Along Sale and specifically identifying the Tag-Along Transferee of
the Stock, and shall give each Tag-Along Offeree at least 10 days after delivery
of the Tag-Along Notice within which to exercise its rights contained in this
Section 5, by written notice thereof to the Selling Stockholder.
Section 6. CONFLICTING AGREEMENTS. Each Stockholder represents and warrants that
such Stockholder has not granted and is not a party to any proxy, voting trust
or other agreement which is inconsistent with or conflicts with any provision of
this Agreement, and no holder of Stock shall grant any proxy or become party to
any voting trust or other agreement which is inconsistent with or conflicts with
any provision of this Agreement.
SECTION 7. LEGEND. (a) Each stockholder and the Company shall take all such
action necessary (including exchanging with the Company certificates
representing shares of stock issued prior to the date hereof) to cause each
certificate representing outstanding shares of stock (other than shares which
have been registered under the Securities Act, to which the first paragraph of
such legends shall not apply) to bear legends substantially in the form as
follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT
BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT OR SUCH LAWS."
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY AN AGREEMENT ON FILE AT THE OFFICES OF THE CORPORATION."
"IN ADDITION TO THE RESTRICTIONS SET FORTH IN THE SECURITIES PURCHASE
AGREEMENT BETWEEN KRAUSE'S FURNITURE, INC. AND GENERAL ELECTRIC CAPITAL
CORPORATION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
RESTRICTIONS SET FORTH IN THE STOCKHOLDERS AGREEMENT BY AND AMONG KRAUSE'S
FURNITURE, INC. AND THE STOCKHOLDERS PARTIES THERETO, A COPY OF WHICH IS ON FILE
IN THE OFFICES OF THE CORPORATION."
Transferred pursuant to rule 144 under the securities act or (iii) when
such shares are transferred in any other transaction if the seller delivers to
the company an opinion of its counsel, which counsel and opinion shall be
reasonably satisfactory to the Company, or a "no-action" letter from the staff
of the Securities and Exchange Commission, in either case to the effect that
such legend is no longer necessary in order to protect the Company against a
violation by it of the Securities Act upon any sale or other disposition of such
shares without registration thereunder. The requirement that the above legend
regarding this agreement be placed upon certificates evidencing shares of stock
shall cease and terminate upon the sale of such shares, other than pursuant to a
permitted transfer. Upon the consummation of any event requiring the removal of
a legend hereunder, the company, upon the surrender of certificates containing
such legend, shall, at its own expense, deliver to the holder of any such shares
as to which the requirement for such legend shall have terminated, one or more
new certificates evidencing such shares not bearing such legend.
SECTION 8. REPRESENTATIONS AND WARRANTIES.
(a) Each party hereto represents and warrants to the other parties hereto
as follows:
(i) it has full power and authority to execute, deliver and perform its
obligations under this agreement this agreement.
(ii this agreement has been duly and validly authorized, executed and
delivered by it, and constitutes a valid and binding obligation of it,
enforceable against it in accordance with its terms except to the extent that
enforceability may be limited by bankruptcy, insolvency or other similar laws
affecting creditors' rights generally.
(iii) the execution, delivery and performance of this Agreement by it does
not (x) violate, conflict with, or constitute a breach of or default under its
organizational documents, if any, or any agreement to which it is a party or by
which it is bound or (y) violate any law, regulation, order, writ, judgment,
injunction or decree applicable to it.
(iv) no consent or approval of, or filing with, any governmental or
regulatory body is required to be obtained or made by it in connection with the
transactions contemplated hereby.
(v) it is not a party to any agreement which is inconsistent with the
rights of any party hereunder or otherwise conflicts with the provisions hereof.
(b) each stockholder severally represents and warrants to GECC with respect
only to itself and not any other stockholder as follows:
(i) Schedule 8(b) hereto sets forth a list of all securities of the company
(including, without limitation, shares of capital stock, convertible securities,
debentures, etc.) held of record or beneficially owned by it immediately after
the date hereof.
(ii) except as set forth on Schedule 8(b) hereto and other than this
agreement and the registration rights agreement, it is not a party to any
contract or agreement, written or oral, with respect to the voting or transfer
of securities of the Company (including, without limitation, any Voting
Agreement, Voting Trust, Stockholder's Agreement, Registration Rights Agreement,
etc.).
SECTION 9. DURATION OF AGREEMENT. Subject to the last sentence of this Section,
the rights and obligations of a stockholder under this agreement shall terminate
at such time as such stockholder no longer is the beneficial owner of any shares
of stock. This agreement shall terminate at such time as GECC no longer is the
beneficial owner of 2,000,000 or more of the outstanding shares of common stock,
or at such earlier time as may be agreed by GECC and Permal group. this
agreement (other than Section 4A), shall terminate as to any member of the
Hawley Group on the later of (i) six months after Hawley ceases to be a Director
of the Company and (ii) August 31, 1999.
SECTION 10. FURTHER ASSURANCES. At any time or from time to time after the date
hereof, the parties agree to cooperate with each other, and at the request of
any other party, to execute and deliver any further instruments or documents and
to take all such further action as the other party may reasonably request in
order to evidence or effectuate the consummation of the transactions
contemplated hereby and to otherwise carry out the intent of the parties
hereunder.
SECTION 11. AMENDMENT AND WAIVER. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against the Company or any Stockholder unless such modification,
amendment or waiver is approved in writing by the Company, Stockholders holding
at least a majority of the Common Stock, and, so long as it holds any shares of
stock, by GECC. The failure of any party to enforce any of the provisions of
this agreement shall in no way be construed as a waiver of such provisions and
shall not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
SECTION 12. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
SECTION 13. ENTIRE AGREEMENT. Except as otherwise expressly set forth herein,
this document and the other documents dated the date hereof executed in
connection herewith embody the complete agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way.
SECTION 14. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this
agreement shall bind and inure to the benefit of and be enforceable by the
company and its successors and assigns and each stockholder and their respective
successors, assigns, heirs and personal representatives, so long as they hold
stock. except pursuant to a permitted transfer (in which case the transferee
shall be entitled to exercise all rights, and shall be bound by all obligations,
of a stockholder under this agreement), no stockholder shall have the right to
assign its rights and obligations under this agreement.
SECTION 15. COUNTERPARTS. This agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
SECTION 16. REMEDIES. Each stockholder shall be entitled to enforce its rights
under this agreement specifically to recover damages by reason of any breach of
any provision of this agreement and to exercise all other rights existing in
their favor. The parties hereto agree and acknowledge that money damages may not
be an adequate remedy for any breach of the provisions of this agreement and
that each party may in its sole discretion apply to any court of law or equity
of competent jurisdiction for specific performance and/or injunctive relief
(without posting a bond or other security) in order to enforce or prevent any
violation of the provisions of this agreement.
SECTION 17. NOTICES AND OTHER COMMUNICATIONS. All notices, consents, requests,
instructions, approvals, financial statements, proxy statements, reports and
other communications provided for herein shall be in writing and shall be
delivered personally, by telecopy or sent by prepaid overnight courier service,
to the company and to each stockholder as set forth below and to any subsequent
holder of stock subject to this agreement at such address as indicated by the
company's records, or at such address or to the attention of such other person
as the recipient party has specified by prior written notice to the sending
party:
THE COMPANY:
Krause's Furniture, Inc.
200 North Berry Street
Brea, CA 92621-3903
Attention: Philip M. Hawley
with a copy to:
Krause's Furniture, Inc.
200 North Berry Street
Brea, CA 92621-3903
Attention: Judith Lasker
with copies to:
Warren de Wied, Esq.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
and
David Kaufman, Esq.
Stroock Stroock & Lavan
7 Hanover Square
New York, New York 10004
STOCKHOLDERS:
To each Stockholder at the address for such Stockholder set forth on Schedule
17 attached hereto.
SECTION 18. GOVERNING LAW; CONSENT TO JURISDICTION. This agreement shall be
governed by and construed in accordance with the laws of the State of New York
without giving effect to the principles of conflicts of law. each of the parties
hereto hereby irrevocably and unconditionally consents to submit to the
exclusive jurisdiction of the courts of the State of New York and of the United
States of America, in each case located in the County of New York, for any
action, proceeding or investigation in any court or before any governmental
authority ("litigation") arising out of or relating to this agreement and the
transactions contemplated hereby (and agrees not to commence any litigation
relating thereto except in such courts), and further agrees that service of any
process, summons, notice or document by U.S. Registered Mail to its respective
address set forth in this Agreement shall be effective service of process for
any litigation brought against it in any such court. Each of the parties hereto
hereby irrevocably and unconditionally waives any objection to the laying of
venue of any litigation arising out of this agreement or the transactions
contemplated hereby in the courts of the State of New York or the United States
of America, in each case located in the County of New York, and hereby further
irrevocably and unconditionally waives and agrees not to plead or claim in any
such court that any such litigation brought in any such court has been brought
in an inconvenient forum. Each of the parties irrevocably and unconditionally
waives, to the fullest extent permitted by applicable law, any and all rights to
trial by jury in connection with any litigation arising out of or relating to
this agreement or the transactions contemplated hereby.
SECTION 19. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
SECTION 20. CONSTRUCTION. Where specific language is used to clarify by example
a general statement contained herein, such specific language shall not be deemed
to modify, limit or restrict in any manner the construction of the general
statement to which it relates. The language used in this agreement shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party.
IN WITNESS WHEREOF, the parties hereto have executed this stockholders agreement
on the day and year first above written.
Krause's Furniture, Inc.
BY:
Name:
Title:
GENERAL ELECTRIC CAPITAL CORPORATION
By:
Name: Jeffrey H. Coats
Title: Managing Director/
Department Operations
Manager
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Stockholders
Agreement on the day and year first above written.
By:
<PAGE>
SCHEDULE A
HAWLEY GROUP CONSISTS OF:
Allison Booth Hawley Trust I
Caitlin Hale Hawley Trust I
Maureen Erin Hawley Trust I
Shannon Follen Hawley Trust I
Hawley Family Trust
Dr. Philip M. Hawley, Jr.
Philip M. Hawley
<PAGE>
SCHEDULE B
OTHER INVESTORS CONSISTS OF:
SHARES OF COMMON STOCK
PURCHASED
Other Investors
ATCO Holdings, Ltd. 400,000
Isaac Robert Souede 250,000
Jean R. Perrette 250,000
United Gulf Bank (B.S.C.)E.C. 225,000
ATCO Development, Inc. 100,000
Thomas M. DeLitto 25,000
Helopolis Inc. 100,000
Peter L. Rhulen 100,000
T. Michael Wallace 100,000
Carlton Securities N.V. 100,000
G Investment Partners 60,000
Sidney Kimmel 50,000
Zaxis Partners, L.P. 40,000
Hurly & Co. 35,000
Sanford J. Colen 20,000
Pollat, Evans & Co. Inc. 15,000
C. Redington Barrett, III 5,000
Quadra Appreciation Fund, Inc. 5,000
Peter w. Branagh & Ramona Y. Branagh
TTEES for the Branagh Revocable Trust 5,000
Permal Noscal, Ltd. 405,000
Fairmont Services Ltd. 400,000
Emmanuel Bagdjian 210,000
Gary Gladstein 100,000
-------
TOTAL 3,000,000
<PAGE>
SCHEDULE C
PERMAL GROUP CONSISTS OF:
Permal Capital Management, Inc.
Permal Services, Inc.
Permal Capital Partners, L.P.
Permal Asset Management
Permal Special Opportunities, Ltd.
Edson Investments, Inc.
Jean R. Perrette
Isaac Robert Souede
Thomas M. DeLitto
Thomas M. & Donna S. DeLitto
United Gulf Bank (B.S.C.) E.C.
Kuwait Investment Projects
ATCO Holdings Ltd.
ATCO Development, Inc.
<PAGE>
REGISTRATION RIGHTS AGREEMENT
between
KRAUSE'S FURNITURE, INC.
and
THE STOCKHOLDERS LISTED ON THE SIGNATURE PAGES HEREOF
Dated as of August 26, 1996
<PAGE>
REGISTRATION RIGHTS AGREEMENT, dated as of August 26, 1996, between
KRAUSE'S FURNITURE, INC, a Delaware corporation (the "Company"), and each of the
stockholders of the Company listed on the signature pages hereof (the
"Investors").
l. BACKGROUND. Pursuant to a Securities Purchase Agreement between the
Company and General Electric Capital Corporation ("GECC") dated the date hereof
(the "SECURITIES PURCHASE AGREEMENT"), GECC is purchasing from the Company
5,000,000 shares of the Company's Common Stock, par value $.001 per share (the
"COMMON STOCK"), for an aggregate purchase price of $5,000,000, the Company's
10% Subordinated Pay-in-Kind Notes due August 31, 2001, as described in the
Securities Purchase Agreement (the "NOTES"), in the initial principal amount of
$5,000,000, and, in connection with the Notes, a warrant (the "WARRANT") to
purchase 1,400,000 shares of Common Stock. Concurrently with such purchase by
GECC, (i) the Hawley Group (as defined herein) is purchasing 1,000,000 shares of
Common Stock for an aggregate purchase price of $1,000,000, (ii) certain other
investors are purchasing 3,000,000 shares of Common Stock for an aggregate
purchase price of $3,000,000 and (iii) Edson Investments Inc. and certain other
holders of indebtedness of the Company are exchanging such indebtedness for
shares of Common Stock, as more fully described in the Securities Purchase
Agreement.
2. REGISTRATION UNDER SECURITIES ACT, ETC.
2.1. REGISTRATION ON REQUEST.
(a) REQUEST. Subject to Section 2.8 hereof, at any time and from time to
time upon the written request of holders of Registrable Securities (the
"Initiating Holders") representing not less than the Required Number of Shares
that the Company effect the registration under the Securities Act (other than a
Shelf Registration Statement) of all or part of such Initiating Holders'
Registrable Securities (provided that in no event shall the Company be obligated
to register less than the Required Number of Shares pursuant to such request),
the Company will promptly give written notice of such requested registration to
all registered holders of Registrable Securities, and thereupon the Company will
use its best efforts to effect the registration under the Securities Act of
(i) the Registrable Securities (representing not less than the Required
Number of Shares) which the Company has been so requested to register by such
Initiating Holders, and
(ii) all other Registrable Securities which the Company has been requested
to register by the holders thereof (such holders together with the Initiating
Holders are hereinafter referred to as the "Selling Holders") by written request
given to the Company within 20 days after the giving of such written notice by
the Company, all to the extent requisite to permit the disposition of the
Registrable Securities so to be registered.
(b) REGISTRATION OF OTHER SECURITIES. Whenever the Company shall effect a
registration pursuant to this Section 2.1 in connection with an underwritten
offering by one or more Selling Holders of Registrable Securities, no securities
other than Registrable Securities shall be included among the securities covered
by such registration unless (a) the managing underwriter of such offering shall
have advised each Selling Holder of Registrable Securities to be covered by such
registration in writing that the inclusion of such other securities would not
adversely affect such offering or (b) the Selling Holders of not less than a
majority of all Registrable Securities to be covered by such registration shall
have consented in writing to the inclusion of such other securities.
(c) REGISTRATION STATEMENT FORM. Registrations under this Section 2.1 shall
be on such appropriate registration form of the Commission as shall be selected
by the Company.
(d) EXPENSES. The Company will pay the Registration Expenses in connection
with any registration requested pursuant to this Section 2.1.
(e) EFFECTIVE REGISTRATION STATEMENT. A registration requested pursuant to
this Section 2.1 shall not be deemed to have been effected (i) unless a
registration statement with respect thereto has become effective, (ii) if after
it has become effective, such registration is interfered with by any stop order,
injunction or other order or requirement of the Commission or other governmental
agency or court for any reason not attributable to the Selling Holders and has
not thereafter become effective, or (iii) 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 the Selling Holders.
(f) SELECTION OF UNDERWRITERS. The underwriter or underwriters of each
underwritten offering of the Registrable Securities so to be registered shall be
selected by the mutual agreement of the Company and the Selling Holders of a
majority of the Registrable Securities so to be registered.
(g) PRIORITY IN REQUESTED REGISTRATION. If the managing underwriter of any
underwritten offering shall advise the Company in writing (with a copy to each
Selling Holder of Registrable Securities requesting registration) that, in its
opinion, the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering within a price range
acceptable to the Selling Holders of a majority of the Registrable Securities
requested to be included in such registration, the Company will include in such
registration, to the extent of the number which the Company is so advised can be
sold in such offering, Registrable Securities requested to be included in such
registration, pro rata among the Selling Holders requesting such registration on
the basis of the percentage of the Registrable Securities of such Selling
Holders requested so to be registered. In connection with any such registration
to which this Section 2.1(g) is applicable, no securities other than Registrable
Securities shall be covered by such registration.
(h) LIMITATIONS ON REGISTRATION ON REQUEST. Notwithstanding anything in
this Section 2.1 to the contrary, in no event will the Company be required to
effect, in the aggregate pursuant to this Section 2.1, without regard to the
holder of Registrable Securities making such request, more than two
registrations during any twelve month period.
2.2. INCIDENTAL REGISTRATION.
(a) RIGHT TO INCLUDE REGISTRABLE SECURITIES. If the Company proposes at any
time to register any of its securities under the Securities Act (other than a
Shelf Registration Statement) by registration on Forms S-1, S-2 or S-3 or any
successor or similar form(s) (except registrations on such Forms or similar
form(s) solely for registration of securities in connection with an employee
benefit plan or dividend reinvestment plan or a merger, reorganization, or
consolidation), whether or not for sale for its own account, it will, subject to
Section 2.8 hereof, each such time give prompt written notice to all registered
holders of Registrable Securities of its intention to do so and of such holders'
rights under this Section 2.2. Upon the written request of any such holder (a
"Requesting Holder") made as promptly as practicable and in any event within 20
days after the receipt of any such notice (10 days if the Company states in such
written notice or gives telephonic notice to all registered holders of
Registrable Securities, with written confirmation to follow promptly thereafter,
that (i) such registration will be on Form S-3 and (ii) such shorter period of
time is required because of a planned filing date) (which request shall specify
the Registrable Securities intended to be disposed of by such Requesting
Holder), the Company will, subject to Section 2.8 hereof, use its best efforts
to effect the registration under the Securities Act of all Registrable
Securities which the Company has been so requested to register by the Requesting
Holders thereof; PROVIDED, HOWEVER, that if, at any time after giving written
notice of its intention to register any securities and prior to the effective
date of the registration statement filed in connection with such registration,
the Company shall determine for any reason not to register or to delay
registration of such securities, the Company may, at its election, give written
notice of such determination to each Requesting Holder of Registrable Securities
and (i) in the case of a determination not to register, shall be relieved of its
obligation to register any Registrable Securities in connection with such
registration (but not from any obligation of the Company to pay the Registration
Expenses in connection therewith), without prejudice, however, to the rights of
any holder or holders of Registrable Securities entitled to do so to request
that such registration be effected as a registration under Section 2.1 and (ii)
in the case of a determination to delay registering, shall be permitted to delay
registering any Registrable Securities, for the same period as the delay in
registering such other securities. No registration effected under this Section
2.2 shall relieve the Company of its obligation to effect any registration upon
request under Section 2.1. The Company will pay all Registration Expenses in
connection with registration of Registrable Securities requested pursuant to
this Section 2.2.
(b) PRIORITY IN INCIDENTAL REGISTRATIONS. If the managing underwriter of
any underwritten offering shall inform the Company (or, in the case of a
secondary offering, the selling stockholders initiating such offering) of its
belief that the number or type of Registrable Securities requested to be
included in such registration would materially adversely affect such offering,
then the Company will include in such registration, to the extent of the number
and type which the Company is (or the selling stockholders initiating such
offering are) so advised can be sold in (or during the time of) such offering,
first, all securities proposed by the Company (or, in the case of a secondary
offering, the selling stockholders initiating such offering) to be sold for its
(or their) own account, and second, such Registrable Securities and any other
securities of the Company requested to be included in such registration, pro
rata among all such holders on the basis of the estimated gross proceeds of the
securities of such holders requested to be so included.
(c) SELECTION OF MANAGING UNDERWRITER. The managing underwriter of any
underwritten offering pursuant to this Section 2.2 shall be selected by the
Company at its sole discretion.
2.3. REGISTRATION PROCEDURES. If and whenever the Company is required to
use its best efforts to effect the registration of any Registrable Securities
under the Securities Act as provided in Section 2.1, 2.2 or 2.9, the Company
will as expeditiously as possible:
(i) in the case of a registration pursuant to Section 2.1 or 2.2, prepare
and (as soon as practicable, and in any event within 75 days in the case of
Forms S-1 or S-2 and 30 days in the case of a registration requested on Form S-3
after the end of the period within which requests for registration may be given
to the Company) file with the Commission the requisite registration statement to
effect such registration and thereafter use its best efforts to cause such
registration statement to become effective; PROVIDED, HOWEVER, that the Company
may discontinue any registration of its securities which are not Registrable
Securities (and, under the circumstances specified in Section 2.2(a), its
securities which are Registrable Securities) at any time prior to the effective
date of the registration statement relating thereto;
(ii) prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by such registration statement for such period as
shall be required for the disposition of all of such Registrable Securities,
PROVIDED, THAT in the case of a registration pursuant to Section 2.1 or 2.2,
such period need not exceed 90 days;
(iii) furnish to each seller of Registrable Securities covered by such
registration statement, such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the prospectus contained in
such registration statement (including each preliminary prospectus and any
summary prospectus) and any other prospectus filed under Rule 424 under the
Securities Act, in conformity with the requirements of the Securities Act, and
such other documents, as such seller may reasonably request;
(iv) use its best efforts (x) to register or qualify all Registrable
Securities and other securities covered by such registration statement under
such other securities or blue sky laws of such States of the United States of
America where an exemption is not available and as the sellers of Registrable
Securities covered by such registration statement shall reasonably request, (y)
to keep such registration or qualification in effect for so long as such
registration statement remains in effect, and (z) to take any other action which
may be reasonably necessary or advisable to enable such sellers to consummate
the disposition in such jurisdictions of the securities to be sold by such
sellers, except that the Company shall not for any such purpose be required to
qualify generally to do business as a foreign corporation in any jurisdiction
wherein it would not but for the requirements of this subdivision (iv) be
obligated to be so qualified or to consent to general service of process in any
such jurisdiction;
(v) use its best efforts to cause all Registrable Securities covered by
such registration statement to be registered with or approved by such other
federal or state governmental agencies or authorities as may be necessary in the
opinion of counsel to the Company and counsel to the seller or sellers thereof
to consummate the disposition of such Registrable Securities;
(vi) in the case of a registration pursuant to Section 2.1 or 2.2, furnish
to each seller of Registrable Securities a signed counterpart of
(x) an opinion of counsel for the Company, and
(y) a "comfort" letter signed by the independent public accountants who
have certified the Company's financial statements included or incorporated by
reference in such registration statement covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of the accountant's comfort 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 accountant's comfort letters
delivered to the underwriters in underwritten public offerings of securities
(and dated the dates such opinions and comfort letters are customarily dated)
and, in the case of the accountant's comfort letter, such other financial
matters, and in the case of the legal opinion, such other legal matters, as the
sellers of a majority of the Registrable Securities covered by such registration
statement, or the underwriters, may reasonably request;
(vii) notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, upon discovery that, or upon
the happening of any event as a result of which, in the judgment of the Company,
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,
and at the request of any such seller promptly prepare and furnish to it a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, in the judgment of the Company, 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;
(viii) otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make available to its security holders,
as soon as reasonably practicable, an earnings statement covering the period of
at least twelve months, but not more than eighteen months, beginning with the
first full calendar month after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 promulgated thereunder, and promptly
furnish to each such seller of Registrable Securities a copy of any amendment or
supplement to such registration statement or prospectus;
(ix) provide and cause to be maintained a transfer agent and registrar
(which, in each case, may be the Company) for all Registrable Securities covered
by such registration statement from and after a date not later than the
effective date of such registration; and
(x) use its best efforts to list all Registrable Securities covered by such
registration statement on any national securities exchange or national
quotations system on which Registrable Securities of the same class covered by
such registration statement are then listed.
The Company may require each seller of Registrable Securities as to which
any registration is being effected to furnish the Company in writing as promptly
as reasonably practicable such information regarding such seller and the
distribution of such securities as the Company may from time to time reasonably
request in writing.
Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that upon receipt of any notice from the Company of the
happening of any event of the kind described in subdivision (vii) of this
Section 2.3, such holder will forthwith discontinue such holder's disposition of
Registrable Securities pursuant to the registration statement relating to such
Registrable Securities until such holder's receipt of the copies of the
supplemented or amended prospectus contemplated by subdivision (vii) of this
Section 2.3 and, if so directed by the Company, will deliver to the Company (at
the Company's expense) all copies, other than permanent file copies, then in
such holder's possession, of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice.
2.4. UNDERWRITTEN OFFERINGS.
(a) REQUESTED UNDERWRITTEN OFFERINGS. If requested by the underwriters for
any underwritten offering by holders of Registrable Securities pursuant to a
registration requested under Section 2.1, the Company will enter into an
underwriting agreement with such underwriters for such offering, such agreement
to be reasonably satisfactory in substance and form to the Company, each such
holder and the underwriters and to contain such representations and warranties
by the Company and such other terms as are generally prevailing in agreements of
that type, including, without limitation, indemnities to the effect and to the
extent provided in Section 2.7. The holders of the Registrable Securities
proposed to be distributed by such underwriters will cooperate with the Company
in the negotiation of the underwriting agreement and will give consideration to
the reasonable suggestions of the Company regarding the form thereof. Such
holders of Registrable Securities to be distributed by such underwriters shall
be parties to such underwriting agreement and may, at their option, require that
any or all of the representations and warranties by, and the other agreements on
the part of, the Company to and for the benefit of such underwriters shall also
be made to and for the benefit of such holders of Registrable Securities and
that any or all of the conditions precedent to the obligations of such
underwriters under such underwriting agreement be conditions precedent to the
obligations of such holders of Registrable Securities. Any such holder of
Registrable Securities shall not be required to make any representations or
warranties to or agreements with the Company or the underwriters other than
representations, warranties or agreements regarding such holder, such holder's
Registrable Securities, such holder's intended method of distribution and any
other representations required by law.
(b) INCIDENTAL UNDERWRITTEN OFFERINGS. If the Company proposes to register
any of its securities under the Securities Act as contemplated by Section 2.2
and such securities are to be distributed by or through one or more
underwriters, the Company will, subject to Section 2.8 hereof, if requested by
any Requesting Holder of Registrable Securities arrange for such underwriters to
include all the Registrable Securities to be offered and sold by such Requesting
Holder among the securities of the Company to be distributed by such
underwriters. The holders of Registrable Securities to be distributed by such
underwriters shall be parties to the underwriting agreement between the Company
and such underwriters and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of such holders of Registrable Securities and that any or all of
the conditions precedent to the obligations of such underwriters under such
underwriting agreement be conditions precedent to the obligations of such
holders of Registrable Securities. Any such Requesting Holder of Registrable
Securities shall not be required to make any representations or warranties to or
agreements with the Company or the underwriters other than representations,
warranties or agreements regarding such Requesting Holder, such Requesting
Holder's Registrable Securities and such Requesting Holder's intended method of
distribution or any other representations required by law. Notwithstanding the
foregoing provisions of this Section 2.4(b), the Company need not include any
Registrable Securities of any such Requesting Holder in an underwritten offering
of the Company's securities if the inclusion of such Requesting Holder's
securities, in the opinion of the managing underwriter for such offering by the
Company, might adversely affect such offering by the Company.
(c) HOLDBACK AGREEMENTS. (i) In the case of any underwritten public
offering by the Company of shares of Common Stock, each holder of Registrable
Securities agrees not to effect any disposition (other than a disposition of
Registrable Securities under such underwritten public offering or a bona fide
pledge or a disposition to an Affiliate of such holder who agrees to be bound by
the provisions of this paragraph) (a "Disposition") of any Registrable
Securities, and not to effect any such Disposition of any other equity security
of the Company or of any security convertible into or exchangeable or
exercisable for any equity security of the Company (in each case, other than as
part of such underwritten public offering) during the 15 days prior to, and
during the 90-day period (or such longer period as may be reasonably requested
by the underwriter of such offering) beginning on, the effective date of such
registration statement (except as apart of such registration), provided that
each holder of Registrable Securities has received written notice of such
registration at least 15 days prior to such effective date.
(ii) If any registration of Registrable Securities shall be in connection
with an underwritten public offering, the Company agrees (i) not to effect any
public sale or distribution of any of its equity securities or of any security
convertible into or exchangeable or exercisable for any equity security of the
Company (other than any such sale or distribution of such securities in
connection with any merger or consolidation by the Company or any subsidiary of
the Company of the capital stock or substantially all the assets of any other
person or in connection with an employee stock option or other benefit plan)
during the 90 days prior to, and during the 180-day period beginning on, the
effective date of such registration statement (except as part of such
registration) and (ii) that any agreement entered into after the date of this
Agreement pursuant to which the Company issues or agrees to issue any privately
placed equity securities shall contain a provision under which holders of such
securities agree not to effect any Disposition of any such securities during the
period referred to in the foregoing clause (i) (except as part of such
registration, if permitted).
2.5. PREPARATION: REASONABLE INVESTIGATION. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the holders of Registrable
Securities registered under such registration statement, their underwriters, if
any, and their respective counsel and accountants the opportunity to participate
in the preparation of such registration statement, each prospectus included
therein or filed with the Commission, and, to the extent practicable, each
amendment thereof or supplement thereto, and give each of them such access to
its books and records (to the extent customarily given to underwriters of the
Company's securities) and such opportunities to discuss the business of the
Company with its officers and the independent public accountants who have
certified its financial statements as shall be necessary, in the opinion of such
holders' and such underwriters' respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
2.6. LIMITATIONS, CONDITIONS AND QUALIFICATIONS TO OBLIGATIONS UNDER
REGISTRATION Covenants. The obligation of the Company to use its best efforts to
cause the Registrable Securities to be registered under the Securities Act is
subject to the following limitations, conditions and qualifications.
(a) The Company shall be entitled to postpone for a reasonable period of
time (but not exceeding 180 days, in the case of a registration pursuant to
Section 2.1 or 2.2, and 30 days in the case of a registration pursuant to
Section 2.9) the filing of any registration statement otherwise required to be
prepared and filed by it pursuant to Section 2.1, if the Company determines, in
its reasonable judgment, that such registration and offering (i) would interfere
with any financing, acquisition, merger, consolidation, material joint venture,
corporate reorganization or other material transaction involving the Company or
any of its Affiliates, or (ii) would require premature disclosure of any of the
foregoing transactions (or of the existence of negotiations, discussions or
pending proposals with respect thereto) or of any pending or threatened
litigation, claim, assessment or governmental investigation which would be
material to the Company, and promptly gives the holders of Registrable
Securities requesting registration thereof pursuant to Section 2.1 written
notice of such delay. If the Company shall so postpone the filing of a
registration statement, such holders of Registrable Securities requesting
registration thereof pursuant to Section 2.1 shall have the right to withdraw
the request for registration by giving written notice to the Company within 30
days after receipt of the notice of postponement and, in the event of such
withdrawal, such request shall not be counted for purposes of the requests for
registration to which holders of Registrable Securities are entitled pursuant to
Section 2.1 hereof.
(b) The Company shall not be obligated to effect the registration of
Registrable Securities of any holder pursuant to Section 2.1, 2.2 or 2.9 unless
such holder consents to reasonable conditions imposed by the Company, including
without limitation:
(i) conditions prohibiting the sale of shares by such holder until the
registration shall have been effective for a specified period of time;
(ii) conditions requiring such holder to comply with all prospectus
delivery requirements of the Securities Act and with all anti-stabilization,
anti-manipulation and similar provisions of Section 10 of the Exchange Act and
any rules issued thereunder by the Commission, and to furnish to the Company
information about sales made in such public offering;
(iii) conditions prohibiting such holder from effecting sale of shares upon
receipt of telegraphic or written notice from the Company (until further notice)
given to permit the Company to correct or update a registration statement or
prospectus; and
(iv) conditions requiring that at the end of the period during which the
Company is obligated to keep the registration statement effective under Section
2.3(ii) or 2.9(c), such holder shall discontinue sales of shares pursuant to
such registration statement upon receipt of notice from the Company of its
intention to remove from registration the shares covered by such registration
statement that remain unsold, and requiring such holder to notify the Company of
the number of Registrable Securities registered that remain unsold promptly upon
receipt of notice from the Company.
(c) Holders of Registrable Securities shall use their reasonable best
efforts to effect as wide a distribution of such Registrable Securities as
reasonably practicable, and in no event shall any sale of Registrable Securities
be made knowingly to (i) any Person (including its Affiliates) or (ii) any
Persons or entities which are to the knowledge of such holders (or to the
knowledge of any underwriter for such holders) part of any "group" within the
meaning of Regulation 13D of the Exchange Act which includes such purchaser or
any of its Affiliates that, after giving effect to such sale, would beneficially
own securities representing more than 5% of the aggregate voting power of all
outstanding voting securities of the Company. The holders of such Registrable
Securities shall secure the agreement of their underwriter or underwriters, if
any, for such offering to comply with the foregoing.
2.7. INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. In the event of any registration of any
securities of the Company under the Securities Act, the Company will, and hereby
does, indemnify and hold harmless, in the case of any registration statement
filed pursuant to Section 2.1, 2.2 or 2.9, each seller of any Registrable
Securities covered by such registration statement, its directors, officers,
partners, agents and Affiliates and each other Person who participates as an
underwriter in the offering or sale of such securities and each other Person, if
any, who controls such seller or any such underwriter within the meaning of the
Securities Act, insofar as losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein in light of the circumstances in which they were made not misleading,
and the Company will reimburse such seller and each such director, officer,
partner, agent or affiliate, underwriter and controlling Person for any legal or
any other expenses reasonably incurred by them in connection with investigating
or defending any such loss, claim, liability, action or proceeding; PROVIDED,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability (or action or proceeding in respect thereof)
or expense arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
any such preliminary prospectus, final prospectus, summary prospectus, amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company through an instrument executed by or on behalf of such
seller or underwriter, as the case may be, specifically stating that it is for
use in the preparation thereof; and PROVIDED, further, that the Company shall
not be liable to any Person who participates as an underwriter in the offering
or sale of Registrable Securities or any other Person, if any, who controls such
underwriter within the meaning of the Securities Act, in any such case to the
extent that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of such Person's failure to send or give
a copy of the final prospectus, as the same may be then supplemented or amended,
to the Person asserting an untrue statement or alleged untrue statement or
omission or alleged omission at or prior to the written confirmation of the sale
of Registrable Securities to such Person if such statement or omission was
corrected in such final prospectus so long as such final prospectus, and any
amendments or supplements thereto, have been furnished to such underwriter. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such seller or any such director, officer, partner,
agent or affiliate or controlling Person and shall survive the transfer of such
securities by such seller.
(b) INDEMNIFICATION BY THE SELLERS. As a condition to including any
Registrable Securities in any registration statement, the Company shall have
received an undertaking satisfactory to it from the prospective seller of such
Registrable Securities, to indemnify and hold harmless (in the same manner and
to the same extent as set forth in subdivision (a) of this Section 2.7) the
Company, and each director of the Company, each officer of the Company and each
other Person, if any, who controls the Company within the meaning of the
Securities Act, with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company through an instrument duly executed
by such seller specifically stating that it is for use in the preparation of
such registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement; PROVIDED, HOWEVER, that the liability of
such indemnifying party under this Section 2.7(b) shall be limited to the amount
of proceeds received by such indemnifying party in the offering giving rise to
such liability. 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 or controlling Person and shall survive the transfer of such securities
by such seller.
(c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified party
of notice of the commencement of any action or proceeding involving a claim
referred to in the preceding subdivisions of this Section 2.7, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, give written notice to the latter of the commencement of such action;
PROVIDED, HOWEVER, that the failure of any indemnified party to give notice as
provided herein shall not relieve the indemnifying party of its obligations
under the preceding subdivisions of this Section 2.7, except to the extent that
the indemnifying party is actually prejudiced by such failure to give notice. In
case any such action is brought against an indemnified party, unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties is reasonably likely to exist in respect of
such claim, the indemnifying party shall be entitled to participate in and, to
assume the defense thereof, jointly with any other indemnifying party similarly
notified to the extent that it may wish, with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties arises in respect of such claim after the
assumption of the defense thereof and the indemnified party notifies the
indemnifying party of such indemnified party's judgment and the basis therefor.
No indemnifying party shall be liable for any settlement of any action or
proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability
in respect of such claim or litigation.
(d) CONTRIBUTION. If the indemnification provided for in this Section 2.7
shall for any reason be held by a court to be unavailable to an indemnified
party under subparagraph (a) or (b) hereof in respect of any loss, claim, damage
or liability, or any action in respect thereof, then, in lieu of the amount paid
or payable under subparagraph (a) or (b) hereof, the indemnified party and the
indemnifying party under subparagraph (a) or (b) hereof shall contribute to the
aggregate losses, claims, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating the same), (i) in
such proportion as is appropriate to reflect the relative fault of the Company
and the prospective sellers of Registrable Securities covered by the
registration statement which resulted in such loss, claims, damage or liability,
or action in respect thereof, with respect to the statements or omissions which
resulted in such loss, claim, damage or liability, or action in respect thereof,
as well as any other relevant equitable considerations or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company and such prospective sellers from the offering of the securities
covered by such registration statement. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. Such prospective sellers' obligations to
contribute as provided in this subparagraph (d) are several in proportion to the
relative value of their respective Registrable Securities covered by such
registration statement and not joint. In addition, no Person shall be obligated
to contribute hereunder any amounts in payment for any settlement of any action
or claim effected without such Person's consent, which consent shall not be
unreasonably withheld.
(e) OTHER INDEMNIFICATION. Indemnification and contribution similar to that
specified in the preceding subdivisions of this Section 2.7 (with appropriate
modifications) shall be given by the Company and each seller of Registrable
Securities with respect to any required registration or other qualification of
securities under any federal or state law or regulation of any governmental
authority other than the Securities Act.
(f) INDEMNIFICATION PAYMENTS. The indemnification and contribution required
by this Section 2.7 shall be made by periodic payments of the amount thereof
during the course of the investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred. In any case in which
it shall be judicially determined that a party is not entitled to
indemnification or contribution, any payments previously received by such party
hereunder shall be promptly reimbursed.
2.8. LIMITATIONS ON REGISTRATIONS OF REGISTRABLE SECURITIES.
(a) The Company shall not be required to effect any registration of
Registrable Securities pursuant to Section 2.1 prior to August 31, 1999 unless
either (i) GECC shall have consented thereto in writing or (ii) (x) the offering
price (net of underwriters' fees, commissions and discounts) pursuant to such
registration results in a Total Return on Investment of at least 40% per annum
and (y) GECC is given the opportunity to include at least 50% of the Registrable
Securities held by it in such registration. GECC shall have the right to require
the withdrawal of any previously filed registration statement if it determines
that the foregoing conditions will not be met.
(b) The Company shall not be required to effect any registration of
Registrable Securities pursuant to Section 2.1, 2.2 or 2.9 hereof if it shall
deliver to the holder or holders requesting such registration an opinion of
counsel (which opinion and counsel shall be reasonably satisfactory to such
holder or holders) to the effect that all Registrable Securities held by such
holder may than be sold in the public market without registration under the
Securities Act and any applicable state securities laws.
2.9 SHELF REGISTRATION STATEMENTS. (a) Within 120 days following the date
hereof, the Company shall file with the Commission and shall use its best
efforts to cause to be declared effective within 180 days from the date hereof,
Shelf Registration Statement No. 1, relating to the offer and sale of 50% of the
Registrable Securities owned by the Hawley Trusts from time to time in
accordance with the methods of distribution elected by them and set forth in
Shelf Registration Statement No. 1.
(b) Within 215 days following the date Shelf Registration Statement No. 1
is first declared effective by the Commission, the Company shall file with the
Commission and shall use its best efforts to cause to be declared effective
within 275 days following the effective date of Shelf Registration Statement No.
1, Shelf Registration Statement No. 2, relating to the offer and sale of the
remaining 50% of the Registrable Securities owned by the Hawley Trusts from time
to time in accordance with the methods of distribution elected by them and set
forth in Shelf Registration Statement No. 2.
(c) The Company will use its best efforts to keep each Shelf Registration
Statement continuously effective in order to permit the prospectus forming part
thereof to be usable by the Hawley Trusts for a period of three years from the
date such Shelf Registration Statement is first declared effective by the
Commission, or for such shorter period that will terminate when all Registrable
Securities covered by such Shelf Registration Statement have been sold pursuant
to thereto or cease to be outstanding or otherwise to be Registrable Securities.
(d) Whenever the Company shall effect a Shelf Registration Statement
pursuant to this Section 2.9, no other securities shall be included among the
securities covered by such Shelf Registration Statement.
(e) The Company will pay the Registration Expenses in connection with any
Shelf Registration Statement pursuant to this Section 2.9.
(f) At the discretion of Permal Group, either Shelf Registration Statement
may include Stock purchased by the Specified Investors (as defined below);
provided that the number of Registrable Securities purchased by the Specified
Investors after the date hereof shall not exceed 1,500,000 in the aggregate and
no Registrable Securities may be purchased by the Specified Investors after
September 30, 1996. For purposes hereof, the "Specified Investors" shall mean
all of the Investors except for the Permal Group, GECC and the Hawley Group.
3. DEFINITIONS. As used herein, unless the context otherwise requires, the
following terms have the following respective meanings (capitalized terms used
but not defined herein having the meanings set forth in the Stockholders
Agreement):
"AFFILIATE" shall have the meaning ascribed to such term in Rule 12b-2 of
the General Rules and Regulations under the Exchange Act.
"COMMISSION" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Exchange Act of 1934, as amended, shall
include a reference to the comparable section, if any, of any such similar
Federal statute.
"HAWLEY GROUP" shall mean those Persons listed on Schedule A attached
hereto.
"HAWLEY TRUSTS" shall mean the Hawley Group other than Philip M. Hawley and
Philip M. Hawley, Jr.
"HOLDER" of Common Stock or Registrable Securities means any holder of such
stock or of Warrants exercisable for such stock.
"PERSON" means a corporation, an association, a partnership, an
organization, a business, an individual, a governmental or political subdivision
thereof or a governmental agency.
"REGISTRATION EXPENSES" means all expenses incident to the Company's
performance of or compliance with Section 2, including, without limitation, all
registration, filing and NASD fees, all listing fees, all fees and expenses of
complying with securities or blue sky laws (including, without limitation,
reasonable fees and disbursements of counsel for the underwriters in connection
with blue sky qualifications of the Registrable Securities), all word
processing, duplicating and printing expenses, messenger and delivery expenses,
the fees and disbursements of counsel for the Company and of its independent
public accountants, including the expenses of "cold comfort" letters required by
or incident to such performance and compliance, any fees and disbursements of
underwriters (including, without limitation, fees and expenses of counsel to the
underwriters) customarily paid by issuers or sellers of securities and the
reasonable fees and expenses of one counsel to the Selling Holders (selected by
Selling Holders representing at least a majority of the Registrable Securities
covered by such registration); PROVIDED, HOWEVER, that Registration Expenses
shall exclude, and the sellers of the Registrable Securities being registered
shall pay, underwriters' fees and underwriting discounts and commissions and
transfer taxes in respect of the Registrable Securities being registered.
"REGISTRABLE SECURITIES" means (i) the shares of Common Stock (or other
securities) held by the Investors or issuable or issued upon exercise of any
warrants to purchase Common Stock and (ii) any securities of the Company
issuable or issued with respect to the Common Stock and/or warrants (or other
securities) referred to in clause (i) by way of a merger, consolidation, stock
split, stock dividend, recapitalization of the Company or similar transaction.
As to any particular Registrable Securities, once issued such securities shall
cease to be Registrable Securities when (a) a registration statement with
respect to the sale of such securities shall have become effective under the
Securities Act and such securities shall have been disposed of in accordance
with such registration statement, (b) they shall have been sold as permitted by,
and in compliance with, Rule 144 (or successor provision) promulgated under the
Securities Act, (c) they shall have been otherwise transferred, new certificates
for them not bearing a legend restricting further transfer under the Securities
Act shall have been delivered by the Company and subsequent public distribution
of them shall not require registration of them under the Securities Act, or (d)
they shall have ceased to be outstanding.
"REQUIRED NUMBER OF SHARES" means shares of Common Stock representing a
total of 1,000,000 shares of Common Stock, subject to adjustment as provided in
Section 12.
"SECURITIES ACT" means the Securities Act of 1933, or any similar federal
statute, and the rules and regulations of the Commission thereunder, all as the
same shall be in effect at the time. References to a particular section of the
Securities Act of 1933 shall include a reference to the comparable section, if
any, of any such similar federal statute.
"SHELF REGISTRATION STATEMENT" means either Shelf Registration Statement
No. 1 or Shelf Registration Statement No. 2.
"SHELF REGISTRATION STATEMENT NO. 1" shall mean a "shelf" registration
statement of the Company pursuant to Section 2.9, which covers 50% of the
Registrable Securities owned by the Hawley Trusts on an appropriate form under
Rule 415 under the Securities Act, or any similar rule that may be adopted by
the Commission, and all amendments and supplements to such registration
statement, including post-effective amendments, in each case including the
prospectus contained therein, all exhibits thereto and all material incorporated
by reference therein.
"SHELF REGISTRATION STATEMENT NO. 2" shall mean, at the Company's election
either: (i) a "shelf" registration statement of the Company pursuant to Section
2.9, which covers the remaining 50% of the Registrable Securities owned by the
Hawley Trusts on an appropriate form under Rule 415 under the Securities Act, or
any similar rule that may be adopted by the Commission, and all amendments and
supplements to such registration statement, including post-effective amendments,
in each case including the prospectus contained therein, all exhibits thereto
and all material incorporated by reference therein; or (ii) an amendment to
Shelf Registration Statement No. 1 to cover the remaining 50% of the Registrable
Securities owned by the Hawley Trusts.
"STOCKHOLDERS AGREEMENT" shall mean the Stockholders Agreement dated the
date hereof between the Company and the Investors.
"TOTAL RETURN ON INVESTMENT" shall mean, as of any date, the compound
annual return from the Closing Date to such date on the shares of Common Stock
purchased by GECC on the Closing Date, based upon the sum of (i) all dividends
and distributions (if any) (other than dividends or distributions paid in shares
of Common Stock pro rata to all holders of Common Stock) with respect to, and
proceeds (if any) of sales of, Common Stock actually paid prior to such date,
and (ii) the proceeds which would be received by GECC from the sale of Common
Stock at the proposed public offering price on such date. In calculating Total
Return on Investment, (x) any dividend or distribution of a publicly traded
security shall be valued based upon the average closing price of such security
for the 20 consecutive trading days ending on the date of such dividend or
distribution and (y) any dividend or distribution of property other than cash or
publicly traded securities shall be valued at its fair market value as of the
date of such dividend or distribution, as determined by a nationally recognized
independent investment banking or valuation firm selected by mutual agreement
between the Company and GECC.
4. RULE 144. The Company shall take all actions reasonably necessary to
enable holders of Common Stock to sell such securities without registration
under the Securities Act within the limitation of the exemptions provided by (a)
Rule 144 under the Securities Act, as such Rule may be amended from time to
time, or (b) any similar rule or regulation hereafter adopted by the Commission
including, without limiting the generality of the foregoing, filing on a timely
basis all reports required to be filed by the Exchange Act. Upon the request of
any holder of Common Stock, the Company will deliver to such holder a written
statement as to whether it has complied with such requirements.
5. AMENDMENTS AND WAIVERS. This Agreement may be amended with the consent
of the Company and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company shall
have obtained the written consent to such amendment, action or omission to act,
of the holders of at least a majority of the Registrable Securities and GECC so
long as GECC beneficially owns at least 2,000,000 shares of Common Stock;
PROVIDED; HOWEVER; that, in the case of any amendment to the provisions of
Section 2.9, the written consent of the Hawley Trusts also shall be obtained.
Each beneficial owner of any Registrable Securities at the time or thereafter
outstanding shall be bound by any consent authorized by this Section 5, whether
or not such Registrable Securities shall have been marked to indicate such
consent.
6. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election in writing delivered to the
Company, be treated as the holder of such Registrable Securities for purposes of
any request or other action by any holder or holders of Registrable Securities
pursuant to this Agreement or any determination of any number or percentage of
Registrable Securities held by any holder or holders of Registrable Securities
contemplated by this Agreement. If the beneficial owner of any Registrable
Securities so elects, the Company may require assurances reasonably satisfactory
to it of such owner's beneficial ownership of such Registrable Securities.
7. NOTICES All communications provided for hereunder shall be sent by
courier or other overnight delivery service, shall be effective upon receipt,
and shall be addressed as follows:
(a) if to an Investor, at such address as the Investor shall have furnished
to the Company in writing;
(b) if to any other holder of Registrable Securities, at the address that
such holder shall have furnished to the Company in writing, or, until any such
other holder so furnishes to the Company an address, then to and at the address
of the last holder of such Registrable Securities who has furnished an address
to the Company; or
(c) if to the Company, addressed to it at Krause's Furniture, Inc. 200
North Berry Street Brea, CA 92621-3903
or at such other address as the Company shall have furnished to each holder of
Registrable Securities at the time outstanding.
8. ASSIGNMENT; CALCULATION OF INTERESTS IN REGISTRABLE SECURITIES.
(a) This Agreement shall be binding upon and inure the benefit of and be
enforceable by the parties hereto and, with respect to the Company, its
respective successors and assigns and, with respect to the Investors, any
beneficial owner of any Registrable Securities, subject to the provisions
respecting the minimum number or proportion of shares of Registrable Securities
required in order to be entitled to certain rights, or take certain actions,
contained herein; PROVIDED, HOWEVER, that the provisions of Section 2.9 hereof
(i) are personal to the Hawley Trusts, (ii) may not be assigned by the Hawley
Trusts, (iii) upon the sale, transfer or other disposition of any particular
Registrable Securities owned by the Hawley Trusts, shall cease to apply to such
particular Registrable Securities, and (iv) shall not inure to the benefit of
and shall not be enforceable by any person or entity other than the Hawley
Trusts.
(b) For purposes of this Agreement, all references to a proportion of the
Registrable Securities shall be calculated based upon the number of Registrable
Securities participating in a registration hereunder, except that for the
purposes of Section 5 Registrable Securities shall be calculated on a Fully
Diluted basis.
9. DESCRIPTIVE HEADINGS. The descriptive headings of the several sections
and paragraphs of this Agreement are inserted for reference only and shall not
limit or otherwise affect the meaning hereof.
10. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE
PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY
AND UNCONDITIONALLY CONSENTS TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES OF AMERICA, IN EACH
CASE LOCATED IN THE COUNTY OF NEW YORK, FOR ANY ACTION, PROCEEDING OR
INVESTIGATION IN ANY COURT OR BEFORE ANY GOVERNMENTAL AUTHORITY ("LITIGATION")
ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
HEREBY (AND AGREES NOT TO COMMENCE ANY LITIGATION RELATING THERETO EXCEPT IN
SUCH COURTS), AND FURTHER AGREES THAT SERVICE OF ANY PROCESS, SUMMONS, NOTICE OR
DOCUMENT BY U.S. REGISTERED MAIL TO ITS RESPECTIVE ADDRESS SET FORTH IN THIS
AGREEMENT SHALL BE EFFECTIVE SERVICE OF PROCESS FOR ANY LITIGATION BROUGHT
AGAINST IT IN ANY SUCH COURT. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF ANY LITIGATION
ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY IN THE
COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES OF AMERICA, IN EACH CASE
LOCATED IN THE COUNTY OF NEW YORK, AND HEREBY FURTHER IRREVOCABLY AND
UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT
ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. EACH OF THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHTS TO TRIAL
BY JURY IN CONNECTION WITH ANY LITIGATION ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
11. NO INCONSISTENT AGREEMENTS. The Company will not hereafter enter into
any agreement with respect to its securities which is inconsistent with the
rights granted to the holders of Registrable Securities in this Agreement.
12. RECAPITALIZATIONS. ETC. In the event that any capital stock or other
securities are issued in respect of, in exchange for, or in substitution of, any
Registrable Securities by reason of any reorganization, recapitalization,
reclassification, merger, consolidation, spin-off, partial or complete
liquidation, stock dividend, split-up, sale of assets, distribution to
stockholders or combination of the shares of Registrable Securities or any other
change in the Company's capital structure, appropriate adjustments shall be made
in this Agreement so as to fairly and equitably preserve, as far as practicable,
the original rights and obligations of the parties hereto under this Agreement.
At the request of the Selling Holders of a majority of Registrable Securities in
connection with any registration pursuant to Section 2.1 hereof, the Company
will effect such adjustments to the outstanding Common Stock by way of stock
split or stock dividend as the Selling Holders may reasonably request to
facilitate the registration and sale of the Common Stock.
13. ATTORNEYS' FEES. In any action or proceeding brought to enforce any
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the prevailing party to such action or proceeding shall be
entitled to recover reasonable attorneys' fees in addition to any other
available remedy.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be executed and delivered by their respective officers thereunto
duly authorized as of the date first above written.
KRAUSE'S FURNITURE, INC.
By:________________________________________
Name:
Title:
GENERAL ELECTRIC CAPITAL CORPORATION
By:________________________________________
Name: Jeffrey H. Coats
Title: Managing Director/
Department Operations Manager
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be executed and delivered by their respective officers thereunto
duly authorized as of the date first above written.
By:________________________________________
<PAGE>
SCHEDULE A
HAWLEY GROUP CONSISTS OF:
Allison Booth Hawley Trust I
Caitlin Hale Hawley Trust I
Maureen Erin Hawley Trust I
Shannon Follen Hawley Trust I
Hawley Family Trust
Dr. Philip M. Hawley, Jr.
Philip M. Hawley
EMPLOYMENT
BETWEEN
KRAUSE'S FURNITURE, INC.
AND
PHILIP M. HAWLEY
This document is an Employment Agreement effective as of August 26, 1996
between Krause's Furniture, Inc. ("KFI") and Philip M. Hawley.
ARTICLE I
RECITALS
I.A. Mr. Hawley has agreed to become the Chairman of the Board and Chief
Executive Officer, the position of senior responsibility and authority within
the KFI Organization.
I.B. The purpose of this Agreement is to express the terms upon which KFI
agrees to employ Mr. Hawley and Mr. Hawley agrees to serve as Chairman of the
Board and Chief Executive Officer of KFI.
I.C. Mr. Hawley's services to KFI as Chief Executive are extremely valuable
to KFI and the importance of his leadership and the extraordinary
responsibilities and demands of his role in the affairs of KFI warrant
contractual arrangements of the nature herein provided.
ARTICLE II.
KEY ELEMENTS OF RELATIONSHIP
II. A. Employment
KFI hereby employs Mr. Hawley as its Chairman of the Board and Chief
Executive Officer reporting only to its Board of Directors. Mr. Hawley shall be
the senior ranking officer of KFI with general supervision and control over, and
responsibility for, the management and operations of KFI and its subsidiaries,
together with such additional responsibilities and powers consistent with the
foregoing as the Board of Directors of KFI may from time to time prescribe.
II. B. Salary
Mr. Hawley's Basic Salary shall be at the annual rate of $225,000 ("Basic
Salary"). Such salary shall be earned monthly and shall be payable in periodic
installments no less frequently than monthly. Amounts payable shall be reduced
by any deferrals elected by Mr. Hawley pursuant to any deferred compensation
plan of KFI in which Mr. Hawley may, from time to time participate. Amounts
attributable to partial months at the beginning and end of the term shall be
prorated on the basis of the number of days of employment in relation to the
number of days in the month.
II. C. Term
Mr. Hawley is hereby employed for a period commencing on August 26, 1996
and ending on August 25, 1999.
II. D. Outside Activities
Mr. Hawley's duties hereunder shall constitute his exclusive employment as
a managerial executive. The parties acknowledge that non-employment activities
of a business, civic and public character are consistent with Mr. Hawley's
duties hereunder, and in the future Mr. Hawley's participation in these
activities is to be determined by Mr. Hawley within the general level of
commitment and effort which Mr. Hawley presently devotes to such matters.
II. E. Place of Performance
In connection with his employment by KFI hereunder, Mr. Hawley shall not be
based anywhere other than in the Los Angeles metropolitan area, except for
required travel on KFI business.
II. F. Termination by KFI for Mr. Hawley's Disability
KFI may terminate Mr. Hawley's status as an employee on account of Mr.
Hawley's disability at the end of any month, if Mr. Hawley is and has been for
either (a) fifty percent or more of the normal working days during the six
consecutive full calendar months then ending, or (b) thirty percent or more of
the normal working days during the twelve consecutive full calendar months then
ending, unable due to mental or physical illness or injury to perform his duties
under this Agreement.
II. G. Other Termination
Mr. Hawley may, in his discretion, terminate both his obligation to serve
as Chairman of the Board and Chief Executive Officer and his duty to render any
services hereunder, but not his status as an employee for purposes of any plan
or program of or sponsored by KFI (which shall continue for the entire remaining
stated term of this agreement), in the event that KFI materially breaches its
obligations hereunder. This Agreement shall be deemed to have been "materially"
breached by KFI for purposes of this Section if KFI fails in any material
respect to meet its obligations pursuant to any provision of Article II or
Article III or Article V hereof.
KFI may terminate both Mr. Hawley's obligation to serve as Chairman of the
Board and Chief Executive Officer and his duty to render any services hereunder,
but only both together and irrevocably, and not his status as an employee (which
shall continue for the entire remaining stated term of this agreement), at any
time at its discretion. In the event of such a termination on a discretionary
basis by Mr. Hawley or by KFI, Mr. Hawley shall continue be entitled to his
Basic Salary and all other benefits provided in his Agreement except as
hereinafter provided. Pension and other benefits shall continue to accrue on his
account whether under the relevant plans or as payments hereunder in order that
he shall receive upon retirement or other events an amount equal to that which
he would have received had such termination not occurred.
In the event of such termination, Mr. Hawley shall not be required to seek
other employment or otherwise to mitigate KFI's obligations to him. If Mr.
Hawley accepts any full-time managerial employment (but not part-time consulting
arrangements) prior to August 26, 1999 the amount paid to Mr. Hawley as Basic
Salary from KFI during the period of such employment shall be reduced up to but
not exceeding the amount otherwise due hereunder by the amount of any salary
received by Mr. Hawley as a result of such employment. This provision for
reduction in salary shall have no effect upon the continuing obligation of KFI
to provide all other benefits and entitlements, including the accrual and
vesting thereof, which appertaining to Mr. Hawley hereunder or otherwise by
reason of his status as an employee and senior executive officer of KFI.
The termination of Mr. Hawley's obligations and duties pursuant to this
Section shall not limit or affect any of his other rights under this Agreement.
ARTICLE III
BENEFITS
III. A. Vesting Provisions
If Mr. Hawley's service as Chairman of the Board and Chief Executive
Officer is terminated for any reason other than (i) "Cause" as provided in
Section IV or (ii) Mr. Hawley's "Voluntary Resignation" as provided below, or if
KFI decides to terminate Mr. Hawley as Chairman of the Board and Chief Executive
Officer under Section II.G., he shall be entitled to the immediate full vesting
and availability for exercise of all stock options, stock appreciation rights
and other similar rights which have then been allocated or awarded to him,
whether or not the same would otherwise then be vested or exercisable. For
purposes of this Section, "Voluntary Resignation" shall mean that Mr. Hawley
resigns from his positions with KFI of his own volition and without business
justification. No termination or resignation of Mr. Hawley for any reason shall
terminate or otherwise affect options that were vested on the date of
termination or resignation.
III. B. Compensation in the Event of Injury or Sickness, Temporary or
Permanent Disability
If Mr. Hawley is absent from work on account of personal injuries or
sickness or because of a temporary or permanent disability, in lieu of salary,
Mr. Hawley shall receive during such absence, an amount equal to, payable at the
same time and in the same manner as Basic Salary; provided, however, that if
such period of absence of Mr. Hawley on account of personal injuries or sickness
is for more than four consecutive weeks, any such payments shall be reduced by
the amount which Mr. Hawley is entitled to receive for the period covered by
disability payments provided under any KFI disability plan and by or pursuant to
state or federal law.
III. C. Change of Control
If a Change of Control occurs during the term of this Agreement Mr. Hawley
shall be entitled to choose whether he wishes to have this Agreement remain in
full force and effect. If Mr. Hawley chooses to continue the Agreement according
to its terms he shall be entitled to no payment under this paragraph. If Mr.
Hawley elects to terminate this Agreement, KFI shall pay to Mr. Hawley at the
time of the Change of Control a lump sum payment equal to the greater of (i) the
remaining amounts that would be paid to Mr. Hawley under the terms of the
Agreement or (ii) $225,000; provided, however, that the amount payable under
this Section III E taken together with other amounts payable to Mr. Hawley, if
any, shall not exceed the amounts deductible under Section 280G of the internal
revenue Code of 1986, as amended. Nothing in this Section shall impose upon Mr.
Hawley any obligation to refund any payments to KFI. The term "Change of
Control" shall mean any of (i) the sale or merger of KFI or its principal
operating subsidiaries, if after such transaction a majority of the Board of
Directors of the surviving corporation are persons who were not members of the
KFI Board prior to the announcement of the proposed sale or merger, (ii) the
completion of a tender offer, stock sale or similar transaction which results in
a transfer in one or more installments of sufficient shares of KFI stock to
permit the tendering or acquiring parties to control the selection of KFI
Directors (it being conclusively presumed that a transfer of shares having more
than 50% voting power in an election of directors will have such a power, even
if KFI has adopted a staggered board or other similar arrangement that would
delay the change in directors) or (iii) any other transaction that results in
the election of persons to the Board of Directors of KFI who prior to the
announcement of the transaction were not disinterested KFI directors but who
following the transaction together with any directors who are interested (by
virtue of an affiliation with the acquiring party or otherwise) constitute a
majority of KFI's Board of Directors. Notwithstanding the foregoing, any
above-described transaction in which General Electric Capital Corporation, or
any affiliate thereof, is the person acquiring control shall not constitute a
Change of Control for purposes of this agreement.
III. D. Participation in Other Benefits.
Mr. Hawley shall be entitled to all other benefits and conditions of
employment available generally to executives of KFI of the same tenure, level
and responsibility pursuant to KFI plans including, by way of illustration, but
not by way of limitation, bonuses, retirement, vacation, deferred compensation,
employee discount, profit sharing, hospital, surgical, medical or other group
health benefits and life insurance benefits.
III. E. Certain Costs and Expenses; Continuation of Basic Salary and Benefits.
KFI shall pay to Mr. Hawley on a current basis all costs and expenses
(including reasonable legal fees and expenses and costs and expenses incurred in
connection with any investigation), if any, incurred by Mr. Hawley as a result
of his seeking to obtain or enforce any right or benefit provided by this
Agreement. Notwithstanding the dependency of any such dispute, Mr. Hawley shall
continue to be entitled to, and KFI will continue to pay Mr. Hawley, his full
compensation (including, but not limited to, his Basic Salary) in effect when
any action giving rise to any dispute occurred, and Mr. Hawley shall continue as
a participant in all compensation, benefit and insurance plans in which he was
participating at such time until the dispute is finally resolved. Amounts paid
as costs and expenses under this provision are in addition to all other amounts
due under this Agreement and shall not be offset against or reduce any other
amounts due under this Agreement.
III. F. Expenses
Mr. Hawley will be reimbursed in accordance with policies applicable
generally to senior executive officers of KFI from time to time in effect for
traveling, entertainment and other expenses reasonably incurred in the
performance of his duties and responsibilities hereunder.
ARTICLE IV
TERMINATION FOR CAUSE
IV. A. Termination by KFI for Cause
IV. A.1. "Cause" Defined, etc. KFI may terminate this Agreement at any time
for "Cause." For purposes of this Agreement "Cause" shall have only the meaning
established by the following sections IV.A.1.(a) and IV.A.1.(b).
IV. A.1.(a) "Cause is the actual willful and continued failure by Mr.
Hawley to perform substantially" for purposes of this Agreement cannot be found
to exist until there shall have been a written demand for substantial
performance delivered to Mr. Hawley by the KFI Board of Directors (the "Board")
and, after receipt of such demand, a reasonable opportunity under all the
circumstances and in no event fewer than sixty days for Mr. Hawley to rectify
the failure so identified. The document so to be delivered shall specifically
identify the manner in which the Board believes that Mr. Hawley has not
substantially performed his duties.
IV.A.1.(b) "Cause" is also Mr. Hawley's willful misconduct which is
demonstrably and materially injurious to the economic interest of KFI.
IV.A.2. Procedures for Finding Cause.
For purposes of determining whether "Cause" exists no act or failure to act
on Mr. Hawley's part may be considered "willful" unless done or omitted to be
done by Mr. Hawley not in good faith and without reasonable belief by Mr. Hawley
that his action or omission was in the best interest of KFI. Mr . Hawley shall
not be terminated for "Cause" unless and until, following any period of
opportunity to rectify, there shall been duly adopted by the affirmative vote of
not less than three-quarters of the entire membership of the Board at a meeting
of the Board called and held for the purpose (after reasonable notice to Mr.
Hawley and an opportunity for Mr. Hawley, together with his counsel, to be heard
before the Board), and delivered to Mr. Hawley a finding that in the good faith
opinion of the Board, Mr. Hawley was guilty of conduct justifying Mr. Hawley's
termination for Cause as defined herein and specifying the particulars thereof
in detail. If the reasons for such finding include "actual willful and continued
failure by Mr. Hawley to perform substantially" those reasons must have been
previously identified to Mr. Hawley in a demand and opportunity to rectify
delivered as required by Section IV.A.1.(a).
IV.B. Notice of Termination
Any action to effect termination of Mr. Hawley's status as an employee by
KFI shall be communicated by written Notice of Termination to Mr. Hawley which
shall be delivered to him not less than thirty days prior to the effective date
of such action. The "Notice of Termination" shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances which are alleged to provide a
basis for action pursuant to the terms of this Agreement and shall specify the
date upon which Mr. Hawley's status as an employee is to be terminated (the
"Date of Termination").
IV.C. Termination of Benefits
If this Agreement is terminated by KFI for Cause, following the date of
termination KFI shall not be required to make any payment to Mr. Hawley
hereunder with respect to any period or event occurring after the date of
termination. Such termination shall not affect any right of Mr. Hawley to
receive any payments under any benefit plan or program, including without
limitation the stock option plan referred to in Section V, which, by its own
terms, has then vested in, become exerciseable by and otherwise remains
available to Mr. Hawley notwithstanding such termination.
V. IN THE EVENT THIS AGREEMENT IS TERMINATED BY KFI FOR CAUSE, FOLLOWING
THE DATE OF TERMINATION KFI SHALL NOT BE REQUIRED TO MAKE ANY PAYMENT TO MR.
HAWLEY HEREUNDER WITH RESPECT TO ANY PERIOD OR EVENT OCCURRING AFTER THE DATE OF
TERMINATION. SUCH TERMINATION SHALL NOT EFFECT ANY RIGHT OF MR. HAWLEY TO
RECEIVE ANY PAYMENTS UNDER ANY BENEFIT PLAN OR PROGRAM WHICH, BY ITS OWN TERMS,
HAS THEN VESTED IN, BECOME EXERCISABLE BY AND OTHERWISE REMAINS AVAILABLE TO MR.
HAWLEY NOTWITHSTANDING SUCH TERMINATION.
ARTICLE V.
GRANT OF STOCK OPTIONS
V.A. Agreement to Grant
Concurrently with the execution of this Agreement, KFI will grant to Mr.
Hawley pursuant to the [KFI 1996 Stock Option Plan] non-qualified employee stock
options covering 1,234,000 shares of KFI Common Stock having a fair market value
exercise price of $1.00 per share.
V.B. Vesting of Options
The options granted to Mr. Hawley will vest and become fully exerciseable
25% of the total original grant immediately at the time of the grant, 50% of the
total original grant on the first anniversary of his employment, 75% of the
total original grant on the second anniversary of his employment and 100% of the
total original grant on the third anniversary of his employment. Notwithstanding
the foregoing vesting schedule, vesting of certain options may be delayed until
the third anniversary of Mr. Hawley's employment if, and to the extent that, the
"Hawley Trusts" (as defined below) sell shares of KFI Common Stock. On or about
the date of commencement of this agreement, five trusts established by or for
the benefit of certain members of Mr. Hawley's family (the "Hawley Trusts") are
purchasing from KFI 950,000 shares of KFI's Common Stock (the "Trust Shares").
If the Hawley Trusts sell Trust Shares prior to the second anniversary of Mr.
Hawley's employment hereunder the number of shares as to which options vest on
the anniversary next following such sale shall be reduced by an amount equal to
the number of Trust Shares sold; provided, however, if Mr. Hawley, or any of his
siblings or lineal descendants, or any of their spouses or any trusts
established by or for the benefit of any of them purchases shares of KFI Common
Stock after the date hereof and continues to hold such shares on such
anniversary, the amount of the foregoing reduction shall offset to the extent of
such purchases. If the amount of reduction in vesting on the first anniversary
is greater than the amount scheduled for vesting on such date, the balance of
such reduction shall be applied to the amount scheduled for vesting on the
second anniversary. Any options as to which vesting is so delayed shall vest on
the third anniversary of Mr. Hawley's employment and subject to the terms
hereof. Except as is otherwise provided in this agreement, unvested amounts
shall lapse if Mr. Hawley's employment is terminated prior to vesting dates;
provided, in the event of Mr. Hawley's death or disability 100% of the options
shall be fully vested and may be exercised by his successors in interest.
V.C. Term of Options; Registration
Each option will extend for ten years from the original date of grant. KFI
represents and warrants that the grant will be entitled to the benefits of Rule
16b-3 promulgated under the Securities and Exchange Act of 1934, as amended, and
the grant will be exempt from the provisions of Section 16(b) of such act. KFI
will obtain any needed shareholder approvals for the [KFI 1996 Stock Option
Plan] or to authorize additional shares to be set aside and reserved for
issuance upon the exercise of the options and will set aside and register the
shares underlying the options so that shares issued upon exercise will be fully
registered under the applicable state and federal securities laws, as soon as
possible and in no event later than six months following the execution of this
Agreement.
V. D. Acceleration of Options
Notwithstanding any other provision herein or in the [KFI 1996 Stock Option
Plan], on the occurrence of a Change of Control as provided in Section III.C. or
at such time as General Electric Capital Corporation ("GECC"), owns less than
2,000,000 shares of KFI Common Stock, all options granted to Mr. Hawley will
accelerate and will be vested and exercisable immediately prior to the
consummation of such Change of Control or the time of the sale resulting in GECC
owning less than 2,000,000 shares. In any such circumstances, Mr. Hawley shall
be entitled to participate in the transactions as a shareholder on exercise of
the options.
ARTICLE VI.
ADMINISTRATION AND ENFORCEMENT OF THIS AGREEMENT
VI.A Assumption and Assignability of Employment Agreement.
Rights and duties of the parties hereunder shall not be assignable by
either party, except that this Employment Agreement and all the rights and
obligations of the parties hereunder shall be assigned by KFI to and assumed by
any corporation or other business entity which succeeds to all or substantially
all of the assets or operations of KFI through merger, consolidation, corporate
reorganization or by acquisition of all or substantially all of the assets of
KFI. Any transferee of a substantial portion of the assets of KFI shall be
jointly and severally liable to Mr. Hawley for the due and prompt performance of
this Agreement by KFI, its successors and assigns. This Agreement, and all
amounts due Mr. Hawley hereunder shall inure to the benefit of and be
enforceable by Mr. Hawley's personal or legal representative, executor or
administrator, his surviving spouse and his minor children.
VI.B. Integration
With respect to the matters covered herein this Employment Agreement
contains the entire agreement and understanding between Mr. Hawley and KFI and
supersedes all prior or and written agreements, understandings, commitments and
practices between the parties, including all prior employment agreements,
whether or not fully performed by Mr. Hawley before the effective date of this
Employment Agreement. No amendments to this Employment Agreement may be made
except by a writing signed by both parties.
VI.C. Specific Enforcement
Mr. Hawley is obligated under this Employment Agreement to render service
of a special, unique, unusual, extraordinary, and intellectual character,
thereby giving this Employment Agreement peculiar value so that the loss thereof
could not be reasonably or adequately compensated in damages in an act ion at
law. Therefore, in addition to other remedies provided by law, KFI shall have
the right to compel specific performance hereof by Mr. Hawley and/or to obtain
injunctive relief against the performance of services elsewhere by Mr. Hawley.
VI.D. Confidential Information
Mr. Hawley acknowledges and stipulates that in the performance of duties
hereunder, KFI discloses to and entrusts Mr. Hawley with confidential and secret
information of a proprietary nature, including, but not limited to, financial
and statistical information regarding affairs of KFI, supplier and subcontractor
lists, price and cost information, business plans and programs, merchandising
opportunities, expansion plans, data, methods, techniques, marketing data,
design and know-how, developed or obtained by KFI. Mr. Hawley agrees that all of
the same are the exclusive property of KFI which he may possess or use only in
performance of his duties for KFI and he agrees not to directly or indirectly
disclose at any time either during the term of employment by KFI or thereafter
any such information, whether it be in the form of records, lists, data,
drawing, reports or otherwise, which are acquired through Mr. Hawley's
relationship with KFI.
VI.E. Non-Solicitation
During the term of this agreement and for a period of three years after the
end of the term hereof, so long as KFI carries on a business similar to that
carried on as of the last day of Mr. Hawley's employment hereunder, Mr. Hawley
shall not disrupt, damage, impair or interfere with the business of KFI, whether
by interfering with or recruiting its employees, disrupting its relationships
with customers, vendors, suppliers or representatives, or otherwise.
VI.F. Arbitration.
Any dispute or controversy arising under or in connection with this
Agreement shall be resolved in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, that Mr. Hawley
shall be entitled to seek specific performance of his right to be paid until the
Date of Termination during the dependency of any dispute or controversy arising
under or in connection with this Agreement.
VI.G. Severability.
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect. The parties choose the
law of California for the interpretation and enforcement of this Agreement.
VI.H. Titles and Headings.
Title and Headings are for ease of reference and convenience and shall not
be used to affect the meaning of any provision of this Agreement.
VI.I. Notices.
Any notices to KFI required or permitted hereunder shall be given in
writing to KFI, either by personal service or by registered or certified mail,
postage prepaid, duly addressed to the Secretary of KFI at its then principal
place of business. Any such notice to Mr. Hawley except those required pursuant
to Article IV shall be given in like manner, and if mailed shall be addressed to
Mr. Hawley at his home address as recorded in the employment records of KFI. For
the purpose of determining compliance with any time limit herein, a notice shall
be deemed given at the time of postmark date except as to notices to be
delivered to Mr. Hawley pursuant to Article IV which shall be deemed given only
when personally delivered to him.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the day and year first above written.
---------------------------
Philip M Hawley
KRAUSE'S FURNITURE, INC.
By________________________
Exhibit 99
FOR IMMEDIATE RELEASE
KRAUSE'S FURNITURE, INC. AND NEW INVESTORS CLOSE
AGREEMENT ON $17 MILLION CAPITAL FINANCING
-Philip M. Hawley Named Chairman and CEO-
Brea, CA, August 27, 1996 -- Krause's Furniture, Inc. (Nasdaq: SOFA)
reported today that it had received $17 million in financing from new investors
including GE Capital Services of Stamford, Connecticut and Mr. Philip M. Hawley,
the Company's newly appointed Chairman and Chief Executive Officer.
The financing consists of a combination of equity and new subordinated
debt, including:
A $10 million infusion of new capital from GE Capital Services
comprising 5 million shares of common stock sold for $1.00 per share
and $5 million of subordinated debt with a two year pay- in-kind
provision. As part of the investment, GE Capital Services will
receive warrants to purchase 1.4 million additional shares.
An additional $4 million through the sale of 4 million shares of
common stock sold for $1.00 per share to a combination of new and
existing investors, including Mr. Hawley.
The conversion of $3 million of existing Convertible Promissory
Notes and a Demand Promissory Note into common stock, also for $1.00
per share.
In conjunction with the new financings, the Company's Krause's Sofa Factory
subsidiary amended its revolving credit agreement with Congress Financial
Corporation. Under the revised facility, the term of the loan was extended to
January 20, 2000; the interest rate was reduced to prime plus 1%; and the
borrowing capacity was improved.
Mr. Hawley, age 71, is the former Chairman and Chief Executive Officer of
Carter Hawley Hale Stores, the Los Angeles-based department store chain. Mr.
Hawley replaces the current Chairman, Jean Perrette, age 65, and Thomas M.
DeLitto, age 42, the current Vice Chairman and Chief Executive Officer. Mr.
DeLitto will remain the Company's Vice Chairman.
"We are very excited about the opportunities that lie ahead for the
Company. Both Krause's Sofa Factory and Castro Convertibles stores have
excellent consumer recognition and wonderful retail franchises. The new capital
infusion will enable them to remerchandise and remodel stores, implement new
merchandising strategies and generally revitalize the retail concept. As
indicated by their significant capital commitment, the new investors share my
excitement for the potential of this Company," commented Mr. Hawley.
Jean Perrette, the outgoing Chairman, noted, "We are very fortunate to have
Phil Hawley as our new Chairman and Chief Executive and GE Capital Services as a
new stockholder. They will be invaluable in affecting the Company's strategic
initiatives and realizing the potential of its franchise. We are very excited to
have them on board."
Except for historical information contained herein, the statements in this
release are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual result in future periods to differ
materially from forecasted results. Those risks include, among others, the
change in the retail environment, and the ability of the Company to successfully
implement its new business strategies. Those and other risks are described in
the Company's filings with the Securities and Exchange Commission (SEC), copies
of which are available from the SEC or may be obtained upon request from the
Company.
Krause's Furniture, Inc. wholly owns Krause's Sofa Factory, a vertically
integrated retailer and manufacturer of made-to-order upholstered furniture.
Krause's sells its furniture under the name Krause's Sofa Factory and Castro
Convertibles through 83 furniture showrooms and four dealers in 12 states.
