<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. - )*
KRAUSE'S FURNITURE, INC.
------------------------
(Name of Issuer)
COMMON STOCK
------------------------------
(Title of Class of Securities)
500760-20-2
--------------
(CUSIP Number)
MICHAEL J. CONNELL, ESQ.
J. TIMOTHY SCOTT, ESQ.,
MORRISON & FOERSTER
555 W. FIFTH STREET
LOS ANGELES, CALIFORNIA 90013
(213) 892-5200
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications)
AUGUST 26, 1996
-------------------------------------------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ].
Check the following box if a fee is being paid with this statement [ X ]. (A
fee is not required only if the reporting person: (1) has a previous statement
on file reporting beneficial ownership of more than five percent of the class
of securities described in Item 1; and (2) has filed no amendment subsequent
thereto reporting beneficial ownership of less than five percent of such class.
(See Rule 13d-7.)
Note: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are to
be sent.
* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities,
and for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities Exchange
Act of 1934 ("Act") or otherwise subject to the liabilities of that section of
the Act but shall be subject to all other provisions of the Act (however, see
the Notes).
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CUSIP No. 500760-20-2 SCHEDULE 13D Page 2 of ___
1) Names of Reporting Persons S.S. or I.R.S. Identification Nos. of above
Persons
Philip M. Hawley
2) Check the Appropriate Box if a Member of a Group (a) [ ]
(b) [ X ]
3) SEC Use Only ______________________________________________________
4) Source of Funds* PF
5) Check if Disclosure of Legal Proceedings is Required Pursuant to Items
2(d) or 2(e) [__]
6) Citizenship or Place of Organization
United States of America
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
7) Sole Voting Power 338,000* (see Item 5 below)
8) Shared Voting Power * (see Item 5 below)
9) Sole Dispositive Power 338,000* (see Item 5 below)
10) Shared Dispositive Power * (see Item 5 below)
11) Aggregate Amount Beneficially Owned by Each Reporting Person
338,000* (see Item 5 below)
12) Check if the Aggregate Amount in Row (11) Excludes Certain Shares [ X ]
(see Item 5 below)
13) Percent of Class Represented by Amount in Row (11)
1.9%
14) Type of Reporting Person
IN
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CUSIP No. 500760-20-2 SCHEDULE 13D Page 3 of ___
1) Names of Reporting Persons S.S. or I.R.S. Identification Nos. of above
Persons
Dr. Philip M. Hawley, Jr.
S.S. No.: ###-##-####
2) Check the Appropriate Box if a Member of a Group (a) [ ]
(b) [ X ]
3) SEC Use Only ______________________________________________________
4) Source of Funds* PF
5) Check if Disclosure of Legal Proceedings is Required Pursuant to Items
2(d) or 2(e) [__]
6) Citizenship or Place of Organization
United States of America
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH
7) Sole Voting Power 20,000
8) Shared Voting Power * (see Item 5)
9) Sole Dispositive Power 20,000
10) Shared Dispositive Power * (see Item 5)
11) Aggregate Amount Beneficially Owned by Each Reporting Person
20,000
12) Check if the Aggregate Amount in Row (11) Excludes Certain Shares [ X ]
(see Item 5 below)
13) Percent of Class Represented by Amount in Row (11)
0.1%
14) Type of Reporting Person
IN
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CUSIP No. 500760-20-2 SCHEDULE 13D Page 4 of ___
Unless otherwise expressly set forth herein, the responses contained
herein, including those on the cover page, are as of September 5, 1996.
Item 1. SECURITY AND ISSUER
This statement relates to the common stock, $.001 par value
per share, of KRAUSE'S FURNITURE, INC., a Delaware corporation (the "Company").
The principal executive offices of the Company are located at 200 North Berry
Street, Brea, California 92621-3903.
Item 2. IDENTITY AND BACKGROUND
(a) The person filing this statement is Philip M. Hawley,
an individual (Mr. Hawley").
The person filing this statement is Dr. Philip M. Hawley,
Jr., an individual ("Dr. Hawley").
(b) Mr. Hawley's business address is 200 North Berry
Street, Brea, California 92621-3903.
Dr. Hawley's business address is 201 North Figueroa Street,
11th Floor, Los Angeles, California 90012.
(c) Mr. Hawley is Chairman of the Board and Chief
Executive Officer of the Company, the address of which is set forth above as
Mr. Hawley's business address. The Company's principal business is the
manufacture and distribution of furniture.
Dr. Hawley is President of Pace Healthcare Management L.P.,
the address of which is set forth above as Dr. Hawley's business address. Pace
Healthcare's principal business is healthcare consulting.
(d) During the last five years, Mr. Hawley has not been
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors).
During the last five years, Dr. Hawley has not been convicted
in a criminal proceeding (excluding traffic violations or similar
misdemeanors).
(e) During the last five years, Mr. Hawley has not been a
party to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a
judgment, decree or final order enjoining future violations of, or prohibiting
or mandating activities subject to, Federal or State securities laws or finding
any violation with respect to such laws.
During the last five years, Dr. Hawley has not been a party
to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a
judgment, decree or final order enjoining future violations of, or prohibiting
or
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CUSIP No. 500760-20-2 SCHEDULE 13D Page 5 of ___
mandating activities subject to, Federal or State securities laws or finding
any violation with respect to such laws.
(f) Mr. Hawley is a citizen of the United States of
America.
Dr. Hawley is a citizen of the United States of America.
Item 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
The aggregate purchase price for the Common Stock acquired by
Mr. Hawley was $30,000, or $1.00 per share, which funds were personal funds.
With respect to options granted to Mr. Hawley, the options were granted in
consideration of his entering into a three year employment agreement with the
Company.
The aggregate purchase price for the Common Stock acquired by
Dr. Hawley was $20,000, or $1.00 per share, which funds were personal funds.
Item 4. PURPOSE OF TRANSACTION
The purpose of the transactions more fully described under
Item 6 below, was to recapitalize the Company, substantially increasing its
capital base, while eliminating certain debt and preferred stock of the
Company. These transactions have had the immediate result of substantially
increasing the Company's working capital. In addition, as part of the
transactions described, the Company named a new Chairman and Chief Executive
Officer.
Except as set forth herein and in Item 6, the reporting
person herein has no plans or proposals which relate to or would result in:
(a) The acquisition by any person of additional
securities of the Company, or the disposition of securities of the Company;
except that the Registration Rights Agreement described below provides that the
Company will register under the Securities Act of 1933 up to 500,000 shares
held by the Hawley Trustees (as defined below) within approximately 180 days
following the initial closing, and will register substantially all the
remaining shares held by the Hawley Trustees approximately nine months
thereafter. In addition, the Stockholders Agreement described below provides
for certain rights of first refusal on the sale of shares of Common Stock by
various persons, including the reporting persons hereunder, and provides for
certain tag-along rights on certain substantial sales of Common Stock by
General Electric Capital Corporation ("GECC") and another principal shareholder
group (the "Permal Group"). The tag-along rights do not apply to sales by the
reporting persons hereunder.
(b) An extraordinary corporate transaction, such as a
merger, reorganization or liquidation, involving the Company or any of its
subsidiaries;
(c) A sale or transfer of a material amount of assets of
the Company or any of its subsidiaries;
(d) Any change in the present directors or management of
the Company, including any plans or proposals to change the number or term of
directors or to fill any existing
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CUSIP No. 500760-20-2 SCHEDULE 13D Page 6 of ___
vacancies on the board of directors, except that, as part of the transactions
described herein and pursuant to the Stockholders Agreement, certain
shareholders of the Company owning in excess of 50% of the outstanding shares
of Common Stock have agreed to cause certain designees, including Philip M.
Hawley ("Mr. Hawley") and the designees of GECC and the Permal Group, to be
elected to the Company's Board of Directors, which designees will constitute
all of the Company's directors for the foreseeable future. In addition, in
connection with the issuance of certain notes to GECC as described in Item 6
below, the Company agreed to comply with certain covenants applicable to
financial and operational aspects of the Company's business;
(e) Any material change in the present capitalization or
dividend policy of the Company, except for the substantial change in the
Company's capitalization resulting from the transactions described herein;
(f) Any other material change in the Company's business
or corporate structure;
(g) Changes in the Company's charter, bylaws or
instruments corresponding thereto or other actions which may impede the
acquisition of control of the Company by any person, other than the agreements
described herein, including the Stockholders Agreement;
(h) Causing a class of securities of the Company to be
delisted from a national securities exchange or to cease to be authorized to be
quoted in an inter-dealer quotation system of a registered national securities
association;
(i) A class of equity securities of the Company becoming
eligible for termination of registration pursuant to Section 12(g)(4) of the
Securities Exchange Act of 1934; or
(j) Any actions similar to any of those enumerated above.
Item 5. INTEREST IN SECURITIES OF THE ISSUER
(a) On August 26, 1996, Mr. Hawley purchased 30,000
shares of Common Stock pursuant to a Purchase Agreement, and was granted
1,234,000 options pursuant to an Employment Agreement entered into on that
date. Of the 1,234,000 options granted, options to purchase 308,000 shares of
Common Stock were immediately vested and exercisable. The 338,000 shares
beneficially owned by Mr. Hawley (including 308,000 vested options) constitute
1.9% of the Common Stock assuming the exercise of the vested options. Pursuant
to the Commission's Rule 13d-4, Mr. Hawley specifically disclaims beneficial
ownership of all shares of Common Stock other than the 30,000 shares held of
record by him. Concurrent with Mr. Hawley's acquisition, the following persons
(for reference, the "Investors") acquired the number of shares of Common Stock
set forth opposite their names below.
On August 26, 1996, Dr. Hawley purchased 20,000 shares of
Common Stock pursuant to a Purchase Agreement. Pursuant to the Commission's
Rule 13d-4, Dr. Hawley specifically disclaims beneficial ownership of all
shares of Common Stock other than the 20,000 shares held of record by him.
Concurrent with Dr. Hawley's acquisition, the following persons (for reference,
the "Investors") acquired the number of shares of Common Stock set forth
opposite their names below.
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CUSIP No. 500760-20-2 SCHEDULE 13D Page 7 of ___
<TABLE>
<CAPTION>
Shares of
Common Stock
Purchased
---------
<S> <C>
Dr. Philip M. Hawley, Jr. ("Dr. Hawley") 20,000
Philip M. Hawley ("Mr. Hawley") 30,000(1)
General Electrical Capital Corporation ("GECC") 5,000,000(2)
ATCO Holdings, Ltd. 400,000
Isaac Robert Souede 250,000
Jean R. Ferrette 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
Fairmount Services Ltd. 400,000
Emmanuel Bagdjian 210,000
Gary Gladstein 100,000
</TABLE>
In connection with the foregoing acquisitions, certain of the
Investors and certain other persons converted certain outstanding debt owing by
the Company, and certain preferred stock of the Company to Common Stock. In
the aggregate, 4,246,201 shares of Common Stock were issued on such
conversions.
In addition, also concurrent with Mr. Hawley's acquisition
John F. Hawley and Barbara H. Hawley (together, the "Hawley Trustees"), as
trustees of certain trusts (the "Hawley Trusts") for the benefit of certain
members of the Hawley family acquired an aggregate of 950,000 shares directly
from the Company.
__________________________________
(1) Mr. Hawley also acquired 1,234,000 options to purchase shares of Common
Stock. Options as to 308,000 shares vested immediately and are currently
exercisable. The remaining options vest 308,000 on each of August 26, 1997,
1998 and 1999.
(2) GECC also acquired a warrant to purchase 1,400,000 shares of Common Stock,
which is exercisable immediately.
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CUSIP No. 500760-20-2 SCHEDULE 13D Page 8 of ___
The Investors are parties to the Stockholders Agreement and a
Registration Rights Agreement which affect the voting powers of the record
holders and the power of disposition of the record holders, including the
reporting person herein, and, consequently, all such persons may be deemed to
be a "group" within the meaning of Section 13(d)(3) of the Securities Exchange
Act of 1934. If such persons are deemed to be a "group," the 13,539,394 shares
of Common Stock beneficially owned by them as of August 26, 1996, including
358,000 owned by Dr. Hawley and Mr. Hawley (including options exercisable
within 60 days), the 6,400,000 shares owned by GECC (including exercisable
warrants) and an aggregate of 6,662,446 shares held by the members of the
Permal Group, plus warrants and options in favor of members of the Permal Group
to purchase 118,448 shares within 60 days, would represent 71.0% of the shares
outstanding, assuming exercise of the warrants and options referred to herein.
(b) Mr. Hawley has sole voting power and power of
disposition over 30,000 shares held of record by him and over the 308,000
vested options granted to him. The shares held of record by Mr. Hawley are
subject of a Stockholders Agreement and a Registration Rights Agreement
described below.
Dr. Hawley has sole voting power and power of disposition
over 20,000 shares held of record by him. The shares held of record by Dr.
Hawley are subject of a Stockholders Agreement and a Registration Rights
Agreement described below.
(c) Except as set forth above, the reporting persons
herein are not aware of any transaction effected in the Common Stock during the
past 60 days.
(d) No other person is known to have the right to receive
or the power to direct the receipt of dividends from, or the proceeds from the
sale of the Company's common stock beneficially owned by any reporting person
herein.
(e) Not Applicable.
Item 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS
WITH RESPECT TO SECURITIES OF THE ISSUER
On August 26, 1996, pursuant to various agreements dated as
of that date, as described below, the Company sold shares of its Common Stock
to the members of the Acquisition Group in the amounts specified in Item 5.
The shares of Common Stock were issued in consideration of the payment by the
purchaser of cash in the amount of $1.00 per share, or the cancellation of
accrued indebtedness of the Company owing to the purchaser, at the rate of
$1.00 per share of Common Stock issued, or on conversion of all of the
outstanding shares of the Company's Series A Preferred Stock held by the
purchaser. In the aggregate, 13,246,201 shares of Common Stock were sold for
an aggregate purchase price of $13,246,201, $9,000,000 of which was paid in
cash. In addition and in connection with such acquisitions, the Company sold
to GECC $5,000,000 in principal amount of its 10% Subordinated Pay-In-Kind
Notes due August 31, 2001 (the "Notes") for an aggregate purchase price of
$5,000,000, and in connection with GECC's purchase of the Notes, the Company
issued to GECC a warrant to purchase 1,400,000 shares of Common Stock at a
price equal to par value, $.001 per share. The Company and the purchasers
agreed informally prior to the First Closing that up to an additional 2,000,000
shares could be purchased by the purchasers or
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CUSIP No. 500760-20-2 SCHEDULE 13D Page 9 of ___
their affiliates or associates on the same terms at the Second Closing, which
was anticipated to follow the First Closing by approximately two weeks.
The Investors entered into the following agreements relating
to the acquisition of shares of Common Stock and the voting or transfer of such
shares:
The Stockholders Agreement (the "Stockholders Agreement")
among the Company and the Investors, among others.
The Registration Rights Agreement (the "Registration Rights
Agreement") between the Company and the Investors, among others.
The Securities Purchase Agreement (the "GECC Purchase
Agreement") between GECC and the Company.
A Warrant to purchase shares of the Company executed by the
Company in favor of GECC.
Individual Purchase Agreements with respect to shares of
Common Stock of the Company entered into between the Company and each of the
Investors, and other purchasers of Common Stock.
Employment Agreement entered into between the Company and Mr.
Hawley.
Item 7. MATERIAL TO BE FILED AS EXHIBITS
The following are filed as Exhibits hereto:
<TABLE>
<S> <C>
1 Agreements concerning borrowing - none.
2-1 Stockholders Agreement, incorporated herein by reference to Exhibit 10.5
to the report of the Company on Form 8-K filed with the Commission on September 10,
1996 (the "September 10, 1996 Form 8-K").
2-2 Registration Rights Agreement, incorporated herein by reference to Exhibit 10.6
to the September 10, 1996 Form 8-K.
2-3 Securities Purchase Agreement (GECC), incorporated herein by reference to Exhibit 10.1
to the September 10, 1996 Form 8-K.
2-4 Warrant (GECC), incorporated herein by reference to Exhibit 10.3
to the September 10, 1996 Form 8-K.
2-5 Purchase Agreement form, Hawley Trusts, Mr. Hawley and Dr. Hawley.
2-6 Employment Agreement (Mr. Hawley), incorporated herein by reference to Exhibit 10.7
to the September 10, 1996 Form 8-K.
3-1 Stockholders Agreement (see Exhibit 2-1).
3-2 Registration Rights Agreement (see Exhibit 2-2).
</TABLE>
SIGNATURE
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CUSIP No. 500760-20-2 SCHEDULE 13D Page 10 of ___
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: September 10, 1996 /s/ Philip M. Hawley
---------------------------------
PHILIP M. HAWLEY
Dated: September 10, 1996 /s/ Dr. Philip M. Hawley, Jr.
-----------------------------------
DR. PHILIP M. HAWLEY, JR.
The original statement shall be signed by each person on whose behalf
the statement is filed or his authorized representative. If the statement is
signed on behalf of a person by his authorized representative (other than an
executive officer or general partner of this filing person), evidence of the
representative's authority to sign on behalf of such person shall be filed with
the statement; provided, however, that a power of attorney for this purpose
which is already on file with the Commission may be incorporated by reference.
The name and any title of each person who signs the statement shall be typed or
printed beneath his signature.
ATTENTION: INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACT
CONSTITUTE FEDERAL CRIMINAL VIOLATIONS (SEE 18 U.S.C. 1001).
<PAGE> 1
EXHIBIT 2.5
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 (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
<PAGE> 2
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, as
specified in and required by the Securities Purchase Agreement, 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: (u) execution
by the Company of that certain employment agreement between the Company and
Philip M. Hawley; (v) concurrent closing
<PAGE> 3
of the transactions contemplated pursuant to the Securities Purchase Agreement;
(w) completion of the purchases and sales pursuant to the Purchaser 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; (x) certain of the Purchasers and
GECC, as specified in and required by the Securities Purchase Agreement, shall
have entered into the Stockholders Agreement; (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
-3-
<PAGE> 4
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.
4.5. Additional Representations and Warranties. In addition to
the representations and warranties made by the Company in this Section 4, the
Purchaser may rely upon the representations and warranties made by the Company
in Section 2 of the Securities Purchase Agreement and such representations
shall hereby be made a part of this Agreement.
SECTION 5. Representations, Warranties and Covenants of the
Purchaser. (a) The Purchaser represents and warrants to, and
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<PAGE> 5
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 Section
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
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<PAGE> 6
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 (including, without limitation, the representations and warranties
incorporated by reference as specified in Section 4.5 above); (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:
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<PAGE> 7
"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
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<PAGE> 8
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.
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<PAGE> 9
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.
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<PAGE> 10
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: _______________________
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<PAGE> 11
Appendix I
KRAUSE'S FURNITURE, INC.
STOCK CERTIFICATE QUESTIONNAIRE
Pursuant to Section 3 of the Agreement, please provide us with the
following information:
<TABLE>
<S> <C> <C>
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.
</TABLE>
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<PAGE> 12
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
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