<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
KRAUSE'S FURNITURE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
---------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------
<PAGE> 2
KRAUSE'S FURNITURE, INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 17, 2000
To the Stockholders of
KRAUSE'S FURNITURE, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Krause's
Furniture, Inc., a Delaware corporation, will be held on May 17, 2000, at the
offices of the Company at 200 North Berry Street, Brea, California 92821-3903 at
10:00 a.m., local time, for the following purposes:
(1) To elect a Board of seven directors to serve for the ensuing year.
(2) To approve an amendment to the 1997 Stock Incentive Plan
increasing the number of shares that may be awarded by 2,500,000 shares, to
a total of 4,500,000 shares;
(3) To approve the Krause's Furniture, Inc. Series A Convertible
Preferred Stock Purchase Agreement dated January 11, 2000 and approve the
transactions related thereto, including the amendment of the Certificate of
Designation of the Series A Convertible Preferred Stock;
(4) To approve an amendment to the Certificate of Incorporation of the
Company increasing the authorized common stock of the Company to
100,000,000 shares in order to permit the conversion of the Company's
Series A Convertible Preferred Stock, to make additional common stock
available for the exercise of incentive options and for general corporate
purposes;
(5) To approve an amendment to the Certificate of Incorporation of the
Company increasing the authorized preferred stock of the Company by
2,000,000 shares to a total of 2,666,667 shares in order to make additional
preferred stock available for general corporate purposes;
(6) To consider and ratify the appointment of Arthur Andersen LLP as
independent public accountants for the fiscal year ending December 24,
2000.
(7) To transact such other business as may properly come before the
meeting or any adjournment thereof.
Nominees for directors are set forth in the enclosed Proxy Statement. The
Board of Directors has fixed the close of business on April 17, 2000, as the
record date for the determination of stockholders entitled to receive notice of
and to vote at the Annual Meeting. Your proxy will be revocable at any time
prior to its exercise.
Dated: April 20, 2000. BY ORDER OF THE BOARD OF DIRECTORS
JUDITH OLSON LASKER
Secretary
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE ANNUAL
MEETING, YOU MAY VOTE IN PERSON IF YOU HAVE NOTIFIED THE SECRETARY OF YOUR
INTENTION TO DO SO, EVEN THOUGH YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
<PAGE> 3
KRAUSE'S FURNITURE, INC.
200 NORTH BERRY STREET
BREA, CALIFORNIA 92821
------------------------
PROXY STATEMENT
------------------------
The accompanying proxy is solicited by the Board of Directors of Krause's
Furniture, Inc. (the "Company"), for use at the Annual Meeting of Stockholders
(the "Annual Meeting") to be held at 10:00 a.m. local time on May 17, 2000, at
the Company's offices, and at any adjournment or postponement thereof, for the
purposes set forth in the attached Notice. If a choice is not specified in the
proxy, the shares represented thereby will be voted FOR the actions proposed. A
stockholder giving a proxy has the power to revoke it at any time prior to its
exercise by filing with the Secretary of the Company a written revocation or a
duly executed proxy bearing a later date, or by attending the Annual Meeting and
electing to vote in person.
The cost of solicitation of proxies will be borne by the Company. In
addition to solicitation by mail, officers and directors of the Company may
solicit proxies by telephone, telegraph or personal interview.
The close of business on April 17, 2000, has been fixed as the record date
for determining stockholders entitled to vote at the Annual Meeting. On that
date, the Company had outstanding and entitled to vote 22,050,328 shares of
Common Stock. Each share of Common Stock entitles the holder to one vote on all
matters to come before the Annual Meeting.
At the close of business on April 17, 2000, the Company had outstanding and
entitled to vote 380,000 shares of Series A Convertible Preferred Stock. Each
share of Preferred Stock entitles the holder to approximately 45.45 votes on all
matters to come before the Annual Meeting, based upon a conversion rate of $1.10
per share of Common Stock.
This Proxy Statement and accompanying form of proxy were first sent to
stockholders on or about April 26, 2000. The Company's Annual Report accompanies
this Proxy Statement.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
All directors are elected annually by the stockholders. The Company's
Bylaws provide for seven directors. Seven individuals are being nominated to
serve as directors until the next Annual Meeting. Unless marked to the contrary,
proxies received will be voted for the following seven nominees: Kamal G.
Abdelnour, Jeffrey H. Coats, Peter H. Dailey, Thomas M. DeLitto, John A. Gavin,
George L. Hashbarger and Philip M. Hawley, all of whom are incumbent directors.
All of the nominees have agreed to serve if elected. If any of such persons is
unable or unwilling to stand for election at the date of the Annual Meeting or
any adjournment thereof, the proxy holders will vote for a substitute nominee in
their discretion. Those nominees receiving the largest number of votes will be
elected as directors. Officers of the Company are appointed by the Board of
Directors and serve at the pleasure of the Board.
Under Delaware law and the Company's Certificate of Incorporation and
Bylaws, if a quorum is present, directors are elected by a plurality of the
votes of the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors. A majority of the outstanding
shares entitled to vote, present in person or represented by proxy, constitutes
a quorum. Shares represented by proxies or ballots withholding votes from one or
more directors and "broker non-votes", if the broker's proxy is voted for at
least one proposal, will be counted for purposes of determining a quorum.
<PAGE> 4
NAME, AGE AND BUSINESS EXPERIENCE OF EACH NOMINEE FOR
DIRECTOR AND EACH EXECUTIVE OFFICER
Set forth below is a summary of the business experience over the last five
years of the seven nominees for director and the executive officers who are not
directors.
Nominees for Election as Directors
KAMAL G. ABDELNOUR, age 63, has been a director since September 1996. He
had been a director from February 1993 to August 1996 when he resigned in
connection with the Company's recapitalization. Mr. Abdelnour has been
President, Chief Executive Officer and a director of ATCO Development, Inc.
("ATCO") since 1980. ATCO is engaged in the business of investments, real estate
ownership and management, and export sales. Mr. Abdelnour currently serves as a
director of Permal Management Corporation.
JEFFREY H. COATS, age 42, has been a director since August 1996. He has
been a Managing Director of TH Lee Global Internet Partners, L.P., from July
1999 to present. He formerly served as Managing Director of GE Equity, a wholly
owned subsidiary of GE Capital, from April 1996 to July 1999. From February 1994
to April 1996, Mr. Coats served as President of Maverick Capital Equity
Partners, LLC, and from May 1993 to January 1994, he was a Managing Director of
Veritas Capital, Inc., both of which are investment firms. From September 1991
to April 1993, Mr. Coats was also a Managing Director of GE Capital Corporate
Finance Group, Inc., a wholly owned subsidiary of GE Capital. Mr. Coats is a
director of Wink Communications, autobytel.com, Whatshotnow.com, Wine.com and
The Museum Company, Inc. Mr. Coats is also a director of ValueVision
International, Consumer Financial Network and Homemaker. Mr. Coats is the
Chairman of The Hastings Group, Inc., which filed for bankruptcy in October 1995
and confirmed a plan of liquidation in December 1997.
HON. PETER H. DAILEY, age 69, has been a director since September 1996. He
served as Ambassador to Ireland from 1982 to 1984, and was special Presidential
envoy to NATO countries. From 1985 to 1988, Mr. Dailey served as counselor to
the Director of the Central Intelligence Agency. From 1985 to 1992 he was a
member of President's Advisory Committee on Arms Control and Disarmament. He
serves as founder and Chairman of Enniskerry Financial, Ltd., a private
investment company founded in 1968. Mr. Dailey is a member of the Board of
Directors of Chicago Title Corporation and Jacobs Engineering Group, Inc. Prior
to returning to government service, he served as a director of the Walt Disney
Co. and the Interpublic Group of Companies. He served as the Director, Chairman
and Chief Executive Officer of Memorex Telex, NV, a worldwide technology company
headquartered in Amsterdam, the Netherlands from April 1994 to January 1997.
Memorex Telex Corp., the U.S. Subsidiary of Memorex Telex, NV, filed for
bankruptcy in 1996 and is in the process of liquidation.
THOMAS M. DELITTO, age 47, has been Vice Chairman since December 1994 and a
director since June 1991. He was Chief Executive from April 1995 to August 1996,
President and Chief Executive Officer from July 1992 to December 1994, and
Executive Vice President and Chief Operating Officer from June 1991 to July
1992. Mr. DeLitto has been a director of Permal Capital Management, Inc., a
wholly owned subsidiary of Worms & Co., Inc., since September 1991 and President
since March 1991; in this capacity he oversees operations of that company's
direct investment activities. He has been Executive Vice President of Worms &
Co., Inc. since February 1996, and Chief Administrative Officer since June 1998.
HON. JOHN A. GAVIN, age 69, has been a director since September 1996. He
has been a Managing Director and Partner of Hicks, Muse, Tate and Furst (Latin
America), a private equity investment firm, since 1995. He is also founder and
Chairman of Gamma Holdings, an international capital and consulting firm. He is
a member of the Board of Directors of Apex Mortgage Capital and International
Wire Group and is a trustee of the Hotchkis & Wiley Funds (a Merrill Lynch
company).
GEORGE L. HASHBARGER, age 39, has served as a director since September
1999. Mr. Hashbarger has served in various Vice President positions with GE
Capital Equity Investments, Inc. since March 1993. Mr. Hashbarger serves as a
director of PinkDot, Inc. (which specializes in home delivery of convenience
2
<PAGE> 5
items) and HomePoint.com, Inc. (a leading provider of business-to-business
services in the furniture category).
PHILIP M. HAWLEY, age 74, has been Chairman and Chief Executive Officer
since August 1996. He served as Chairman and Chief Executive Officer of The
Broadway Stores, Inc. (formerly Carter Hawley Hale Stores, Inc.) from 1977 to
1993, and has been President and Chief Executive Officer of P. M. Hawley, Inc.,
since 1993. Mr. Hawley is also a director of Weyerhaeuser Company and Aeromovel,
U.S.A.
Executive Officers Who are not Directors
ROBERT A. BURTON, age 59, was named Executive Vice President and Chief
Financial Officer on February 1, 1999; he had been Senior Vice President and
Chief Financial Officer since December 1996. Mr. Burton was an independent
financial consultant from January 1995 to November 1996, and from November 1987
to December 1994 he was Senior Vice President and Chief Financial Officer of
John Breuner Company, a home furnishings company. In October 1993, John Breuner
Company filed for bankruptcy and emerged in July 1994.
HERBERT J. FRIEDMAN, age 49, was named Executive Vice President of
Merchandising, Product Development, Marketing and Stores on February 1, 1999; he
had been Senior Vice President of Merchandising, Product Development, Marketing
and Stores since April 1997. Mr. Friedman was Senior Vice President of Strategic
Planning from April 1995 to April 1997 and Vice President of Merchandising from
June 1989 to April 1995.
K. JAMES MCTAGGART, age 38, was named Executive Vice President of
Manufacturing and Distribution on February 1, 1999; he had been Senior Vice
President of Manufacturing and Distribution since April 1996. Mr. McTaggart was
Vice President of Distribution and Logistics from February 1996 to March 1996.
Mr. McTaggart was formerly the Vice President of Distribution/Logistics at
Stanley Works-Door Systems from March 1995 to February 1996, and served in other
manufacturing and distribution positions in Stanley Works-Door Systems from
November 1985 to March 1995.
THOMAS J. BEALE, age 50, was named Senior Vice President of Stores/Visual
Presentation on February 1, 1999; he had been Vice President of Stores since
October 1996. Prior to joining Krause's, Mr. Beale was Regional Vice President
of Macy's West in Southern California, and a former Regional Vice President of
Carter, Hawley, Hale's Broadway Division in Southern California since 1988.
KLAUS TABAR, age 46, is Senior Vice President of Real Estate and
Construction. Mr. Tabar was Senior Vice President of Development, Store Planning
and Construction from April 1997 to December 1997 and Senior Vice President of
Real Estate and Administration from April 1996 to April 1997. He joined the
Company as Vice President of Real Estate in January 1989.
3
<PAGE> 6
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 31, 2000 by (i)
each person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii) each of the
Company's directors and executive officers, and (iii) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) SHARES OWNED
------------------------------------ --------------------- ------------
<S> <C> <C>
General Electric Capital Corporation (GECC)...... 8,169,231(2), (16) 32.4
260 Long Ridge Road
Stamford, CT 06927
Worms & Cie...................................... 3,298,124(3), (16) 14.6
55 rue la Boetie
75008 Paris, France
Japan Omnibus Ltd. (JOL)......................... 530,769(4) 2.4
Tropic Isle Building
Road Town, Tortola
British Virgin Islands
John F. Hawley and Barbara H. Hawley, as
Trustees....................................... 1,376,472(5), (16) 6.2
515 South Figueroa Street
Los Angeles, CA 90071
ATCO Holdings Limited............................ 1,115,923(16) 5.1
c/o ATCO Development, Inc.
11777 Katy Freeway
Houston, TX 77079
Philip M. Hawley................................. 1,362,500(6) 5.8
Thomas M. DeLitto................................ 103,995(7), (16) *
Robert A. Burton................................. 100,000(8) *
Herbert J. Friedman.............................. 102,260(9) *
K. James McTaggart............................... 83,500(10) *
Klaus Tabar...................................... 96,540(11) *
Thomas Beale..................................... 65,000(12) *
George L. Hashbarger............................. -- --
Kamal G. Abdelnour............................... 56,909(13) *
Jeffrey H. Coats................................. 9,389(14) *
Peter H. Dailey.................................. 23,959(15) *
John A. Gavin.................................... 23,959(15) *
All directors and executive officers as a group
(11 persons)................................... 2,028,011 8.5
</TABLE>
- ---------------
* Less than one percent.
(1) Outstanding warrants and options held by each of the principal
stockholders, directors and executive officers which are exercisable
currently or within 60 days of the date of this table are deemed to be
outstanding shares of Common Stock for their respective calculations.
(2) Includes warrants to purchase 3,169,231 shares of Common Stock.
(3) Worms & Cie, through JOL, Permal Capital Management, Inc. and certain other
affiliates, may be deemed to be the beneficial owner of 2,755,310 shares of
Common Stock and warrants to purchase 542,814 shares of Common Stock, which
amounts include 1,288,040 shares held by two former directors of the
Company, and exclude 103,995 shares, options and warrants held by Mr.
DeLitto and shown separately below. The two former directors and Mr.
DeLitto are directors and officers of affiliates of Worms & Cie. Worms &
Cie disclaims ownership of the shares held by these individuals.
(4) Including warrants to purchase 530,769 shares of Common Stock.
4
<PAGE> 7
(5) As trustees for various Hawley Trusts, John F. Hawley and Barbara H. Hawley
are deemed to be beneficial owners of such shares.
(6) Includes options to purchase 1,309,000 shares of Common Stock.
(7) Includes options to purchase 9,998 shares of Common Stock and 18,959
deferred stock units.
(8) Includes options to purchase 90,000 shares of Common Stock.
(9) Includes options to purchase 101,260 shares of Common Stock.
(10) Includes options to purchase 82,500 shares of Common Stock.
(11) Includes options to purchase 94,700 shares of Common Stock
(12) Includes options to purchase 60,000 shares of Common Stock.
(13) Includes options to purchase 5,000 shares of Common Stock and 18,959
deferred stock units.
(14) Includes 9,389 deferred stock units.
(15) Consists of options to purchase 5,000 shares of Common Stock and 18,959
deferred stock units.
(16) Excluding Common Stock shares issuable upon conversion of Series A
Convertible Preferred Stock.
The following table sets forth certain information with respect to
beneficial ownership of the Company's Series A Convertible Preferred Stock as of
March 31, 2000 by (i) each person (or group of affiliated persons) who is known
by the Company to own beneficially more than 5% of the Company's Series A
Convertible Preferred Stock, (ii) each of the Company's directors and executive
officers, and (iii) all directors and executive officers as a group. If the
stockholders authorize the requisite number of shares of common stock, each
share of Series A Convertible Preferred Stock will be convertible into
approximately 45.45 shares of common stock at any time at the option of the
holder.
<TABLE>
<CAPTION>
SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED SHARES OWNED
------------------------------------ ------------------ ------------
<S> <C> <C>
TH Lee Global Internet Partners, L.P..................... 260,000 68.5%
200 Madison Avenue
Suite 2225
New York, NY 10016
GECC..................................................... 20,000 5.3%
260 Long Ridge Road
Stamford, CT 06927
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the directors
and officers of the Company and persons who own more than ten percent of a
registered class of the Company's equity securities ("Reporting Persons") to
file with the Securities and Exchange Commission and the American Stock Exchange
initial reports of ownership and reports of changes in ownership of Common
Stock. In addition, under Section 16(a), trusts for which a Reporting Person is
a trustee and a beneficiary (or a member of his immediate family is a
beneficiary), may have a separate reporting obligation with regard to holdings
and transactions in Common Stock. Specific due dates for these reports have been
established, and the Company is required to disclose in this proxy statement any
failure to file by these dates during 1999 or in prior years if not previously
reported. To the Company's knowledge, all of these requirements were satisfied,
except that Mr. Beale, Reporting Person, filed one late Form 4 for promotion,
one stock transaction and stock options. This late filing has been corrected.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
During the fiscal year ended December 26, 1999 (fiscal year 1999), the
Board of Directors of the Company held five meetings. All directors attended at
least 80% of the aggregate number of meetings of the Board and all committees of
the Board on which they served.
5
<PAGE> 8
All directors were reimbursed for travel and other expenses related to
their activities as directors during fiscal year 1999, and will continue to be
so reimbursed in fiscal year 2000 and beyond. Until August 1999 there were four
non-employee directors other than Jeffrey H. Coats and each were paid a fee of
$10,000 for their services during fiscal year 1999. In August 1999, Mr. Coats
became eligible to be paid a director's fee; he was thereupon paid $10,000 for
his services. In August 1999, George L. Hashbarger was elected to the board and
by virtue of his employment by GE Capital Equity Investments, Inc., is not
eligible to receive payment for his services. Deferred stock units valued at
$10,000 were granted under the Company's 1997 Stock Incentive Plan for services
rendered as directors to each non-employee director in office on December 31,
1999 and will be granted on December 31 of each year thereafter during the term
of the 1997 Stock Incentive Plan.
The Board of Directors has designated four principal standing committees.
Set forth below are descriptions of the functions of these committees and the
names of their current members.
Executive Committee. The current members of the Executive Committee are
Messrs. Hawley (Chairman), DeLitto and Coats. The Executive Committee has all of
the powers and authority in the management of the business and affairs of the
Company, except those prohibited by law, to take action on behalf of the Board
of Directors as may be necessary between regular meetings of the Board when a
special meeting or a telephonic meeting of the full Board is not possible or
practicable. All actions taken by the Executive Committee are presented to the
full Board of Directors for ratification at its next regular or special meeting.
The Executive Committee held no meetings in fiscal year 1999.
Audit Committee. The current members of the Audit Committee are Messrs.
Gavin (Chairman), Dailey, Coats and Abdelnour. This committee reviews and makes
reports and recommendations to the Board of Directors with respect to the
selection of the independent public accountants of the Company, and the
arrangements for and the scope of the audits to be performed by such independent
public accountants and reviews the annual consolidated financial statements of
the Company. The Audit Committee held two meetings in fiscal year 1999.
Compensation Committee. The members of the Compensation Committee are
Messrs. Abdelnour (Chairman), Gavin, Dailey and Coats. This committee reviews
the salaries and salary ranges of the officers and employees of the Company and
its subsidiaries whose compensation exceeds specified levels as well as the
compensation, retirement and fringe benefits plans (including option plans) of
the Company and its subsidiaries, and makes recommendations with respect to such
matters to the Board of Directors. The Compensation Committee also serves as the
administrative committee of the Company's 1997 Stock Incentive Plan. The
Compensation Committee held three meetings in fiscal year 1999.
Nominating Committee. The members of the Nominating Committee are Messrs.
Hawley (Chairman), DeLitto, Coats and Abdelnour. This committee identifies,
reviews the qualifications of and recommends candidates to the Board of
Directors for election as directors of the Company, and also acts on other
matters pertaining to membership on the Board of Directors. The Nominating
Committee advises the Board of Directors on terms of tenure and compensation for
directors and issues involving potential conflicts of interest. The Nominating
Committee also identifies, reviews the qualifications of, and recommends to the
Board of Directors individuals for senior management positions of the Company.
The Nominating Committee held no meetings in fiscal year 1999.
The Nominating Committee will consider recommendations by stockholders of
the Company as to candidates for membership on the Board of Directors. Any
stockholder who desires to propose to the Nominating Committee a candidate for
such membership should send to the attention of the Secretary of the Company a
letter of recommendation containing the name and address of the proposing
stockholder and the proposed candidate. A written consent of the proposed
candidate to serve as director if elected and a detailed description of his or
her qualifications and background should also be provided.
6
<PAGE> 9
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth all compensation paid by the Company during
fiscal 1999, 1998, and 1997 to (i) the Company's Chief Executive Officer during
fiscal 1999 and (ii) the four other most highly compensated executive officers
of the Company during fiscal 1999 (collectively referred to as the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#) ($)
--------------------------- ---- ------------ -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Philip M. Hawley...................... 1999 260,333 300,000
Chairman of the Board and 1998 233,649 --
Chief Executive Officer 1997 233,842 --
Robert A. Burton...................... 1999 156,200 50,000
Executive Vice President and 1998 155,415 15,000
Chief Financial Officer 1997 155,160 50,000
Herbert J. Friedman................... 1999 167,017 50,000 35,335(1)
Executive Vice President of 1998 157,215 15,000
Merchandising, Product 1997 156,959 50,000 39,119(1)
Development, Marketing and Stores
K. James McTaggart.................... 1999 137,867 50,000
Executive Vice President of 1998 135,405 15,000
Manufacturing and 1997 135,633 40,000
Distribution
Thomas J. Beale....................... 1999 144,100 --
Senior Vice President, Stores 1998 148,420 10,000
1997 148,528 40,000
</TABLE>
- ---------------
(1) Represents payment for prior years accrued but unused vacation.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options and
deferred stock units granted during fiscal 1999 to the Named Executive Officers.
<TABLE>
<CAPTION>
REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES
NUMBER OF OPTIONS/SARS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE OR FOR OPTION TERM
OPTIONS/SARS FISCAL BASE PRICE EXPIRATION -------------------
NAME GRANTED(#) YEAR(1) ($/SH) DATE 5%($) 10%($)
---- ------------ ------------ ----------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Philip M. Hawley.... 150,000 21.3% 3.00 02/22/09 733,500 1,165,500
Philip M. Hawley.... 150,000 21.3% 1.44 02/22/09 351,469 558,469
Robert A. Burton.... 50,000 7.1% 1.56 03/17/09 127,344 202,344
Herbert J.
Friedman.......... 50,000 7.1% 1.56 03/17/09 127,344 202,344
K. James
McTaggart......... 50,000 7.1% 1.56 03/17/09 127,344 202,344
Thomas J. Beale..... -- -- -- -- -- --
</TABLE>
- ---------------
(1) The Company granted options for a total of 23,277 deferred stock units to
directors and 680,000 shares of Common Stock to employees of the Company
during 1999. All of the options and deferred stock units were granted under
the 1997 Stock Incentive Plan.
7
<PAGE> 10
AGGREGATED OPTION/SAR EXERCISES IN 1999
AND YEAR-END OPTION/SAR VALUES(1)
The following table sets forth information concerning the value of
unexercised options and deferred stock units held by the Named Executive
Officers as of December 26, 1999, the end of the Company's 1999 fiscal year. No
Named Executive Officers exercised any options during fiscal year 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
NUMBER OF AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Philip M. Hawley.... -- -- 1,234,000 300,000 2,319,920 216,000
Robert A. Burton.... -- -- 65,000 100,000 64,500 130,500
Herbert J.
Friedman.......... -- -- 76,260 100,000 75,646 130,500
K. James
McTaggart......... -- -- 60,000 90,000 60,700 117,600
Thomas J. Beale..... -- -- 50,000 40,000 51,600 51,600
</TABLE>
- ---------------
(1) Based on the closing price of the Common Stock as quoted on the American
Stock Exchange of $2.88 on December 26, 1999.
EMPLOYMENT AGREEMENTS
In August 1996, the Company entered into an Employment Agreement with
Philip M. Hawley pursuant to which the Company agreed to employ Mr. Hawley for a
term ending on August 25, 1999, and to pay Mr. Hawley a base salary at the rate
of $225,000 per year and provide benefits. The Company and Mr. Hawley have
agreed to extend this agreement to January 28, 2001. Mr. Hawley's salary was
increased by the Compensation Committee effective February 1, 1999, to $275,000.
Mr. Hawley was also granted options in February 1999 (see Option/SAR Grants in
Last Fiscal Year, above). If Mr. Hawley's employment is terminated by the
Company without cause (as defined in the Employment Agreement) he is entitled to
receive his full base salary and benefits for the remaining term of the
Employment Agreement. If Mr. Hawley resigns from the Company upon a change in
control (as defined in the Employment Agreement) he is entitled to a lump sum
payment equal to the greater of (i) the remaining amounts that would be payable
to him under the Employment Agreement and (ii) $275,000. Furthermore, the
Company agreed to grant Mr. Hawley an option to purchase 1,234,000 shares of
Common Stock at an exercise price of $1.00 per share with vesting over three
years. In the event of a change in control, the right to exercise the options
would accelerate. Mr. Hawley is also entitled to all other benefits of
employment available to executive officers of the Company generally, including
bonuses, retirement, vacation, deferred compensation, employee discount, and
various health related benefits.
The Company has entered into agreements with Messrs. Burton, Friedman,
McTaggart, Beale and Tabar, as well as several other officers and employees of
the Company, providing for the payment of severance benefits equal to such
officers' or employees' monthly salary plus benefits for up to 12 months if
terminated without cause.
8
<PAGE> 11
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee (the "Committee") of Krause's Furniture, Inc.
(the "Company"), has met three times during fiscal year 1999. At the meetings,
the Committee reviewed and made recommendations to the Board of Directors on
compensation for the Company's executive officers.
In making its recommendations, the Committee took into account many factors
in determining aggregate compensation, including awards of stock options and a
proposed management bonus program. The factors considered by the Committee
include (1) the financial results of the Company for the preceding fiscal year,
(2) the performance of the Company's stock, (3) the experience level and
performance of the executive officers, (4) the compensation paid to executive
officers in prior years and (5) compensation of executive officers employed by
companies in industries similar to that of the Company. The committee also
considered and intended to set executive compensation policies in order to
preserve qualifying compensation deductions under 162(m) of the Internal Revenue
Code which could limit certain deductions for executive compensation.
The Committee awarded stock options to employees based on salary levels,
special circumstances such as promotions and contractual commitments, and
performance, experience and level of responsibility of each executive. The
Company's executive officers have a significant equity ownership in the Company,
and the Committee is of the view that this has been and continues to be a key
factor in focusing the efforts of management in building shareholder value.
In 1999, the compensation to executive officers was comprised of (1) annual
salary, and (2) other employee benefits, including stock options, which are
described in the Proxy Statement.
Philip M. Hawley, the Chief Executive Officer of the Company, received
compensation according to the terms of his employment agreement with the
Company. This employment agreement was negotiated at arm's length with General
Electric Capital Corporation in 1996. Mr. Hawley's salary was increased by the
Compensation Committee effective February 1, 1999, to $275,000.
The Committee on February 23, 1999, March 18, 1999 and on September 8,
1999, awarded stock option grants to various members of the senior management
staff of the Company.
The members of the Compensation Committee are Kamal Abdelnour, John A.
Gavin, Peter H. Dailey and Jeffrey H. Coats.
9
<PAGE> 12
PERFORMANCE GRAPHS
KRAUSE'S FURNITURE, INC., NASDAQ (U.S. COMPANIES) AND
NYSE/AMEX/NASDAQ STOCKS (HOME FURNITURE AND FURNISHINGS STORES)
COMPARISON OF CUMULATIVE TOTAL RETURN FROM JANUARY 27, 1995 TO DECEMBER 26, 1999
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
KRAUSE'S FURNITURE, AMEX STOCK MARKET (US NYSE/AMEX/NASDAQ
INC. COMPANIES STOCKS
------------------- --------------------- ----------------
<S> <C> <C> <C>
01/27/95 100.00 100.00 100.00
01/26/96 42.40 123.40 79.90
01/31/97 32.30 130.20 100.80
01/30/98 40.40 156.30 160.20
01/29/99 24.20 178.30 158.60
12/23/99 36.40 207.70 142.50
</TABLE>
The above graph shows the cumulative total return assuming $100 invested on
January 27, 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors are
Kamal G. Abdelnour, President and Chief Executive Officer of ATCO Development,
Inc.; John A. Gavin, founder and Chairman of Gamma Holdings and Partner and
Managing Director of Hicks, Muse, Tate and Forst (Latin America); Peter H.
Dailey, a Principal of Enniskerry Financial, Ltd.; and Jeffrey H. Coats,
Managing Director of TH Lee Global Internet Partners, L.P. Mr. Abdelnour is
Chairman of the Compensation Committee.
All decisions with respect to compensation were either made or ratified by
the current Committee. There were no interlocks.
10
<PAGE> 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, 1998 and 1997 a number of transactions occurred between the
Company and its subsidiaries and certain directors and their affiliates. The
Company believes that each such arrangement was as fair as could have been
obtained from unaffiliated persons.
SALE OF THE SERIES A CONVERTIBLE PREFERRED STOCK OF KRAUSE'S, INC.
GECC
On January 14, 2000, GE Capital Equity Investments, Inc., an affiliate of
General Electric Capital Corporation ("GECC"), purchased 20,000 shares of Series
A Convertible Preferred Stock of the Company at a purchase price of $1 million.
GECC is the largest stockholder of the Company, with beneficial ownership of
8,169,231 shares of common stock, comprising 32.4% of the company's issued and
outstanding common stock. (Those numbers are as of March 31, 2000. They give
effect to warrants and other rights to acquire common stock of the company
exercisable within sixty days, but not the conversion of the Series A
Convertible Preferred Stock.)
George Hashbarger, a vice president of GE Capital Equity Investments, Inc.,
is a member of the Company's Board of Directors. He did not participate in the
Board's vote to approve the sale of the Series A Convertible Preferred Stock.
TH LEE GLOBAL INTERNET PARTNERS, L.P.
On January 14, 2000, TH Lee.Putnam Internet Partners, L.P., and TH
Lee.Putnam Internet Parallel Partners, L.P., affiliates of TH Lee Global
Internet Partners, L.P. ("TH Lee"), purchased a total of 260,000 shares of
Series A Convertible Preferred Stock of the Company at a purchase price of $13
million. Jeffrey H. Coats, a managing director of TH Lee Global Internet
Partners, is a member of the Company's Board of Directors. He did not
participate in the Board's vote to approve the sale of the Series A Convertible
Preferred Stock.
OTHER TRANSACTIONS
Private Label Credit Card Program with Monogram Credit Card Bank of Georgia
(an Affiliate of GECC). In April 1997, the Company entered into an agreement
with Monogram Credit Card Bank of Georgia ("Monogram"), an affiliate of GECC,
pursuant to which Monogram provides a customized credit program to the Company.
Under this program, approved customers of the Company are able to purchase
products on credit through a credit card issued by Monogram. Monogram purchases
each credit from the Company and bears the risk of loss on such credit
purchases. The program is for an initial term of five years and will
automatically renew for consecutive five-year terms unless terminated by either
party at least six months prior to the end of any such five-year term.
Succession Agreement. In December 1997, a Succession Agreement was entered
into by the Company and the following stockholders: Philip M. Hawley, its
Chairman, his sons John F. Hawley and Dr. Philip M. Hawley, Jr., GECC and Permal
Capital Management. The parties to the Succession Agreement agreed that if
Philip M. Hawley ceases to serve on the Board of Directors, the stockholder
parties would take all necessary action to ensure that John F. Hawley, or his
nominee if he is unavailable, is elected to serve as a director. Furthermore,
GECC and each of the members of the Hawley Group agreed to cooperate in
connection with the acquisition, by either, of Common Stock held by the Permal
Group. The agreement will continue as long as the Hawley Group owns an aggregate
of at least 1,000,000 shares of Common Stock.
11
<PAGE> 14
PROPOSAL NO. 2
TO APPROVE AN AMENDMENT TO THE 1997 STOCK INCENTIVE PLAN
INCREASING THE NUMBER OF SHARES THAT MAY BE AWARDED
BY 2,500,000 SHARES, TO A TOTAL OF 4,500,000 SHARES
PROPOSAL TO AMEND THE KRAUSE'S FURNITURE, INC. 1997 STOCK INCENTIVE PLAN
The Company's Board of Directors has unanimously approved an amendment to
The Krause's Furniture, Inc. 1997 Stock Incentive Plan (the "Incentive Plan") to
increase the number of shares of common stock reserved for issuance thereunder
from 2,000,000 to 4,500,000 and has recommended the amendment to the
stockholders.
As of the Record Date, of the 2,000,000 shares of common stock currently
reserved under the Incentive Plan, 430,000 shares of common stock were available
for future grants under the Incentive Plan. With aggregate annual grants of
options averaging 531,000 shares over the last three years, the Board believes
it is prudent to increase the number of shares available for future grants. In
addition, the Board believes that there may be circumstances (including, but not
limited to, special awards to existing employees and awards to senior level
executive officers as part of a package of benefits offered to induce them to
join the Company) in which it would be appropriate to award an individual
options to purchase shares and, therefore, is requesting the flexibility to
increase the number of shares available for future grants.
The Board believes that the grant of stock options to officers and key
employees of the Company and its subsidiaries is a vital factor in attracting
and retaining effective and capable employees who contribute to the growth and
success of the Company. Proceeds received by the Company upon exercise of the
options granted under the Incentive Plan are available for general corporate
purposes. It is not possible at this time to determine the number or identity of
all of the individuals who will be eligible for the grants of stock options
under the Incentive Plan on or prior to January 19, 2007.
Set forth below is a summary of certain of the provisions of the Incentive
Plan and the tax consequences to the Company and employees who receive stock
options under the Incentive Plan.
The Board adopted the Incentive Plan effective as of January 20, 1997, and
the Shareholders approved the Incentive Plan at the annual meeting on May 29,
1997. To date, the Compensation Committee has granted options covering an
aggregate of 1,570,000 shares of common stock under the Incentive Plan.
In addition to the grants described above, Messrs. Abdelnour, DeLitto,
Dailey, and Gavin, each of whom is a non-employee director of the Company, have
received annual grants of deferred stock units. Beginning in 1999, Mr. Coats
also received annual grants of deferred stock units. These grants are made
automatically under the Incentive Plan and are not subject to the approval of
the Compensation Committee. Each grant provides for the award of a number of
deferred stock units determined by dividing $10,000 by the fair market value of
a share of the Company's Common Stock on the date of the award. Actual issuance
of stock is deferred until after a participating director ceases to serve as a
director of the Company.
The Incentive Plan is intended to enable the Company to enhance its ability
to provide key employees, consultants and directors with meaningful awards and
incentives commensurate with their contributions and competitive with those
offered by other employers. It will also increase stockholder value by further
aligning the interests of key employees, consultants and directors with the
interests of the Company's stockholders by providing an opportunity to benefit
from stock price appreciation that generally accompanies improved financial
performance. The Board of Directors believes that the Company's long term
success is dependent upon the ability of the Company to attract and retain
superior individuals who, by virtue of their ability and qualifications, make
important contributions to the Company.
A total of 4,500,000 shares of Common Stock, including the shares added by
the proposed amendment (the "Shares"), which is equal to 20.4% of the Shares
outstanding as of the Record Date, have been reserved for issuance under the
Incentive Plan. The Incentive Plan will terminate on January 19, 2007, unless
earlier terminated by the Board.
12
<PAGE> 15
PROPOSED AMENDMENT
The proposed amendment to the 1997 Plan would revise the terms of Section
3(a) to read as follows:
"(a) Subject to the provisions of Section 11, below, the maximum
aggregate number of Shares which may be issued pursuant to all Awards is
four million five hundred thousand (4,500,000). The shares to be issued
pursuant to Awards may be authorized but unissued, or reacquired Common
Stock."
Other than the increase in the number of shares of common stock reserved
for issuance pursuant to options, no additional amendments to the plan are
contemplated at this time.
The affirmative vote of a majority of the shares present in person or by
proxy at the Annual Meeting and entitled to vote is required for adoption of
Proposal No. 2. For purposes of the vote on Proposal 2, abstentions will have
the same effect as votes against the proposal and broker non-votes will not be
counted as votes cast and will have no effect on the result of the vote.
A general description of the principal terms of the Incentive Plan as
proposed is set forth below. This description is qualified in its entirety by
the terms of the Incentive Plan, a copy of which, as it is proposed to be
amended, is attached to this Proxy Statement as Appendix A and is incorporated
by reference herein.
GENERAL DESCRIPTION
The Incentive Plan provides for the grant of (i) Shares, (ii) an option, an
SAR or similar right with an exercise or conversion privilege at a fixed or
variable price related to the Common Stock and/or the passage of time, the
occurrence of one or more events, or the satisfaction of performance criteria or
other conditions, or (iii) any other security with the value derived from the
value of the Common Stock of the Company to employees and consultants, and for
automatic grants of deferred stock units to participating outside Directors
(collectively, the "Awards"). The maximum number of Shares with respect to which
options and SARs may be granted to an employee of the Company during a fiscal
year of the Company is 1,500,000 Shares.
The Incentive Plan is administered, with respect to grants to directors,
officers, consultants, and other employees, by the plan administrator (the
"Administrator"), defined as the Board or one or more committees designated by
the Board. With respect to grants to officers and directors, the committee shall
be constituted in such a manner as to satisfy applicable laws, including Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended. Awards
of deferred stock units to participating outside Directors are automatic, but to
the extent that any administration is required, they will be administered by the
Board.
The Board of Directors may at any time amend, suspend or terminate the
Incentive Plan. To the extent necessary to comply with applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Awards granted to residents therein,
the Company shall obtain stockholder approval of any amendment to the Incentive
Plan in such a manner and to such a degree as required.
Stock options granted under the Incentive Plan may be either incentive
stock options under the provisions of Section 422 of the Code, or non-qualified
stock options. Incentive stock options may be granted only to employees of the
Company or any parent or subsidiary corporation of the Company. Awards other
than incentive stock options may be granted to employees and consultants.
Under the Incentive Plan, incentive stock options may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised during the
lifetime of the grantee only by the grantee. However, the Incentive Plan permits
the designation of beneficiaries by holders of incentive stock options. Other
Awards shall be transferable to the extent provided in the Award agreement.
The Incentive Plan authorizes the Administrator to select the employers,
directors and consultants of the Company to whom Awards may be granted and to
determine the terms and conditions of any Award; however, the term of an
incentive stock option may not be for more than 10 years (or 5 years in the case
of incentive stock options granted to any grantee who owns stock representing
more than 10% of the combined voting
13
<PAGE> 16
power of the Company or any parent or subsidiary corporation of the Company).
The Incentive Plan authorizes the Administrator to grant Awards at an exercise
price determined by the Administrator. In the case of incentive stock options,
such price cannot be less than 100% (or 110%, in the case of incentive stock
options granted to any grantee who owns stock representing more than 10% of the
combined voting power of the Company or any parent or subsidiary corporation of
the Company) of the fair market value of the Common Stock on the date the option
is granted. In the case of non-qualified stock options, such price cannot be
less than 100% of the fair market value of the Common Stock on the date the
option is granted. Payment of the purchase price upon exercise of any Award
granted under the Incentive Plan must be made in the form designated by the
Administrator, which may include: (i) cash; (ii) check; (iii) delivery of a
promissory note with terms acceptable to the Administrator; (iv) surrender of
Shares owned by Grantee; (v) by delivery of an irrevocable direction to a
securities broker to sell shares and deliver proceeds to the Company in payment
for the Shares; or (vi) any combination of the foregoing. The aggregate fair
market value of the Common Stock with respect to any incentive stock options
that are exercisable for the first time by an eligible employee in any calendar
year may not exceed $100,000. If a Grantee satisfies the exercise price of an
option by having the Company withhold Shares otherwise deliverable to the
Grantee, the Administrator may issue the Grantee an additional option, with
terms identical to the Award agreement under which the option was exercised, but
an exercise price based upon the fair market value of the Company's stock at the
time of the grant of the additional option.
The Awards may be granted subject to vesting schedules and restrictions on
transfer and repurchase or forfeiture rights in favor of the Company as
specified in the agreements to be issued under the Incentive Plan. Except as
provided in an Award agreement, the vesting schedule is accelerated and all
Awards become fully vested, exercisable, and released from any restrictions on
transfer and repurchase or forfeiture rights in the event of a Corporate
Transaction, a Change in Control or a Subsidiary Disposition, each as defined in
the Incentive Plan. Effective upon the consummation of a Corporate Transaction,
all outstanding Awards under the Plan shall terminate unless assumed by the
successor company or its parent or the acquiring company substitutes a
satisfactory cash incentive program. The administrator of the Incentive Plan has
the ability to accelerate award vesting in anticipation of a Change in Control
or the disposition of a subsidiary. The Incentive Plan also permits the
Administrator to include a provision whereby the grantee may elect at any time
while an employee, director or consultant to exercise any part or all of the
Award prior to full vesting of the Award.
Under the Incentive Plan, the Administrator may establish one or more
programs under the Incentive Plan to permit selected grantees the opportunity to
elect to defer receipt of consideration payable under an Award. The
Administrator also may establish under the Incentive Plan separate programs for
the grant of particular forms of Awards to one or more classes of grantees.
Directors who are not employees of the Company, other than one non-employee
director who has indicated that he cannot accept an award because of his current
employment by a stockholder of the Company, receive automatic grants of deferred
stock units covering shares having a fair market value of $10,000 for each year
of service as a director. These awards provide deferred compensation to
directors equivalent to an investment in an equivalent amount of the Company's
Common Stock, based upon the fair market value of the Company's shares on the
date the award is effective. Payout of the award is made in stock following a
director's retirement from the Board of Directors or death. Normally the payment
occurs in five annual installments, but a director may elect to receive a single
payment. In the event of a Change of Control of the Company, as defined in the
Incentive Plan, the director's deferred stock account will be paid immediately
in cash.
The Incentive Plan permits the grant of Awards prior to approval of the
Incentive Plan by the Stockholders. However, incentive stock options are not
exercisable until such approval is obtained and, if approval is not obtained
within twelve months of the date the Board adopted the Incentive Plan,
previously granted incentive stock options will terminate. The Incentive Plan
provides that no grant of deferred stock units to participating outside
directors will be effective if the Incentive Plan is not approved by the
Stockholders.
14
<PAGE> 17
CERTAIN FEDERAL TAX CONSEQUENCES
The following summarizes only the federal income tax consequences of stock
options and shares of restricted stock granted under the Incentive Plan. State
and local tax consequences may differ.
The grant of a nonqualified stock option under the Incentive Plan will not
result in any federal income tax consequences to the Optionee or to the Company.
Upon exercise of a nonqualified stock option, the Optionee is subject to income
taxes at the rate applicable to ordinary compensation income on the difference
between the option price and the fair market value of the Shares on the date of
exercise. This income is subject to withholding for federal income and
employment tax purposes. The Company is entitled to an income tax deduction in
the amount of the income recognized by the Optionee. Any gain or loss on the
Optionee's subsequent disposition of the Shares of Common Stock will be a
capital gain or loss. The Company does not receive a tax deduction for any such
gain. The maximum marginal rate at which ordinary income is taxed to individuals
is currently 39.6% and the maximum rate at which long-term capital gains are
taxed is 28%.
The grant of an incentive stock option under the Incentive Plan will not
result in any federal income tax consequences to the Optionee or to the Company.
An Optionee recognizes no federal taxable income upon exercising an incentive
stock option ("ISO") (subject to the alternative minimum tax rules discussed
below), and the Company receives no deduction at the time of exercise. In the
event of a disposition of stock acquired upon exercise of an ISO, the tax
consequences depend upon how long the optionee has held the Shares of Common
Stock. If the optionee does not dispose of the Shares within two years after the
ISO was granted, nor within one year after the ISO was exercised and Shares were
purchased, the optionee will recognize a long-term capital gain (or loss) equal
to the difference between the sale price of the Shares and the exercise price.
The Company is not entitled to any deduction under these circumstances.
If the optionee fails to satisfy either of the foregoing holding periods,
he or she must recognize ordinary income in the year of the disposition
(referred to as a "disqualifying disposition"). The amount of such ordinary
income generally is the lesser of (i) the difference between the amount realized
on disposition and the exercise price, or (ii) the difference between the fair
market value of the stock on the exercise date and the exercise price. Any gain
in excess of the amount taxed as ordinary income will be treated as a long- or
short-term capital gain, depending on whether the stock was held for more than
one year. The Company, in the year of the disqualifying disposition, is entitled
to a deduction equal to the amount of ordinary income recognized by the
optionee.
The "spread" under an ISO -- i.e., the difference between the fair market
value of the Shares at exercise and the exercise price -- is classified as an
item of adjustment in the year of exercise for purposes of the alternative
minimum tax.
The grant of restricted stock will subject the recipient to ordinary
compensation income on the difference between the amount paid for such stock and
the fair market value of the Shares on the date that the restrictions lapse.
This income is subject to withholding for federal income and employment tax
purposes. The Company is entitled to an income tax deduction in the amount of
the income recognized by the recipient. Any gain or loss on the recipient's
subsequent disposition of the Shares will receive long- or short-term capital
gain or loss treatment depending on whether the Shares are held for more than
one year and depending on how long the stock has been held since the
restrictions lapsed. The Company does not receive a tax deduction for any such
gain. Recipients of restricted stock may make an election under Internal Revenue
Code Section 83(b) to recognize as ordinary compensation income in the year that
such restricted stock is granted the amount equal to the spread between the
amount paid for such stock and the fair market value on date of the issuance of
the stock. If such an election is made, the recipient recognizes no further
amounts of compensation income upon the lapse of any restrictions and any gain
or loss on subsequent disposition will be long- or short-term capital gain. The
Section 83(b) election must be made within thirty days from the time the
restricted stock is issued.
Grants of Deferred Stock Units to directors are treated as deferred
compensation taxable as ordinary income upon issuance of the Shares in
satisfaction of the account. The Company is entitled to an income tax deduction
in the amount of the income recognized by the director.
15
<PAGE> 18
VOTE REQUIRED FOR APPROVAL
Approval of the amendment to the 1997 Plan will require the affirmative
vote of a majority of the votes cast in person and by proxy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 2
PROPOSAL NO. 3
TO APPROVE KRAUSE'S FURNITURE, INC.
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
DATED JANUARY 11, 2000 AND APPROVE THE TRANSACTIONS RELATED THERETO,
INCLUDING THE AMENDMENT OF THE CERTIFICATE OF DESIGNATION OF THE
SERIES A CONVERTIBLE PREFERRED STOCK
THE SERIES A CONVERTIBLE PREFERRED STOCK.
On January 14 and 19, 2000, the Company completed a private placement of
380,000 shares of Series A Convertible Preferred Stock at a price of $50.00 per
share. Proceeds from the private placement totaled approximately $18,700,000
after deducting legal fees and related expenses. The Securities Purchase
Agreement between the Company and the purchasers of the Series A Convertible
Preferred Stock requires the Company to use $10 million of the proceeds to
launch the Company's business to business and e-commerce activities. The Company
will use the balance in support of its core business of manufacturing and
retailing upholstered furniture. Specifically, the Company is using those
proceeds to pay down debt, to fund the opening of new showrooms, and for general
corporate purposes.
Each share of Series A Convertible Preferred Stock is convertible at any
time, at the option of the holders, into approximately 45.45 shares of common
stock. However, the Company does not have sufficient shares of authorized common
stock to convert all the outstanding shares of the Series A Convertible
Preferred Stock unless the stockholders authorize additional shares of common
stock. Each share of Series A Convertible Preferred Stock has voting rights
equal to approximately 45.45 shares of common stock. The holders of the Series A
Convertible Preferred Stock can elect to redeem all of their shares at the
original issue price of $50 per share after January 14, 2005, or fifteen days
after the 2000 annual meeting if the stockholders do not authorize sufficient
shares of common stock to allow for the conversion of the Series A Convertible
Preferred Stock, or upon a change in control of the Company. If the Company
spends a portion of the proceeds of the sale of the Series A Convertible
Preferred Stock intended for e-commerce and business-to-business uses for other
uses, the holders may partially redeem their shares. If assets of the Company
are distributed in a voluntary or involuntary liquidation, the holders of the
Series A Convertible Preferred Stock will have in aggregate a preference giving
them the right to the first $19 million of assets distributed to shareholders.
The Company has no right to call or redeem any shares of the Series A
Convertible Preferred Stock. However, all of the Series A Convertible Preferred
Stock will automatically convert to common stock if the company closes a firm
commitment public offering of its common stock that yields at least $25 million
gross cash proceeds to the Corporation at a price per share of at least $3.30.
All of the Series A Convertible Preferred Stock will also automatically convert
into common stock if holders of 66 2/3% of the Series A Convertible Preferred
Stock vote to do so.
The definitive documents relating to the Series A Convertible Preferred
Stock are attached hereto as follows:
<TABLE>
<S> <C>
CERTIFICATE OF DESIGNATION OF SERIES A CONVERTIBLE PREFERRED
STOCK OF KRAUSE'S FURNITURE, INC.......................... APPENDIX B
SERIES A CONVERTIBLE PREFERRED STOCK SECURITIES PURCHASE
AGREEMENT................................................. APPENDIX C
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT.......... APPENDIX D
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT................. APPENDIX E
</TABLE>
16
<PAGE> 19
Stockholders should read and consider the definitive documents relating to
the Series A Convertible Preferred Stock before voting on Proposal No. 3.
BACKGROUND OF THE SALE OF THE PREFERRED STOCK.
The terms for the proposed Series A Preferred Stock were negotiated between
the parties at arm's length.
In September of 1999, TH Lee.Putnam Internet Partners, L.P. ("TH Lee") and
the Company began discussing the possible formation of a strategic alliance to
exploit the potential of furniture sales over the internet. TH Lee and the
Company became aware of each other through Jeffrey Coats, who is a managing
director of TH Lee's affiliate TH Lee Global Internet Partners, who had
previously been an officer of GECC and has served on the Company's board of
directors for approximately four years. TH Lee is a prominent investor and
strategic partner of internet and e-commerce companies. GECC, the Company's
largest common stockholder and a source of private financing in earlier stages
of the Company's restructuring, also took part in these early discussions.
The Company had already been considering expanding into
business-to-business channels, in particular sales to the hospitality industry
(hotels and motels). As a result, senior management found the prospect of a
strategic relationship with TH Lee attractive, particularly with the additional
support of GECC. Discussions about the structure of the possible relationship
ensued. TH Lee and GECC expressed an interest in participating in a financing to
help provide capital for the Company's expansion into the new sectors, in
exchange for preferred equity securities of the Company.
In discussions between September and November, a number of meetings took
place in person and by telephone between representatives of the Company, TH Lee
and GECC. During this same period, the potential investors conducted a due
diligence review of the Company.
The parties negotiated the price and terms of the proposed Series A
Convertible Preferred Stock at arm's length. Senior management of the Company
endeavored to obtain the best price for the Series A Convertible Preferred
Stock. As the largest holder of the Company's common stock, GECC also sought
terms that would not impair the value and rights of the common stock. The
parties reached a preliminary understanding that the Series A Convertible
Preferred Stock would have a fixed 8% dividend rate, a liquidation preference,
board representation rights, redemption rights and a right to register the stock
with the SEC. The parties also reached a preliminary understanding that the
stock would be priced based on the average market price of the common stock into
which it could be converted, averaged over a trailing 45-day period.
In September, when TH Lee and GECC first proposed to invest in the Company
to finance e-commerce and business-to-business activities, the range of closing
prices of the Company's common stock was $1.50 to $1.9375. In October, the range
was $0.75 to $1.875, and in November, the range was $0.8125 to $1.50.
The parties reached a preliminary understanding that, in addition to the
internet-related investment, an infusion of capital into the Company's core
business would strengthen the Company's balance sheet and enhance the Company's
ability to execute its strategic plan. They therefore discussed designating part
of the proceeds of the sale of the Series A Convertible Preferred Stock to be
applied to the Company's core business, including reducing the Company's
indebtedness under its revolving credit line. Because the parties believed
additional funds would be needed to fulfill the Company's strategic plans, they
reached a preliminary understanding that the Company would seek additional
accredited private investors to purchase shares of the Series A Convertible
Preferred Stock to obtain the additional proceeds for the core business of the
Company. In total, TH Lee and its affiliates proposed to invest $10 million,
while GECC proposed to invest $3 million. The Company would seek at least $2
million and as much as $6 million in additional funds from other accredited
investors. Of the total proceeds, $10 million would be set aside for e-commerce
and business-to-business efforts while the remainder would be used for core
business purposes.
A final term sheet was prepared by the negotiating parties on December 16,
1999. The final term sheet set the price of the preferred stock at $1.25, which
was the average of the daily closing prices of the Company's
17
<PAGE> 20
common stock on the AMEX for the 45 days ending December 16, 1999. The closing
price of the Company's common stock on December 16, 1999 was $1.4375. Each share
of the Series A Convertible Preferred Stock would be convertible into 40 shares
of common stock.
In December and January, counsel for the parties drafted and negotiated
definitive agreements for the sale of the Series A Convertible Preferred Stock
based on the final term sheet. During this final negotiating process, TH Lee and
GECC offered to remove any dividend rights for the Series A Convertible
Preferred Stock, in exchange for a compensating reduction in price. The company
and the investors considered the present value of the 8% annual accruing
dividend that the prospective holders of Series A Convertible Preferred Stock
were relinquishing, and agreed on a value of $0.15 per converted share. As a
result, the conversion price of the Series A Convertible Preferred Stock was
changed to $1.10 per share. As a result of the reduction in conversion price, a
share of Series A Convertible Preferred Stock, with an issue price of $50, will
be convertible into approximately 45.45 shares of common stock.
The final Certificate of Designation and the other transaction documents
for the sale of the Series A Convertible Preferred were presented to the Board
of Directors for approval at a special meeting on December 29, 1999. Director
George L. Hashbarger, who is an officer of GECC, and director Jeffrey Coats, who
is an officer of TH Lee, recused themselves from voting. The board considered
the terms of the transaction, and weighed the risks to the investors and the
Company in the investment. They also considered the fact that the price of
common stock on that day was $2.3125. The board noted that much lower prices had
recently prevailed, including during the negotiations of the Series A
Convertible Preferred Stock. It also noted that purchasers of the Series A
Convertible Preferred Stock would be exposed to the risk of a drop in the market
price of the common stock for at least several months.
The Board of Directors weighed the value of the privileges of the Series A
Convertible Preferred Stock against its lack of liquidity and lack of immediate
convertibility into common stock. The board noted that the pricing mechanism,
which was based on trading prices on the 45 days preceding the agreement on
final terms, was negotiated on an arm's length basis and resulted in a price (on
a converted basis) that was significantly higher than the trading price of the
Company's common stock at the time negotiations began. They also noted that
removing the dividend right from the preferred stock resulted in a benefit to
the Company that offset the $0.15 reduction in the conversion price per share.
The Board of Directors approved the price and terms of the Series A Convertible
Preferred Stock and approved a Certificate of Designation to be filed with the
state of Delaware to create the Series A Convertible Preferred Stock. The
members of the Board of Directors who had not recused themselves unanimously
approved the transaction.
The definitive securities purchase agreement was signed on January 11,
2000, and announced to the public on the morning of January 12, 2000. On January
11, 2000, the closing price of the Company's common stock on the AMEX was $3 per
share, and on January 12, 2000 it was $2.75 per share.
Since the closing of the sale of the Series A Convertible Preferred Stock,
the company has used the approximately $8,750,000 in net proceeds from the sale
that are available for the Company's core business to reduce the Company's
indebtedness under its revolving line of credit.
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
The Company's Certificate of Incorporation currently has authorized
35,000,000 shares of Common Stock, of which 22,050,328 are issued and
outstanding and another 5,620,728 are reserved for the exercise of outstanding
options and warrants, as of January 6, 2000. That leaves 7,328,944 shares of
authorized common stock available for issuance. The terms of the Series A
Convertible Preferred Stock provide that each share may be converted into
approximately 45.45 shares of common stock, for an aggregate of 17,272,727, and
require the Company to keep enough common stock authorized and reserved for
conversion of the Series A Convertible Preferred Stock. The Board of Directors
therefore proposes that the holders of the Company's common stock authorize an
additional 9,943,783 shares of common stock, which the Board will reserve for
issuance on the conversion of the Series A Convertible Preferred Stock. The
total number of authorized shares of common stock will then be 44,943,783.
18
<PAGE> 21
If the stockholders do not authorize the additional common stock to permit
conversion of the Series A Convertible Preferred Stock, then fifteen days after
the annual meeting the holders of the Series A Convertible Preferred Stock may
notify the Company of their redemption of all or part of their stock, specifying
a date between 30 and 90 days after the notice date. As a result, the Company
could be obligated to repurchase any or all of the Series A Convertible
Preferred Stock, with an aggregate redemption price of up to $19,000,000. The
Company has used approximately $8,750,000 of the proceeds of the offering of the
Series A Convertible Preferred Stock to pay down indebtedness of its wholly
owned subsidiary, Krause's Custom Crafted Furniture Corp., under its revolving
line of credit with Congress Financial Corporation (Western). If the holders of
the Series A Convertible Preferred Stock redeem their shares, the Company could
not re-borrow the proceeds used to pay down indebtedness because covenants with
Congress Financial Corporation (Western) prevent certain transfers from Krause's
Custom Crafted Furniture Corp. to the Company. The Company would therefore have
to seek alternative sources of financing to redeem the Series A Convertible
Preferred Stock.
AMENDMENT TO THE CERTIFICATE OF DESIGNATION
The present Certificate of Designation of the Company is attached as a part
of Appendix B. Among the features of the Series A Convertible Preferred Stock is
a provision in Section 6(d) of the Certificate of Designation that will cause an
adjustment in the conversion price if the Company issues new common stock (or
securities convertible into common stock) at a price lower than the $1.10
original conversion price of the Series A Convertible Preferred Stock. An
adjustment of this type is sometimes referred to as an "anti-dilution
adjustment." Section 6(d)(v)(C) excludes issuances of common stock on the
exercise of enumerated existing options and warrants from the anti-dilution
adjustment. However, outstanding warrants to purchase one million shares of
common stock issued to GECC and Japan Omnibus Limited in 1997 (the "Performance
Warrants"), which have not been exercisable until April 2000, are not enumerated
in the excluded options and warrants. The Performance Warrants have an exercise
price of $0.01.
If the Certificate of Designation is not amended, when GECC and Japan
Omnibus Limited exercise the Performance Warrants the conversion price of the
Series A Convertible Preferred Stock will be reduced from $1.10 to $1.0528.
Because the Company, GECC and TH Lee intended to exclude the exercise of
all outstanding warrants from the anti-dilution adjustment, the Company includes
in the terms of the Series A Convertible Preferred Stock presented to the
Stockholders for approval an amendment to the Certificate of Designation to
expressly exclude the exercise of the Performance Warrants from anti-dilution
adjustment. Specifically, the Board of Directors proposes that the certificate
of designation be amended and restated in its entirety, with the only change
that Section 6(d)(v)(C) be replaced with the following:
"(C) Common Stock issued or issuable upon conversion of the Series A
Preferred Stock or upon exercise of all or any portion of the warrants
issued before the Issue Date to purchase 3,712,045."
The full text of the Certificate of Designation as currently in effect is
attached to this proxy statement as Appendix B.
VOTE REQUIRED FOR APPROVAL
Approval of the issuance of the Series A Convertible Preferred Stock,
including the amendment to the Certificate of Incorporation and Certificate of
Designation, will require the affirmative vote of a majority of the holders of
the Company's common stock. In addition, under Section 10(b) of the Certificate
of Designation, the amendment to the Certificate of Designation will require the
affirmative vote of 66 2/3% of the holders of the Series A Convertible Preferred
Stock.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 3
19
<PAGE> 22
PROPOSAL NO. 4
TO APPROVE AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION
OF THE COMPANY INCREASING THE AUTHORIZED COMMON STOCK OF THE COMPANY
TO 100,000,000 SHARES, TO MAKE ADDITIONAL COMMON STOCK
AVAILABLE FOR THE EXERCISE OF INCENTIVE OPTIONS AND
FOR GENERAL CORPORATE PURPOSES
The Company currently has 35,000,0000 shares of authorized common stock. If
Proposal No. 3 is approved, the Company will have 44,943,783 authorized shares
of common stock, but all of them will be either issued and outstanding or
reserved for issuance on the exercise of options and warrants or the conversion
of the Series A Convertible Preferred Stock. The board of directors proposes
that the stockholders authorize an additional 55,056,217 shares of common stock
to increase the option pool and for general corporate purposes, including future
financings. This will bring the total number of authorized shares of common
stock to 100,000,000.
VOTE REQUIRED FOR APPROVAL
Approval of the amendment to the Certificate of Incorporation to increase
the authorized common stock will require the affirmative vote of holders of a
majority of the common stock and Series A Convertible Preferred Stock voting
together on a fully converted basis.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 4
PROPOSAL NO. 5
TO APPROVE AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION
OF THE COMPANY INCREASING THE AUTHORIZED PREFERRED STOCK
OF THE COMPANY BY 2,000,000 SHARES TO A TOTAL
OF 2,666,667 SHARES IN ORDER TO MAKE ADDITIONAL
PREFERRED STOCK AVAILABLE FOR GENERAL CORPORATE PURPOSES
The Company currently has 666,667 authorized shares of Preferred Stock. Of
that number, 450,000 have been designated Series A Convertible Preferred Stock,
of which 380,000 are issued and outstanding. The Board of Directors believes
that the remaining 216,667 shares are insufficient to give it the flexibility
needed if the Company seeks future financings. Accordingly, the Board of
Directors proposes authorizing an additional 2,000,000 shares of preferred stock
for future issuance, for a total of 2,666,667 authorized shares of Preferred
Stock.
Once additional shares of Preferred Stock are authorized, the Board of
Directors shall have the authority to fix and determine the relative rights and
preferences of preferred shares, as well as the authority to issue shares of
Preferred Stock without further stockholder approval. As a result, the Board of
Directors could authorize the issuance of a series of Preferred Stock that would
have preferential rights to the assets of the Company in a liquidation, a right
to receive dividends before they are declared for the common stock, a right to
redemption, and such other preferred provisions as the Board of Directors may,
in its sole discretion, deem appropriate. This could negatively affect the value
of the Company's common stock. The power of the board of directors to issue
preferred stock without further approval by the stockholders could also
discourage a potential acquiror of the company who might otherwise pay a premium
price over the market price to acquire the Company's common stock.
VOTE REQUIRED FOR APPROVAL
Approval of the amendment to the Certificate Incorporation to increase the
authorized preferred stock will require the affirmative vote of holders of a
majority of the common stock and holders of a majority of the Series A
Convertible Preferred Stock, each class voting separately.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 5
20
<PAGE> 23
PROPOSAL NO. 6
TO CONSIDER AND RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP
AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE
FISCAL YEAR ENDING DECEMBER 24, 2000
The firm of Arthur Andersen LLP has been provisionally designated by the
Board of Directors to examine the financial statements of the Company for the
fiscal year ending December 24, 2000. A resolution will be presented at the
Annual Meeting to retain said firm as independent public accountants to examine
the financial statements for the year ending December 24, 2000. The Board may
appoint a new firm of independent public accountants at any time if it believes
that such a change would be in the best interests of the Company and its
stockholders. If the stockholders, by the affirmative vote of a majority of the
shares represented at the Annual Meeting, do not vote to ratify the decision to
retain Arthur Andersen LLP, the selection of independent public accountants will
be reconsidered by the Board. Arthur Andersen LLP served as independent public
accountants of the Company for fiscal year 1999. It is anticipated that a
representative of Arthur Andersen LLP will be present at the Annual Meeting and
will be available to answer any appropriate questions from the stockholders and
will be given the opportunity to make a statement should the representative
desire to do so.
VOTE REQUIRED TO APPROVE
To ratify the selection of Arthur Andersen LLP as the Company's independent
public accountants will require the affirmative vote of holders of a majority of
shares present at the meeting in person or by proxy on a fully converted basis.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL NO. 6
OTHER BUSINESS
The Board of Directors knows of no other business that will be presented
for consideration at the Annual Meeting. If any other matters are brought before
the meeting, it is the intention of the persons named in the accompanying proxy
to vote, or otherwise act, in accordance with their judgment on such matters.
ANNUAL REPORT
A copy of the Company's Annual Report for fiscal 1999 is enclosed with this
Proxy Statement.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 2001 Annual
Meeting of Stockholders must be received at the principal executive office of
the Company not later than March 12, 2001, for inclusion in next year's Proxy
Statement and Proxy Card. All such proposals should be in compliance with
applicable Securities and Exchange Commission regulations. Nominations for
director intended to be presented at the 2001 Annual Meeting of Stockholders
must be received at the principal executive office of the Company not later than
March 27, 2001, for inclusion in next year's Proxy Statement and Proxy Card.
BY ORDER OF THE BOARD OF DIRECTORS
JUDITH OLSON LASKER
Secretary
Dated: April 20, 2000.
21
<PAGE> 24
APPENDIX A
KRAUSE'S FURNITURE, INC.
1997 STOCK INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Officers,
Directors and Consultants of the Company and its Subsidiaries and to promote the
success of the Company's business.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Account" means a bookkeeping account established for a
Participant under Section 6.
(b) "Administrator" means the Board or any of the Committees
appointed to administer the Plan.
(c) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.
(d) "Applicable Laws" means the legal requirements relating to the
administration of stock incentive plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Awards granted to residents therein.
(e) "Award" means the grant of an Option, SAR, Dividend Equivalent
Right, Restricted Stock, Performance Unit, Performance Share, Deferred Stock
Unit or other right or benefit under the Plan.
(f) "Award Agreement" means the written agreement evidencing the
grant of an Award executed by the Company and the Grantee, including any
amendments thereto.
(g) "Beneficiary" mean's a Grantee's beneficiary, designated in
writing and in a form and manner satisfactory to the Administrator, or if a
Grantee fails to designate a beneficiary, or if the Grantee's designated
Beneficiary predeceases the Grantee, the Grantee's estate.
(h) "Board" means the Board of Directors of the Company.
(i) "Change in Control" means a change in ownership or control of
the Company effected through either of the following transactions:
(1) the direct or indirect acquisition by any person or
related group of persons (other than an acquisition from or by the Company or by
a Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of
1
<PAGE> 25
Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the Company's
stockholders which a majority of the Continuing Directors who are not Affiliates
or Associates of the offeror do not recommend such stockholders accept, or
(2) a change in the composition of the Board over a period
of thirty-six (36) months or less such that a majority of the Board members
ceases, by reason of one or more contested elections for Board membership, to be
comprised of individuals who are Continuing Directors.
(j) "Closing Price" shall mean, for any trading day, the closing
price of a Share on the market then used to determine Fair Market Value.
(k) "Code" means the Internal Revenue Code of 1986, as amended.
(l) "Committee" means any committee appointed by the Board to
administer the Plan.
(m) "Common Stock" means the common stock of the Company.
(n) "Company" means Krause's Furniture, Inc., a Delaware
corporation.
(o) "Consultant" means any person who is engaged by the Company or
any Parent or Subsidiary to render consulting or advisory services as an
independent contractor and is compensated for such services.
(p) "Continuing Directors" means members of the Board who either
(i) have been Board members continuously for a period of at least thirty-six
(36) months or (ii) have been Board members for less than thirty-six (36) months
and were elected or nominated for election as Board members by at least a
majority of the Board members described in clause (i) who were still in office
at the time such election or nomination was approved by the Board.
(q) "Continuous Status as an Employee, Officer, Director or
Consultant" means that the employment, officer, director or consulting
relationship with the Company, any Parent, or Subsidiary, is not interrupted or
terminated. Continuous Status as an Employee, Director or Consultant shall not
be considered interrupted in the case of (i) any leave of absence approved by
the Company or (ii) transfers between locations of the Company or between the
Company, its Parent, any Subsidiary, or any successor. A leave of absence
approved by the Company shall include sick leave, military leave, or any other
personal leave approved by an authorized representative of the Company. For
purposes of Incentive Stock Options, no such leave may exceed the time permitted
in the Company's personnel policies published from time to time, unless
reemployment upon expiration of such leave is guaranteed by statute or contract.
(r) "Corporate Transaction" means any of the following
stockholder-approved transactions to which the Company is a party:
2
<PAGE> 26
(1) a merger or consolidation in which the Company is not
the surviving entity, except for a transaction the principal purpose of which is
to change the state in which the Company is incorporated;
(2) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital stock of
the Company's subsidiary corporations) in connection with the complete
liquidation or dissolution of the Company; or
(3) any reverse merger in which the Company is the
surviving entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding securities
are transferred to a person or persons different from those who held such
securities immediately prior to such merger.
(s) "Covered Employee" means an Employee who is a "covered
employee" under Section 162(m)(3) of the Code.
(t) "Deferred Stock Unit" means a hypothetical share of Common
Stock as described in Section 6.
(u) "Director" means a member of the Board.
(v) "Dividend Equivalent Right" means a right entitling the
Grantee to compensation measured by dividends paid with respect to Common Stock.
(w) "Effective Date" means the date when this Plan has been
adopted by the Board.
(x) "Employee" means any person, including an Officer or Director,
who is an employee of the Company or any Parent or Subsidiary of the Company for
purposes of Section 422 of the Code. The payment of a director's fee by the
Company shall not be sufficient to constitute "employment" by the Company.
(y) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(z) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(1) Where there exists a public market for the Common
Stock, the Fair Market Value shall be (A) the closing price for a Share for the
last market trading day prior to the time of the determination (or, if no
closing price was reported on that date, on the last trading date on which a
closing price was reported) on the stock exchange determined by the
Administrator to be the primary market for the Common Stock or the NASDAQ
National Market, whichever is applicable or (B) if the Common Stock is not
traded on any such exchange or national market system, the average of the
closing prices of a Share on the NASDAQ Small Cap Market for the three trading
days prior to the time of the determination (or, if no such prices were reported
on one or more of such days, on the last three days on which such prices were
3
<PAGE> 27
reported), in each case, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable; or
(2) In the absence of an established market of the type
described in (1), above, for the Common Stock, the Fair Market Value thereof
shall be determined by the Administrator in good faith.
(aa) "Grantee" means an Employee, Director or Consultant who
receives an Award under the Plan.
(bb) "Incentive Stock Option" means an option intended to qualify
as an Incentive Stock Option under Section 422 of the Code.
(cc) "Non-Qualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(dd) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(ee) "Option" means a stock option granted pursuant to the Plan.
(ff) "Outside Director" means a Director who is not the beneficial
owner of ten percent (10%) or more of the Company's stock of any class or an
employee of the Company or of any Subsidiary.
(gg) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(hh) "Participating Outside Director" means an Outside Director
who has not indicated in writing to the Company prior to the date of an Award
under Section 6 the he or she cannot or does not wish to participate in the
deferred stock program described in Section 6.
(ii) "Payment Commencement Date" means the first business day of
the Plan Year immediately following the Plan Year in which the Outside Director
terminates service as a member of the Board.
(jj) "Performance - Based Compensation" means compensation
qualifying as "performance-based compensation" under Section 162(m) of the Code.
(kk) "Performance Shares" means Shares or an award denominated in
Shares which may be earned in whole or in part upon attainment of performance
criteria established by the Administrator.
4
<PAGE> 28
(ll) "Performance Units" means an award which may be earned in
whole or in part upon attainment of performance criteria established by the
Administrator and which may be settled for cash, Shares or other securities or a
combination of cash, Shares or other securities as established by the
Administrator.
(mm) "Plan" means this 1997 Stock Incentive Plan.
(nn) "Plan Year" means the calendar year.
(oo) "Restricted Stock" means Shares issued under the Plan to the
Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture provisions,
and other terms and conditions as established by the Administrator.
(pp) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange
Act or any successor thereto.
(qq) "SAR" means a stock appreciation right entitling the Grantee
to Shares or cash compensation, as established by the Administrator, measured by
appreciation in the value of Common Stock.
(rr) "Share" means a share of the Common Stock.
(ss) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
(tt) "Subsidiary Disposition" means the disposition by the Company
of its equity holdings in any subsidiary corporation effected by a merger or
consolidation involving that subsidiary corporation, the sale of all or
substantially all of the assets of that subsidiary corporation or the Company's
sale or distribution of substantially all of the outstanding capital stock of
such subsidiary corporation.
3. Stock Subject to the Plan.
(a) Subject to the provisions of Section 10, below, the maximum
aggregate number of Shares which may be issued pursuant to all Awards is four
million five hundred thousand (4,500,000)(1). The Shares to be issued pursuant
to Awards may be authorized, but unissued, or reacquired Common Stock.
(b) If an Award expires or becomes unexercisable without having
been exercised in full, or is surrendered pursuant to an Award exchange program,
or if any unissued Shares are retained by the Company upon exercise of an Award
in order to satisfy the exercise price for such Award or any withholding taxes
due with respect to such Award, such unissued or retained Shares shall become
available for future grant or sale under the Plan (unless the Plan has
_______________
(1) Resolution regarding increase of shares from 2,000,000 to 4,500,000 approved
on April 20, 2000 board meeting. Resolution regarding increase of shares from
2,000,000 to 4,500,000 approved on May 27, 1999 board meeting.
5
<PAGE> 29
terminated). Shares that actually have been issued under the Plan pursuant to an
Award shall not be returned to the Plan and shall not become available for
future distribution under the Plan, except that if unvested Shares are
forfeited, or repurchased by the Company at their original purchase price, such
Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
(a) Plan Administrator.
(1) Administration with Respect to Directors and Officers.
With respect to grants of Awards to Officers, Directors or Employees who are
also Officers or Directors of the Company, the Plan shall be administered by (A)
the Board or (B) a Committee designated by the Board to serve at the pleasure of
the Board, which Committee shall be constituted in such a manner as to satisfy
the Applicable Laws and to permit such grants and related transactions under the
Plan to be exempt from Section 16(b) of the Exchange Act in accordance with Rule
16b-3. Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. The Committee shall select one
of its members as chairman, and shall hold meetings at such times and places as
it may determine. A majority of the Committee shall constitute a quorum and acts
of the Committee at which a quorum is present, or acts reduced to or approved in
writing by all members of the Committee, shall be the valid acts of the
Committee.
(2) Administration With Respect to Consultants and Other
Employees. With respect to grants of Awards to Employees or Consultants who are
neither Directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the Applicable Laws. Once
appointed, such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board. The Board may authorize one or more
Officers to grant such Awards and may limit such authority by requiring that
such Awards must be reported to and ratified by the Board or a Committee within
six (6) months of the grant date, and if so ratified, shall be effective as of
the grant date.
(3) Administration With Respect to Covered Employees.
Notwithstanding the foregoing, grants of Awards to any Covered Employee intended
to qualify as Performance-Based Compensation shall be made only by a Committee
(or subcommittee of a Committee) which is comprised solely of two or more
Directors eligible to serve on a committee making Awards qualifying as
Performance-Based Compensation. In the case of such Awards granted to Covered
Employees, references to the "Administrator" or to a "Committee" shall be deemed
to be references to such Committee or subcommittee.
(4) Administration Errors. In the event an Award is granted
in a manner inconsistent with the provisions of this subsection (a), such Award
shall be presumptively valid as of its grant date to the extent permitted by the
Applicable Laws.
6
<PAGE> 30
(5) Notwithstanding the foregoing and any designation of
the Administrator by the Board, Awards made under Section 6 shall be
administered exclusively by the Board, except as is specifically otherwise
provided in Section 6.
(b) Powers of the Administrator. Subject to Applicable Laws and
the provisions of the Plan (including any other powers given to the
Administrator hereunder), and except as otherwise provided by the Board, the
Administrator shall have the authority, in its discretion:
(1) to select the Employees, Officers, Directors and
Consultants to whom Awards may be granted from time to time hereunder;
(2) to determine whether and to what extent Awards are
granted hereunder;
(3) to determine the number of Shares or the amount of
other consideration to be covered by each Award granted hereunder;
(4) to approve forms of Award Agreement for use under the
Plan;
(5) to determine the terms and conditions of any Award
granted hereunder;
(6) to amend the terms of any outstanding Award granted
under the Plan, including a reduction in the exercise price (or base amount on
which appreciation is measured) of any Award to reflect a reduction in the Fair
Market Value of the Common Stock since the grant date of the Award, provided
that any amendment that would adversely affect the Grantee's rights under an
outstanding Award shall not be made without the Grantee's written consent;
provided, however, that the Administrator may not amend the terms of any
outstanding option to reduce the purchase price of the Shares covered by such
option without the consent of the stockholders then sufficient to approve the
Plan in the first instance. The Administrator may, with the Optionee's written
consent, cancel any outstanding stock option or accept any outstanding stock
option in exchange for a new option; provided, however, that the Administrator
may not cancel any outstanding option and replace such canceled option with any
option or options having a purchase price of the Shares covered by such option
or options which is lower than that of the canceled option without the consent
of the stockholders then sufficient to approve the Plan in the first instance.
(7) to construe and interpret the terms of the Plan and
Awards granted pursuant to the Plan;
(8) to establish additional terms, conditions, rules or
procedures to accommodate the rules or laws of applicable foreign jurisdictions
and to afford Grantees favorable treatment under such laws; provided, however,
that no Award shall be granted under any such additional terms, conditions,
rules or procedures with terms or conditions which are inconsistent with the
provisions of the Plan; and
7
<PAGE> 31
(9) to take such other action, not inconsistent with the
terms of the Plan, as the Administrator deems appropriate.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be conclusive and
binding on all persons.
5. Eligibility. Awards, other than Incentive Stock Options, may be
granted to Employees, Officers, Directors and Consultants. Incentive Stock
Options may be granted only to Employees. An Employee, Officer, Director or
Consultant who has been granted an Award may, if otherwise eligible, be granted
additional Awards; provided, however, Outside Directors shall not be eligible
for any award under this plan other than those provided for in Section 6. Awards
may be granted to such Employees of the Company and its subsidiaries who are
residing in foreign jurisdictions as the Administrator may determine from time
to time.
6. Automatic Awards of Deferred Stock Units to Outside Directors.
(a) As of the Effective Date and as of the last day of each Plan
Year, the Company shall credit Deferred Stock Units to each participating
Outside Director's Deferred Stock Unit Account equal to the number of Deferred
Stock Units determined by dividing Ten Thousand Dollars ($10,000) by the Fair
Market Value of a Share on the date of the Award. In the case of a Participating
Outside Director whose service as an Outside Director terminates during the Plan
Year, the applicable dollar amount shall be determined by multiplying Ten
Thousand Dollars ($10,000) by a fraction, the numerator of which shall be the
number of full calendar quarters of service as an Outside Director completed by
the Participating Outside Director during the Plan Year and the denominator of
which shall be four.
(b) A separate Account under the Plan shall be established for
each Participating Outside Director. Such Account shall be (i) credited with the
amounts credited in accordance with paragraph (a), (ii) credited (or charged, as
the case may be) with the investment results determined in accordance with
paragraph (c) and (iii) charged with the amounts paid by the Plan to or on
behalf of the Participating Outside Director in accordance with paragraph (e).
Within each Participating Outside Director's Account, separate subaccounts shall
be maintained to the extent the Administrator determines them to be necessary or
useful in the administration of the Plan.
(c) A Participating Outside Director's Deferred Stock Unit Account
shall be treated as if it were invested in Deferred Stock Units that are
equivalent in value to the fair market value of shares of Company Common Stock
in accordance with the following rules:
(1) Deemed Reinvestment Of Dividends. The number of
Deferred Stock Units credited to a Participating Outside Director's Deferred
Stock Unit Account shall be increased on each date on which a dividend is paid
on Company Common Stock. The number of additional Deferred Stock Units credited
to a Participating Outside Director's Deferred Stock Unit Account as a result of
such increase shall be determined by (i) multiplying the total number of
Deferred Stock Units (excluding fractional Deferred Stock Units) credited to the
Participating Outside Director's Deferred Stock Unit Account immediately before
such increase by the amount
8
<PAGE> 32
of the dividend paid per share of Company Common Stock on the dividend payment
date, and (ii) dividing the product so determined by the Fair Market Value of a
Share on the dividend payment date.
(2) Conversion Out of Deferred Stock Units. The dollar
value of the Deferred Stock Units credited to a Participating Outside Director's
Deferred Stock Unit Account on any date shall be determined by multiplying the
number of Deferred Stock Units (including fractional Deferred Stock Units)
credited to the Participating Outside Director's Deferred Stock Unit Account by
the Fair Market Value of a Share on that date.
(3) Effect of Recapitalization. In the event of a
transaction or event described in this subparagraph (3), the number of Deferred
Stock Units credited to a Participating Outside Director's Deferred Stock Unit
Account shall be adjusted in such manner as the Board, in its sole discretion,
deems equitable. A transaction or event is described in this subparagraph (3) if
(x) it is a dividend (other than regular quarterly dividends) or other
distribution (whether in the form of cash, shares, other securities, or other
property), extraordinary cash dividend, recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
repurchase, or exchange of shares or other securities, the issuance or
exercisability of stock purchase rights, the issuance of warrants or other
rights to purchase shares or other securities, or other similar corporate
transaction or event and (y) the Board determines that such transaction or event
affects the shares of Company Common Stock, such that an adjustment pursuant to
this paragraph (3) is appropriate to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan.
(4) Change in Deemed Investment Election. A Participating
Outside Director who elects to receive distribution of his or her Accounts in
annual installments will continue to have his or her Deferred Stock Unit Account
credited with Deferred Stock Units during the installment period.
(d) Each Account established under this Section 6 shall be
maintained for bookkeeping purposes only. Neither the Plan nor any of the
Accounts established under the Plan shall hold any actual funds or assets. The
Deferred Stock Units established hereunder shall be used solely to determine the
amounts to be paid hereunder, shall not be or represent an equity security of
the Company, shall not be convertible into or otherwise entitle a Participating
Outside Director to acquire an equity security of the Company and shall not
carry any voting or dividend rights.
(e) Payments shall be made as follows:
(1) Amounts credited to a Participating Outside Director's
Deferred Stock Unit Account shall be paid in shares of Company Common Stock,
except that a cash payment will be made with any final installment for any
fraction of a Deferred Stock Unit remaining in the Participating Outside
Director's Account. Such fractional Deferred Stock Unit shall be valued at the
Closing Price on the date of settlement. The right of any person to receive
9
<PAGE> 33
one or more payments under this Section 6 shall be an unsecured claim against
the general assets of the Company.
(2) Payments to a Participating Outside Director with
respect to the Participating Outside Director's Account shall begin as of the
Participating Outside Director's Payment Commencement Date; provided that if a
Participating Outside Director dies before the Participating Outside Director's
Payment Commencement Date, payment of the entire value of the Participating
Outside Director's Account shall be made to the Participating Outside Director's
Beneficiary in accordance with the provisions of subparagraphs (3) or (4),
whichever is applicable, after the Administrator receives all documents and
other information that it requests in connection with the payment.
(3) Five Annual Installments. A Participating Outside
Director shall receive his or her Account in five annual installments unless the
Participating Outside Director elects to receive his or her benefits under the
Plan in the form of a lump-sum payment in accordance with subparagraph (4),
below. Annual installments shall be payable to the Participating Outside
Director beginning as of the Payment Commencement Date and continuing as of each
Payment Anniversary Date thereafter until all installments have been paid. The
first annual installment shall equal one-fifth (1/5th) of the value of the
Participating Outside Director's Account(s), determined as of the Payment
Commencement Date. Each successive annual installment shall equal the value of
the Participating Outside Director's Account(s), determined as of the Payment
Anniversary Date, multiplied by a fraction, the numerator of which is one, and
the denominator of which is the excess of five over the number of installment
payments previously made (i.e., 1/4th, 1/3rd, etc.). If the Participating
Outside Director dies before the Participating Outside Director's Payment
Commencement Date, or after the Participating Outside Director's Payment
Commencement Date but before all five installments have been paid, the remaining
installments shall be paid to the Participating Outside Director's Beneficiary
in accordance with the schedule in this subparagraph (3).
(4) Lump Sum. A Participating Outside Director may elect to
receive his or her Account under the Plan in the form of a lump-sum payment in
lieu of the five installment payments determined under subparagraph (3), above.
The lump sum shall be payable to the Participating Outside Director in shares of
Company Common Stock on the Payment Commencement Date. An election under this
subparagraph (4) shall be made in a form and manner satisfactory to the Board
and shall be effective as to the Participating Outside Director only if made
prior to termination of service with the Board of Directors. If the
Participating Outside Director dies before his or her Payment Commencement Date
having elected to receive benefits in the form of a lump sum, a lump sum payment
shall be made to the Participating Outside Director's Beneficiary on the Payment
Commencement Date.
(f) Notwithstanding any other provision in this Section 6 or in
any other Section of the Plan to the contrary, the value of a Participating
Outside Director's Account shall be paid to the Participating Outside Director
in a lump-sum cash payment on the occurrence of a Change in Control or as soon
thereafter as practicable, but in no event later than five days after a Change
in Control. For purposes of payments under this paragraph (f), the value of a
Deferred Stock Unit shall be computed as the greater of (1) the Closing Price of
a Share on or nearest the
10
<PAGE> 34
date on which the Change of Control is deemed to occur, or (2) the highest per
Share price for Shares actually paid in connection with the Change of Control.
(g) The Board may amend, suspend, or terminate the provisions of
this Section 6 at any time; provided that no amendment, suspension, or
termination of this Section 6 shall, without a Participating Outside Director's
consent, reduce the Participating Outside Director's benefits accrued under this
Section 6 before the date of such amendment, suspension, or termination. If this
Section 6 is terminated in accordance with this paragraph (g), the terms of the
Plan as in effect immediately before termination shall determine the right to
payment in respect of any amounts that remain credited to a Participating
Outside Director's Account upon termination.
(h) The Board shall furnish an annual statement to each
Participating Outside Director or, if the Participating Outside Director is
deceased, the Participating Outside Director's Beneficiary, reporting the value
of the Participating Outside Director's Account as of the end of the most recent
Plan Year.
(i) The Board may delegate to officers of the Company any and all
authority with which it is vested under this Section 6, and the Board may
allocate its responsibilities under this Section 6 among its members.
(j) No payment due under this Section 6 shall be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, or charge in any other way. Any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, or charge such payment in any other
way shall be void. No such payment or interest therein shall be liable for or
subject to the debts, contracts, liabilities, or torts of any Participating
Outside Director or Beneficiary. If any Participating Outside Director or
Beneficiary becomes bankrupt or attempts to anticipate, alienate, sell,
transfer, assign, pledge, encumber, or charge in any other way any payment under
the Plan, the Board may direct that such payment be suspended and that all
future payments to which such Participating Outside Director or Beneficiary
otherwise would be entitled be held and applied for the benefit of such person,
the person's children or other dependents, or any of them, in such manner and in
such proportions as the Board may deem proper.
(k) Nothing in this Section 6 shall confer upon any person the
right to continue to serve as a member of the Board or to participate in the
Plan, including this Section 6, other than in accordance with its terms.
(l) The Board may make any appropriate arrangements to deduct from
all credits and payments under this Section 6 any taxes that the Board
reasonably determines to be required by law to be withheld from such credits and
payments.
(m) If the Board determines, upon evidence satisfactory to the
Board, that any Participating Outside Director or Beneficiary to whom a benefit
is payable under this Section 6 is unable to care for his or her affairs because
of illness or accident or otherwise, any payment due under this Section 6
(unless prior claim therefor shall have been made by a duly authorized
11
<PAGE> 35
guardian or other legal representative) may be paid, upon appropriate
indemnification of the Board and the Company, to the spouse of the Participating
Outside Director or Beneficiary or other person deemed by the Board to have
incurred expenses for the benefit of and on behalf of such Participating Outside
Director or Beneficiary. Any such payment shall be a complete discharge of any
liability under this Section 6 with respect to the amount so paid.
(n) Each Participating Outside Director and Beneficiary entitled
to receive a payment under this Section 6 shall keep the Board advised of his or
her current address. If the Board is unable for a period of 36 months to locate
a Participating Outside Director or Beneficiary to whom a payment is due under
the Plan, commencing with the first day of the month as of which such payment
first comes due, the total amount payable to such Participating Outside Director
or Beneficiary shall be forfeited. Should such a Participating Outside Director
or Beneficiary subsequently contact the Board requesting payment, the Board
shall, upon receipt of all documents and other information that it might request
in connection with the payment, restore and pay the forfeited payment in a lump
sum, the value of which shall not be adjusted to reflect any interest or other
type of investment earnings or gains for the period of forfeiture.
(o) NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS SECTION 6, THE
PROVISIONS OF THIS SECTION 6 SHALL NOT BE EFFECTIVE IF A MAJORITY OF THE
SHAREHOLDERS PRESENT IN PERSON OR BY PROXY AT A DULY CONVENED MEETING OF
SHAREHOLDERS OF THE COMPANY DO NOT APPROVE THE PLAN. IF SUCH APPROVAL IS NOT
OBTAINED WITHIN TWELVE MONTHS FOLLOWING THE EFFECTIVE DATE PARTICIPATING OUTSIDE
DIRECTORS SHALL HAVE NO RIGHTS HEREUNDER AND ALL GRANTS SHALL BE OF NO FORCE OR
EFFECT WHATSOEVER.
7. Terms and Conditions of Awards.
(a) Type of Awards. The Administrator is authorized under the Plan
to award any type of arrangement to an Employee, Officer, Director (other than
an Outside Director) or Consultant that is not inconsistent with the provisions
of the Plan and that by its terms involves or might involve the issuance of (i)
Shares, (ii) an Option, a SAR or similar right with an exercise or conversion
privilege at a fixed or variable price related to the Common Stock and/or the
passage of time, the occurrence of one or more events, or the satisfaction of
performance criteria or other conditions, or (iii) any other security with the
value derived from the value of the Common Stock. Such awards include, without
limitation, Options, SARs, sales or bonuses of Restricted Stock, Dividend
Equivalent Rights, Performance Units or Performance Shares, and an Award may
consist of one such security or benefit, or two or more of them in any
combination or alternative.
(b) Designation of Award. Each Award shall be designated in the
Award Agreement. In the case of an Option, the Option shall be designated as
either an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by a Grantee during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess
12
<PAGE> 36
Options, to the extent of the Shares covered thereby in excess of the foregoing
limitation, shall be treated as Non-Qualified Stock Options. For this purpose,
Incentive Stock Options shall be taken into account in the order in which they
were granted, and the Fair Market Value of the Shares shall be determined as of
the date the Option with respect to such Shares is granted.
(c) Conditions of Award. Subject to the terms of the Plan, the
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, increase in share price, earnings per share, total stockholder
return, return on equity, return on assets, return on investment, net operating
income, cash flow, revenue, economic value added, personal management
objectives, or other measure of performance selected by the Administrator.
Partial achievement of the specified criteria may result in a payment or vesting
corresponding to the degree of achievement as specified in the Award Agreement.
(d) Deferral of Award Payment. The Administrator may establish one
or more programs under the Plan to permit selected Grantees the opportunity to
elect to defer receipt of consideration upon exercise of an Award, satisfaction
of performance criteria, or other event that absent the election would entitle
the Grantee to payment or receipt of Shares or other consideration under an
Award. The Administrator may establish the election procedures, the timing of
such elections, the mechanisms for payments of, and accrual of interest or other
earnings, if any, on amounts or Shares so deferred, and such other terms,
conditions, rules and procedures that the Administrator deems advisable for the
administration of any such deferral program.
(e) Award Exchange Programs. The Administrator may establish one
or more programs under the Plan to permit selected Grantees to exchange an Award
under the Plan for one or more other types of Awards under the Plan on such
terms and conditions as established by the Administrator from time to time.
(f) Individual Option and SAR Limit. The maximum number of Shares
with respect to which Options and SARs may be granted to any Employee in any
fiscal year of the Company shall be one million five hundred thousand
(1,500,000) Shares(2). The foregoing limitation shall be adjusted
proportionately in connection with any change in the Company's capitalization
pursuant to Section 11, below. To the extent required by Section 162(m) of the
Code or the regulations thereunder, in applying the foregoing limitation with
respect to an Employee, if any Option or SAR is canceled, the canceled Option or
SAR shall continue to count against the maximum number of Shares with respect to
which Options and SARs may be granted to the Employee. For this purpose, the
repricing of an Option (or in the case of a SAR, the reduction of the base
amount on which the stock appreciation is calculated to reflect a reduction
_______________
(2) Resolution to increase the maximum number of shares from 200,000 shares to
up to 1,500,00 shares was approved on May 27, 1999 board meeting.
13
<PAGE> 37
in the Fair Market Value of the Common Stock) shall be treated as the
cancellation of the existing Option or SAR and the grant of a new Option or SAR.
(g) Early Exercise. The Award may, but need not, include a
provision whereby the Grantee may elect at any time while an Employee, Officer,
Director or Consultant to exercise any part or all of the Award prior to full
vesting of the Award. Any unvested Shares received pursuant to such exercise may
be subject to a repurchase right in favor of the Company
or to any other restriction the Administrator determines to be appropriate.
(h) Term of Award. The term of each Award shall be the term stated
in the Award Agreement, provided, however, that the term of an Incentive Stock
Option shall be no more than ten (10) years from the date of grant thereof.
However, in the case of an Incentive Stock Option granted to a Grantee who, at
the time the Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the term of the Incentive Stock Option shall be five (5) years
from the date of grant thereof or such shorter term as may be provided in the
Award Agreement.
(i) Transferability of Awards. Incentive Stock Options may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee. Other Awards
shall be transferable to the extent provided in the Award Agreement.
(j) Time of Granting Awards. The date of grant of an Award shall
for all purposes be the date on which the Administrator makes the determination
to grant such Award, or such other date as is determined by the Administrator.
Notice of the grant determination shall be given to each Employee, Officer,
Director or Consultant to whom an Award is so granted within a reasonable time
after the date of such grant.
8. Award Exercise or Purchase Price, Consideration, Taxes and Reload
Options.
(a) Exercise or Purchase Price. The exercise or purchase price, if
any, for an Award shall be as follows:
(1) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be not less than one hundred
ten percent (110%) of the Fair Market Value per Share on the date of grant.
14
<PAGE> 38
(B) granted to any Employee other than an Employee
described in the preceding paragraph, the per Share exercise price shall be not
less than one hundred percent (100%) of the Fair Market Value per Share on the
date of grant.
(2) In the case of a Non-Qualified Stock Option, the per
Share exercise price shall be not less than one hundred percent (100%) of the
Fair Market Value per Share on the date of grant unless otherwise determined by
the Administrator.
(3) In the case of Awards intended to qualify as
Performance-Based Compensation, the exercise or purchase price, if any, shall be
not less than one hundred percent (100%) of the Fair Market Value per Share on
the date of grant.
(4) In the case of other Awards, such price as is
determined by the Administrator.
(b) Consideration. Subject to Applicable Laws, the consideration
to be paid for the Shares to be issued upon exercise or purchase of an Award
including the method of payment, shall be determined by the Administrator. In
addition to any other types of consideration the Administrator may determine,
the Administrator is authorized to accept as consideration for Shares issued
under the Plan the following:
(1) cash;
(2) check;
(3) delivery of Grantee's promissory note with such
recourse, interest, security, and redemption provisions as the Administrator
determines is appropriate;
(4) surrender of Shares (including withholding of Shares
otherwise deliverable upon exercise of the Award) which have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the Shares as
to which said Award shall be exercised (but only to the extent that such
exercise of the Award would not result in an accounting compensation charge with
respect to the Shares used to pay the exercise price unless otherwise determined
by the Administrator);
(5) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Award and delivery to the
Company of the sale or loan proceeds required to pay the exercise price; or
(6) any combination of the foregoing methods of payment.
(c) Taxes. No Shares shall be delivered under the Plan to any
Grantee or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign, federal,
state, or local income and employment tax withholding obligations. Upon exercise
of an Award, the Company shall withhold or collect from Grantee an amount
sufficient to satisfy such tax obligations. Upon an Optionee's exercise
15
<PAGE> 39
of a stock option, the Company may satisfy its withholding by withholding from
such Optionee or requiring the Optionee to surrender Shares sufficient to
satisfy federal, state and local income and employment tax withholding
obligations.
(d) Reload Options. In the event the exercise price or tax
withholding of an Option is satisfied by the Company or the Grantee's employer
withholding Shares otherwise deliverable to the Grantee, the Administrator may
issue the Grantee an additional Option, with terms identical to the Award
Agreement under which the Option was exercised, but at an exercise price as
determined by the Administrator in accordance with the Plan.
9. Exercise of Award.
(a) Procedure for Exercise; Rights as a Stockholder.
(1) Any Award granted hereunder shall be exercisable at
such times and under such conditions as determined by the Administrator under
the terms of the Plan and specified in the Award Agreement.
(2) An Award shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Award by the person entitled to exercise the Award and full payment
for the Shares with respect to which the Award is exercised has been received by
the Company. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company) of
the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to
Shares subject to an Award, notwithstanding the exercise of an Option or other
Award. The Company shall issue (or cause to be issued) such stock certificate
promptly upon exercise of the Award. No adjustment will be made for a dividend
or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in the Award Agreement or Section 11,
below.
(b) Exercise of Award Following Termination of Employment,
Officer, Director or Consulting Relationship.
(1) An Award may not be exercised after the termination
date of such Award set forth in the Award Agreement and may be exercised
following the termination of a Grantee's Continuous Status as an Employee,
Officer, Director or Consultant only to the extent provided in the Award
Agreement.
(2) Where the Award Agreement permits a Grantee to exercise
an Award following the termination of the Grantee's Continuous Status as an
Employee, Officer, Director or Consultant for a specified period, the Award
shall terminate to the extent not exercised on the last day of the specified
period or the last day of the original term of the Award, whichever occurs
first.
(c) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Award previously granted, based on
such terms and
16
<PAGE> 40
conditions as the Administrator shall establish and communicate to the Grantee
at the time that such offer is made.
10. Conditions Upon Issuance of Shares.
(a) Shares shall not be issued pursuant to the exercise of an
Award unless the exercise of such Award and the issuance and delivery of such
Shares pursuant thereto shall comply with all Applicable Laws, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
(b) As a condition to the exercise of an Award, the Company may
require the person exercising such Award to represent and warrant at the time of
any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
Applicable Laws.
11. Adjustments Upon Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which
have been returned to the Plan, as well as the price per share of Common Stock
covered by each such outstanding Award, shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock, or any other similar event resulting in
an increase or decrease in the number of issued shares of Common Stock. Except
as expressly provided herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason hereof shall be made with respect to, the
number or price of Shares subject to an Award.
12. Corporate Transactions/Changes in Control/Subsidiary Dispositions.
(a) In the event of any Corporate Transaction, each Award which is
at the time outstanding under the Plan automatically shall become fully vested
and exercisable and be released from any restrictions on transfer and repurchase
or forfeiture rights, immediately prior to the specified effective date of such
Corporate Transaction, for all of the Shares at the time represented by such
Award. However, an outstanding Award under the Plan shall not so fully vest and
be exercisable and released from such limitations if and to the extent: (i) such
Award is, in connection with the Corporate Transaction, either to be assumed by
the successor corporation or Parent thereof or to be replaced with a comparable
Award with respect to shares of the capital stock of the successor corporation
or Parent thereof, (ii) such Award is to be replaced with a cash incentive
program of the successor corporation which preserves the compensation element of
such Award existing at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such Award or (iii) the vesting, exercisability and release from such
limitations of such Award is subject to other limitations imposed by the
Administrator at the time of the grant of the Award. The determination of Award
comparability under clause (i) above shall be made by the Administrator, and its
determination
17
<PAGE> 41
shall be final, binding and conclusive. The Administrator also shall have the
authority to grant Awards under the Plan that are to automatically vest and be
fully exercisable and released from such limitations in whole or in part
immediately prior to the Corporate Transaction or upon the subsequent
termination of the Continuous Status as an Employee or Consultant of the
Grantee, whether or not the Award is otherwise to be assumed or replaced in
connection with the consummation of such Corporate Transaction.
(b) Effective upon the consummation of the Corporate Transaction,
all outstanding Awards under the Plan shall terminate and cease to remain
outstanding, except to the extent assumed by the successor company or its
Parent. Notwithstanding the foregoing, the Administrator, in its discretion, may
prevent the acceleration of vesting and release from any restrictions on
transfer and repurchase or forfeiture rights of any outstanding Award with
respect to any Corporate Transaction.
(c) The Administrator shall have the authority, exercisable either
in advance of any actual or anticipated Change in Control (other than a Change
in Control which is also a Corporate Transaction) or at the time of an actual
Change in Control and either at the time of the grant of an Award or at any time
while an Award remains outstanding, to provide for the automatic full vesting
and exercisability of one or more outstanding unvested Awards under the Plan and
the termination of restrictions on transfer and repurchase or forfeiture rights
on such Awards, in connection with a Change in Control. The Administrator also
shall have the authority to condition any such Award vesting and exercisability
or release from such limitations upon the subsequent termination of the
Continuous Status as an Employee or Consultant of the Grantee within a specified
period following the effective date of the Change in Control. The Administrator
may provide that any Awards so vested or released from such limitations in
connection with a Change in Control, shall remain fully exercisable until the
expiration or sooner termination of the Award.
(d) The Administrator shall have the authority, exercisable either
in advance of any actual or anticipated Subsidiary Disposition or at the time of
an actual Subsidiary Disposition and either at the time of the grant of an Award
or at any time while an Award remains outstanding, to provide for the automatic
full vesting and exercisability of one or more outstanding unvested Awards under
the Plan and the termination of restrictions on transfer and repurchase or
forfeiture rights on such Awards, in connection with a Subsidiary Disposition,
but only with respect to those Grantees who are at the time engaged primarily in
Continuous Service as an Employee or Consultant with the subsidiary corporation
involved in such Subsidiary Disposition. The Administrator also shall have the
authority to condition any such Award vesting and exercisability or release from
such limitations upon the subsequent termination of the affected Grantee's
Continuous Service as an Employee or Consultant with that subsidiary corporation
within a specified period following the effective date of the Subsidiary
Disposition. The Administrator may provide that any Awards so vested or released
from such limitations in connection with a Subsidiary Disposition, shall remain
fully exercisable until the expiration or sooner termination of the Award.
13. Term of Plan. Subject to approval of the Plan by the stockholders of
the Company within twelve months of the date of its adoption by the Board, the
Plan shall become
18
<PAGE> 42
effective immediately upon its adoption by the Board. The Plan shall continue in
effect for a term of ten (10) years unless sooner terminated.
14. Amendment, Suspension or Termination of the Plan.
(a) The Board may at any time amend, suspend or terminate the
Plan. To the extent necessary to comply with Applicable Laws, the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) No Award may be granted during any suspension of the Plan or
after termination of the Plan.
(c) Any amendment, suspension or termination of the Plan shall not
affect Awards already granted, and such Awards shall remain in full force and
effect as if the Plan had not been amended, suspended or terminated, unless
mutually agreed otherwise between the Grantee and the Administrator, which
agreement must be in writing and signed by the Grantee and the Company.
15. Reservation of Shares.
(a) The Company, during the term of the Plan, will at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(b) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
16. No Effect on Terms of Employment. The Plan shall not confer upon any
Grantee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
17. Stockholder Approval. The grant of Incentive Stock Options under the
Plan shall be subject to approval of the Plan by the stockholders of the Company
within twelve (12) months before or after the date the Plan is adopted by the
Board. Such stockholder approval shall be obtained in the degree and manner
required under Applicable Laws. The Administrator may grant Incentive Stock
Options under the Plan prior to approval by the stockholders, but until such
approval is obtained, no such Incentive Stock Option shall be exercisable. In
the event that stockholder approval is not obtained within the twelve (12) month
period provided above, all Incentive Stock Options previously granted under the
Plan shall terminate.
19
<PAGE> 43
APPENDIX B
CERTIFICATE OF DESIGNATION
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
KRAUSE'S FURNITURE, INC.
------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
------------------------
Krause's Furniture, Inc. (the "Corporation"), a corporation
organized and existing under and by virtue of the provisions of the General
Corporation Law of the State of Delaware (the "DGCL"), certifies as follows:
FIRST: The Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation") authorizes the issuance of Six Hundred Sixty Six
Thousand, Six Hundred Sixty-Seven (666,667) shares of Preferred Stock, par value
$0.001 per share (the "Preferred Stock"), and further provides that Preferred
Stock may be issued in one or more series and the number of shares,
designations, preferences, rights and restrictions of each series as shall be
fixed by resolution or resolutions adopted by the Board of Directors prior to
the issuance of any shares of a particular series of Preferred Stock.
SECOND: The Board of Directors of the Corporation, at a special
meeting of the Board of Directors on January 12, 2000 did duly adopt the
following resolutions authorizing the creation and issuance of up to 450,000
shares of a series of Preferred Stock to be known as "Series A Convertible
Preferred Stock."
RESOLVED that, pursuant to the authority vested in the Board of
Directors by the Certificate of Incorporation, a series of the class of
authorized Preferred Stock, par value $0.001 per share (the "Preferred Stock"),
of the Corporation is hereby created, such series to consist of 450,000 shares,
which shall be designated as Series A Convertible Preferred Stock ("Series A
Preferred Stock"), having the following designations, preferences, rights,
qualifications, powers, privileges, limitations and restrictions of the shares
of such series:
1. CERTAIN DEFINITIONS. Unless the context otherwise requires, the terms
defined in this paragraph 1 shall have, for all purposes of this resolution, the
meanings herein specified.
<PAGE> 44
Adjusted E-Commerce Proceeds as of any date shall mean $10,000,000 less
any amounts spent on or prior to such date for E-Commerce Proceed Uses (as
defined in the Securities Purchase Agreement) either (a) in accordance with the
E-Commerce Plan (as defined in the Securities Purchase Agreement) or (b)
otherwise as consented to in writing by THLi.
Affiliate shall have the meaning ascribed to it in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act.
Change of 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 Corporation entitled to vote generally in the election of
directors, but excluding, for this purpose, any such acquisition by (i) the
Corporation or any of its subsidiaries, (ii) any employee benefit plan (or
related trust) of the Corporation 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 Corporation 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 Corporation entitled to vote generally in
the election of directors, (iv) GECC or an Affiliate of GECC or (v) THLi or an
Affiliate of THLi; 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 Corporation
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 Corporation and its 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 transaction among GECC or any Affiliate of GECC,
THLi or any Affiliate THLi, and the Corporation.
2
<PAGE> 45
Common Stock shall mean all shares now or hereafter authorized of any
class of Common Stock of the Corporation and any other stock of the Corporation,
howsoever designated, authorized after the Issue Date, which has the right
(subject always to prior rights of any class or series of preferred stock) to
participate in the distribution of the assets and earnings of the Corporation
without limit as to per share amount.
Conversion Price shall mean the price per share of Common Stock used to
determine the number of shares of Common Stock deliverable upon conversion of a
share of the Series A Preferred Stock, which price shall initially be $1.10 per
share, subject to adjustment in accordance with the provisions of paragraph 6
below.
Convertible Securities shall mean all options, warrants or other rights
to purchase or subscribe for Common Stock other than Options.
Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
GECC shall mean, collectively, General Electric Capital Corporation and
GE Capital Equity Investments, Inc.
Issue Date shall mean the date that shares of Series A Preferred Stock
are first issued by the Corporation.
Issue Price shall mean $50 per share of Series A Preferred Stock.
Junior Stock shall mean the Common Stock and any other class or series
of stock of the Corporation other than Parity Stock or Senior Stock.
Maximum Amount shall mean as to any holder on any date:
(a) if such date is prior to the sixth anniversary of the Issue Date,
the product of (i) the sum of (x) 125,400 and (y) 33% of the number of shares of
Series A Preferred Stock issued after the Second Closing Date (as defined in the
Securities Purchase Agreement) and (ii) the ratio of (x) the number of shares of
Series A Preferred Stock then held by such holder to (y) the total number of
shares of Series A Preferred Stock then outstanding,
(b) if such date is from the sixth anniversary of the Issue Date through
the seventh anniversary of the Issue Date, the product of (i) the sum of (x)
315,400 and (y) 83% of the number of shares of Series A Preferred Stock issued
after the Second Closing Date and (ii) the ratio of (x) the number of shares of
Series A Preferred Stock then held by such holder to (y) the total number of
shares of Series A Preferred Stock then outstanding, and
3
<PAGE> 46
(c) thereafter, 100% of the shares of Series A Preferred Stock.
Maximum Number shall mean, on any date, with respect to any holder of
Series A Preferred Stock, that number of shares of Series A Preferred Stock
equal to the product of (a) the ratio of (i) the Adjusted E-Commerce Proceeds on
such date divided by (ii) the Redemption Price times (b) the ratio of (i) the
number of shares of Series A Preferred Stock purchased by such holder pursuant
to the Purchase Agreement divided by (ii) 380,000.
Options shall mean securities by their terms convertible into or
exchangeable for Common Stock.
Parity Stock shall mean any class or series of stock of the Corporation
issued after the Issue Date ranking on a parity with the Series A Preferred
Stock in respect of (i) the right to receive dividends or (ii) the right to
receive assets upon the liquidation, dissolution or winding up of the affairs of
the Corporation.
Redemption Date shall mean, with respect to any redemption of shares of
Series A Preferred Stock pursuant to paragraph 5 below, the date on which such
shares are redeemed.
Redemption Price shall mean the Issue Price.
Securities Purchase Agreement shall mean the Securities Purchase
Agreement dated as of January 11, 2000 among the Corporation and the purchasers
listed on the signature pages thereto.
Senior Stock shall mean any class or series of stock of the Corporation
issued after the Issue Date ranking senior to the Series A Preferred Stock in
respect of (i) the right to receive dividends or (ii) the right to receive
assets upon the liquidation, dissolution or winding up of the affairs of the
Corporation.
Subordinated Notes shall mean the 9.5% Subordinated Notes due 2003
issued by the Corporation pursuant to the Supplemental Securities Agreement.
Supplemental Securities Agreement shall mean the Supplemental Securities
Purchase Agreement dated as of August 14, 1997 among the Corporation, General
Electric Capital Corporation and Japan Omnibus Ltd., as in effect on the Issue
Date.
THLi shall mean, collectively, TH Lee.Putnam Internet Partners, L.P. and
TH Lee.Putnam Internet Parallel Partners, L.P., together with their affiliates.
4
<PAGE> 47
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.
2. DIVIDEND RIGHTS. So long as any shares of Series A Preferred Stock
shall be outstanding, the Corporation shall not declare or pay on any Junior
Stock any dividend whatsoever, whether in cash, property or otherwise, nor shall
the Corporation or any of its subsidiaries make any distribution on any Junior
Stock, nor shall the Corporation or any of its subsidiaries purchase or redeem
any Junior Stock or pay or make available any monies for a sinking fund for the
purchase or redemption of any Junior Stock.
3. LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation (a "Liquidation"), the
holders of the outstanding shares of Series A Preferred Stock shall be entitled
to receive, out of the assets of the Corporation available for distribution to
its stockholders, whether from capital, surplus funds or earnings, prior and in
preference to any distribution of any of the assets of the Corporation to the
holders of Junior Stock, an amount per share equal to the Issue Price for such
share (the "Series A Liquidation Preference Price"). After the full liquidation
preference of the holders of the outstanding shares of Series A Preferred Stock
has been satisfied as set forth in this paragraph 3, the remaining assets of the
Corporation shall be distributed to the holders of shares of Common Stock and
Series A Preferred Stock in an equal amount per share as if all shares of Series
A Preferred Stock had been converted into shares of Common Stock immediately
prior to the Liquidation.
4. CHANGE OF CONTROL. The Corporation shall give each holder of record
of Series A Preferred Stock written notice of an impending Change of Control not
later than twenty-five (25) days prior to the earlier of (i) any record date
relating to such Change of Control, (ii) any stockholders' meeting called to
approve such transaction, or (iii) the closing of such transaction, and shall
also notify such holders in writing of the final approval of such transaction.
The first of such notices shall describe the material terms and conditions of
the impending transaction, and the Corporation shall thereafter give such
holders prompt notice of any material changes. The transaction shall in no event
take place sooner than twenty-five (25) days after the Corporation has given the
first notice provided for herein or sooner than ten (10) days after the
Corporation has given notice of any material changes provided for herein;
provided, however, that such periods may be shortened upon the written consent
of the holders of two-thirds of the voting power of the Series A Preferred Stock
entitled to such notice or similar right to receive notice.
5. REDEMPTION.
(a) At any time on or after January 14, 2005, upon the written
5
<PAGE> 48
request of the holders of a majority of the shares of Series A Preferred Stock
(which request shall specify (i) a Redemption Date not less than thirty (30) or
more than ninety (90) days from the date of such request and (ii) the number of
shares of Series A Preferred Stock to be redeemed, which number shall not exceed
the Maximum Amount applicable to each requesting holder less the number of
shares of Series A Preferred Stock, if any, previously redeemed from such holder
pursuant to this paragraph 5(a)), the Corporation shall redeem, on a pro rata
basis, the number of shares of Series A Preferred Stock specified in such
request on the specified Redemption Date at the Redemption Price.
(b) In the event of a Change of Control, each holder of Series A
Preferred Stock may elect, by written notice to the Corporation specifying the
number of shares of Series A Preferred Stock to be redeemed and the Redemption
Date (which shall not be less than thirty (30) or more than ninety (90) days
from the date of such notice) to have the Corporation redeem all or any part of
the shares of Series A Preferred Stock then held by such holder on the specified
Redemption Date at the Redemption Price.
(c) Upon the written request of a holder of Series A Preferred
Stock pursuant to, and in accordance with, Section 6.2 of the Securities
Purchase Agreement on or prior to the second anniversary of the Issue Date, the
Corporation shall redeem any or all of such holder's shares of Series A
Preferred Stock not to exceed such holder's Maximum Number on the Redemption
Date at the Redemption Price.
(d) If the Corporation is not in compliance with the provisions
of the first sentence of paragraph 13 below, each holder of Series A Preferred
Stock may elect, by written notice to the Corporation specifying the number of
shares of Series A Preferred Stock to be redeemed and the Redemption Date (which
shall not be less than thirty (30) or more than ninety (90) days from the date
of such notice) to have the Corporation redeem all or any part of the shares of
Series A Preferred Stock then held by such holder on the specified Redemption
Date at the Redemption Price.
(e) In the event of a redemption of any shares of Series A
Preferred Stock pursuant to this paragraph 5, the conversion rights set forth in
paragraph 6 below shall terminate as to the shares designated for redemption at
the close of business on the business day preceding the applicable Redemption
Date, except as provided in paragraph 5(f)(iii) below.
(f) Mechanics of Redemption.
(i) Each holder of Series A Preferred Stock tendering
shares for redemption shall surrender to the Corporation at its principal
corporate office, together with the request for redemption, the certificate or
certificates
6
<PAGE> 49
representing such shares, duly endorsed, and thereupon the Redemption Price of
such shares shall be paid by the Corporation after receipt of the shares to the
person whose name appears on such certificate or certificates as the owner
thereof and each surrendered certificate shall be cancelled. If less than all of
the shares represented by any such certificate or certificates are redeemed, a
new certificate shall be issued by the Corporation representing the unredeemed
shares.
(ii) If the Redemption Price has been timely paid or the
Redemption Price has been escrowed in an arrangement reasonably satisfactory to
the holder, from and after the applicable Redemption Date, all rights of the
holders of such shares surrendered for redemption (except the right to receive
the Redemption Price) shall cease with respect to such shares, and such shares
shall not thereafter be transferred on the books of the Corporation or be deemed
to be outstanding for any purpose whatsoever.
(iii) The holders of Series A Preferred Stock who have
tendered shares for redemption shall be entitled to receive the Redemption Price
on or before the applicable Redemption Date, except that in no case shall the
Corporation be required to pay a Redemption Price which in the aggregate would
be in violation of Section 160 of the DGCL. Those funds of the Corporation that
are available hereunder for redemption shall be used to redeem the maximum
number possible of such shares ratably among the holders of such shares to be
redeemed. The tendered shares of Series A Preferred Stock for which the
applicable Redemption Price is not received on or before the applicable
Redemption Date shall be considered not to have been redeemed and shall remain
outstanding and entitled to all the rights and preferences provided herein and
shall be redeemed by the Corporation as soon as permitted pursuant to this
paragraph 5(f)(iii).
(g) Except as set forth in this paragraph 5, the Corporation
shall not have the right to call or redeem all or any shares of the Series A
Preferred Stock at any time.
6. CONVERSION. The holders of the Series A Preferred Stock shall have
conversion rights as follows:
(a) Right to Convert. Each share of Series A Preferred Stock
shall be convertible, at the option of the holder thereof, at any time, at the
office of the Corporation or a transfer agent for the Series A Preferred Stock,
as the case may be, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Issue Price by the Conversion
Price then in effect. Any notice to the Corporation of a holder's exercise of
conversion rights pursuant to this paragraph 6(a) may be made contingent upon
the happening of a redemption pursuant to paragraph 5 above.
7
<PAGE> 50
(b) Mandatory Conversion. Each share of Series A Preferred Stock
shall automatically be converted into such number of shares of Common Stock as
is determined by dividing the Issue Price by the Conversion Price at the time in
effect for such stock, without further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent, (i) at the closing of a bona fide firm
commitment registered public offering of the Corporation's Common Stock for an
aggregate offering price resulting in gross cash proceeds to the Corporation of
not less than twenty-five million dollars ($25,000,000) and at a price per share
of Common Stock of at least $3.30, subject to adjustment for stock splits,
combinations or similar transactions (a "Qualified Public Offering") or (ii)
upon the vote of the holders of at least 66 2/3% of the Series A Preferred
Stock. Except for the purposes of the calculation in the immediately preceding
sentence, in the event of a Qualified Public Offering, the person(s) entitled to
receive the Common Stock issuable upon conversion of Series A Preferred Stock
shall not be deemed to have converted such Series A Preferred Stock until
immediately prior to the closing of such offering.
(c) Mechanics of Conversion; Fractional Shares; Dividends.
(i) Before any holder of Series A Preferred Stock shall be
entitled to convert the same into shares of Common Stock pursuant to paragraph
6(a) (or, in the case of an automatic conversion, to receive a certificate for
such holder's shares of Common Stock outstanding as a result of such
conversion), such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of a transfer agent
for the Series A Preferred Stock, as the case may be, and shall give written
notice by mail, postage prepaid, to the Corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued.
(ii) The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder, or to the nominee
or nominees of such holder, a certificate or certificates for the number of
shares of Common Stock to which such holder shall be entitled. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Series A Preferred Stock to be
converted (or, in the case of an automatic conversion on the date specified in
paragraph 6(b) above), and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of such date.
(iii) Upon conversion of only a portion of the number of
shares of Series A Preferred Stock represented by a certificate surrendered for
conversion, the Corporation shall issue and deliver to the holder of such
certifi-
8
<PAGE> 51
cate, a new certificate for the number of shares of Series A Preferred Stock not
converted. No fractional shares shall be issued upon conversion of the Series A
Preferred Stock. Whether or not fractional shares are issuable upon such
conversion shall be determined on the basis of the total number of shares of
Series A Preferred Stock the holder is at the time converting into Common Stock
and the number of shares of Common Stock issuable upon such aggregate
conversion. In lieu of fractional shares to which the holder would otherwise be
entitled, the Corporation shall pay such holder a cash amount equal to such
fraction multiplied by the fair market value of a share of the Common Stock, as
reasonably determined in good faith by the Board of Directors.
(d) Adjustments to Series A Preferred Stock Conversion Price.
(i) Issue of Additional Stock. Upon each issuance or sale
(or deemed issuance or sale) by the Corporation of any Additional Stock (as
defined below) without consideration or for a consideration per share less than
the Conversion Price in effect immediately prior to the issuance of such
Additional Stock, the Conversion Price shall, upon such issue or sale, be
reduced to a price determined by multiplying the Conversion Price in effect
immediately prior to each such issuance or sale by a fraction:
(x) the numerator of which shall be (A) the number of shares of
Common Stock outstanding (or deemed to be outstanding pursuant to this paragraph
6(d)) immediately prior to such issue or sale, plus (B) the number of shares of
Common Stock that the aggregate consideration received by the Corporation for
the total number of shares of Additional Stock so issued or sold (or deemed
issued or sold) would purchase at the Conversion Price, and
(y) the denominator of which shall be (A) the number of shares of
Common Stock outstanding (or deemed to be outstanding pursuant to this paragraph
6(d)) immediately prior to such issue or sale, plus (B) the number of shares of
such Additional Stock so issued or sold (or deemed issued or sold).
(ii) No Adjustment of Conversion Price. No adjustment of
the Conversion Price shall be made in an amount less than one cent ($.01) per
share; provided that any adjustments which are not required to be made by reason
of this paragraph shall be carried forward and shall be either taken into
account in any subsequent adjustment made prior to three (3) years from the date
of the event giving rise to the adjustment being carried forward, or shall be
made at the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward. No adjustment of the Conversion Price shall
have the effect of increasing the Conversion Price above the Conversion Price at
the time in effect.
(iii) Determination of Consideration.
9
<PAGE> 52
(A) In the case of the issuance or sale (or deemed
issuance or sale) of Additional Stock or Options for cash, the consideration
shall be deemed to be the net amount of cash received by the Corporation after
deducting any discounts, underwriting or similar commissions, compensation or
other expenses allowed, paid or incurred by the Corporation in connection with
the issuance and sale (or deemed issuance or sale) thereof.
(B) In the case of the issuance (or deemed issuance
or sale) of Additional Stock or Options for a consideration in whole or in part
other than cash, the consideration other than cash shall be deemed to be the
fair market value thereof as reasonably determined in good faith by the Board of
Directors of the Corporation.
(iv) Issue of Securities Deemed Issue of Common Stock. In
the case of the issuance (whether before, on or after the date hereof) of
Options, Convertible Securities or options to purchase or rights to subscribe
for Convertible Securities (which are not excluded from the definition of
Additional Stock), the following provisions shall apply:
(A) The aggregate maximum number of shares of
Common Stock deliverable upon exercise of such Options shall be deemed to have
been issued at the time such Options were issued (whether or not such Options
are then exercisable) and for a consideration equal to the consideration
(determined in the manner provided in paragraph 6(d)(iii) above), if any,
received or receivable by the Corporation upon the issuance of such Options plus
the minimum additional aggregate consideration, if any, payable to the
Corporation upon the exercise of all such Options.
(B) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange for any such
Convertible Securities or upon the exercise of options for such Convertible
Securities and subsequent conversion or exchange thereof shall be deemed to have
been issued at the time such Convertible Securities or such options were issued
(whether or not such Convertible Securities are then convertible or exchangeable
or such options are then exercisable) and for a consideration equal to the
consideration, if any, received or receivable by the Corporation upon the sale
or issuance of any such Convertible Securities and related options (excluding
any cash received on account of accrued interest or accrued dividends), plus the
minimum additional aggregate consideration, if any, payable to the Corporation
upon the conversion or exchange of such Convertible Securities or the exercise
of any related options (the consideration in each case to be determined in the
manner provided in paragraph 6(d)(iii) above).
10
<PAGE> 53
(C) In the event of any change in the number of
shares of Common Stock deliverable or any increase in the consideration payable
to the Corporation upon exercise of such Options, or upon conversion of or in
exchange for such Convertible Securities or options for such Convertible
Securities, any Conversion Price obtained with respect to the adjustment which
was made upon the issuance of such Options, Convertible Securities or options
for such Convertible Securities, and any subsequent adjustments based thereon,
shall be recomputed to reflect such change, but no further adjustment shall be
made for the actual issuance of Common Stock or any payment of such
consideration upon the exercise of any such Options or the conversion or
exchange of such Convertible Securities or the exercise of options for such
Convertible Securities.
(D) Upon the expiration of any such Options, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such Convertible Securities, any Conversion Price
obtained with respect to the adjustment which was made upon the issuance of such
Options or Convertible Securities or options related to such Convertible
Securities, and any subsequent adjustments based thereon, shall be recomputed to
reflect the issuance of only the number of shares of Common Stock actually
issued upon the exercise of such Options, upon the conversion or exchange of
such Convertible Securities or upon the exercise of the options related to such
Convertible Securities.
(E) In the case of any Option or Convertible
Security with respect to which the maximum number of shares of Common Stock
issuable upon exercise or conversion or exchange thereof is not determinable, no
adjustment to the Conversion Price shall be made until such number becomes
determinable.
(v) Definition of Additional Stock. "Additional Stock"
shall mean any shares of Common Stock issued (or deemed to have been issued
pursuant to paragraph 6(d)(iv) above) by the Corporation after the Issue Date
other than:
(A) Common Stock issued pursuant to a transaction
described in Paragraph 6(d)(vi) below;
(B) shares of Common Stock (as constituted on the
date hereof) issuable or issued to employees, officers, directors, or
consultants of the corporation pursuant to a stock purchase, stock option or
restricted stock plan or agreement existing on the Issue Date or thereafter
approved in accordance with Section 2.2(m) of the Amended and Restated
Stockholders Agreement dated as of January 14, 2000 among the Company and the
stockholders party thereto; provided that the purchase price for such shares (or
in the case of options, the exercise price thereof) shall not be less than fair
market value on the date of issuance; and
11
<PAGE> 54
(C) Common Stock issued or issuable upon conversion
of the Series A Preferred Stock or upon exercise of all or any portion of the
warrants issued before the Issue Date to purchase 2,712,045 shares of Common
Stock.
(vi) Stock Splits, Subdivisions and Dividends. In the
event the Corporation shall at any time or from time to time after the Issue
Date, fix a record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of holders of Common
Stock entitled to receive a dividend or other distribution payable in additional
shares of Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Common Stock (hereinafter referred to as "Common Stock Equivalents")
without payment of any consideration by such holder for the additional shares of
Common Stock or the Common Stock Equivalents (including without payment for the
additional shares of Common Stock issuable upon conversion or exercise thereof)
then, as of such record date (or the date of such dividend distribution, split
or subdivision if no record date is fixed), the Conversion Price shall be
appropriately decreased so that the holders of Series A Preferred Stock shall
receive, upon the conversion thereof, the number of shares of Common Stock they
would have received if they had converted their shares of Series A Preferred
Stock into Common Stock immediately prior to the occurrence of such event.
(vii) Combinations or Consolidations. In the event that
the number of shares of Common Stock outstanding at any time after the Issue
Date is decreased by a combination, reclassification or consolidation of the
outstanding shares of Common Stock then, on the effective date of such event,
the Conversion Price shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of such series shall
be decreased in proportion to such decrease in the number of outstanding shares.
(viii) Other Distributions. In the event that the
Corporation shall declare a distribution on the Common Stock payable in
securities of other persons, evidences of indebtedness issued by the Corporation
or other persons, assets (excluding cash dividends) or options or rights not
referred to in paragraph (d)(iv) above, then, in each such case for the purpose
of this paragraph 6(d)(viii), the holders of the Series A Preferred Stock shall
be entitled to a proportionate share of any such distribution as though they
were the holders of the number of shares of Common Stock of the Corporation into
which their shares of Series A Preferred Stock are convertible as of the record
date fixed for the determination of the holders of Common Stock of the
Corporation entitled to receive such distribution.
(ix) Recapitalizations. If at any time or from time to
time there shall be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction provided for
elsewhere in this
12
<PAGE> 55
paragraph 6), provision shall be made so that the holders of the Series A
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series A Preferred Stock the number of shares of stock or other securities or
property of the Corporation or otherwise, to which they would have been entitled
to receive if they had converted their shares of Series A Preferred Stock
immediately prior to such recapitalization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this paragraph
6, with respect to the rights of the holders of the Series A Preferred Stock
after the recapitalization to the end that the provisions of this paragraph 6
(including adjustment of the Conversion Price then in effect and the number of
shares issuable upon conversion of the Series A Preferred Stock) shall be
applicable after that event as nearly equivalent as may be practicable.
(x) Other Dilutive Events. In case any event shall occur
as to which the provisions of this paragraph 6 are not strictly applicable but
the failure to make any adjustment would not fairly protect the conversion
rights in accordance with the essential intent and principle of the provisions
of such paragraph, then, in each such case, the Corporation shall appoint a firm
of independent certified public accountants of recognized national standing
(which may be the regular auditors of the Corporation), which shall give their
opinion upon the adjustment, if any, on a basis consistent with the essential
intent and principles established in paragraph 6, necessary to preserve, without
dilution, the conversion rights. Upon receipt of such opinion, the Corporation
will promptly mail a copy thereof to the holders of the Series A Preferred Stock
and shall make the adjustments described therein.
(xi) No Impairment. The Corporation will not, by amendment
and/or restatement of this Certificate of Designation or its Certificate of
Incorporation or through any reorganization, recapitalization, 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 terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
paragraph 6 and in the taking of all such action as may be necessary or
appropriate in order to protect the holders of the Series A Preferred Stock
against impairment of the conversion rights.
(xii) Certificate as to Adjustments. Upon the occurrence
of each adjustment or readjustment of the Conversion Price pursuant to this
paragraph 6, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of the Series A Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Series A Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting forth (A) any
such adjustment and readjustment with respect to such series, (B) the Conversion
Price at the time in effect, and (C) the
13
<PAGE> 56
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of a share of such series.
7. NOTICES OF RECORD DATE. In the event of any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Corporation shall
mail to each holder of Series A Preferred Stock, at least twenty (20) days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
8. NOTICES. Any notice required by the provisions of this Certificate of
Designation to be given to the holders of shares of Series A Preferred Stock
shall be deemed effectively given upon receipt by the party by means of personal
delivery, courier service delivery, electronic mail or five (5) days after
deposit with the United States Post Office, by registered or certified mail,
postage prepaid, and addressed to each holder of record at his address appearing
on the books of the corporation.
9. VOTING RIGHTS. Expect as otherwise expressly provided herein or
required by law, the holder of each share of Series A Preferred Stock shall have
the right to one vote for each share of Common Stock into which such share could
then be converted (with any fractional share determined on an aggregate
conversion basis being rounded to the nearest whole share), and with respect to
such vote, such holder shall have full voting rights and powers equal to the
voting rights and powers of the holders of Common Stock. The holders of the
Series A Preferred Stock shall be entitled, notwithstanding any provision
hereof, to notice of any stockholders' meeting in accordance with the by-laws of
the Corporation, and to vote on any matter submitted to the stockholders for a
vote. Except as expressly set forth herein or otherwise required by law, the
holders of Series A Preferred Stock and Common Stock shall vote together as a
single class on an as-converted basis.
10. PROTECTIVE PROVISIONS. So long as any shares of Series A Preferred
Stock are outstanding, the Corporation shall not, without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of not
less than 66 2/3% of the Series A Preferred Stock:
(a) Authorize, create, designate, determine or issue any Parity
Stock or Senior Stock other than shares of Series A Preferred Stock issued in
satisfaction of deferred interest pursuant to the Supplemental Securities
Agreement.
(b) Amend, modify or repeal any provision of the Corporation's
Certificate of Incorporation or by-laws in any manner which would alter or
change the
14
<PAGE> 57
rights, preferences, privileges or powers of, or the restrictions provided for
the benefit of, the Series A Preferred Stock.
(c) Authorize any amendment, modification, waiver or repeal of
any provision of any agreement which grants the holders of the Series A
Preferred Stock any rights, privileges or powers and to which the Corporation is
a party.
(d) Authorize the merger, consolidation or sale or license of all
or substantially all the assets (including, without limitation, the intellectual
property rights of the Corporation) of the Corporation or of any assets the
disposition or licensing of which would have a material effect on the business
of the Corporation or any subsidiary, or any liquidation, dissolution or winding
up of the Corporation or effect any transaction or series of transactions in
which more than 50% of the voting power of the Corporation is disposed of.
(e) Authorize (i) the distribution of, or payment of dividends
on, or (ii) the purchase, repurchase, redemption or other acquisition by the
Corporation (or otherwise set aside any sums therefor), of any securities of the
Corporation, or any interest therein, junior to the Series A Preferred Stock.
(f) Amend the Corporation's Certificate of Incorporation to
increase the aggregate authorized number of shares of Common Stock or Series A
Preferred Stock if the additional shares so authorized are to be sold at a price
below the Issue Price, other than for purposes of Management Incentive Plans.
11. ADDITIONAL SERIES A PREFERRED PROTECTIVE PROVISIONS. The Corporation
shall not, without first obtaining the approval of each holder of Series A
Preferred Stock affected thereby:
(a) Amend any applicable Redemption Date.
(b) Reduce the stated value or liquidation preference or
Redemption Price of the Series A Preferred Stock.
(c) Change the place or currency of payment of any liquidation
preference or dividend to which a holder of shares of Series A Preferred Stock
is entitled pursuant to this Certificate of Designation.
(d) Impair the right to institute suit for the enforcement of any
payment on or with respect to any share of Series A Preferred Stock.
(e) Amend this Certificate of Designation in a manner which would
adversely affect the right to convert any share of Series A Preferred Stock
including, without limitation, any amendment which would adversely affect the
15
<PAGE> 58
calculation of the Issue Price or the Conversion Price.
(f) Amend this Certificate of Designation to reduce the
percentage of outstanding shares of Series A Preferred Stock required to modify,
amend or repeal the provisions of the Certificate of Designation or grant
waivers of any provision hereof.
12. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares of
Series A Preferred Stock shall be redeemed or converted pursuant to paragraph 5
or 6 above, the shares so converted or redeemed shall be cancelled and shall not
be issuable by the Corporation, and the Certificate of Incorporation of the
Corporation shall be appropriately amended to effect the corresponding reduction
in the Corporation's authorized capital stock. Notwithstanding the foregoing, no
such amendment shall be required unless the aggregate number of shares converted
or redeemed exceeds 25% of the Corporation's then authorized shares of Series A
Preferred Stock.
13. RESERVATION OF COMMON STOCK. The Corporation shall at all times on
and after the 15th day following the first meeting of stockholders of the
Corporation occurring on or after the Issue Date reserve and keep available out
of its authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of the Series A Preferred Stock such
number of its shares of Common Stock free from preemptive rights as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
the Series A Preferred Stock. If at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Series A Preferred Stock, in addition to
such other remedies as shall be available to the holders of such Series A
Preferred Stock, the Corporation will take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes, including, without
limitation, engaging in best efforts to obtain the requisite stockholder
approval of any necessary amendment to the Corporation's Certificate of
Incorporation.
14. COSTS. The Corporation shall pay all documentary, stamp, transfer or
other transactional taxes attributable to the issuance or delivery of shares of
Common Stock upon conversion of any shares of Series A Preferred Stock; provided
that the Corporation shall not be required to pay any taxes which may be payable
in respect of any transfer involved in the issuance or delivery of any
certificate for such shares in a name other than that of the holder of the
shares of Series A Preferred Stock in respect of which such shares are being
issued.
15. APPROVALS. If any shares of Common Stock to be reserved for the
purpose of conversion of shares of Series A Preferred Stock require registration
with or approval of any governmental authority under any Federal or state law
before such
16
<PAGE> 59
shares may be validly issued or delivered upon conversion, then the Corporation
will in good faith and as expeditiously as possible endeavor to secure such
registration or approval, as the case may be. If, and so long as, any Common
Stock into which the shares of Series A Preferred Stock are then convertible is
listed on any national securities exchange, the Corporation will, if permitted
by the rules of such exchange, list and keep listed on such exchange, upon
official notice of issuance, all shares of such Common Stock issuable upon
conversion.
16. VALID ISSUANCE. All shares of Common Stock which may be issued upon
conversion of the shares of Series A Preferred Stock will upon issuance by the
Corporation be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issuance thereof, and the
Corporation shall take no action which will cause a contrary result (including
without limitation, any action which would cause the Conversion Price to be less
than the par value, if any, of the Common Stock).
17. EXCLUSION OF OTHER RIGHTS. Except as may otherwise be required by
law, the shares of Series A Preferred Stock shall not have any preferences or
relative, participating, optional or other special rights, other than those
specifically set forth in this resolution (as such resolution may be amended
from time to time) and in the Corporation's Certificate of Incorporation. The
shares of Series A Preferred Stock shall have no preemptive or subscription
rights.
18. HEADINGS OF SUBDIVISIONS. The headings of the various subdivisions
hereof are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
19. SEVERABILITY OF PROVISIONS. If any right, preference or limitation
of the Series A Preferred Stock set forth in this resolution (as such resolution
may be amended from time to time) is invalid, unlawful or incapable of being
enforced by reason of any rule of law or public policy, all other rights,
preferences and limitations set forth in this resolution (as so amended) which
can be given effect without the invalid, unlawful or unenforceable right,
preference or limitation shall, nevertheless, remain in full force and effect,
and no right, preference or limitation herein set forth shall be deemed
dependent upon any other such right, preference or limitation unless so
expressed herein.
20. STATUS OF REACQUIRED SHARES. Shares of Series A Preferred Stock
which have been issued and reacquired in any manner shall (upon compliance with
any applicable provisions of the laws of the State of Delaware) have the status
of authorized and unissued shares of Series A Preferred Stock issuable in series
undesignated as to series and may be redesignated and reissued.
17
<PAGE> 60
FURTHER RESOLVED, that, before the Corporation shall issue any
shares of Series A Preferred Stock, a certificate pursuant to Section 151 of the
DGCL shall be made, executed, acknowledged, filed, and recorded in accordance
with the provisions of Sections 103 and 151 of the DGCL, and the proper officers
of the Corporation be, and they hereby are, authorized and directed to do all
acts and things which may be necessary or proper in their opinion to carry into
effect the purposes and intent of this and the foregoing resolutions.
18
<PAGE> 61
IN WITNESS WHEREOF, the Corporation has caused this Certifi-cate
of Designation to be signed in its name and on its behalf and attested on this
12th day of January, 2000, by duly authorized officers of this Corporation.
KRAUSE'S FURNITURE, INC.
By: /s/ Robert A. Burton
----------------------------------------
Name:: Robert A. Burton
Title: Executive Vice President and CFO
ATTEST:
By: /s/ Judith O. Lasker
--------------------------------
Name: Judith O. Lasker
Title: Secretary and General Counsel
19
<PAGE> 62
APPENDIX C
KRAUSE'S FURNITURE, INC.
SERIES A CONVERTIBLE PREFERRED STOCK
SECURITIES PURCHASE AGREEMENT
Dated as of January 11, 2000
<PAGE> 63
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. PURCHASE AND SALE OF THE SERIES A PREFERRED STOCK....................... 1
1.1. Authorization to Sell the Series A Preferred Stock...................... 1
1.2. Closings................................................................ 1
1.3. Deliveries at Closings.................................................. 2
1.4. Restructuring 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....................................................... 3
2.3. Subsidiaries............................................................ 4
2.4. SEC Reports............................................................. 4
2.5. Financial Statements.................................................... 4
2.6. Actions Pending; Compliance with Laws................................... 5
2.7. Title to Properties; Insurance.......................................... 5
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 Series A Preferred Stock............. 8
2.14. Registration Under Exchange Act......................................... 8
2.15. ERISA................................................................... 9
2.16. Possession of Franchises, Licenses, etc................................. 9
2.17. Environmental and Other Regulations..................................... 10
2.18. Patents and Trademarks.................................................. 10
2.19. Material Contracts and Obligations...................................... 10
2.20. Books and Records....................................................... 11
2.21. Transactions with Related Parties....................................... 11
2.22. Brokers................................................................. 11
2.23. Accuracy of Information................................................. 11
2.24. Offering of Series A Preferred Stock.................................... 12
</TABLE>
-i-
<PAGE> 64
<TABLE>
<S> <C> <C>
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS........................ 12
3.1. Organization and Qualification.......................................... 12
3.2. Due Authorization....................................................... 12
3.3. Conflicting Agreements and Other Matters................................ 13
3.4. Acquisition for Investment.............................................. 13
3.5. Brokers or Finders...................................................... 13
3.6. Accredited Investor..................................................... 13
4. COVENANTS OF THE COMPANY................................................ 13
4.1. Limitation on Senior Equity Securities ................................. 14
4.2. Compliance with Laws.................................................... 14
4.3. Preservation of Franchises and Existence................................ 14
4.4. Use of Proceeds......................................................... 14
4.5. Insurance............................................................... 14
4.6. Payment of Taxes and Other Charges...................................... 14
4.7. Effect of Breach........................................................ 15
4.8. ERISA................................................................... 15
4.9. Financial Statements and Other Reports.................................. 16
4.10. Inspection of Property.................................................. 17
4.11. Lost, Stolen, Damaged and Destroyed Stock Certificates.................. 18
4.12. Related Party Transactions.............................................. 18
4.13. Operations in Accordance with Business Plan............................. 18
4.14. Reservation of Shares................................................... 18
4.15. Notice of Breach........................................................ 19
4.16. Limitation on Dividends ................................................ 19
4.17 Right of First Refusal.................................................. 19
5. RESTRICTIONS ON TRANSFER................................................ 20
6. EVENT OF DEFAULT AND REMEDIES........................................... 20
6.1. Event of Default........................................................ 21
6.2. Remedies................................................................ 21
6.3. Conduct no Waiver....................................................... 21
6.4 Remedies Cumulative..................................................... 22
</TABLE>
-ii-
<PAGE> 65
<TABLE>
<S> <C> <C>
7. CONDITIONS.............................................................. 22
7.1 Conditions to Each Party's Obligations to Effect the Transactions
Contemplated Hereby..................................................... 22
7.2 Conditions to Purchasers' Obligations to Effect the Transactions
Contemplated Hereby..................................................... 23
8. INTERPRETATION.......................................................... 24
8.1. Definitions............................................................. 24
8.2. Accounting Principles................................................... 27
9. MISCELLANEOUS........................................................... 27
9.1. Severability............................................................ 27
9.2. Specific Enforcement.................................................... 28
9.3. Entire Agreement........................................................ 28
9.4. Counterparts............................................................ 28
9.5. Notices and Other Communications........................................ 28
9.6. Amendments.............................................................. 29
9.7. Cooperation............................................................. 30
9.8. Successors and Assigns.................................................. 30
9.9. Expenses and Remedies................................................... 30
9.10. Survival of Representations and Warranties.............................. 32
9.11. Transfer of Series A Preferred Stock.................................... 32
9.12. Governing Law; Consent to Jurisdiction.................................. 33
9.13. Publicity............................................................... 34
9.14. Signatures.............................................................. 34
</TABLE>
Exhibit A - Form of Amended and Restated Stockholders' Agreement
Exhibit B - Form of Opinion of Morrison & Foerster LLP
Exhibit C - Form of Amended and Restated Registration Rights Agreement
Exhibit D - Form of Indebtedness Amendment
-iii-
<PAGE> 66
This Securities Purchase Agreement, dated as of January 11, 2000 (this
"Agreement"), between Krause's Furniture, Inc., a Delaware corporation
(including its predecessors, the "Company") and the purchasers listed on the
signature pages hereto (each a "Purchaser", and collectively, the "Purchasers").
WHEREAS, the Purchasers wish to severally purchase from the Company, and
the Company wishes to sell to the Purchasers, an aggregate of 380,000 shares of
the Company's Series A Convertible Preferred Stock, par value $.001 per share
(the "Series A Preferred Stock"), at an aggregate purchase price of $19,000,000.
WHEREAS, in connection with the purchase and sale of the Series A
Preferred Stock, the Purchasers, the Company and the stockholders listed on the
signature pages thereof, will enter into an amended and restated Stockholders
Agreement, substantially in the form attached hereto as Exhibit A (the
"Stockholders Agreement").
WHEREAS, the Purchasers 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:
SECTION 1. PURCHASE AND SALE OF THE SERIES A PREFERRED STOCK.
1.1 Authorization to Sell the Series A Preferred Stock. Subject to the
terms and conditions of this Agreement, the Company has duly authorized the
issuance and sale of the Series A Preferred Stock.
1.2 Closings. The transactions contemplated hereby will take place in
two closings. The first closing shall be held on or prior to January 18, 2000
(the "First Closing") at the offices of Skadden, Arps, Slate, Meagher & Flom LLP
("SASM&F"), 300 South Grand Avenue, Suite 3400, Los Angeles, California 90071-
3144 at 9:00 a.m., or at such place, date and time as shall be mutually agreed
by the Company and the Initial Purchasers (the "First Closing Date"). The second
closing shall be held on or prior to January 18, 2000 (the "Second Closing" and
together with the First Closing, the "Closings") at SASM&F, 300 South Grand
Avenue, Los Angeles, California 90071-3144, at 9:00 a.m, or such place, date and
time as shall be
1
<PAGE> 67
mutually agreed by the Company and the Individual Purchasers (the "Second
Closing Date" and together with the First Closing Date, the "Closing Dates").
1.3 Deliveries at Closings.
(a) At the First Closing:
(i) the Company shall execute and deliver an Amended and
Restated Stockholders Agreement in the form of Exhibit A hereto;
(ii) Morrison & Foerster LLP, counsel to the Company, shall
deliver to the Initial Purchasers an opinion dated the First Closing
Date substantially in the form of Exhibit B hereto;
(iii) the Company shall execute and deliver an Amended and
Restated Registration Rights Agreement substantially in the form of
Exhibit C hereto (the "Registration Rights Agreement");
(iv) the Company shall deliver to each Initial Purchaser stock
certificates representing the number of shares of Series A Preferred
Stock to be purchased by such Initial Purchaser, as set forth under its
signature on the signature pages hereto, registered in the name of such
Initial Purchaser or its designee or nominee;
(v) each Initial Purchaser shall pay to the Company, by wire
transfer of immediately available funds, the purchase price for the
Series A Preferred Stock being purchased by such Initial Purchaser; and
(vi) the Company shall deliver evidence of the restructuring of
certain indebtedness of the Company as described in Section 1.4 below in
form and substance satisfactory to the Initial Purchasers.
(b) At the Second Closing:
(i) Morrison & Foerster LLP, counsel to the Company, shall
deliver to the Individual Purchasers an opinion dated the Second Closing
Date substantially in the form of Exhibit B hereto;
2
<PAGE> 68
(ii) the Company shall deliver to each Individual Purchaser stock
certificates representing the number of shares of Series A Preferred
Stock to be purchased by such Individual Purchaser, as set forth under
its signature on the signature pages hereto, registered in the name of
such Individual Purchaser or its designee or nominee; and
(iii) each Individual Purchaser shall pay to the Company, by wire
transfer of immediately available funds, the purchase price for the
Series A Preferred Stock being purchased by such Individual Purchaser.
1.4 Restructuring of Certain Indebtedness. On or before the First
Closing Date, the Company shall execute and deliver an Amendment to the Note
Agreement substantially in the form of Exhibit D hereto (the "Indebtedness
Amendment").
1.5 Definitions. Certain capitalized terms used in this Agreement are
defined in Section 8 hereof.
SECTION 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 and the Registration Rights Agreement, and the issuance
and sale of the Series A Preferred Stock by the Company and compliance by the
Company with all the provisions of this Agreement, the Stockholders Agreement
and the Registration Rights Agreement (i) are within the corporate power and
authority of the Company; (ii) do not and will not require any approval or
consent of the stockholders of the Company or any other Person, other than
approvals and consents which have been duly obtained or which will be obtained
pursuant to Section 4.14;
3
<PAGE> 69
and (iii) have been authorized by all requisite corporate proceedings on the
part of the Company. This Agreement, the Stockholders Agreement and the
Registration Rights Agreement 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 Purchasers 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
Exchange Act, since December 31, 1996; and the Company has furnished the
Purchasers copies of its Annual Report on Form 10-K for the fiscal year ended
January 31, 1999, 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 in all material respects 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. 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
4
<PAGE> 70
material in amount or effect). The Company and its Subsidiaries have no material
liabilities, contingent or otherwise, not reflected in the Company's balance
sheet as of January 31, 1999 that is included in the SEC Reports or otherwise
referred to in the SEC Reports or otherwise disclosed to the Purchasers in
writing prior to the date of this Agreement, other than any such liabilities
incurred in the ordinary course of business, consistent with past practice,
since January 31, 1999. Since January 31, 1999, the Company and its Subsidiaries
have operated their respective businesses only in the ordinary course,
consistent with past practice, and no event has occurred that 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 Purchasers 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 Series A
Preferred Stock 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
Purchasers 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 fiscal year ended January 31, 1999, 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
5
<PAGE> 71
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 or other Person 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 and the valid
offer, issue, sale or delivery of the Series A Preferred Stock, 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 applicable 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. (a) The Company and each of its Subsidiaries have filed or
caused to be filed all tax returns which are required to be filed by them, and
all such tax returns are true, complete and correct in all material respects.
The Company and each of its Subsidiaries have paid or caused to be paid all
taxes that 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 in accordance with generally
accepted accounting principles. 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. The Company and its Subsidiaries have paid or caused to be paid,
or have established reserves in accordance with generally accepted accounting
principles that the Company reasonably believes are adequate, for all federal
income tax liabilities and state income tax liabilities applicable to the
Company or any of its
6
<PAGE> 72
Subsidiaries for all fiscal years which have not been examined and reported on
by the taxing authorities (or closed by applicable statutes).
(b) As of January 31, 1999, the Company did not have any
accumulated "earnings and profits" as determined under section 312 of the
Internal Revenue Code of 1986, as amended (the "Code"). To the best knowledge
and belief of the Company, the Company does not anticipate having any material
current earnings and profits, as determined under section 312 of the Code, for
its current taxable year. As of the date hereof, the Company is not a "United
States real property holding corporation" within the meaning of section
897(c)(2) of the Code. The Company shall not become a United States real
property holding corporation.
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 and the Registration
Rights Agreement and the issuance of the Series A Preferred Stock and (ii) the
fulfillment of and compliance with the terms and provisions hereof and thereof
and of the Series A Preferred Stock 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, par value
$0.001 per share (the "Common Stock" and, together with the Series A Preferred
Stock, the "Stock"), of which 22,050,328 shares are validly issued and
outstanding, fully paid and nonassessable; (b) warrants to purchase 2,712,045
shares of Common Stock which are validly issued and outstanding, fully paid and
nonassessable; (c) options to
7
<PAGE> 73
purchase 2,823,458 shares of Common Stock and deferred stock units representing
the right to receive 85,225 shares of Common Stock, all of which are validly
issued and outstanding, fully paid and nonassessable; and (d) 666,667 shares of
Preferred Stock, par value $.001 per share, of which no shares are outstanding,
as of the date hereof, and 380,000 shares designated as Series A Convertible
Preferred Stock will be issued and outstanding on the Second Closing Date after
consummation of the transactions contemplated hereby. All of the outstanding
shares of Common Stock have been validly issued and are fully paid and
nonassessable. Except as set forth in the Stockholders Agreement, no class of
capital stock of the Company is entitled to preemptive rights. Except for the
options and warrants listed above, there are no outstanding options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, 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 August 1, 1996, 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 Series A Preferred Stock. The
shares of Series A Preferred Stock being issued to the Initial Purchasers at the
First Closing and the shares of Series A Preferred Stock being issued to the
Individual Purchasers at the Second Closing are duly authorized and when issued
and delivered in accordance herewith will be, validly issued, fully paid and
nonassessable. The 17,272,727 shares of Common Stock to be issued upon
conversion of the Series A Preferred Stock, when issued and delivered upon such
conversion in accordance with the terms of the Certificate of Designation, will
be validly issued, fully paid and nonassessable. The Company will take all
action necessary to increase its authorized but unissued shares of Common Stock
to such number of shares as shall be sufficient to reserve shares of Common
Stock for issuance upon conversion of the Series A Preferred Stock, including,
without limitation, obtaining the requisite stockholder approval of any
necessary amendment to the Company's Certificate of Incorporation.
2.14 Registration Under Exchange Act. The Company has not registered the
Series A Preferred Stock as a class pursuant to Section 12 of the Exchange Act.
8
<PAGE> 74
2.15 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 reason ably 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).
2.16 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.
9
<PAGE> 75
2.17 Environmental and Other Regulations. The Company and its
Subsidiaries are in compliance with all applicable laws and regulations relating
to protection of the environment and human health, and are in compliance in all
material respects with all other applicable 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.
2.18 Patents and Trademarks. Set forth on Schedule 2.18 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 2.18,
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. Except as set forth on Schedule 2.18, 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.
2.19 Material Contracts and Obligations. Schedule 2.19 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
material 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 (other than plans or
arrangements providing for less than $10,000 per employee), (c) all
manufacturing, distributor and sales representative agreements and all
agreements with suppliers or vendors if the value of the payments thereunder is
in excess of $100,000, (d) all agreements or commitments that materially
restrict the ability of the Company or any Subsidiary or Affiliate to
10
<PAGE> 76
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 if the value of the payments thereunder is in excess of $100,000 and
(f) any other agreement or commitment which requires future payments by or to
the Company or any Subsidiary in excess of $100,000 or which is otherwise
material to the Company or any of its Subsidiaries. The Company has delivered or
made available to the Purchasers copies of all of the foregoing agreements and
commitments. To the best knowledge of the Company, all of such agreements and
commitments are valid, binding and in full force and effect.
2.20 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
Purchasers true and complete texts of all of the minutes relating to meetings of
the stockholders, boards of directors and committees of the Company and each
Subsidiary for the past five years.
2.21 Transactions with Related Parties. Schedule 2.21 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 Purchasers, (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.
2.22 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.
2.23 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 Purchasers in connection with the transactions
contemplated by this Agreement contains any material misstatement of fact, or
omits any material fact necessary to make the statements herein and therein, in
light of the circumstances under which they were made, not misleading. All
projections fur-
11
<PAGE> 77
nished 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.
2.24 Offering of Series A Preferred Stock. Neither the Company nor any
Person acting on its behalf has offered any of the Series A Preferred Stock or
any similar securities of the Company for sale to, solicited any offers to buy
any of the Series A Preferred Stock or any similar securities of the Company
from or otherwise approached or negotiated with respect to the Company with any
Person other than the Purchasers 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 Series
A Preferred Stock 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 Series A Preferred Stock to the
registration requirements of Section 5 of the Securities Act.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.
Each Purchaser represents and warrants as follows:
3.1 Organization and Qualification. Such Purchaser is either (a) (i)
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 and (ii) 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
such Purchaser's ability to perform its obligations hereunder or (b) a natural
person with the capacity to enter into this Agreement and to consummate the
transactions contemplated hereby.
3.2 Due Authorization. Such Purchaser has all right, power and authority
to enter into this Agreement and to consummate the transactions contemplated
12
<PAGE> 78
hereby. The execution and delivery of this Agreement by the Purchaser and the
consummation by such Purchaser of the transactions contemplated hereby have been
duly authorized by all necessary action on behalf of such 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 Series A
Preferred Stock 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 Series A
Preferred Stock has 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
Purchasers, 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 9.9.
3.6 Accredited Investor. The Purchaser is an "Accredited Investor"
within the meaning of Rule 501 promulgated under the Securities Act.
SECTION 4. COVENANTS OF THE COMPANY.
13
<PAGE> 79
4.1 Limitation on Senior Equity Securities. Without the consent of the
holders of a majority of the then outstanding shares of Series A Preferred
Stock, 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 pari passu or
senior as to dividends or upon liquidation to the Series A Preferred Stock.
4.2 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.
4.3 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 4.3 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, 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 Series A Preferred Stock.
4.4 Use of Proceeds. The Company will only use the Proceeds for
Permitted Proceeds Uses; provided that, in the case of Retail Proceeds, the
Company may, pending any Retail Proceeds Uses, use Retail Proceeds to pay down
long-term indebtedness so long as the Company has the right to immediately
reborrow such amounts.
4.5 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.
14
<PAGE> 80
4.6 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.
4.7 Effect of Breach. In addition to the rights of THLi under the
Stockholders Agreement, upon the occurrence of an Event of Default and
notification by THLi prior to the two-year anniversary of the First Closing Date
of its desire to add directors in accordance with Section 6.2, then the Board of
Directors 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 THLi that, when
added to any directors then in office designated solely by THLi, will result in
directors designated by THLi constituting a majority of the entire Board of
Directors. THLi shall be entitled to designate the Additional Members and, for
so long as such Event of Default continues, at each subsequent annual meeting,
THLi 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. In the event of any vacancy
arising by reason of the resignation, death, removal or inability to serve of
any Additional Member, THLi 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 THLi under this
Section 4.7 shall terminate (and THLi shall cause such Additional Directors to
resign from the Board of Directors), subject to revesting in the event of each
and every subsequent Event of Default.
4.8 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
15
<PAGE> 81
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.
4.9 Financial Statements and Other Reports.
(a) 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 THLi 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);
(b) The Company will, as soon as practicable and in any event
within 100 days after the end of each fiscal year, furnish to THLi
statements of consolidated net income and cash flows and a statement of
changes in
16
<PAGE> 82
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);
(c) The Company will, promptly upon transmission thereof, furnish
to each 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 relating to employee benefit or dividend
reinvestment plans, and all such regular and periodic reports as it
shall file with the Commission;
(d) The Company will, promptly after such package becomes
available, furnish to THLi copies of all financial reporting packages
prepared for management of the Company; and
(e) Until the two-year anniversary of the First Closing Date, the
Company will, as soon as practicable, and in any event within 5 days
after the end of each month, furnish to THLi and GECC detailed reports,
and any other information THLi and GECC may reasonably request, relating
to (i) the use of Proceeds by the Company and its Subsidiaries and (ii)
the Company's compliance with the Retail Plan and the E-Commerce Plan;
(f) The Company will promptly furnish to THLi copies of any
reports furnished to GECC pursuant to the Note Agreement; and
(g) The Company will promptly furnish to THLi copies of any
compliance certificates furnished to lenders in respect of indebtedness
of the Company and its Subsidiaries and, with reasonable promptness,
furnish to each Purchaser such other financial and other data of the
Company and its Subsidiaries as such 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.
17
<PAGE> 83
4.10 Inspection of Property. The Company will permit representatives of
THLi to visit and inspect, at THLi'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 such Purchaser may
reasonably request.
4.11 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 Series A Preferred Stock (or any
certificate for the shares of Common Stock into which the Series A Preferred
Stock is convertible) and in the case of loss, theft or destruction, upon
delivery of an indemnity satisfactory to the Company (which, in the case of any
Purchaser, may be an undertaking by such 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 Series A Preferred Stock (or, if applicable, shares of Common Stock
into which the Series A Preferred Stock is convertible) equal to the number of
shares of such stock represented by the certificate lost, stolen, destroyed or
mutilated.
4.12 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 (i) any action to terminate the
Consumer Credit Card Agreement by and among Krause's Sofa Factory, Castro
Convertible Corporation and Monogram Credit Bank of Georgia, dated as of April
27, 1997 and (ii) the payment of salary and benefits pursuant to employment
agreements entered into in the ordinary course of business.
4.13 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 a majority of the Board of Directors, which majority must include
the GECC Designee and the THLi Designees (each 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. The Company shall submit the
E-Commerce Plan to the Board of Directors for approval no later than 90 days
from the First Closing Date.
18
<PAGE> 84
4.14 Reservation of Shares. From and after the 15th day following the
first meeting of stockholders of the Company occurring on or after the First
Closing Date, the Company shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of the Series A Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series A Preferred
Stock.
4.15 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 4, the Company shall provide the
Purchasers with written notice specifying the nature of such breach and any
actions proposed to be taken by the Company to cure such breach.
4.16 Limitation on Dividends. The Company shall not pay any dividends on
Common Stock so long as any shares of Series A Preferred Stock remain out
standing.
4.17 Right of First Refusal. Subject to the terms and conditions
specified in this Section 4.17, the Company hereby grants to THLi or any of its
designees (collectively, the "First Refusal Stockholders") a right of first
offer with respect to future sales by the Company of its Offered Shares (as
hereinafter defined).
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable or exchangeable for any shares of, any class of
its capital stock ("Offered Shares"), the Company shall first make an offering
of such Offered Shares to the First Refusal Stockholders in accordance with the
following provisions:
(a) The Company shall deliver a notice in accordance with Section
9.5 of this Agreement ("Notice") to THLi stating (i) its bona fide
intention to offer such Offered Shares, (ii) the number of such Offered
Shares to be offered, and (iii) the price and terms, if any, upon which
it proposes to offer such Offered Shares.
(b) Within 15 days after delivery of the Notice, the First
Refusal Stockholders may elect to purchase or obtain, at the price and
on the terms specified in the Notice, up to that portion of such Offered
Shares that equals the proportion that the number of shares of Common
Stock issued and held
19
<PAGE> 85
(or issuable upon conversion and exercise of all convertible or
exercisable securities then held by THLi and its Affiliates) bears to
the total number of shares of Common Stock then outstanding (assuming
full conversion and exercise of all outstanding convertible or
exercisable securities).
(c) The right of first offer in this Section 4 shall not be
applicable to any issuance or sale of any of the following securities:
(i) Common Stock issued pursuant to any stock split, dividend or
distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof
to receive directly or indirectly, additional shares of Common Stock
without payment of any consideration by such holder, provided that all
holders of capital stock of the Company and options or warrants or other
securities exercisable or exchangeable for or convertible into, capital
stock of the Company receive their pro rata share (on a common
equivalent basis) of such Common Stock,
(ii) Common Stock issuable or issued to employees, consultants or
directors of the Company directly or pursuant to a stock option plan or
restricted stock plan, or other similar arrangements related to
compensation for services in effect on the date of this Agreement, or
thereafter approved by a majority vote of THLi Designees;
(iii) capital stock issued upon conversion or exercise of
warrants, options or other securities outstanding immediately following
the First Closing; or
(iv) Common Stock issued in a bona fide firm commitment under
written offering to the public.
SECTION 5. RESTRICTIONS ON TRANSFER. Neither the Purchasers or any of
their respective Affiliates shall, directly or indirectly, sell, transfer,
pledge, encumber or otherwise dispose of (collectively, a "Transfer") any of the
Series A Preferred Stock or Common Stock received upon conversion of the Series
A Preferred Stock, except for: (a) Transfers to or between Affiliates who agree
to be bound by the provisions of this Agreement; (b) Transfers of Series A
Preferred Stock or Common Stock received upon conversion of the Series A
Preferred Stock pursuant to the exercise of the registration rights set forth in
the Registration Rights Agreement; or (c) other Transfers that comply with the
provisions of the Securities Act. The Company may
20
<PAGE> 86
require, in connection with any Transfer pursuant to the preceding clause (c),
an opinion of counsel to the Purchaser that such Transfer complies with the
provisions of the Securities Act.
SECTION 6. EVENT OF DEFAULT AND REMEDIES.
6.1 Event of Default. The occurrence of any of the events set forth on
Schedule 6.1 prior to the two-year anniversary of the First Closing Date shall
constitute an Event of Default under this Agreement.
6.2 Remedies. The Company shall notify the Purchasers immediately upon
becoming aware of any Event of Default. If an Event of Default occurs and is
continuing, then in every such case:
(a) THLi at its option, shall have the right to either:
(i) demand immediate redemption of up to its Maximum Number
(as such term is defined in the Certificate of Designation) of shares of Series
A Preferred Stock pursuant to paragraph 5(c) of the Certificate of Designation,
or
(ii) nominate and designate additional members of the Board
of Directors pursuant to Section 4.7 hereof; and
(b) without limiting the foregoing, any Purchaser 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
Certificate of Incorporation or in aid of the exercise of any power granted in
this Agreement or the Certificate of Incorporation.
If THLi elects to demand redemption pursuant to clause (a)(i) above,
each other holder of Series A Preferred Stock shall also be entitled to demand
immediate redemption of such shares of Series A Preferred Stock permitted under
paragraph 5(c) of the Certificate of Designation.
6.3 Conduct No Waiver. 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.
21
<PAGE> 87
6.4 Remedies Cumulative. No right or remedy conferred upon or reserved
to the holders of Series A Preferred Stock 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 Series A Preferred Stock
may be exercised from time to time and as often as may be deemed expedient by
the holders.
SECTION 7. CONDITIONS.
7.1 Conditions to Each Party's Obligations to Effect the Transactions
Contemplated Hereby. The respective obligations of each party to effect the
transactions contemplated by this Agreement shall be subject to the fulfillment
at or prior to the applicable Closing Date of the following conditions:
(a) No temporary restraining order, preliminary or permanent
injunction or other order or decree by any court of competent
jurisdiction which prevents the consummation of the transactions
contemplated hereby or imposes material conditions with respect thereto
shall have been issued and remain in effect (each party agreeing to use
its reasonable efforts to have any such injunction, order or decree
lifted).
(b) No action shall have been taken, and no statute, rule or
regulation shall have been enacted, by any state or Federal government
or governmental agency which would prevent the consummation of the
transactions contemplated by this Agreement or imposes material
conditions with respect thereto.
(c) All consents and approvals of governmental entities legally
required for the consummation of the transactions contemplated by this
Agreement shall have been obtained and be in effect at the applicable
Closing Date, except those for which failure to obtain such consents and
approvals would not, individually or in the aggregate, have a Material
Adverse Effect or materially impair the ability of any party to this
Agreement to consummate the transactions contemplated by this Agreement.
7.2 Conditions to Purchasers' Obligations to Effect the Transactions
Contemplated Hereby. The obligations of the Purchasers to effect the
transactions
22
<PAGE> 88
contemplated by this Agreement shall be subject to the fulfillment at or prior
to the applicable Closing Date of the following additional conditions:
(a) The Company shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or
prior to the applicable Closing Date, and the representations and
warranties of the Company contained in this Agreement shall be true and
correct in all material respects (if not qualified by materiality) and
true and correct (if so qualified) on and as of the date of this
Agreement and at and as of the applicable Closing Date as if made at and
as of the applicable Closing Date, except to the extent that any such
representation or warranty expressly relates to another date (in which
case, as of such date).
(b) The consent or approval of each third party whose consent or
approval shall be required in connection with the transactions
contemplated hereby shall have been obtained.
(c) The Company and the stockholders listed on the signature
pages thereto shall have executed and delivered the Stockholders
Agreement substantially in the form attached hereto as Exhibit A.
(d) Purchasers shall have received an opinion of Morrison &
Foerster LLP, counsel to the Company, substantially in the form attached
hereto as Exhibit B.
(e) The Company and the stockholders listed on the signature
pages thereto shall have executed and delivered the Registration Rights
Agreement substantially in the form attached hereto as Exhibit C.
(f) Since the date of this Agreement, there shall not have been
any change or events which have resulted or would in reasonable
probability result in a Material Adverse Effect.
(g) The Company, GECC and JOL shall have executed and delivered
the Indebtedness Amendment substantially in the form attached hereto as
Exhibit D.
23
<PAGE> 89
(h) The Company shall have filed the Certificate of Designation
substantially in the form attached hereto as Exhibit E with the Delaware
Secretary of State.
(i) Purchasers shall have completed their business, legal and
financial due diligence review and the results of such review shall be
satisfactory to Purchasers in their sole judgment.
SECTION 8. INTERPRETATION.
8.1 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 Series A Preferred Stock shall
mean having "beneficial ownership" of such Series A Preferred Stock (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 of Directors" shall mean the board of directors of the Company.
"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.
"Certificate of Designation" shall mean the Certificate of Designation
of Series A Convertible Preferred Stock of the Company substantially in the form
attached hereto as Exhibit E.
"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 attribut-
24
<PAGE> 90
able to shares of preferred stock of any such Person not owned by any other such
Person.
"E-Commerce Plan" shall mean a business plan setting forth the Company's
planned business to business and E-commerce activities, including detailed
information with respect to E-Commerce Proceed Uses, strategy, implementation
of strategy, milestone targets and a timeline with respect thereto, as such
business plan may be amended from time to time in accordance with Section 2.2(u)
of the Stockholders Agreement.
"E-Commerce Proceed Uses" shall mean the use of Proceeds to build
infrastructure and sales and marketing capabilities for (including the
recruitment of appropriate talent associated with) business-to-business
activities and e-commerce activities, including commerce related to transactions
on the Internet and such further uses described in the E-Commerce Plan.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"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.
"GECC" shall mean, collectively, General Electric Capital Corporation, a
New York corporation and GE Capital Equity Investments, Inc., a Delaware
corporation.
"Individual Purchasers" shall mean the Purchasers other than THLi, GECC
and Permal.
"Initial Purchasers" shall mean THLi, GECC and Permal.
"JOL" shall mean Japan Omnibus Ltd., an international business
corporation incorporated in the British Virgin Islands.
"Note Agreement" shall mean, collectively, the Securities Purchase
Agreement dated as of August 26, 1996 between the Company and GECC and the
Supple-
25
<PAGE> 91
mental Securities Purchase Agreement, dated as of August 14, 1997, among the
Company GECC and JOL, in each case, as amended.
"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.
"Permal" shall mean those entities and individuals constituting the
Permal Group as set forth on Schedule C to the Stockholders Agreement.
"Permitted Proceeds Uses" shall mean Retail Proceed Uses or E-Commerce
Proceed Uses.
"Person" shall mean any individual, firm, corporation, partnership or
other entity, and shall include any successor (by merger or otherwise) of such
entity.
"Proceeds" shall mean the proceeds from the sale of the Series A
Preferred Stock pursuant to this Agreement.
"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; provided, however, that neither THLi nor GECC shall be deemed
to be a Related Party.
"Retail Plan" shall mean a business plan setting forth the Company's
planned retail activities, including detailed information with respect to Retail
Proceed Uses, Strategy, implementation of Strategy, milestone targets and a time
line with respect thereto, as such business plan may be amended from time to
time in accordance with section 2.2(a) of the Stockholders Agreement.
"Retail Proceed Uses" shall mean the use of Proceeds to (i) repay the
Loan and Security Agreement, dated as of January 20, 1995, as amended, by and
between
26
<PAGE> 92
Congress Financial Corporation (Western), Krause's Sofa Factory and Castro
Convertible Corporation (the "Credit Agreement"), (ii) make capital expenditures
related to the opening of new stores, (iii) for working capital purposes in
connection with the Company's retail business and (iv) for such further uses
described in the Retail Plan.
"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.
"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.
"THLi" shall mean, collectively, TH Lee.Putnam Internet Partners, L.P.
and TH Lee.Putnam Internet Parallel Partners, L.P., together with their
affiliates.
"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.
8.2 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, 1998 fiscal year refers to the fiscal year
ending January 31, 1999.)
SECTION 9. MISCELLANEOUS.
9.1 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
27
<PAGE> 93
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.
9.2 Specific Enforcement. Each 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.
9.3 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.
9.4 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.
9.5 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 facsimile or sent by prepaid overnight courier service,
to:
The Company:
Krause's Furniture, Inc.
200 North Berry Street
Brea, CA 92821-3903
Facsimile #: (714) 990-3561
Attention: Philip M. Hawley
With a copy to:
28
<PAGE> 94
Krause's Furniture, Inc.
200 North Berry Street
Brea, CA 92821-3903
Facsimile #: (714) 990-3561
Attention: Judith O. Lasker, Esq.
and
Morrison & Foerster LLP
555 West 5th Street, Suite 3500
Los Angeles, CA 90013-1024
Facsimile #: (213) 892-5454
Attention: Charles Kaufman, Esq.
Each Purchaser:
At the address or facsimile number set forth on the signature
pages hereto.
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Suite 3400
Los Angeles, California 90071
Facsimile #: (213) 687-5600
Attention: Michael A. Woronoff, Esq.
or to such other address as any party may, from time to time, designate in a
written notice given in a like manner.
9.6 Amendments. This Agreement may be amended as to the Purchasers 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 (i) the written consent of the Purchasers and/or such
successors and assigns who are the registered holders of not less than a
majority of the outstanding shares of Series A Preferred Stock then held by the
Purchasers and their successors or assigns and (ii) the written consent of THLi;
provided, however, that without the consent of each holder affected, however, no
amendment or waiver may (with
29
<PAGE> 95
respect to any shares of Series A Preferred Stock held by a nonconsenting holder
of shares of Series A Preferred Stock):
(a) reduce the aggregate number of shares of Series A Preferred
Stock whose holders must consent to an amendment or waiver of any
provision of this Agreement; or
(b) make any change in the foregoing amendment and waiver
provisions.
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.
9.7 Cooperation. Each 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.
9.8 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. Any Purchaser may (but shall not be required
to) assign any or all of its rights under this Agreement to any transferee of
any Series A Preferred Stock; provided that THLi may only assign its rights
under Section 4 to a transferee of at least 30% of the Stock held by THLi as of
the date of this Agreement (calculated as if all shares of Series A Preferred
Stock had been converted into shares of Common Stock as of the date of such
calculation). If THLi assigns any or all of its rights under Section 4, such
rights shall only be exercised by holders of more than 50% of the Stock held by
THLi as of the date of this Agreement (calculated as if all shares of Series A
Preferred Stock had been converted into shares of Common Stock as of the date of
such calculation). This Agreement may not be assigned by the Company.
9.9 Expenses and Remedies.
(a) The Company agrees to pay THLi for all reasonable outside
legal and consulting fees of THLi in connection with this Agreement and
the consummation of all transactions contemplated hereby, which costs
shall not
30
<PAGE> 96
exceed $50,000, and all costs and expenses relating to any future
amendment or supplement to this Agreement or the Series A Preferred
Stock (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 THLi relating to the enforcement of this
Agreement, the Registration Rights Agreement or the Series A Preferred
Stock.
(b) The Company further agrees to indemnify and save harmless
each Purchaser and each Purchaser's officers, directors, partners,
employees, trustees and agents, each Person who controls such 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
such Purchaser of any of its representations, warranties or other
agreements contained herein, (ii) from the gross negligence or willful
misconduct of such Purchaser or any of its officers, directors,
partners, employees or agents, or any Person who controls such 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 such
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 9.9 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 9.9 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 9.9. In case any such
action shall be brought against any indemnified party and it shall
notify the Company of the commencement thereof,
31
<PAGE> 97
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 9.9 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. The obligations of the Company to each indemnified
party hereunder shall be separate obligations, and the Company's
liability to any such indemnified party hereunder shall not be
extinguished solely because any other indemnified party is not entitled
to indemnity hereunder. The obligations of the Company under this
Section 9.9 shall survive the redemption or purchase by the Company of
the shares of Series A Preferred Stock purchased by any Purchaser, any
transfer of the Series A Preferred Stock by any Purchaser and the
termination of this Agreement, the Series A Preferred Stock, the
Stockholders Agreement and any of the other documents executed in
connection herewith.
9.10 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 Series A Preferred Stock, regardless of any
investigation made by or on behalf of any party.
9.11 Transfer of Series A Preferred Stock. (a) Each Purchaser
understands and agrees that the Series A Preferred Stock has 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
32
<PAGE> 98
from the registration requirements of the Securities Act and, where applicable,
such laws are available. Each Purchaser acknowledges that, except as provided in
the Registration Rights Agreement, such Purchaser has no right to require the
Company to register the Series A Preferred Stock. Each Purchaser understands and
agrees that each certificate representing the Series A Preferred Stock shall
bear legends substantially in the form as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") 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 A STOCKHOLDERS AGREEMENT BY AND AMONG KRAUSE'S
FURNITURE, INC. (THE "COMPANY") AND THE STOCKHOLDERS PARTIES THERETO
(THE "STOCKHOLDERS AGREEMENT"), A COPY OF WHICH IS ON FILE AT THE
OFFICES OF THE COMPANY."
"IN ADDITION TO THE RESTRICTIONS SET FORTH IN THE STOCKHOLDERS
AGREEMENT, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE RESTRICTIONS SET FORTH IN A SECURITIES PURCHASE AGREEMENT BY AND
AMONG THE COMPANY AND THE PURCHASERS LISTED ON THE SIGNATURE PAGES
THERETO, A COPY OF EACH OF WHICH IS ON FILE AT THE OFFICES OF THE
COMPANY."
9.12 Governing Law; Consent to Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
including, without limitation, Sections 5-1401 and 5-1402 of the New York
General Obligations Law and New York Civil Practice Laws and Rules 327(b). 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.
33
<PAGE> 99
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.
9.13 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.
9.14 Signatures. This Agreement shall be effective upon delivery of
original signature pages or facsimile copies thereof executed by each of the
parties hereto.
34
<PAGE> 100
IN WITNESS WHEREOF, the Company and the Purchasers have caused this
agreement to be executed and delivered by their respective officers thereunto
duly authorized.
KRAUSE'S FURNITURE, INC.
By:
-----------------------------------
Name: Robert A. Burton
Title: Executive Vice President/CFO
35
<PAGE> 101
TH LEE.PUTNAM INTERNET PARTNERS, L.P.
By: TH LEE.PUTNAM INTERNET FUND
ADVISORS, L.P., its General Partner
By: TH LEE.PUTNAM INTERNET FUND
ADVISORS, LLC, its General Partner
By:________________________________________
Name: Christine Kim
Title: Vice President
Address: 200 Madison Avenue, Suite 2225
New York, New York 10016
Facsimile #: (212) 951-8655
Attention: Christine Kim
Number of Shares: 134,000
Purchase Price: $6,700,000
<PAGE> 102
TH LEE.PUTNAM INTERNET PARALLEL
PARTNERS, L.P.
By: TH LEE.PUTNAM INTERNET FUND
ADVISORS, L.P., its General Partner
By: TH LEE.PUTNAM INTERNET FUND
ADVISORS, LLC, its General Partner
By:________________________________________
Name: Christine Kim
Title: Vice President
Address: 200 Madison Avenue, Suite 2225
New York, New York 10016
Facsimile #: (212) 951-8655
Attention: Christine Kim
Number of Shares: 126,000
Purchase Price: $6,300,000
<PAGE> 103
GE CAPITAL EQUITY INVESTMENTS, INC.
By:________________________________________
Name: George L. Hashbarger, Jr.
Title: Senior Vice President
Address: 260 Long Ridge Road
Stamford, Connecticut 06927
Facsimile #: (203)
Attention:
Number of Shares: 20,000
Purchase Price: $1,000,000
<PAGE> 104
SCHEDULE 6.1
EVENTS OF DEFAULT
(a) the Company's breach of the covenant contained in the last
sentence of Section 4.13 of the Agreement;
(b) the failure of the Company to receive approval of the
E-Commerce Plan in accordance with Section 2.2(u) of the Stockholders
Agreement within 120 days from the First Closing Date;
(c) failure to use at least $10,000,000 of the Proceeds for
E-Commerce Proceed Uses during the term of the E-Commerce Plan; and
(d) the Company's material variance (positive or negative) from
the aggregate projected expenditures contained in the E-Commerce Plan
for any calendar month and the continuance of a material variance for
the period beginning on the first day of such month and ending 60 days
after written notice is given to the Company by THLi.
THLi shall be deemed to waive any Event of Default pursuant to clause
(c) or (d) above unless THLi has notified the Company in writing of such Event
of Default within 15 days of the later of (i) THLi's becoming aware of such
Event of Default and (ii) THLi's receipt of the monthly report required by
Section 4.9(e) of the Agreement. In addition, THLi may approve deviations from
the E-Commerce Plan (and such deviations will not be deemed to be Events of
Default) or waive any of the defaults listed above, in each case by executing a
written instrument specifying such waiver.
Schedule 6.1 - 1
<PAGE> 105
APPENDIX D
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
by and among
KRAUSE'S FURNITURE, INC.
and
THE STOCKHOLDERS LISTED ON THE SIGNATURE PAGES HEREOF
Dated as of January 14, 2000
<PAGE> 106
Amended and Restated Registration Rights Agreement (this "Agreement"),
dated as of January 14, 2000, 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 hereto (the "Investors").
1. Background. The Investors own shares of either the Company's common
stock, par value $.001 per share (the "Common Stock") or the Company's Series A
Convertible Preferred Stock, par value $.0001 per share, (the "Series A
Preferred Stock"), which is convertible into Common Stock. In connection with a
Securities Purchase Agreement between the Company and the purchasers listed
thereto, dated August 26, 1996, the Company entered into a Registration Rights
Agreement with certain stockholders dated August 26, 1996 (the "Prior
Registration Rights Agreement").
Pursuant to a Securities Purchase Agreement among the Company and the
purchasers listed thereto, dated the date hereof, the Company and the Investors
have entered into this Agreement to amend, restate and supersede the Prior
Registration Rights 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 (the "Initiating Holders") of not
less than the Required Number of Shares that the Company effect the registration
under the Securities Act (other than pursuant to a Shelf Registration Statement)
of all or part of such Initiating Holders' Registrable Securities (provided that
the Company shall not 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, 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
<PAGE> 107
written request given to the Company within 20 days after the giving of
such written notice by the Company, all to the extent required 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, no securities other than
Registrable Securities shall be included among the securities covered by such
registration unless (i) the managing underwriter of such offering shall have
advised each Selling Holder to be covered by such registration in writing that
the inclusion of such other securities would not adversely affect such offering
or (ii) 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 such registration 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 shall be selected by the
2
<PAGE> 108
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) 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 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, the Company shall not be required to
effect, in the aggregate pursuant to this Section 2.1, without regard to the
Holder 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 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 , 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
3
<PAGE> 109
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, 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 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 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
4
<PAGE> 110
Securities Act as provided in Section 2.1, 2.2 or 2.8, the Company will as
expeditiously as possible:
(a) 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 Form 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, 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;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective 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;
(c) 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;
(d) use its best efforts:
(i) 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;
5
<PAGE> 111
(ii) to keep such registration or qualification in effect for so
long as such registration statement remains in effect; and
(iii) 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 (d) be obligated to
be so qualified or to consent to general service of process in any such
jurisdiction;
(e) 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;
(f) 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 (i) an
opinion of counsel for the Company and (ii) 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;
(g) 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 circum-
6
<PAGE> 112
stances 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;
(h) 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;
(i) 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
(j) 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 agrees that upon receipt of any notice from the Company of
the happening of any event of the kind described in subdivision (g) 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
7
<PAGE> 113
prospectus contemplated by subdivision (g) 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 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
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 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 . Any such Holder 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 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
8
<PAGE> 114
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 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. Any such Requesting Holder 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) Hold-back Agreements.
(i) In the case of any underwritten public offering by the
Company of shares of Common Stock, each Holder 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 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 (x) 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
9
<PAGE> 115
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 (y) 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 (x) (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 2.8) 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
10
<PAGE> 116
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 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 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 2.8 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 the 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(b) or 2.8(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.
11
<PAGE> 117
(c) Holders 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 2.8, 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 (a "Controlling Person"), 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
12
<PAGE> 118
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 (a "Company Controlling Person"), 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
13
<PAGE> 119
of the Company or any such director, officer or Company 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,
14
<PAGE> 120
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.
15
<PAGE> 121
2.8 Shelf Registration Statements.
(a) Within 120 days of the date hereof, the Company shall have filed
with the Commission and shall use its best efforts to cause to be declared
effective within 180 days from the date hereof, a Shelf Registration Statement,
relating to the offer and sale of the Registrable Securities owned by the
Holders listed on Schedule A hereto.
(b) The Company will use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the prospectus
forming part thereof to be usable by such Holders 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 thereto or cease to be outstanding or otherwise to be Registrable
Securities.
(c) The Company will pay the Registration Expenses in connection with
any Shelf Registration Statement pursuant to this Section 2.8.
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.
"Holder" means any holder of Registrable Securities.
16
<PAGE> 122
"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 fees of the National Association of Securities Dealers,
Inc., 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 and the
shares of Common Stock issuable upon conversion of the Series A Preferred Stock
held or otherwise acquired by the Investors (including by way of issuance upon
exercise or conversion of any warrants or other securities) and (ii) any Common
Stock of the Company issuable or issued with respect to the Common Stock, the
Series A Preferred 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
17
<PAGE> 123
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 (or securities
convertible into or exchangeable or exercisable for 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, 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. References to a
particular section of the Securities Act of 1933, as amended, 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" shall mean a "shelf" registration statement
of the Company filed pursuant to Section 2.8, 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.
"Stockholders Agreement" shall mean the Amended and Restated Stockholders
Agreement dated the date hereof between the Company and the stockholders listed
on the signature pages thereof.
4. Rule 144. The Company shall take all actions reasonably necessary to
enable Holders of Common Stock or Series A Preferred 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 or Series A
Preferred Stock, the Company will deliver to such Holder a written statement as
to whether it has complied with such requirements.
18
<PAGE> 124
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 :
(i) the Holders of at least a majority of the Registrable Securities
(calculated on a fully diluted basis);
(ii) GE Capital Equity Investments, Inc. (collectively, with General
Electric Capital Corporation, "GECC"), in the event GECC beneficially owns at
least 2,000,000 shares of Registrable Securities; and
(iii) TH Lee.Putnam Internet Partners, L.P. and TH Lee.Putnam Internet
Parallel Partners, L.P. (collectively with their affiliates, "THLi"), in the
event THLi beneficially owns at least 2,000,000 shares of Registrable
Securities.
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 pursuant to this Agreement
or any determination of any number or percentage of Registrable Securities held
by any Holder or Holders 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;
19
<PAGE> 125
(b) if to any other Holder , 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 92821-3903, Attention: Judith O. Lasker, Esq. or at
such other address as the Company shall have furnished to each Holder 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.
(b) All references to Registrable Securities shall be calculated as if
all shares of Series A Preferred Stock had been converted into shares of Common
Stock as of the date of such calculation; provided, that any proportion of the
Registrable Securities necessary to be determined in connection with a specific
registration shall be calculated based upon the number of Registrable Securities
participating in such registration only (assuming any shares of Series A
Preferred Stock had been converted into shares of Common Stock.)
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; Consent to Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
including, without limitation, Sections 5-1401 and 5-1402 of the New York
General Obligations Law and New York Civil Practice Laws and Rules 327(b). 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")
20
<PAGE> 126
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 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, to the extent
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.
21
<PAGE> 127
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.
22
<PAGE> 128
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: /s/ ROBERT A. BURTON
------------------------------------
Name: Robert A. Burton
Title: Executive Vice President/CFO
<PAGE> 129
GE CAPITAL EQUITY INVESTMENTS, INC.
By:
------------------------------------
Name: George L. Hashbarger, Jr.
Title: Senior Vice President
GENERAL ELECTRIC CAPITAL CORPORATION
By:
------------------------------------
Name: George L. Hashbarger, Jr.
Title: Department Operations Manager
<PAGE> 130
SCHEDULE A
Ascend Partners, L.P.
Larry Black
Branagh Revocable Trust
Matthew William Clarke - IRA
Sanford J. Colen
Aaron J. Colen, UTMA, CA
Elyse L. Colen, UTMA, CA
Sara K. Cox
John Davies
Diamond A. Partners, L.P.
J. Steven Emerson
Emily Fairbairn - IRA
Malcolm Fairbairn - IRA
William T. and Kathleen P. Gibson
Jonathan & Nancy Glaser Family Trust
George P. Hawley
Allison Booth Hawley Trust I
Caitlin Hale Hawley Trust I
Hawley Family Trust
Maureen Erin Hawley Trust I
Shannon Follen Hawley Trust I
Philip M. Hawley
Dr. Philip Hawley, Jr.
Victor F. Hawley
Richard Hicks
Kathryn Jergens Trust
Diane Johnson
Richard M. Keller
Stephen M. Keller
Stephen F. Keller Professional Corporation Defined Benefit Plan
Paul Kessler
Sidney Kimmel
Theodore D. Konopisos
Peter Lamm
Robert London
Jeffrey S. Morgan
The Muhl Family Trust
Pacific Security Group, Inc.
<PAGE> 131
Pilot Holdings, L.P.
Pointe Investments Capital, Ltd.
Pollat, Evans & Co., Inc.
Kevin and Erin Przybocki
Charles B. Runnels, Jr.
Charles B. Runnels, III
G. Tyler Runnels.
Lord Robin Russell
Timothy Michael Wallace
Wave Enterprises, Inc.
Ira Weingarten
J.D. Yates
Zaxis Partners, L.P.
Schedule A - 2
<PAGE> 132
APPENDIX E
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
by and among
KRAUSE'S FURNITURE, INC.
and
THE STOCKHOLDERS LISTED ON
THE SIGNATURE PAGES HEREOF
Dated as of January 14, 2000
<PAGE> 133
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Section 1. Definitions...................................................2
Section 2. Corporate Governance..........................................8
2.1 Board of Directors............................................8
2.2 Certain Actions Requiring Consent of the GECC Designee
and the THLi Fund Designee...................................11
2.3 Management...................................................14
2.4 Directors' Indemnification..................................15
2.5 Expenses.....................................................15
2.6 Cooperation..................................................16
Section 3. Restrictions on Transfers of Stock...........................16
Section 4. Rights of First Offer........................................16
Section 4A. Hawley Trust Stock Rights of First Offer....................18
Section 5. Tag-Along Rights.............................................20
Section 6. Conflicting Agreements.......................................21
Section 7. Legend.......................................................21
Section 8. Representations and Warranties...............................22
Section 9. Duration of Agreement........................................23
Section 10. Further Assurances..........................................24
Section 11. Amendment and Waiver........................................24
Section 12. Severability................................................24
Section 13. Entire Agreement............................................24
</TABLE>
-i-
<PAGE> 134
<TABLE>
<S> <C> <C>
Section 14. Successors and Assigns......................................24
Section 15. Counterparts................................................25
Section 16. Remedies....................................................25
Section 17. Notices and Other Communications............................25
Section 18. Governing Law; Consent to Jurisdiction......................27
Section 19. Descriptive Headings........................................27
Section 20. Construction................................................28
</TABLE>
-ii-
<PAGE> 135
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
This Amended and Restated Stockholders Agreement (this "Agreement") is
made as of January 14, 2000 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 "Signatory Stockholder" and collectively,
the "Signatory 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 (collectively, with GE Capital Equity
Investments, Inc., "GECC") dated August 26, 1996 (the "1996 Securities Purchase
Agreement"), GECC purchased 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 "First Warrant") to purchase 1,400,000 shares of
Common Stock;
WHEREAS, concurrently with such purchase by GECC, (i) Hawley Group
purchased 1,000,000 shares of Common Stock for an aggregate purchase price of
$1,000,000, (ii) certain other investors purchased 3,000,000 shares of Common
Stock for an aggregate purchase price of $3,000,000 and (iii) Japan Omnibus Ltd.
(formerly named Edson Investments Inc.) and certain other holders of
indebtedness of the Company exchanged such indebtedness for shares of Common
Stock, as more fully described in the Securities Purchase Agreement;
WHEREAS, in connection with the 1996 Securities Purchase Agreement, the
Company entered into a Stockholders Agreement with certain stockholders dated
August 26, 1996 (the "Prior Stockholders Agreement");
WHEREAS, pursuant to a Supplemental Securities Purchase Agreement
between the Company, GECC and Japan Omnibus LTD. ("JOL"), dated August 14, 1997,
(i) the Company and GECC amended and restated the provisions of the Notes, (ii)
GECC and JOL purchased certain additional notes, (iii) in connection with the
Notes, GECC and JOL received warrants (the "Second Warrants") to purchase
1,300,000 shares of Common Stock and (iv) GECC and JOL received an additional
1
<PAGE> 136
warrant (the "Performance Warrant," and collectively with the First Warrant and
the Second Warrants, the "Warrants") to purchase 1,000,000 shares of Common
Stock;
WHEREAS, pursuant to a Securities Purchase Agreement among the Company,
TH Lee.Putnam Internet Partners, L.P. and TH Lee.Putnam Internet Parallel
Partners, L.P. (collectively with their Affiliates, "THLi"), and the purchasers
listed on the signature pages thereto (collectively, the "Purchasers"), dated
the date hereof (the "2000 Securities Purchase Agreement," and, together with
the 1996 Securities Purchase Agreement, the "Securities Purchase Agreements"),
the Purchasers are purchasing from the Company 380,000 shares of the Company's
Series A Convertible Preferred Stock, par value $.001 per share (the "Series A
Preferred Stock"), for an aggregate purchase price of $19,000,000;
WHEREAS, pursuant to the 2000 Securities Purchase Agreement, the Company
will restructure the Notes, as more fully described in the 2000 Securities
Purchase Agreement; and
WHEREAS, it is a condition to the consummation of the foregoing
transactions that the parties hereto enter into this Agreement to amend, restate
and supersede the Prior Stockholders Agreement in accordance with Section 11 of
the Prior 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 2000 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.
2
<PAGE> 137
"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
3
<PAGE> 138
securities listed on the principal national securities exchange on which the
Common Stock or such other securities are listed or admitted to trading.
"E-Commerce Activities" shall mean business-to-business and e-commerce
activities, including commerce related to transactions on the Internet, related
to the E-Commerce Proceed Uses.
"Employment Agreement" shall mean the Employment Agreement dated as
of August 26, 1996, as amended, 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
4
<PAGE> 139
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.
5
<PAGE> 140
"Permal Group" shall mean those Persons listed on Schedule C attached
hereto.
"Permitted Transfer" shall mean any Transfer (i) by an individual Stock
holder 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.
"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.
"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
6
<PAGE> 141
Stock; 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" shall mean the stockholders listed on
Schedule B hereto; 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.
7
<PAGE> 142
(a) Members. Subject to the provisions of Section 6.10 of the
1996 Securities Purchase Agreement and Section 4.7 of the 2000 Securities
Purchase Agreement, the Board of Directors of the Company (the "Board") shall
consist of nine members, of whom:
(i) one shall be designated by GECC (such person so designated,
and any successor thereto, being referred to herein as the "GECC
Designee");
(ii) one shall be designated by Permal Group (such person so
designated, and any successor thereto, being referred to herein as the
"Permal Designee");
(iii) one shall be Hawley, or, in the event of death or
incapacity of Hawley, shall be John Hawley, or, if John Hawley is
unavailable to serve as director or ceases to serve as director, then an
individual nominated by the trustee(s) of the Hawley Trusts, having
qualifications similar to those of John Hawley or any other director of
the Company shall serve as director under the same terms that would have
applied to John Hawley hereunder (the "Hawley Designee").
(iv) an E-commerce and/or business to business expert shall be
designated by THLi (the "THLi Internet Designee") and one additional
member shall be designated by THLi (the "THLi Fund Designee" and,
together with the THLi Internet Designee and any successors to either of
them, being referred to herein as the "THLi Designees" );
(v) one shall be unanimously designated by GECC and THLi (such
person so designated, and any successor thereto, being referred to
herein as the "GECC/THLi Designee"); and
(vi) three shall be selected by the vote of the GECC Designee,
the Permal Designee, the THLi Fund Designee and the Hawley Designee
(such persons so designated, any successors thereto, being referred to
herein as the "Joint Designees" and, together with the GECC Designee,
the Permal Designee, the Hawley Designee, the THLi Designees and the
GECC/THLi Designee, the "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
8
<PAGE> 143
action as shall be necessary to cause the 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, Permal Group and THLi,
causing their respective designees on the Board to nominate, and recommend to
the stockholders of the Company the election of, the Designees to the Board and
opposing, and causing their respective designees on the Board to oppose, any
proposal to remove any 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 any
Designee being elected to the Board or increase the prospects of any 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, the Permal Designee,
the THLi Designees and the GECC/THLi 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 any of the THLi
Designees 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 THLi.
If any GECC/THLi Designee shall cease to serve as a director of the Company for
any reason, the vacancy resulting thereby shall be filled by another person
unanimously designated by GECC and THLi. If the Hawley Designee shall cease to
serve as a director of the Company for any reason, the vacancy resulting thereby
shall be filled by another person unanimously designated by the Hawley Group. In
the event that at any time there exist vacancies on the Board such that there is
either no GECC Designee, no Permal Designee, no GECC/THLi Designee or less than
two THLi Designees, no action may be taken by the Board until such vacancy is
filled. GECC, Permal Group, the Hawley Group and THLi 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, no Permal Designee may be removed from office except by Permal Group,
no THLi Designee may be removed from office except by THLi, no Hawley
9
<PAGE> 144
Designee may be removed from office except by the Hawley Group; provided that
such limitation shall not apply to the removal of Hawley as Chairman so long as
Hawley remains a Director, no GECC/THLi Designee may be removed from office
except unanimously by GECC and THLi. GECC shall have the right to remove any
GECC Designee, Permal Group shall have the right to remove any Permal Designee,
THLi shall have the right to remove any THLi Designee, the Hawley Group shall
have the right to remove any Hawley Designee and GECC and THLi shall
unanimously have the right to remove any GECC/THLi 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,
the THLi Fund Designee and the Hawley Designee. 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, the
Permal Designee and at least one THLi 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, Permal Group or THLi, 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, Permal Group and THLi
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, any THLi Designee and the GECC/THLi 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, Permal Group and THLi to
designate directors pursuant to this Section shall continue only for so long as
GECC and its Affiliates, Permal Group, or THLi and its Affiliates, as the case
may be, beneficially owns at least 2,000,000 shares of Common Stock on a Fully
Diluted
10
<PAGE> 145
Basis, as adjusted for stock splits, combinations or similar transactions. The
right of the Hawley Group to designate directors pursuant to this Section 2.1(h)
shall continue only for so long as the Hawley Group beneficially owns at least
1,000,000 shares of Common Stock on a Fully Diluted Basis, as adjusted for stock
splits, combinations or similar transactions.
(i) Observation. In addition to THLi's right to designate members
of the Board pursuant to Section 2.1(a), so long as THLi is the owner of any
Stock, it shall have the right to designate an observer to attend meetings of
the Board, but such observer shall not have a vote with respect to any matter
presented to the Board of Directors for action thereon. In connection with such
observer's right, THLi shall receive all notices and information provided to
Board members.
2.2 CERTAIN ACTIONS REQUIRING CONSENT OF THE GECC DESIGNEE AND THE THLI
FUND DESIGNEE. Notwithstanding any other provision of this Agreement, without
the approval, at a meeting of the Board or a committee thereof duly called and
held, (1) for so long as GECC is entitled to designate the GECC Designee, of the
GECC Designee and (2) for so long as THLi is entitled to designate the THLi Fund
Designee, of the THLi Fund 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
Agreements, the Registration Rights Agreement or an annual business plan
previously approved by the GECC Designee and the THLi Fund 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);
11
<PAGE> 146
(e) expand into new lines of business (it being understood that
"new lines of business" do not include (i) geographic expansion of the retail
operations conducted by the Company and its Subsidiaries as of the date of this
Agreement and (ii) E-Commerce Activities);
(f) assign to any other Person any rights of the Company under
this Agreement, the Registration Rights Agreement or the Securities Purchase
Agreements;
(g) in any transaction or series of transactions, sell, lease or
exchange any assets of the Company and/or any Subsidiary, except for (i) sales
of inventory in the ordinary course of business, (ii) subleasing of vacant
retail space on arm's-length terms and (iii) entering into or terminating leases
in the ordinary course of business pursuant to a procedure adopted by the Board
of Directors and approved by the GECC Designee and the THLi Fund Designee;
(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 (a) Indebtedness in existence as of the date of this Agreement and
interest thereon, reduced to the extent such amounts are repaid or retired, and
any refinancing of such Indebtedness, (b) 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, (c) Indebtedness already
approved in accordance with this subsection, reduced to the extent such amounts
are repaid, refinanced or retired, and (d) other Indebtedness not to exceed in
the aggregate $200,000 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);
12
<PAGE> 147
(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 (i) the calendar year ended December
31, 2000, any capital expenditure or capital expenditures in an amount in excess
of $8,000,000 with respect to the Company's retail business and $100,000 with
respect to the Company's E-commerce business and (ii) any other calendar year
any capital expenditure or capital expenditures in an amount in excess of
$100,000;
(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 $150,000 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; provided that the renewal by the Company in the
ordinary course of its business of benefit plans applicable to employees of the
Company, generally, shall not require consent pursuant to this subparagraph (n);
(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;
13
<PAGE> 148
(p) amend, modify or waive an provision of this Agreement, the
Securities Purchase Agreements, 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 $100,000 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 (i) any action to terminate the
Consumer Credit Card Agreement by and among Krause's Sofa Factory, Castro
Convertible Corporation and Monogram Credit Bank of Georgia, dated as of April
27, 1997, and (ii) 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 required 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 a majority
of
14
<PAGE> 149
the Board; provided that no such person shall be selected without the unanimous
approval of the GECC Designee and the THLi Fund Designee.
(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 $150,000 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 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 or
THLi).
(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 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 Designees.
15
<PAGE> 150
2.5 EXPENSES. The Company shall pay the reasonable out-of-pocket
expenses incurred by each of the GECC designee, the Permal Designee, the THLi
Designees, the GECC/THLi Designees 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
or to amend the Certificate, 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 or to amend the Certificate, as applicable), to (a)
effectuate the provisions of Section 2.1 and (b) cause the Company to have a
sufficient number of authorized and unissued shares of Company Stock reserved
for issuance solely for the purpose of effecting conversion of outstanding
Series A Preferred Stock.
SECTION 3. RESTRICTIONS ON TRANSFERS OF STOCK.
(a) Notwithstanding anything to the contrary contained herein, no
Stockholder shall Transfer any Stock, except for Sales in bona fide transactions
for value complying with the provisions of this Section 3 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.
16
<PAGE> 151
SECTION 4. RIGHTS OF FIRST OFFER.
(a) If any Stockholder (other than the Hawley Trusts) intends to
Sell any Stock (other than (1) Sales pursuant to a registered public offering or
(2) Sales on a national securities exchange which, when aggregated with all
other Sales under this clause (2) by such Stockholder or, if such Stockholder is
a member of a Stockholder Group, all other Sales under this clause (2) by the
members of such Stockholder Group from and after the date of this Agreement,
would represent, in the aggregate, not more than 1,000,000 shares of Common
Stock on a Fully Diluted Basis, as adjusted for stock splits, combinations or
similar transactions):
(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 Sale within 90 days after the expiration of the 15-day period
referred to in
17
<PAGE> 152
clause (ii) above, then the Proposing Seller may not thereafter Sell
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.
(b) THLi, GECC and each of the members of the Hawley Group, each
in favor of the others, covenants that if any of them (for purposes of this
Section, a "Permal Offeree") has the opportunity to purchase any Common Stock
("Offered Shares") owned by any member of the Permal Group, whether by offer to
the Permal Offeree from a member of the Permal Group or due to a solicitation by
the Permal Offeree, or otherwise, the Permal Offeree shall promptly notify the
parties subject to (and entitled to the benefits of) this Section 4(b)(v) of the
opportunity and shall allow them the right to participate in such purchase and
acquire Offered Shares. The number of Offered Shares that may be purchased by
each of them, respectively, shall be (i) as among GECC, THLi and all of the
members of the Hawley Group together, in proportion to the number of shares of
Common Stock owned by GECC, THLI or the Hawley Group, respectively, as a
percentage of the aggregate number of shares of Common Stock then owned by GECC,
THLi and all members of the Hawley Group together, and (ii) as among the members
of the Hawley Group, in proportion to the number of shares of Common Stock owned
by such member as a percentage of the number of shares of Common Stock then
owned by all Hawley Group members electing to purchase Common Stock hereunder.
The rights in this Section 4(b) are in addition to and subordinate to the other
provisions of this Stockholders Agreement. Any failure to exercise the rights
in the Section within 15 days of receipt of notice shall be deemed a waiver of
such rights.
SECTION 4A. HAWLEY TRUST STOCK RIGHTS OF FIRST OFFER. If any of the
Hawley Trusts intends to sell any Stock (other than (1) Sales pursuant to a
registered public offering or (2) Sales on a national securities exchange which,
when aggregated with all other Sales under this clause (2) by the Hawley Group
from and after the date of this Agreement, would represent, in the aggregate,
not more than 1,000,000 shares of Common Stock on a Fully Diluted Basis, as
adjusted for stock splits, combinations or similar transactions):
18
<PAGE> 153
(i) the Hawley Trust intending to transfer such Stock (the
"Hawley Trust Seller") shall give the Company, GECC, THLi and the Permal
Group 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, GECC, THLi and the Permal Group, 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
written notice to the Hawley Trust Seller, GECC, THLi and the Permal
Group 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. 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, THLi and the Permal Group shall have the
right to purchase their pro rata share of any or all of the available
Stock (and, if either elects not to purchase its full pro rata share,
the Stock not so purchased) by giving 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, THLi and the Permal Group 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, THLi, the
Permal Group 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;
(ii) 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
19
<PAGE> 154
Electing Stockholders; and GECC shall have no liability to any other
Stockholder for any act or omission by GECC under this Section 4A;
(iii) if the Company, GECC, THLi and the Permal Group 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, GECC, THLi or the
Permal Group 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 (i)
above;
(iv) 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;
(v) 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 (v).
SECTION 5. TAG-ALONG RIGHTS.
(a) If GECC, any member of Permal Group, or THLi 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 Sell or otherwise propose to Sell to any 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 Common Stock
on a Fully Diluted Basis, as adjusted
20
<PAGE> 155
for stock splits, combinations or similar transactions (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).
(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, AS AMENDED (THE "ACT") 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."
21
<PAGE> 156
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY A STOCKHOLDERS AGREEMENT BY AND AMONG KRAUSE'S FURNITURE, INC.
(THE "COMPANY") AND THE STOCKHOLDERS PARTIES THERETO (THE "STOCKHOLDERS
AGREEMENT"), A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE COMPANY."
"IN ADDITION TO THE RESTRICTIONS SET FORTH IN THE STOCKHOLDERS
AGREEMENT, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
RESTRICTIONS SET FORTH IN A SECURITIES PURCHASE AGREEMENT BETWEEN THE COMPANY
AND GENERAL ELECTRIC CAPITAL CORPORATION AND A SECURITIES PURCHASE AGREEMENT BY
AND AMONG THE COMPANY AND THE PURCHASERS LISTED ON THE SIGNATURE PAGES THERETO,
A COPY OF EACH OF WHICH IS ON FILE AT THE OFFICES OF THE COMPANY."
The first paragraph of the legends shall be removed from certificates
for shares transferred pursuant to Rule 144 under the Securities Act or when
such shares are transferred in any other transaction, in each case 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.
(b) Any provision herein to the contrary notwithstanding,
certificates for up to 1,000,000 shares of Common Stock held by the Hawley
Trusts shall not be required to bear legends required by this Agreement so long
as such shares may sold under Rule 144(k) under the Securities Act or are not
"restricted securities" within the meaning of Rule 144 under the Securities Act.
22
<PAGE> 157
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;
(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; and
(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 Signatory Stockholder severally represents and warrants
to GECC and THLi with respect only to GECC and THLi and not any other
Stockholder as follows:
(i) Schedule 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; and
23
<PAGE> 158
(ii) except as set forth on Schedule 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. As to any of GECC's rights or obligations under this
Agreement, 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
on a Fully Diluted Basis, subject to adjustment for stock splits, combinations
or similar transactions, or at such earlier time as may be agreed by GECC,
Permal Group and THLi (or, if applicable, THLi's transferee pursuant to Section
14(ii)).
As to any of THLi's rights or obligations under this Agreement, this
Agreement shall terminate at such time as THLi (and any transferee's assigned
rights under this Agreement pursuant to Section 14) no longer beneficially owns
2,000,000 or more of the outstanding shares of Common Stock on a Fully Diluted
Basis, subject to adjustment for stock splits, combinations or similar
transactions, or at such earlier time as may be agreed by GECC, Permal Group and
THLi (or such transferee, if applicable).
This Agreement (other than Section 4A), shall terminate as to any member
of the Hawley Group six months after Hawley ceases to be a Director of the
Company.
Any provision herein to the contrary notwithstanding, the
provisions of Sections 3, 4, 4A, 5 and 7 of this Agreement shall not be
applicable to any shares of Stock first acquired by any member of the Hawley
Group after August 26, 1996 or by any member of the Permal Group, GECC or THLi
after the date hereof.
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.
24
<PAGE> 159
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 or THLi. 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. No Stockholder shall have the right to assign its rights and obligations
under this Agreement, except pursuant to (i) a Permitted Transfer or (ii) a
transfer by THLi of more than 50% of the Stock (calculated as if all shares of
Series A Preferred Stock had been converted into shares of Common Stock as of
the date of such calculation) held by THLi as of the date of this Agreement (in
which case the transferee shall be entitled to exercise all rights, and shall be
bound by all obligations, of its transferor under this Agreement).
25
<PAGE> 160
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 facsimile 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 written notice to the
sending party:
The Company:
Krause's Furniture, Inc.
200 North Berry Street
Brea, CA 92821-3903
Facsimile #: (714) 990-3561
Attention: Philip M. Hawley
with copies to:
Krause's Furniture, Inc.
200 North Berry Street
Brea, CA 92821-3903
Facsimile #: (714) 990-3561
Attention: Judith O. Lasker, Esq.
26
<PAGE> 161
and
Morrison & Foerster LLP
555 West 5th Street, Suite 3500
Los Angeles, CA 90013-1024
Facsimile #: (213) 892-5454
Attention: Charles Kaufman, Esq.
To each Stockholder:
At the address for such Stockholder set forth on Schedule
B attached hereto.
with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Facsimile #: (212) 859-4000
Attention: Warren de Wied, Esq.
and
Stroock & Stroock & Lavan LLP
7 Hanover Square
New York, New York 10004
Facsimile #: (212) 806-6006
Attention: David Kaufman, Esq.
and
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Suite 3400
Los Angeles, California 90071
Facsimile #: (213) 687-5600
Attention: Michael A. Woronoff, Esq.
27
<PAGE> 162
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, including, without limitation, Sections 5-1401 and 5-1402 of the New York
General Obligations Law and New York Civil Practice Laws and Rules 327(b). 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.
28
<PAGE> 163
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: Robert A. Burton
Title: Executive Vice President/CFO
<PAGE> 164
GE CAPITAL EQUITY INVESTMENTS, INC.
By:____________________________________
Name: George L. Hashbarger, Jr.
Title: Senior Vice President
GENERAL ELECTRIC CAPITAL CORPORATION
By:____________________________________
Name: George L. Hashbarger, Jr.
Title: Department Operations Manager
<PAGE> 165
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
A - 1
<PAGE> 166
SCHEDULE B
STOCKHOLDER INFORMATION
B-1
<PAGE> 167
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.
Japan Omnibus Ltd.
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.
C-1
