<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
SCHEDULE 13D
(RULE 13d-101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
RULE 13d-2(a)
(AMENDMENT NO. __________)1
Krause's Furniture, Inc.
------------------------
(Name of Issuer)
COMMON STOCK, PAR VALUE $.001 PER SHARE
---------------------------------------
(Title of Class of Securities)
000500760202
--------------
(CUSIP Number)
Christine Kim
TH Lee.Putnam Internet Fund Advisors, LLC
200 Madison Avenue, Suite 2225
New York, NY 10016
(212) 951-8600
with a copy to:
James M. Schell
Skadden, Arps, Slate, Meagher & Flom LLP
4 Times Square
New York, New York 10036-6522
(212) 735-3000
---------------------------------------------
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
January 14, 2000
-------------------------------------------------------
(Date of Event Which Requires Filing of This Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition that is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1 (g), check the following
box [ ].
Note: Schedules filed in paper format shall include a signed original
and five copies of the schedule, including all exhibits. See Rule 13d-7(b) for
other parties to whom copies are to be sent.
(Continued on following pages)
(Page 1 of 16 Pages)
__________________
1 The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class
of securities, and for any subsequent amendment containing information
which would alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not
be deemed to be "filed" for the purpose of Section 18 of the Securities
Exchange Act of 1934 or otherwise subject to the liabilities of that
section of the Act but shall be subject to all other provisions of the
Act (however, see the Notes).
<PAGE> 2
13D
CUSIP No. 000500760202 Page 2 of 16 Pages
- --------------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
TH Lee.Putnam Internet Partners, L.P. (I.R.S. # 06-1561851)
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [x]
(b) [ ]
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
00
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
-0-
NUMBER OF ----------------------------------------------------------
SHARES 8 SHARED VOTING POWER
BENEFICIALLY 6,090,909
OWNED BY ----------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING -0-
PERSON ----------------------------------------------------------
WITH 10 SHARED DISPOSITIVE POWER
6,090,909
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
6,090,909
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (9)
APPROXIMATELY 18.0%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
- --------------------------------------------------------------------------------
<PAGE> 3
SCHEDULE 13D
CUSIP No. 000500760202 Page 3 of 16 Pages
- --------------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
TH Lee.Putnam Internet Parallel Partners, L.P. (I.R.S. # 06-1564965)
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [x]
(b) [ ]
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
00
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
-0-
NUMBER OF ----------------------------------------------------------
SHARES 8 SHARED VOTING POWER
BENEFICIALLY 5,727,273
OWNED BY ----------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING -0-
PERSON ----------------------------------------------------------
WITH 10 SHARED DISPOSITIVE POWER
5,727,273
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
5,727,273
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
APPROXIMATELY 16.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
- --------------------------------------------------------------------------------
<PAGE> 4
SCHEDULE 13D
CUSIP No. 000500760202 Page 4 of 16 Pages
- --------------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
TH Lee.Putnam Internet Fund Advisors, L.P. (I.R.S. # 06-1561849)
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [x]
(b) [ ]
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
00
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
-0-
NUMBER OF ----------------------------------------------------------
SHARES 8 SHARED VOTING POWER
BENEFICIALLY 11,818,181
OWNED BY ----------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING -0-
PERSON ----------------------------------------------------------
WITH 10 SHARED DISPOSITIVE POWER
11,818,181
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11,818,181
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (9)
Approximately 34.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
- --------------------------------------------------------------------------------
<PAGE> 5
SCHEDULE 13D
CUSIP No. 000500760202 Page 5 of 16 Pages
- --------------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
TH Lee.Putnam Internet Fund Advisors, LLC. (I.R.S. # 06-1561999)
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [x]
(b) [ ]
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
00
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
-0-
NUMBER OF ----------------------------------------------------------
SHARES 8 SHARED VOTING POWER
BENEFICIALLY 11,818,181
OWNED BY ----------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING -0-
PERSON ----------------------------------------------------------
WITH 10 SHARED DISPOSITIVE POWER
11,818,181
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11,818,181
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (9)
Approximately 34.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
00
- --------------------------------------------------------------------------------
<PAGE> 6
SCHEDULE 13D
CUSIP No. 000500760202 Page 6 of 16 Pages
- --------------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
James Brown
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [x]
(b) [ ]
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
00
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
-0-
NUMBER OF ----------------------------------------------------------
SHARES 8 SHARED VOTING POWER
BENEFICIALLY 11,818,181
OWNED BY ----------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING -0-
PERSON ----------------------------------------------------------
WITH 10 SHARED DISPOSITIVE POWER
11,818,181
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11,818,181
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (9)
Approximately 34.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- --------------------------------------------------------------------------------
<PAGE> 7
SCHEDULE 13D
CUSIP No. 000500760202 Page 7 of 16 Pages
- --------------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Jeffrey Coats
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [x]
(b) [ ]
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
00
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
-0-
NUMBER OF ----------------------------------------------------------
SHARES 8 SHARED VOTING POWER
BENEFICIALLY 11,818,181
OWNED BY ----------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING -0-
PERSON ----------------------------------------------------------
WITH 10 SHARED DISPOSITIVE POWER
11,818,181
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11,818,181
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (9)
Approximately 34.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- --------------------------------------------------------------------------------
<PAGE> 8
SCHEDULE 13D
CUSIP No. 000500760202 Page 8 of 16 Pages
- --------------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Sharon Pipe
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [x]
(b) [ ]
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
00
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United Kingdom
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
-0-
NUMBER OF ----------------------------------------------------------
SHARES 8 SHARED VOTING POWER
BENEFICIALLY 11,818,181
OWNED BY ----------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING -0-
PERSON ----------------------------------------------------------
WITH 10 SHARED DISPOSITIVE POWER
11,818,181
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11,818,181
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (9)
Approximately 34.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- --------------------------------------------------------------------------------
<PAGE> 9
SCHEDULE 13D
CUSIP No. 000500760202 Page 9 of 16 Pages
- --------------------------------------------------------------------------------
1 NAMES OF REPORTING PERSONS
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Warren C. Smith, Jr.
- --------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
(a) [x]
(b) [ ]
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
00
- --------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT
TO ITEMS 2(d) or 2(e) [ ]
- --------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
United States
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
-0-
NUMBER OF ----------------------------------------------------------
SHARES 8 SHARED VOTING POWER
BENEFICIALLY 11,818,181
OWNED BY ----------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING -0-
PERSON ----------------------------------------------------------
WITH 10 SHARED DISPOSITIVE POWER
11,818,181
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11,818,181
- --------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* [ ]
- --------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (9)
Approximately 34.9%
- --------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
IN
- --------------------------------------------------------------------------------
<PAGE> 10
Page 10 of 16 Pages
STATEMENT ON SCHEDULE 13D
ITEM 1. SECURITY AND ISSUER.
This Statement on Schedule 13D (the "Schedule 13D") relates to
shares of Common Stock, par value $.001 per share (the "Common Stock") of
Krause's Furniture, Inc., a Delaware corporation (the "Issuer"). The principal
executive offices of the Issuer are located at 200 North Berry Street, Brea,
California 92821-3903.
ITEM 2. IDENTITY AND BACKGROUND.
This Schedule 13D is being filed jointly by TH Lee.Putnam
Internet Partners, L.P., a Delaware limited partnership (the "U.S. Investor
Fund"), TH Lee.Putnam Internet Parallel Partners, L.P., a Delaware limited
partnership (the "Non-U.S. Investor Fund"), TH Lee.Putnam Internet Fund
Advisors, L.P., a Delaware limited partnership (the "Fund Advisor"), TH
Lee.Putnam Internet Fund Advisors, LLC, a Delaware limited liability company
(the "Fund Advisor GP"), and James Brown, Jeffrey Coats, Sharon Pipe and Warren
C. Smith, Jr. The Fund Advisor is the sole general partner of the U.S. Investor
Fund and the Non-U.S. Investor Fund. The Fund Advisor GP is the sole general
partner of the Fund Advisor. The U.S. Investor Fund, Non-U.S. Investor Fund,
Fund Advisor and Fund Advisor GP will hereinafter be referred to collectively as
the "THLi Entities."
The principal business of the U.S. Investor Fund and the Non-U.S.
Investor Fund consists of committing capital to finance Internet commerce
activities of companies. The principal business of the Fund Advisor consists of
performing the functions of, and serving as, the general partner of the U.S.
Investor Fund and the Non-U.S. Investor Fund. The principal business of the Fund
Advisor GP consists of performing the functions of, and serving as, the general
partner of the Fund Advisor. The principal business and office address of the
THLi Entities is 200 Madison Avenue, Suite 2225, New York, New York 10016.
Messrs. Brown, Coats and Smith and Ms. Pipe are the managing
directors (the "Managing Directors") of the Fund Advisor GP. Messrs. Brown,
Coats and Smith are each citizens of the United States. Ms. Pipe is a citizen of
the United Kingdom. The principal occupations of each of the Managing Directors
is serving as an executive of one or more of the THLi Entities and their
affiliates. The business address of each of the Managing Directors is 200
Madison Avenue, Suite 2225, New York, New York 10016.
During the last five years, none of the THLi Entities nor any of
the Managing Directors has (i) been convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors) or (ii) been a party to a
civil proceeding of a judicial or administrative body of competent jurisdiction
and as a result of such proceeding was or is subject to a judgment, decree or
final order enjoining future violations of, or prohibiting or mandating
activities subject to, Federal or state securities laws or finding any
violations with respect to such laws.
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
Pursuant to a Series A Convertible Preferred Stock Securities
Purchase Agreement, dated as of January 11, 2000 (the "Securities Purchase
Agreement"), by and among the U.S. Investor Fund, the Non-U.S. Investor Fund
(collectively, the "THLi Purchasers"), the other purchasers listed on the
signature pages thereto and the Issuer, the THLi Purchasers agreed to acquire
260,000 shares of Series A Convertible Preferred Stock,
<PAGE> 11
Page 11 of 16 Pages
par value $.001 per share, of the Issuer (the "Preferred Stock"), from the
Issuer for an aggregate purchase price of $13,000,000 (exclusive of related fees
and expenses).
The Preferred Stock is initially convertible into Common Stock at
the Conversion Price described below. Using the current Conversion Price, the
THLi Entities may be deemed to beneficially own 11,818,181 shares of Common
Stock.
Each of the THLi Purchasers funded the purchases of the
respective shares of Preferred Stock through capital contributions from their
limited and general partners.
All references to, and the summary of, the Securities Purchase
Agreement in this Schedule 13D is qualified in its entirety by reference to such
agreement, the full text of which is filed as Exhibit A and which is
incorporated herein by reference.
ITEM 4. PURPOSE OF TRANSACTION.
On January 14, 2000, the THLi Purchasers acquired the Preferred
Stock pursuant to the Securities Purchase Agreement. The shares of Preferred
Stock acquired by the THLi Purchasers were acquired for general investment
purposes and in the ordinary course of business. The THLi Purchasers maintain
the right to change their investment intent, and, subject to the restrictions
set forth in the Stockholders Agreement (as described below), to propose one or
more possible transactions to the Issuer and or other stockholders of the
Issuer.
On January 12, 2000, the Issuer filed the Certificate of
Designation of Series A Convertible Preferred Stock (the "Certificate of
Designation") with the State of Delaware. Pursuant to the Certificate of
Designation, each share of Preferred Stock is convertible, at the option of the
holder at any time, into such number of shares of Common Stock as is determined
by dividing $50 by the Conversion Price (as defined in the Certificate of
Designation) in effect on the date that the share certificate representing such
shares of Preferred Stock is surrendered for conversion. The initial conversion
price is $1.10, subject to standard anti-dilution provisions.
Each share of Preferred Stock shall be converted into shares of
Common Stock at the Conversion Price in effect at the time, (a) upon the
occurrence of the closing of a bona fide commitment registered public offering
of the Issuer's Common Stock for an aggregate offering price of not less than
$25 million and at a price per share of Common Stock of at least $3.30, subject
to adjustment for stock splits, combinations or similar transactions or (b) upon
the vote of the holders of at least 66 2/3% of the Preferred Stock.
The Preferred Stock is redeemable at the option of the holders of
a majority of the shares of the Preferred Stock at any time on or after January
14, 2005. Upon the exercise of such option, the Issuer will be required to
redeem on a pro rata basis the number of shares of Preferred Stock requested to
be redeemed, which number shall not exceed the Maximum Amount (as defined in the
Certificate of Designation) less the number of shares of Preferred Stock at a
price per share of $50.
Upon the occurrence of a Change of Control (as defined in the
Certificate of Designation), each holder of Preferred Stock has the right to
require that the Issuer redeem all or any part of the shares of Preferred Stock
then held by such holder at a price per share of $50.
<PAGE> 12
Page 12 of 16 Pages
Upon the occurrence of an Event of Default (as defined in the
Securities Purchase Agreement), and upon the written request of a holder of
Preferred Stock on or prior to January 14, 2002, the Issuer will be required to
redeem any or all of such holder's shares of Preferred Stock not to exceed such
holder's Maximum Number (as defined in the Certificate of Designation) at a
price per share of $50.
The holders of Preferred Stock have the right to one vote for
each share of Common Stock into which their shares of Preferred Stock could then
be converted, and with respect to such vote, the holders have full voting rights
and powers equal to the voting rights and powers of the holders of Common Stock.
So long as any shares of Preferred Stock are outstanding, prior
to taking certain actions, the Issuer must obtain the approval of holders of not
less than 66 2/3% of the Preferred Stock. Furthermore, pursuant to the
Certificate of Designation, prior to taking certain actions, the Issuer must
obtain the approval of each holder of Preferred Stock to be affected by such
action or actions.
The THLi Purchasers, certain other stockholders of the Issuer and
the Issuer entered into an Amended and Restated Stockholders Agreement (the
"Stockholders Agreement"), dated as of January 14, 2000, which among other
things: (i) grants to the THLi Purchasers and their affiliates (collectively,
"THLi") the right to nominate two of the nine nominees to the board of directors
of the Issuer (one of whom is referred to as the "THLi Fund Designee"); (ii)
grants to THLi and General Electric Capital Corporation and GE Capital Equity
Investments, Inc., (collectively, "GECC") the right to nominate one of the nine
nominees to the board of directors; (iii) requires that the stockholders party
to the Stockholders Agreement (the "Stockholders") vote in favor of the Issuer's
board of directors' nominees for election as directors of the Issuer; (iv)
requires that the Issuer obtain the consent of the THLi Fund Designee prior to
undertaking certain actions; (v) contains certain transfer restrictions limiting
the Stockholders' ability to transfer Stock (as defined therein), including a
right of first offer to purchase Stock on a pro rata basis and (vi) contains
"tag-along" rights which permit THLi, in certain instances, to participate in a
sale of Stock by other Stockholders.
The Securities Purchase Agreement provides that upon the
occurrence of an Event of Default and notification by THLi prior to January 14,
2002, of its desire to add directors to the board of directors of the Issuer in
accordance with the Securities Purchase Agreement, 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 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 of the Issuer. This
right continues until such Event of Default is cured or waived, subject to
revesting in the event of any subsequent Event of Default. Alternatively, the
Securities Purchase Agreement provides that upon the occurrence of an Event of
Default, THLi shall have the right to demand immediate redemption of up to its
Maximum Number (as such term is defined the Certificate of Designation) of
shares of Preferred Stock pursuant to the Certificate of Designation.
The Securities Purchase Agreement also provides that THLi or any
of its designees (the "First Refusal Stockholders") shall have a right of first
offer with respect to future sales by the Issuer of any shares of, or securities
convertible into or exercisable or exchangeable for, any shares of any class of
its capital stock ("Offered Shares"), other than (i) Common Stock issued
pursuant to any stock split, dividend or distribution payable in additional
shares of Common Stock and similar transactions pursuant to which the holder
thereof will receive additional shares of Common Stock without any payment of
any consideration by such holder, (ii) securities issuable or issued to
employees, consultants or directors of the Issuer pursuant to a stock option
plan
<PAGE> 13
Page 13 of 16 Pages
or similar compensation arrangement, (iii) capital stock issued upon conversion
or exercise of warrants, options or other securities outstanding immediately
following January 14, 2000 or (iv) in a public offering. Pursuant to this right
of first offer, the First Refusal Stockholders may elect to purchase or obtain,
at the price and on the terms offered by the Issuer, up to that portion of such
Offered Shares that equals the proportion that the number of shares of Common
Stock issued and held (or issuable upon conversion and exercise of all
convertible or exercisable securities then held by THLi) bears to the total
number of shares of Common Stock then outstanding (assuming full conversion and
exercise of all outstanding convertible or exercisable securities).
The THLi Purchasers, certain stockholders (collectively with the
THLi Purchasers, the "Investors") and the Issuer also entered into an Amended
and Restated Registration Rights Agreement, dated as of January 14, 2000 (the
"Registration Rights Agreement"), which among other things, entitles each
Investor to: (i) register under the Securities Act of 1933, as amended (the
"Securities Act"), (a) shares of Common Stock previously acquired by such
Investor and the shares of Common Stock issuable upon conversion of the
Preferred Stock (including any shares of Common Stock acquired by way of
issuance upon exercise or conversion of any warrants or other securities) and
(b) any Common Stock issuable or issued with respect to the Common Stock, the
Preferred Stock and/or warrants or other securities referred to in clause (a) by
way of merger, consolidation, stock split, stock dividend, recapitalization of
the Issuer or similar transaction (collectively, the "Registrable Securities"),
and subject to certain exceptions, to require the Issuer to include the
Registrable Securities in any registration of equity securities of the Issuer
under the Securities Act.
Except as aforesaid, the Reporting Persons have no plans or
proposals with respect to any other matters set forth in paragraphs (a) to (j)
of Item 4 of Schedule 13D.
All references to, and summaries of, the Certificate of
Designation, the Stockholders Agreement and the Registration Rights Agreement in
this Schedule 13D are qualified in their entirety by reference to such
agreements, the full text of which are filed as Exhibits B, C and D,
respectively, and incorporated herein by this reference.
ITEM 5. INTEREST IN SECURITIES OF THE ISSUER.
(a) and (b)
The U.S. Investor Fund owns 134,000 shares of Preferred Stock
that are immediately convertible into 6,090,909 shares of Common Stock. The
Non-U.S. Investor Fund owns 126,000 shares of Preferred Stock that are
immediately convertible into 5,727,273 shares of Common Stock. By virtue of
affiliation among each of the Reporting Persons, the Reporting Persons may be
deemed to beneficially own and have sole voting power over 11,818,181 shares of
Common Stock, which will represent approximately 34.9% of the outstanding shares
of Common Stock.
The U.S. Investor Fund and the Non-U.S. Investor Fund, each
acting through its general partner, the Fund Advisor, acting through its general
partner, the Fund Advisor GP, has the sole power to vote or to direct the vote,
and to dispose or direct the disposition of, the shares of Preferred Stock (or
Common Stock into which such Preferred Stock is convertible) respectively owned
by it. As a result, the Fund Advisor may be deemed to beneficially own the
shares of Preferred Stock (or Common Stock into which such Preferred Stock is
convertible) owned by the respective THLi Purchasers of which it is the general
partner, and the Fund Advisor GP may be deemed to beneficially own the shares of
Preferred Stock (or Common Stock into which such
<PAGE> 14
Page 14 of 16 Pages
Preferred Stock is convertible) that may be deemed to be beneficially owned by
the Fund Advisor. The Managing Directors have shared power to vote or to direct
the vote of, and to dispose or to direct the disposition of, the shares of
Preferred Stock (or Common Stock into which such Preferred Stock is convertible)
that may be deemed to be beneficially owned by the Fund Advisor GP. As a result,
each of such Managing Directors may be deemed to beneficially own the shares of
Preferred Stock (or Common Stock into which such Preferred Stock is convertible)
that the Fund Advisor GP may be deemed to beneficially own. Each of such
Managing Directors disclaims beneficial ownership of such shares, other than
that portion of shares corresponding to their individual capital commitments to
the Fund Advisor GP and the Fund Advisor.
(c) To the best knowledge of the Reporting Persons, none of the
THLi Entities nor any of the Managing Directors has beneficial ownership of, or
has engaged in any transaction during the past 60 days in, any shares of Common
Stock, except as disclosed in this Schedule 13D.
(d) Not applicable.
(e) Not applicable.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH
RESPECT TO SECURITIES OF THE ISSUER.
The response to Items 3, 4 and 5 of this Schedule 13D are
incorporated herein and the documents included as Exhibits A through D are
incorporated herein by reference.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.
EXHIBIT A Series A Convertible Preferred Stock Securities
Purchase Agreement, dated as of January 11, 2000
EXHIBIT B Certificate of Designation of Series A Convertible
Preferred Stock
EXHIBIT C Amended and Restated Stockholders Agreement, dated
as of January 14, 2000
EXHIBIT D Amended and Restated Registration Rights
Agreement, dated as of January 14, 2000
<PAGE> 15
Page 15 of 16 Pages
SIGNATURE
After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this statement is true,
complete and correct.
Dated: January 24, 2000
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: /s/ Christine Kim
---------------------------------------
Name: Christine Kim
Title: Vice President
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: /s/ Christine Kim
---------------------------------------
Name: Christine Kim
Title: Vice President
TH LEE.PUTNAM INTERNET FUND ADVISORS, L.P.
By: TH LEE.PUTNAM INTERNET FUND ADVISORS,
LLC, its General Partner
By: /s/ Christine Kim
---------------------------------------
Name: Christine Kim
Title: Vice President
<PAGE> 16
Page 16 of 16 Pages
TH LEE.PUTNAM INTERNET FUND ADVISORS, LLC
By: /s/ Christine Kim
-------------------------------------
Name: Christine Kim
Title: Vice President
/s/ James Brown
-------------------------------------
James Brown
/s/ Jeffrey Coats
-------------------------------------
Jeffrey Coats
/s/ Sharon Pipe
-------------------------------------
Sharon Pipe
/s/ Warren C. Smith, Jr.
-------------------------------------
Warren C. Smith, Jr.
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Item No. Description
- -------- -----------
<S> <C>
Exhibit A Series A Convertible Preferred Stock Securities Purchase
Agreement, dated as of January 11, 2000
Exhibit B Certificate of Designation of Series A Convertible Preferred
Stock
Exhibit C Amended and Restated Stockholders Agreement, dated as
of January 14, 2000
Exhibit D Amended and Restated Registration Rights Agreement,
dated as of January 14, 2000
</TABLE>
<PAGE> 1
EXHIBIT A
KRAUSE'S FURNITURE, INC.
SERIES A CONVERTIBLE PREFERRED STOCK
SECURITIES PURCHASE AGREEMENT
Dated as of January 11, 2000
<PAGE> 2
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> 3
<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> 4
<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> 5
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> 6
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> 7
(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> 8
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> 9
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> 10
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> 11
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> 12
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> 13
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.
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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
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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-
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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
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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.
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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.
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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
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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
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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.
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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.
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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
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(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
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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.
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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
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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> 28
(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> 29
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> 30
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> 31
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> 32
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> 33
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> 34
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> 35
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> 36
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> 37
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> 38
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> 39
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:
Title:
35
<PAGE> 40
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> 41
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> 42
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> 43
ASCEND PARTNERS, L.P.
By:________________________________________
Name:
Title:
Address: One Valley High
Lafayette, California 94549
Facsimile #:
Attention: Malcolm Fairbairn,
c/o Emily Wang
Number of Shares: 6,500
Purchase Price: $325,000
<PAGE> 44
ATCO DEVELOPMENT, INC.
By:________________________________________
Name:
Title:
Address: 11777 Katy Freeway, Suite 175
Houston, Texas 77079
Facsimile #:
Attention: Kamal Abdelnour
Number of Shares: 5,000
Purchase Price: $250,000
<PAGE> 45
ASCEND PARTNERS, L.P.
By:
-------------------------------------
Name:
Title:
ATCO DEVELOPMENT, INC.
By:
-------------------------------------
Name:
Title:
BANK INSINGER De BEAUFORT
By:
-------------------------------------
Name:
-----------------------------------
Its:
-----------------------------------
LARRY BLACK
By:
-------------------------------------
<PAGE> 46
BRANAGH REVOCABLE TRUST
By:
-------------------------------------
Name: Peter W. Branagh
Title: Trustee
By:
-------------------------------------
Name: Ramona Y. Branagh
Title: Trustee
MATTHEW WILLIAM CLARKE
By:
-------------------------------------
Name:
Title:
SANFORD J. COLEN
By:
-------------------------------------
AARON J. COLEN, UTMA, CA
By:
-------------------------------------
Name: Sanford J. Colen
Title: Custodian
<PAGE> 47
ELYSE L. COLEN, UTMA, CA
By:
-------------------------------------
Name: Sanford J. Colen
Title: Custodian
SARAH KESSLER COX
By:
-------------------------------------
JOHN DAVIES
By:
-------------------------------------
DIAMOND A. PARTNERS, L.P.
By:
-------------------------------------
Name:
Title:
J. STEVEN EMERSON
By:
-------------------------------------
<PAGE> 48
EMILY FAIRBAIRN - IRA
By:
-------------------------------------
Name:
Title:
MALCOLM FAIRBAIRN - IRA
By:
-------------------------------------
Name:
Title:
WILLIAM T. AND KATHLEEN P. GIBSON
By:
-------------------------------------
Name: William T. Gibson
By:
-------------------------------------
Name: Kathleen P. Gibson
JONATHAN & NANCY GLASER FAMILY TRUST
By:
-------------------------------------
Name: Jonathan M. Glaser
Title: Trustee
By:
-------------------------------------
Name: Nancy Ellen Glaser
Title: Trustee
<PAGE> 49
EDWARD M. HAWLEY
By:
-------------------------------------
GEORGE P. HAWLEY
By:
-------------------------------------
ALLISON BOOTH HAWLEY TRUST I
By:
-------------------------------------
Name: John F. Hawley
Title: Trustee
Number of Shares: 2,500
Purchase Price: $125,000
<PAGE> 50
CAITLIN HALE HAWLEY TRUST I
By:
-------------------------------------
Name: John F. Hawley
Title: Trustee
HAWLEY FAMILY TRUST
By:
-------------------------------------
Name: John F. Hawley
Title: Trustee
MAUREEN ERIN HAWLEY TRUST I
By:
-------------------------------------
Name: John F. Hawley
Title: Trustee
SHANNON FOLLEN HAWLEY TRUST I
By:
-------------------------------------
Name: John F. Hawley
Title: Trustee
DR. PHILIP HAWLEY, JR.
By:
-------------------------------------
<PAGE> 51
VICTOR F. HAWLEY
By:
-------------------------------------
RICHARD HICKS
By:
-------------------------------------
KATHRYN JERGENS TRUST
By:
-------------------------------------
Name:
Title:
DIANE JOHNSON
By:
-------------------------------------
RICHARD M. KELLER
By:
-------------------------------------
<PAGE> 52
STEPHEN M. KELLER
By:
-------------------------------------
STEPHEN F. KELLER PROFESSIONAL
CORPORATION DEFINED BENEFIT
PLAN
By:
-------------------------------------
Name:
Title:
SIDNEY KIMMEL
By:
-------------------------------------
KONOPISOS FAMILY TRUST DATED 12/15/80
By:
-------------------------------------
Name: Theodore D. Konopisos
Title: Trustee
By:
-------------------------------------
Name: Jeri L. Konopisos
Title: Trustee
<PAGE> 53
PETER LAMM
By:
-------------------------------------
ROBERT LONDON
By:
-------------------------------------
JEFFREY S. MORGAN
By:
-------------------------------------
JEFFREY S. MORGAN BSSC MASTER DEFINED
CONTRIBUTION PENSION PLAN
By:
-------------------------------------
Name:
-----------------------------------
Its:
-----------------------------------
THE MUHL FAMILY TRUST
By:
-------------------------------------
Name: Phillip E. Muhl
Title: Trustee
By:
-------------------------------------
Name: Kristin A. Muhl
Title: Trustee
<PAGE> 54
PACIFIC SECURITY GROUP, INC.
By:
-------------------------------------
Name:
Title:
PERMAL U.S. OPPORTUNITIES LTD.
By:
-------------------------------------
Name:
Title:
PILOT HOLDINGS, L.P.
By: SHED INVESTMENTS, LLC, its
General Partner
By:
-------------------------------------
Name: Thomas M. DeLitto
Title: Managing Member
POINTE INVESTMENTS CAPITAL, LTD.
By:
-------------------------------------
Name:
Title:
<PAGE> 55
POLLAT, EVANS & CO., INC.
By:
-------------------------------------
Name:
Title:
KEVIN AND ERIN PRZYBOCKI
By:
-------------------------------------
Name: Kevin Przybocki
By:
-------------------------------------
Name: Erin Przybocki
CHARLES B. RUNNELS, JR.
By:
-------------------------------------
CHARLES B. RUNNELS, III
By:
-------------------------------------
G. TYLER RUNNELS
By:
-------------------------------------
<PAGE> 56
LORD ROBIN RUSSELL
By:
-------------------------------------
TIMOTHY MICHAEL WALLACE
By:
-------------------------------------
WAVE ENTERPRISES, INC.
By:
-------------------------------------
Name:
Title:
IRA WEINGARTEN
By:
-------------------------------------
DAVID WEINSTEIN
By:
-------------------------------------
J.D. YATES
By:
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ZAXIS PARTNERS, L.P.
By:
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Name:
Title:
<PAGE> 57
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> 1
EXHIBIT 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> 2
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.
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<PAGE> 3
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
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<PAGE> 4
(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.
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<PAGE> 5
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
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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
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<PAGE> 7
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.
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(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-
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<PAGE> 9
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.
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(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).
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(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
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(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
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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
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<PAGE> 14
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
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<PAGE> 15
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
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<PAGE> 16
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
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<PAGE> 17
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.
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<PAGE> 18
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.
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<PAGE> 19
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
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<PAGE> 1
EXHIBIT C
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 [ ], 2000
<PAGE> 2
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> 3
<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> 4
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
This Amended and Restated Stockholders Agreement (this "Agreement") is
made as of January [ ], 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
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<PAGE> 5
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.
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<PAGE> 6
"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
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<PAGE> 7
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> 8
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> 9
"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> 10
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.
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<PAGE> 11
(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
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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
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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
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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);
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(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);
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(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;
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(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
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<PAGE> 18
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.
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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.
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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
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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):
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<PAGE> 22
(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
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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
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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> 25
"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> 26
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> 27
(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> 28
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> 29
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> 30
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> 31
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> 32
IN WITNESS WHEREOF, the parties hereto have executed this Stockholders
Agreement on the day and year first above written.
KRAUSE'S FURNITURE, INC.
By:____________________________________
Name:
Title:
<PAGE> 33
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> 34
PERMAL CAPITAL MANAGEMENT, INC.
By:________________________________
Name:
Title:
PERMAL SERVICES, INC.
By:________________________________
Name:
Title:
PERMAL CAPITAL PARTNERS, L.P.
By: PERMAL MANAGEMENT CORPORATION,
its Investment Manager
By:________________________________
Name:
Title:
PERMAL ASSET MANAGEMENT
By:________________________________
Name:
Title:
PERMAL SPECIAL OPPORTUNITIES, LTD.
By:________________________________
Name:
<PAGE> 35
Title:
JAPAN OMNIBUS LTD.
By:________________________________
Name:
Title:
JEAN R. PERRETTE
By:________________________________
ISAAC ROBERT SOUEDE
By:________________________________
THOMAS M. DELITTO
By:________________________________
THOMAS M. AND DONNA S. DELITTO
By:________________________________
Name: Thomas M. DeLitto
By:________________________________
Name: Donna S. DeLitto
UNITED GULF BANK (B.S.C.) E.C.
<PAGE> 36
By:________________________________
Name:
Title:
KUWAIT INVESTMENT PROJECTS COMPANY
By:________________________________
Name:
Title:
ATCO HOLDINGS, LTD.
By:________________________________
Name:
Title:
ATCO DEVELOPMENT, INC.
By:________________________________
Name:
Title:
<PAGE> 37
PILOT HOLDINGS, L.P.
By: SHED INVESTMENTS, LLC,
its General Partner
By:________________________________
Name: Thomas M. DeLitto
Title: Managing Member
<PAGE> 38
ALLISON BOOTH HAWLEY TRUST I
By:________________________________
Name:
Title:
CAITLIN HALE HAWLEY TRUST I
By:________________________________
Name:
Title:
MAUREEN ERIN HAWLEY TRUST I
By:________________________________
Name:
Title:
SHANNON FOLLEN HAWLEY TRUST I
By:________________________________
Name:
Title:
HAWLEY FAMILY TRUST
By:________________________________
Name:
Title:
<PAGE> 39
DR. PHILIP M. HAWLEY, JR.
By:________________________________
PHILIP M. HAWLEY
By:________________________________
<PAGE> 40
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
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
<PAGE> 41
ASCEND PARTNERS, L.P.
By:________________________________
Name:
Title:
LARRY BLACK
By:________________________________
BRANAGH REVOCABLE TRUST
By:________________________________
Name: Peter W. Branagh
Title: Trustee
By:________________________________
Name: Ramona Y. Branagh
Title: Trustee
MATTHEW WILLIAM CLARKE - IRA
By:________________________________
Name:
Title:
SANFORD J. COLEN
By:________________________________
<PAGE> 42
AARON J. COLEN, UTMA, CA
By:________________________________
Name: Sanford J. Colen
Title: Custodian
ELYSE L. COLEN, UTMA, CA
By:________________________________
Name: Sanford J. Colen
Title: Custodian
SARA K. COX
By:________________________________
JOHN DAVIES
By:________________________________
DIAMOND A. PARTNERS, L.P.
By:________________________________
Name:
Title:
J. STEVEN EMERSON
<PAGE> 43
By:________________________________
EMILY FAIRBAIRN - IRA
By:________________________________
Name:
Title:
MALCOLM FAIRBAIRN - IRA
By:________________________________
Name:
Title:
WILLIAM T. AND KATHLEEN P. GIBSON
By:________________________________
Name: William T. Gibson
By:________________________________
Name: Kathleen P. Gibson
JONATHAN & NANCY GLASER
FAMILY TRUST
By:________________________________
Name: Jonathan M. Glaser
Title: Trustee
By:________________________________
Name: Nancy Ellen Glaser
<PAGE> 44
Title: Trustee
EDWARD M. HAWLEY
By:________________________________
GEORGE P. HAWLEY
By:________________________________
VICTOR F. HAWLEY
By:________________________________
RICHARD HICKS
By:________________________________
KATHRYN JERGENS TRUST
By:________________________________
Name:
Title:
DIANE JOHNSON
<PAGE> 45
By:________________________________
RICHARD M. KELLER
By:________________________________
STEPHEN M. KELLER
By:________________________________
STEPHEN F. KELLER PROFESSIONAL
CORPORATION DEFINED BENEFIT
PLAN
By:________________________________
Name:
Title:
PAUL KESSLER
By:________________________________
SIDNEY KIMMEL
By:________________________________
THEODORE D. KONOPISOS
<PAGE> 46
By:________________________________
PETER LAMM
By:________________________________
ROBERT LONDON
By:________________________________
JEFFREY S. MORGAN
By:________________________________
THE MUHL FAMILY TRUST
By:________________________________
Name: Phillip E. Muhl
Title: Trustee
By:________________________________
Name: Kristin A. Muhl
Title: Trustee
PACIFIC SECURITY GROUP, INC.
By:________________________________
<PAGE> 47
By:________________________________
Name:
Title:
POINTE INVESTMENTS CAPITAL, LTD.
By:________________________________
Name:
Title:
POLLAT, EVANS & CO., INC.
By:________________________________
Name:
Title:
KEVIN AND ERIN PRZYBOCKI
By:________________________________
Name: Kevin Przybocki
By:________________________________
Name: Erin Przybocki
CHARLES B. RUNNELS, JR.
By:________________________________
CHARLES B. RUNNELS, III
By:________________________________
<PAGE> 48
G. TYLER RUNNELS.
By:________________________________
LORD ROBIN RUSSELL
By:________________________________
TIMOTHY MICHAEL WALLACE
By:________________________________
WAVE ENTERPRISES, INC.
By:________________________________
Name:
Title:
IRA WEINGARTEN
By:________________________________
J.D. YATES
By:________________________________
<PAGE> 49
ZAXIS PARTNERS, L.P.
By:________________________________
Name:
Title:
<PAGE> 50
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> 51
SCHEDULE B
STOCKHOLDER INFORMATION
B-1
<PAGE> 52
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
<PAGE> 1
EXHIBIT 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 [ ], 2000
<PAGE> 2
Amended and Restated Registration Rights Agreement (this "Agreement"),
dated as of January [ ], 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> 3
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> 4
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
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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
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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;
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(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-
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<PAGE> 8
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
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<PAGE> 9
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
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<PAGE> 10
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
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<PAGE> 11
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
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<PAGE> 12
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.
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(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
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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
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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,
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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.
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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.
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"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> 19
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> 20
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> 21
(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> 22
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> 23
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> 24
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be executed and delivered by their respective officers thereunto
duly authorized as of the date first above written.
KRAUSE'S FURNITURE, INC.
By:
------------------------------------
Name:
Title:
<PAGE> 25
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> 26
PERMAL CAPITAL MANAGEMENT, INC.
By:
------------------------------------
Name:
Title:
PERMAL SERVICES, INC.
By:
------------------------------------
Name:
Title:
PERMAL CAPITAL PARTNERS, L.P.
By: PERMAL MANAGEMENT CORPORATION,
its Investment Manager
By:
------------------------------------
Name:
Title:
PERMAL ASSET MANAGEMENT
By:
------------------------------------
Name:
Title:
PERMAL SPECIAL OPPORTUNITIES, LTD.
By:
------------------------------------
Name:
Title:
<PAGE> 27
JAPAN OMNIBUS LTD.
By:
------------------------------------
Name:
Title:
JEAN R. PERRETTE
By:
------------------------------------
ISAAC ROBERT SOUEDE
By:
------------------------------------
THOMAS M. DELITTO
By:
------------------------------------
THOMAS M. AND DONNA S. DELITTO
By:
------------------------------------
Name: Thomas M. DeLitto
By:
------------------------------------
Name: Donna S. DeLitto
<PAGE> 28
UNITED GULF BANK (B.S.C.) E.C.
By:
------------------------------------
Name:
Title:
KUWAIT INVESTMENT PROJECTS COMPANY
By:
------------------------------------
Name:
Title:
ATCO HOLDINGS, LTD.
By:
------------------------------------
Name:
Title:
ATCO DEVELOPMENT, INC.
By:
------------------------------------
Name:
Title:
<PAGE> 29
PILOT HOLDINGS, L.P.
By: SHED INVESTMENTS, LLC, its General
Partner
By:
------------------------------------
Name: Thomas M. DeLitto
Title: Managing Member
<PAGE> 30
ALLISON BOOTH HAWLEY TRUST I
By:
------------------------------------
Name:
Title:
CAITLIN HALE HAWLEY TRUST I
By:
------------------------------------
Name:
Title:
MAUREEN ERIN HAWLEY TRUST I
By:
------------------------------------
Name:
Title:
SHANNON FOLLEN HAWLEY TRUST I
By:
------------------------------------
Name:
Title:
HAWLEY FAMILY TRUST
By:
------------------------------------
Name:
Title:
<PAGE> 31
DR. PHILIP M. HAWLEY, JR.
By:
------------------------------------
PHILIP M. HAWLEY
By:
------------------------------------
<PAGE> 32
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
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
<PAGE> 33
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> 34
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
