-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R10mH1Gn1hVyuBzQol844oteqSC/QI8PxLHTdyNRKONMgPHXIbDDYWGJusZGzEyP RFQ3kMPEXR4+nL4jTHCjOQ== 0000895345-00-000033.txt : 20000203 0000895345-00-000033.hdr.sgml : 20000203 ACCESSION NUMBER: 0000895345-00-000033 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20000124 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: KRAUSES FURNITURE INC CENTRAL INDEX KEY: 0000701974 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD FURNITURE [2510] IRS NUMBER: 770310773 STATE OF INCORPORATION: DE FISCAL YEAR END: 1224 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: SEC FILE NUMBER: 005-41192 FILM NUMBER: 511991 BUSINESS ADDRESS: STREET 1: 200 N BERRY ST STREET 2: STE 109 CITY: BREA STATE: CA ZIP: 92821-3903 BUSINESS PHONE: 7149903100 MAIL ADDRESS: STREET 1: 200 NORTH BERRY STREET CITY: BREA STATE: CA ZIP: 94588 FORMER COMPANY: FORMER CONFORMED NAME: WORTH CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: GAMBIT FINANCIAL INC DATE OF NAME CHANGE: 19870331 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL ELECTRIC CAPITAL CORP CENTRAL INDEX KEY: 0000040554 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 131500700 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: 260 LONG RIDGE RD CITY: STAMFORD STATE: CT ZIP: 06927 BUSINESS PHONE: 2033574000 MAIL ADDRESS: STREET 1: 260 LONG RIDGE ROAD CITY: STAMFORD STATE: CT ZIP: 06927 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL ELECTRIC CREDIT CORP DATE OF NAME CHANGE: 19871216 SC 13D/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 13D (AMENDMENT NO. 3* ) UNDER THE SECURITIES EXCHANGE ACT OF 1934 Krause's Furniture, Inc. - --------------------------------------------------------------------------- (Name of Issuer) Common Stock, $.001 par value - --------------------------------------------------------------------------- (Title of Class of Securities) 000500760202 ------------------------------------ (CUSIP Number) NANCY E. BARTON, ESQ. GENERAL ELECTRIC CAPITAL CORPORATION 260 LONG RIDGE ROAD STAMFORD, CONNECTICUT 06927 (203) 357-4000 - ------------------- ------------------------------------------------------- (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 which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. * Represents the first filing on Schedule 13D with respect to the Issuer's securities by GE Capital Equity Investments, Inc. SCHEDULE 13D CUSIP No. 000500760202 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS General Electric Capital Corporation 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [X] (b) [ ] 3 SEC USE ONLY 4 SOURCE OF FUNDS WC 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ] 6 CITIZENSHIP OR PLACE OF ORGANIZATION New York, U.S.A. NUMBER OF 7 SOLE VOTING POWER SHARES 7,400,000 BENEFICIALLY 8 SHARED VOTING POWER OWNED BY EACH 909,091 REPORTING 9 SOLE DISPOSITIVE POWER PERSON WITH 7,400,000 10 SHARED DISPOSITIVE POWER 909,091 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 8,309,091 (includes 909,091 shares as to which General Electric Capital Corporation has shared voting and dispositive power.) 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 32.8% 14 TYPE OF REPORTING PERSON CO SCHEDULE 13D CUSIP No. 000500760202 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS GE Capital Equity Investments, Inc. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [X ] 3 SEC USE ONLY 4 SOURCE OF FUNDS WC 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, U.S.A. NUMBER OF 7 SOLE VOTING POWER SHARES 0 BENEFICIALLY 8 SHARED VOTING POWER OWNED BY EACH 909,091 REPORTING 9 SOLE DISPOSITIVE POWER PERSON WITH 0 10 SHARED DISPOSITIVE POWER 909,091 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 909,091 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 3.6% 14 TYPE OF REPORTING PERSON CO SCHEDULE 13D CUSIP No. 000500760202 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS General Electric Capital Services, Inc. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [X] (b) [ ] 3 SEC USE ONLY 4 SOURCE OF FUNDS Not applicable. 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, U.S.A. NUMBER OF 7 SOLE VOTING POWER SHARES Disclaimed. See 11 below. BENEFICIALLY 8 SHARED VOTING POWER OWNED BY EACH 0 REPORTING 9 SOLE DISPOSITIVE POWER PERSON WITH Disclaimed. See 11 below. 10 SHARED DISPOSITIVE POWER 0 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON Beneficial ownership of all shares is disclaimed by General Electric Capital Services, Inc. 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) Not Applicable. See 11 above. 14 TYPE OF REPORTING PERSON CO CUSIP No. 000500760202 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS General Electric Company 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [X] (b) [ ] 3 SEC USE ONLY 4 SOURCE OF FUNDS Not applicable. 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ] 6 CITIZENSHIP OR PLACE OF ORGANIZATION New York, U.S.A. NUMBER OF 7 SOLE VOTING POWER SHARES Disclaimed. See 11 below. BENEFICIALLY 8 SHARED VOTING POWER OWNED BY EACH 0 REPORTING 9 SOLE DISPOSITIVE POWER PERSON WITH Disclaimed. See 11 below. 10 SHARED DISPOSITIVE POWER 0 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON Beneficial ownership of all shares is disclaimed by General Electric Company. 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) Not Applicable. See 11 above. 14 TYPE OF REPORTING PERSON CO This Schedule 13D ("13D Amendment No. 3") amends and supplements the Schedule 13D filed by General Electric Capital Corporation, a New York corporation ("GECC"), General Electric Capital Services, Inc., a Delaware corporation ("GECS"), and General Electric Company, a New York Corporation ("GE") on September 9, 1996, as amended on August 15, 1997 and on January 12, 1998 (the "Schedule 13D"), relating to the Common Stock, $.001 par value per share (the "Common Stock") of Krause's Furniture, Inc. (the "Company" or the "Issuer"). This 13D Amendment No. 3, together with the Schedule 13D which it amends and supplements, represents the first filing on Schedule 13D by GE Capital Equity Investments, Inc. ("GE Equity") with respect to the Company. Capitalized terms used but not defined herein shall have the meanings set forth in the Schedule 13D. Except as expressly amended hereby, the information set forth in the Schedule 13D remains in effect without modification. This 13D Amendment No. 3 relates to the Securities Purchase Agreement, dated as of January 11, 2000, by and among the Issuer, GE Equity and the other purchasers party thereto (the "2000 Securities Purchase Agreement"), a copy of which is attached hereto as Exhibit 2, the Amended and Restated Stockholders Agreement, dated as of January 14, 2000, by and among the Issuer, GE Equity, GECC and the other stockholders party thereto (the "2000 Stockholders Agreement"), a copy of which is attached hereto as Exhibit 3, the Amended and Restated Registration Rights Agreement, dated as of January 14, 2000, by and among the Issuer, GE Equity, GECC and the other stockholders party thereto (the "2000 Registration Rights Agreement"), a copy of which is attached hereto as Exhibit 4, the Certificate of Designation of Series A Convertible Preferred Stock of Krause's Furniture, Inc., as signed and attested on January 12, 2000 (the "Series A Certificate of Designation"), a copy of which is attached hereto as Exhibit 5, and the Agreement, entered into as of January 11, 2000, by and among the Issuer, GECC and Japan Omnibus Ltd. (the "Note Amendment Agreement") to amend the Standby Note, 1997 Note and the Note, a copy of which is attached hereto as Exhibit 6. ITEM 2. Identity and Background ----------------------- Item 2 (a), (b), (c) is hereby amended to add the following: This 13D Amendment No. 3 is filed by GE Equity, GECC, GECS and GE and they are sometimes referred to herein individually as a "Reporting Person" and collectively as the "Reporting Persons." GE Equity is a Delaware corporation and a wholly-owned subsidiary of GECC. GE Equity is engage in the business of investment and maintains its principal executive offices at 120 Long Ridge Road, Stamford, Connecticut 06927. For updated information with respect to the identity and background of: (i) each director and executive officer of GECC, see Schedule I attached hereto; (ii) each director and executive officer of GE Equity, see Schedule II attached hereto; (iii) each director and executive officer of GECS, see Schedule III attached hereto; and (iv) each director and executive officer of GE, see Schedule IV attached hereto. This 13D Amendment No. 3 is being filed while the Reporting Persons are in the process of verifying information required herein from their respective directors and executive officers. If any Reporting Person obtains information which would cause a change in the information contained herein, an amendment will be filed setting forth such change in information. Item 2 (d), (e) is hereby amended in its entirety to read as follows: Her Majesty's Inspectorate of Pollution v. IGE Medical Systems Limited (St. Albans Magistrates Court, St. Albans, Hertsfordshire, England, Case No. 04/00320181) In April, 1994, GEMS' U.K. subsidiary, IGE Medical Systems Limited (IGEMS) discovered the loss of a radioactive barium source at the Radlett, England facility. The lost source, used to calibrate nuclear camera detectors, emits a very low level of radiation. IGEMS immediately reported the loss as required by the U.K. Radioactive Substances Act. An ensuing investigation, conducted in cooperation with government authorities, failed to locate the source. On July 21, 1994, Her Majesty's Inspectorate of Pollution (HMIP) charged IGEMS with violating the Radioactive Substances Act by failing to comply with a condition of registration. The Act provides that a registrant like IGEMS, which "does not comply with a limitation or condition subject to which (it) is so registered ... shall be guilty of (a criminal) offense." Condition 7 of IGEMS' registration states that it "shall so far as is reasonably practicable prevent ... loss of any registered source." At the beginning of trial on February 24, 1995, IGEMS entered a guilty plea and agreed to pay of fine of (pound)5,000 and assessed costs of (pound)5,754. The prosecutor's presentation focused primarily on the 1991 change in internal IGEMS procedures and, in particular, the source logging procedure. The prosecutor complimented IGEMS' investigation and efforts to locate the source and advised the court that IGEMS had no previous violations of the Radioactive Substances Act. He also told the court that the Radlett plant had been highlighted as an exemplary facility to HIMP inspectors as part of their training. In mitigation, IGEMS emphasized the significant infrastructure and expense undertaken by IGEMS to provide security for radiation sources and the significant effort and expense incurred in attempting to locate the missing source. Except for the foregoing, during the last five years, neither any Reporting Person nor, to the best knowledge of the applicable Reporting Person, any person identified in Schedules I through IV 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 violation with respect to such laws. Item 2 (f) is hereby amended in its entirety to read as follows: To the best knowledge of the applicable Reporting Person, all persons identified in Schedules I through IV are United States citizens, except that: P. Fresco is a citizen of Italy, C.X. Gonzalez is a citizen of Mexico and Andrea Jung is a citizen of Canada. ITEM 3. Source and Amount of Funds or Other Consideration ------------------------------------------------- Item 3 is hereby amended to add the following: On January 14, 2000, GE Equity purchased 20,000 shares (the "Preferred Shares") of the Issuer's Series A Convertible Preferred Stock, par value $.001 per share ("Series A Convertible Preferred Stock"), from the Issuer for $1,000,000 pursuant to the 2000 Securities Purchase Agreement. The 2000 Securities Purchase Agreement, a copy of which is set forth in Exhibit 2, is hereby incorporated by reference herein. The funds used to purchase the Preferred Shares were obtained by GE Equity from working capital. ITEM 4. Purpose of Transaction ---------------------- Item 4 (a-j) is hereby amended to add the following: GE Equity acquired the Preferred Shares for the purpose of investment. Except as previously set forth in the Schedule 13D, no Reporting Person nor, to the best knowledge of the applicable Reporting Person, any Person identified in Schedules I through IV, has any plans or proposals which relate to or would result in the types of transactions set forth in subparagraphs (a) through (j) of Item 4 of Schedule 13D. ITEM 5. Interest in Securities of the Issuer ------------------------------------ Item 5 (a) is hereby amended to read as follows: GECC has sole voting and dispositive power with respect to 7,400,000 shares of Common Stock (including 400,000 shares issuable upon exercise of the Standby Warrant, 600,000 shares issuable upon exercise of the 1997 Warrant, and 1,400,000 shares issuable upon exercise of the Warrant), representing approximately 32.8% of the outstanding shares of Common Stock (assuming the exercise of the Warrant, the 1997 Warrant, and the Standby Warrant) based upon the Company's most recently filed Form 10-Q for the quarter ended November 1, 1999. GE Equity and GECC have shared voting and dispositive power with respect to 909,091 shares of Common Stock issuable upon the conversion of the Preferred Shares, representing approximately 4.0% of the outstanding shares of Common Stock (assuming the exercise of the Warrant, the 1997 Warrant, and the Standby Warrant) based upon the Company's most recently filed Form 10-Q for the quarter ended November 1, 1999. Pursuant to the 2000 Stockholders Agreement, certain provisions of the prior Stockholders Agreement dated as of August 26, 1996 relating to the voting of shares held by Permal Group and the Hawleys were eliminated. By reason of these amendments, GECC and GE Equity believe that, to the extent GECC previously may have been deemed to constitute a "group," as such term is defined in Section 13(d)(3) of the Exchange Act, with Permal Group and the Hawleys, such group has been terminated. Accordingly, GECC and GE Equity disclaim beneficial ownership of all shares held by Permal Group and the Hawleys. Item 5 (b) is hereby amended to read as follows: The responses of each Reporting Person to Items 7 through 11 of the cover pages of this 13D Amendment No. 3 relating to beneficial ownership of shares of Common Stock are incorporated herein by reference. Item 5 (c) is hereby amended to read as follows: Except as set forth above, no Reporting Person nor, to the best knowledge of the applicable Reporting Person, any person identified in Schedules I through IV, beneficially owns any shares of Common Stock or has effected any transactions in shares of Common Stock during the preceding 60 days. ITEM 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer ------------------------------------------------------------- Item 6 is hereby amended to add the following: Reference is made to the 2000 Securities Purchase Agreement, the 2000 Stockholders Agreement, the 2000 Registration Rights Agreement and the Note Amendment, copies of which are attached as Exhibits 2,3,4 and 6, which are hereby incorporated by reference herein. Except as set forth or incorporated by reference in this 13D Amendment No. 3 or as previously reported in the Schedule 13D, no Reporting Person nor, to the best knowledge of the applicable Reporting Person, any person identified in Schedules I through IV, has any contracts, arrangements, understandings or relationships beneficially owns any shares of Common Stock or has effected any transactions in shares of Common Stock during the preceding 60 days. ITEM 7. Material to be Filed as Exhibits -------------------------------- Exhibit 1: Joint Filing Agreement among the Reporting Persons Exhibit 2: The 2000 Securities Purchase Agreement Exhibit 3: The 2000 Stockholders Agreement Exhibit 4: The 2000 Registration Rights Agreement Exhibit 5: The Series A Certificate of Designation Exhibit 6: The Note Amendment Exhibit 7: Powers of Attorney 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. GENERAL ELECTRIC CAPITAL CORPORATION By:/s/ Michael E. Pralle --------------------------------- Name: Michael E. Pralle Title: Vice President GE CAPITAL EQUITY INVESTMENTS, INC. By:/s/ Michael E. Pralle --------------------------------- Name: Michael E. Pralle Title: President/General Manager GENERAL ELECTRIC CAPITAL SERVICES, INC. By:/s/ Michael E. Pralle --------------------------------- Name: Michael E. Pralle Title: Attorney-in-fact* GENERAL ELECTRIC COMPANY By:/s/ Michael E. Pralle --------------------------------- Name: Michael E. Pralle Title: Attorney-in-fact* Dated: January 24, 2000 * Pursuant to a Power of Attorney attached hereto as Exhibit 7. SCHEDULE I GENERAL ELECTRIC CAPITAL CORPORATION DIRECTORS PRESENT PRESENT NAME BUSINESS ADDRESS PRINCIPAL OCCUPATION - ---- ---------------- -------------------- Nigel D.T. Andrews General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 Nancy E. Barton General Electric Senior Vice President, Capital Corporation General Counsel and 260 Long Ridge Road Secretary, General Electric Stamford, CT 06927 Capital Corporation Stephen M. Bennett General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 James R. Bunt General Electric Company Vice President 3135 Easton Turnpike and Treasurer Fairfield, CT 06431 General Electric Company David L. Calhoun General Electric Capital Executive Vice President Services, Inc. General Electric Capital 3135 Easton Turnpike Executive Officer, General Fairfield, CT 06431 Services, Inc. D.D. Dammerman General Electric Company Vice Chairman of the Board, 3135 Easton Turnpike Executive Officer, General Fairfield, CT 06431 Electric Company; Chairman and Chief Executive Officer, General Electric Capital Services, Inc. B.W. Heineman, Jr. General Electric Company Senior Vice President - 3135 Easton Turnpike General Counsel and Fairfield, CT 06431 Secretary, General Electric Company J.R. Immelt General Electric Company Senior Vice President - P.O. Box 414 GE Medical Systems Milwaukee, WI 53201 W.J. McNerney, Jr. General Electric Company Senior Vice President - 1 Neumann Way GE Aircraft Engines Cincinnati, OH 05215 John H. Myers 303 Summer Street Chief Executive Officer, Stamford, CT 06904 GE Investments, Inc. R.L. Nardelli General Electric Company Senior Vice President - 1 River Road GE Power Systems Schenectady, NY 12345 Denis J. Nayden General Electric President and Chief Capital Corporation Executive Officer, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Michael A. Neal General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 James A. Parke General Electric Executive Vice President Capital Corporation and Chief Financial Officer, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation G.M. Reiner General Electric Company Senior Vice President - 3135 Easton Turnpike Chief Information Officer, Fairfield, CT 06431 General Electric Company John M Samuels General Electric Company Vice President and 3135 Easton Turnpike Senior Counsel - Corporate Fairfield, CT 06431 Tax, General Electric Company K.S. Sherin General Electric Company Senior Vice President 3135 Easton Turnpike Finance and Chief Financial Fairfield, CT 06431 Officer, General Electric Company Edward D. Stewart General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 J.F. Welch, Jr. General Electric Company Chairman of the Board 3135 Easton Turnpike and Chief Executive Fairfield, CT 06431 Officer, General Electric Company GENERAL ELECTRIC CAPITAL CORPORATION EXECUTIVE OFFICERS PRESENT PRESENT NAME BUSINESS ADDRESS PRINCIPAL OCCUPATION - ---- ---------------- -------------------- Nigel D.T. Andrews General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 Nancy E. Barton General Electric Senior Vice President, Capital Corporation General Counsel and 260 Long Ridge Road Secretary, General Electric Stamford, CT 06927 Capital Corporation Stephen M. Bennett General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 James A. Colica General Electric Senior Vice President, Capital Corporation Global Risk Management, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Richard D'Avino General Electric Senior Vice President, Capital Corporation Taxes, General Electric 260 Long Ridge Road Capital Corporation Stamford, CT 06927 Michael D. Frazier General Electric Senior Vice President, Capital Corporation Insurance/ Investment 260 Long Ridge Road Products, General Electric Stamford, CT 06927 Capital Corporation Robert L. Lewis General Electric Senior Vice President, Capital Corporation Structured Finance Group, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Denis J. Nayden General Electric President and Chief Capital Corporation Executive Officer, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Michael A. Neal General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 James A. Parke General Electric Executive Vice President Capital Corporation and Chief Financial Officer, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Marc J. Saperstein General Electric Senior Vice President, Capital Corporation Human Resources, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Edward D. Stewart General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 Jeffrey S. Werner General Electric Senior Vice President, Capital Corporation Corporate Treasury and 260 Long Ridge Road Global Funding Operation, Stamford, CT 06927 General Electric Capital Corporation SCHEDULE II GE CAPITAL EQUITY INVESTMENTS, INC. DIRECTOR PRESENT PRESENT NAME BUSINESS ADDRESS PRINCIPAL OCCUPATION - ---- ---------------- -------------------- Michael E. Pralle GE Capital Equity President and Chairman of Investments, Inc. the Board, GE Capital 120 Long Ridge Road Equity Investments, Inc. Stamford, CT 06927 GE CAPITAL EQUITY INVESTMENTS, INC. OFFICERS PRESENT PRESENT NAME BUSINESS ADDRESS PRINCIPAL OCCUPATION - ---- ---------------- -------------------- Michael E. Pralle GE Capital Equity President and Chairman of Investments, Inc. the Board, GE Capital 120 Long Ridge Road Equity Investments, Inc. Stamford, CT 06927 Jonathan K. Sprole GE Capital Equity Vice President, General Investments, Inc. Counsel and Secretary, 120 Long Ridge Road GE Capital Equity Stamford, CT 06927 Investments, Inc. Iain MacKay GE Capital Equity Vice President-Finance Investments, Inc. and Treasurer, 120 Long Ridge Road GE Capital Equity Stamford, CT 06927 Investments, Inc. Joseph Swezey GE Capital Equity Vice President-Controller, Investments, Inc. GE Capital Equity 120 Long Ridge Road Investments, Inc. Stamford, CT 06927 Barbara J. Gould GE Capital Equity Vice President, Associate Investments, Inc. General Counsel and 120 Long Ridge Road Assistant Secretary, GE Stamford, CT 06927 Capital Equity Investments, Inc. Peter J. Muniz GE Capital Equity Vice President, Associate Investments, Inc. General Counsel and 120 Long Ridge Road Assistant Secretary, GE Stamford, CT 06927 Capital Equity Investments, Inc. Bryant Cohen GE Capital Equity Vice President-Taxes, Investments, Inc. GE Capital Equity 120 Long Ridge Road Investments, Inc. Stamford, CT 06927 SCHEDULE III GENERAL ELECTRIC CAPITAL SERVICES, INC. DIRECTORS PRESENT PRESENT NAME BUSINESS ADDRESS PRINCIPAL OCCUPATION - ---- ---------------- -------------------- Nigel D.T. Andrews General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 Nancy E. Barton General Electric Senior Vice President, Capital Corporation General Counsel and 260 Long Ridge Road Secretary, General Electric Stamford, CT 06927 Capital Corporation Stephen M. Bennett General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 James R. Bunt General Electric Company Vice President 3135 Easton Turnpike and Treasurer Fairfield, CT 06431 General Electric Company David L. Calhoun General Electric Capital Executive Vice President Services, Inc. General Electric Capital 3135 Easton Turnpike Executive Officer, General Fairfield, CT 06431 Services, Inc. D.D. Dammerman General Electric Company Vice Chairman of the Board, 3135 Easton Turnpike Executive Officer, General Fairfield, CT 06431 Electric Company; Chairman and Chief Executive Officer, General Electric Capital Services, Inc. B.W. Heineman, Jr. General Electric Company Senior Vice President - 3135 Easton Turnpike General Counsel and Fairfield, CT 06431 Secretary, General Electric Company J.R. Immelt General Electric Company Senior Vice President - P.O. Box 414 GE Medical Systems Milwaukee, WI 53201 W.J. McNerney, Jr. General Electric Company Senior Vice President - 1 Neumann Way GE Aircraft Engines Cincinnati, OH 05215 John H. Myers 303 Summer Street Chief Executive Officer, Stamford, CT 06904 GE Investments, Inc. R.L. Nardelli General Electric Company Senior Vice President - 1 River Road GE Power Systems Schenectady, NY 12345 Denis J. Nayden General Electric President and Chief Capital Corporation Executive Officer, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Michael A. Neal General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 James A. Parke General Electric Executive Vice President Capital Corporation and Chief Financial Officer, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation G.M. Reiner General Electric Company Senior Vice President - 3135 Easton Turnpike Chief Information Officer, Fairfield, CT 06431 General Electric Company John M Samuels General Electric Company Vice President and 3135 Easton Turnpike Senior Counsel - Corporate Fairfield, CT 06431 Tax, General Electric Company K.S. Sherin General Electric Company Senior Vice President 3135 Easton Turnpike Finance and Chief Financial Fairfield, CT 06431 Officer, General Electric Company Edward D. Stewart General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 J.F. Welch, Jr. General Electric Company Chairman of the Board 3135 Easton Turnpike and Chief Executive Fairfield, CT 06431 Officer, General Electric Company GENERAL ELECTRIC CAPITAL SERVICES, INC. EXECUTIVE OFFICERS PRESENT PRESENT NAME BUSINESS ADDRESS PRINCIPAL OCCUPATION - ---- ---------------- -------------------- Joan C. Amble General Electric Vice President and Capital Corporation Controller General Electric 260 Long Ridge Road Capital Services, Inc. Stamford, CT 06927 Nigel D.T. Andrews General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 Nancy E. Barton General Electric Senior Vice President, Capital Corporation General Counsel and 260 Long Ridge Road Secretary, General Electric Stamford, CT 06927 Capital Corporation Stephen M. Bennett General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 David L. Calhoun General Electric Capital Executive Vice President Services, Inc. General Electric Capital 3135 Easton Turnpike Executive Officer, General Fairfield, CT 06431 Services, Inc. James A. Colica General Electric Senior Vice President, Capital Corporation Global Risk Management, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Richard D'Avino General Electric Senior Vice President, Capital Corporation Taxes, General Electric 260 Long Ridge Road Capital Corporation Stamford, CT 06927 Barbara E. Daniele General Electric Capital Vice President and Services, Inc. Senior Litigation Counsel 260 Long Ridge Road General Electric Capital Stamford, CT 06927 Services, Inc. D.D. Dammerman General Electric Company Vice Chairman of the Board, 3135 Easton Turnpike Executive Officer, General Fairfield, CT 06431 Electric Company; Chairman and Chief Executive Officer, General Electric Capital Services, Inc. Michael D. Frazier General Electric Senior Vice President, Capital Corporation Insurance/ Investment 260 Long Ridge Road Products, General Electric Stamford, CT 06927 Capital Corporation Robert L. Lewis General Electric Senior Vice President, Capital Corporation Structured Finance Group, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Denis J. Nayden General Electric President and Chief Capital Corporation Executive Officer, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Michael A. Neal General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 James A. Parke General Electric Executive Vice President Capital Corporation and Chief Financial Officer, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Marc J. Saperstein General Electric Senior Vice President, Capital Corporation Human Resources, 260 Long Ridge Road General Electric Stamford, CT 06927 Capital Corporation Edward D. Stewart General Electric Executive Vice President, Capital Corporation General Electric Capital 260 Long Ridge Road Corporation Stamford, CT 06927 Jeffrey S. Werner General Electric Senior Vice President, Capital Corporation Corporate Treasury and 260 Long Ridge Road Global Funding Operation, Stamford, CT 06927 General Electric Capital Corporation Schedule IV GENERAL ELECTRIC COMPANY DIRECTORS PRESENT PRESENT NAME BUSINESS ADDRESS PRINCIPAL OCCUPATION - ---- ---------------- -------------------- J.I.Cash, Jr. Harvard Business School Professor of Business Morgan Hall Administration-Graduate Soldiers Field Road School of Business Boston, MA 02163 Administration, Harvard University S.S. Cathcart 222 Wisconsin Avenue Retired Chairman, Suite 103 Illinois Tool Works Lake Forest, IL 60045 D.D. Dammerman General Electric Company Vice Chairman of the Board, 3135 Easton Turnpike Executive Officer, General Fairfield, CT 06431 Electric Company; Chairman and Chief Executive Officer, General Electric Capital Services, Inc. P. Fresco Fiat SpA Chairman of the Board, via Nizza 250 Fiat SpA 10126 Torino, Italy A. M. Fudge Kraft Foods, Inc. Executive Vice President, 555 South Broadway Kraft Foods, Inc. Tarrytown, NY 10591 C.X. Gonzalez Kimberly-Clark de Mexico, Chairman of the Board S.A. de C.V. and Chief Executive Jose Luis Lagrange 103, Officer, Tercero Piso Kimberly-Clark de Mexico, Colonia Los Morales S.A. de C.V. Mexico, D.F. 11510, Mexico A. Jung Avon Products, Inc. President and Chief 1345 Avenue of the Americas Executive Officer, New York, NY 10105 Avon Products, Inc. K.G. Langone Invemed Associates, Inc. Chairman, President and 375 Park Avenue Chief Executive Officer, New York, NY 10152 Invemed Associates, Inc. Scott G. McNealy Sun Microsystems, Inc. Chairman, President and 901 San Antonio Road Chief Executive Officer, Palo Alto, CA 94303-4900 Sun Microsystems, Inc. G.G. Michelson Federated Department Stores Former Member of the 151 West 34th Street Board of Directors, New York, NY 10001 Federated Department Stores S. Nunn King & Spalding Partner, King & Spalding 191 Peachtree Street, N.E. Atlanta, Georgia 30303 J.D. Opie General Electric Company Vice Chairman of the 3135 Easton Turnpike Board and Executive Fairfield, CT 06431 Officer, General Electric Company R.S. Penske Penske Corporation Chairman of the Board 13400 Outer Drive, West and President, Penske Detroit, MI 48239-4001 Corporation F.H.T. Rhodes Cornell University President Emeritus 3104 Snee Building Cornell University Ithaca, NY 14853 A.C. Sigler Champion International Retired Chairman of the Corporation Board and CEO 1 Champion Plaza and former Director, Stamford, CT 06921 Champion International Corporation D.A. Warner III J. P. Morgan & Co., Inc. Chairman of the Board, & Morgan Guaranty Trust Co. President, and Chief 60 Wall Street Executive Officer, New York, NY 10260 J.P. Morgan & Co. Incorporated and Morgan Guaranty Trust Company J.F. Welch, Jr. General Electric Company Chairman of the Board 3135 Easton Turnpike and Chief Executive Fairfield, CT 06431 Officer, General Electric Company GENERAL ELECTRIC COMPANY EXECUTIVE OFFICERS PRESENT PRESENT NAME BUSINESS ADDRESS PRINCIPAL OCCUPATION - ---- ---------------- -------------------- J.F. Welch, Jr. General Electric Company Chairman of the Board and 3135 Easton Turnpike Chief Executive Officer, Fairfield, CT 06431 General Electric Company P.D. Ameen General Electric Company Vice President and 3135 Easton Turnpike Comptroller, General Fairfield, CT 06431 Electric Company J.R. Bunt General Electric Company Vice President and 3135 Easton Turnpike Treasurer, General Electric Fairfield, CT 06431 Company W.J. Conaty General Electric Company Senior Vice President - 3135 Easton Turnpike Human Resources, Fairfield, CT 06431 General Electric Company D.D. Dammerman General Electric Company Vice Chairman of the Board 3135 Easton Turnpike Executive Officer, General Fairfield, CT 06431 Electric Company; Chairman and Chief Executive Officer, General Electric Capital Services, Inc. L.S. Edelheit General Electric Company Senior Vice President - P. O. Box 8 Corporate Research Schenectady, NY 12301 and Development, General Electric Company B.W. Heineman, Jr. General Electric Company Senior Vice President - 3135 Easton Turnpike General Counsel and Fairfield, CT 06431 Secretary, General Electric Company J.R. Immelt General Electric Company Senior Vice President - P.O. Box 414 GE Medical Systems Milwaukee, WI 53201 L. R. Johnston General Electric Company Senior Vice President - Appliance Park GE Appliances Louisville, KY 40225 W.J. McNerney, Jr. General Electric Company Senior Vice President - 1 Neumann Way GE Aircraft Engines Cincinnati, OH 05215 R.L. Nardelli General Electric Company Senior Vice President - 1 River Road GE Power Systems Schenectady, NY 12345 R.W. Nelson General Electric Company Vice President - 3135 Easton Turnpike Corporate Financial Planning Fairfield, CT 06431 and Analysis, General Electric Company J.D. Opie General Electric Company Vice Chairman of the Board 3135 Easton Turnpike and Executive Officer, Fairfield, CT 06431 General Electric Company G.M. Reiner General Electric Company Senior Vice President - 3135 Easton Turnpike Chief Information Officer, Fairfield, CT 06431 General Electric Company J.G. Rice General Electric Company Vice President - 2901 East Lake Road GE Transportation Systems Erie, PA 16531 G.L. Rogers General Electric Company Senior Vice President - 1 Plastics Avenue GE Plastics Pittsfield, MA 01201 K.S. Sherin General Electric Company Senior Vice President 3135 Easton Turnpike Finance and Chief Financial Fairfield, CT 06431 Officer, General Electric Company L.G. Trotter General Electric Company Senior Vice President - 41 Woodford Avenue GE Industrial Systems Plainville, CT 06062 M.S. Zafirovski General Electric Company Senior Vice President - Nela Park GE Lighting Cleveland, OH 44112 EX-99.1 2 Exhibit 1 JOINT FILING AGREEMENT This will confirm the agreement by and among all the undersigned that the Amendment No. 3 to Schedule 13D filed on or about this date and any further amendments to the Schedule 13D with respect to beneficial ownership by the undersigned of shares o0f the Common Stock, par value $0.001 per share, of Krause's Furniture, Inc., are being filed on behalf of each of the undersigned in accordance with Rule 13D-1 (k) (1) under the Securities Exchange Act of 1934. This agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Dated: January 24, 2000 GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Michael E. Pralle --------------------------------- Name: Michael E. Pralle Title: Vice President GE CAPITAL EQUITY INVESTMENTS, INC. By: /s/ Michael E. Pralle --------------------------------- Name: Michael E. Pralle Title: President/General Manager GENERAL ELECTRIC CAPITAL SERVICES, INC. By: /s/ Michael E. Pralle --------------------------------- Name: Michael E. Pralle Title: Attorney-in-fact* GENERAL ELECTRIC COMPANY By: /s/ Michael E. Pralle --------------------------------- Name: Michael E. Pralle Title: Attorney-in-fact* * Pursuant to a Power of Attorney attached to the Amendment No. 3 to Schedule 13D. EX-99.2 3 KRAUSE'S FURNITURE, INC. SERIES A CONVERTIBLE PREFERRED STOCK SECURITIES PURCHASE AGREEMENT Dated as of January 11, 2000 TABLE OF CONTENTS PAGE 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 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 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 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 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 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; (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; 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 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 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 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 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. 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 reasonably likely to subject the Company or any Subsidiary or any entity the Company or any Subsidiary has an obligation to indemnify to any tax or penalty imposed under Section 4975 of the Code or Section 502 of ERISA. Each Employee Plan has been maintained and administered in compliance with all applicable law including ERISA and the Code in all material respects. An "ERISA Affiliate" for purposes of this Section is any trade or business, whether or not incorporated, which, together with the Company, is under common control, as described in Section 414(b) or (c) of the Code, and the term "Multiemployer Plan" shall mean any Pension Plan which is a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA). 2.16 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. 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 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 furnished in writing by the Company (i) have been prepared by management of the Company after a careful analysis of all material data, (ii) are based on reasonable assumptions by management of the Company and (iii) represent the best estimate by management of the Company, based upon current reasonable assumptions, as to the financial performance of the Company and its Subsidiaries for the periods indicated, but do not represent any guarantee or assurance of the future financial results of the Company and its Subsidiaries. 2.24 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 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. 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. 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 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 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. 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. 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 outstanding. 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 (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 exercisab1e 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 underwritten 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 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. 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 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. (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 attributable 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 Supplemental 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 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 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: 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 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 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, 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 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. 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. 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: /s/ Robert A. Burton ------------------------------------------------ Name: Robert A. Burton Title: Executive Vice President and Chief Financial Officer 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 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 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 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 GE CAPITAL EQUITY INVESTMENTS, INC. By: /s/ George L. Hashbarger, Jr. ----------------------------------------------- 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 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 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 LARRY BLACK By: ----------------------------------------------- Address: c/o Black and Company One SW Columbia Street Portland, Oregon 97258 Facsimile #: Number of Shares: 1,000 Purchase Price: $50,000 BRANAGH REVOCABLE TRUST By: ----------------------------------------------- Name: Peter W. Branagh Title: Trustee By: ----------------------------------------------- Name: Ramona Y. Branagh Title: Trustee Address: Apex Capital, LLC Pine Grove 4 Orinda Way, Suite 240-B Orinda, California 94563 Facsimile #: Attention: Sanford J. Colen Number of Shares: 300 Purchase Price: $15,000 MATTHEW WILLIAM CLARKE - IRA By: ----------------------------------------------- Name: Title: Address: Apex Capital, LLC Pine Grove 4 Orinda Way, Suite 240-B Orinda, California 94563 Facsimile #: Attention: Sanford J. Colen Number of Shares: 2,000 Purchase Price: $100,000 SANFORD J. COLEN By: ----------------------------------------------- Address: Apex Capital, LLC Pine Grove 4 Orinda Way, Suite 240-B Orinda, California 94563 Facsimile #: Attention: Sanford J. Colen Number of Shares: 900 Purchase Price: $45,000 AARON J. COLEN, UTMA, CA By: ----------------------------------------------- Name: Sanford J. Colen Title: Custodian Address: Apex Capital, LLC Pine Grove 4 Orinda Way, Suite 240-B Orinda, California 94563 Facsimile #: Attention: Sanford J. Colen Number of Shares: 250 Purchase Price: $12,500 ELYSE L. COLEN, UTMA, CA By: ----------------------------------------------- Name: Sanford J. Colen Title: Custodian Address: Apex Capital, LLC Pine Grove 4 Orinda Way, Suite 240-B Orinda, California 94563 Facsimile #: Attention: Sanford J. Colen Number of Shares: 250 Purchase Price: $12,500 SARA K. COX By: ----------------------------------------------- Address: 101 South Las Palmas Avenue Los Angeles, California 90004 Facsimile #: Number of Shares: 500 Purchase Price: $25,000 JOHN DAVIES By: ----------------------------------------------- Address: c/o Tyler Runnels 1999 Avenue of the Stars, Suite 2530 Los Angeles, California 90067 Facsimile #: Number of Shares: 1,250 Purchase Price: $62,500 DIAMOND A. PARTNERS, L.P. By: ----------------------------------------------- Name: Title: Address: Lawndale Capital Management, L.L.C. One Sansome Street, Suite 3900 San Francisco, California 94104 Facsimile #: Attention: Andrew E. Shapiro Number of Shares: 2,625 Purchase Price: $131,250 J. STEVEN EMERSON By: ----------------------------------------------- Address: Emerson Investment Group 10506 Ilona Avenue, Suite 1410 Los Angeles, California 90064 Facsimile #: Attention: J. Steven Emerson Number of Shares: 6,250 Purchase Price: $312,500 EMILY FAIRBAIRN - IRA By: ----------------------------------------------- Name: Title: Address: One Valley High Lafayette, California 94549 Facsimile #: Attention: Emily Wang Number of Shares: 4,500 Purchase Price: $225,000 MALCOLM FAIRBAIRN - IRA By: ----------------------------------------------- Name: Title: Address: One Valley High Lafayette, California 94549 Facsimile #: Attention: Emily Wang Number of Shares: 1,500 Purchase Price: $75,000 WILLIAM T. AND KATHLEEN P. GIBSON By: ----------------------------------------------- Name: William T. Gibson By: ----------------------------------------------- Name: Kathleen P. Gibson Address: 109 La Plata Santa Barbara, California 93109 Facsimile #: Number of Shares: 500 Purchase Price: $25,000 JONATHAN & NANCY GLASER FAMILY TRUST By: ----------------------------------------------- Name: Jonathan M. Glaser Title: Trustee By: ----------------------------------------------- Name: Nancy Ellen Glaser Title: Trustee Address: 1999 Avenue of the Stars, Suite 2530 Los Angeles, California 90067 Facsimile #: Attention: Number of Shares: 2,000 Purchase Price: $100,000 EDWARD M. HAWLEY By: ----------------------------------------------- Address: 129 North Van Ness Los Angeles, California 90004 Facsimile #: Number of Shares: 200 Purchase Price: $10,000 GEORGE P. HAWLEY By: ----------------------------------------------- Address: 116 North Citrus Avenue Los Angeles, California 90036 Facsimile #: Number of Shares: 200 Purchase Price: $10,000 ALLISON BOOTH HAWLEY TRUST I By: ----------------------------------------------- Name: John F. Hawley Title: Trustee Address: 238 South Lorrainne Los Angeles, California 90004 Facsimile #: Attention: John F. Hawley Number of Shares: 2,500 Purchase Price: $125,000 CAITLIN HALE HAWLEY TRUST I By: ----------------------------------------------- Name: John F. Hawley Title: Trustee Address: 238 South Lorrainne Los Angeles, California 90004 Facsimile #: Attention: John F. Hawley Number of Shares: 2,500 Purchase Price: $125,000 HAWLEY FAMILY TRUST By: ---------------------------------------- Name: John F. Hawley Title: Trustee Address: 238 South Lorrainne Los Angeles, California 90004 Facsimile #: Attention: John F. Hawley Number of Shares: 2,500 Purchase Price: $125,000 MAUREEN ERIN HAWLEY TRUST I By: ----------------------------------------------- Name: John F. Hawley Title: Trustee Address: 238 South Lorrainne Los Angeles, California 90004 Facsimile #: Attention: John F. Hawley Number of Shares: 2,500 Purchase Price: $125,000 SHANNON FOLLEN HAWLEY TRUST I By: ----------------------------------------------- Name: John F. Hawley Title: Trustee Address: 238 South Lorrainne Los Angeles, California 90004 Facsimile #: Attention: John F. Hawley Number of Shares: 2,500 Purchase Price: $125,000 DR. PHILIP HAWLEY, JR. By: ----------------------------------------------- Address: 165 South Las Palmas Los Angeles, California 90004-1085 Facsimile #: Number of Shares: 1,250 Purchase Price: $62,500 VICTOR F. HAWLEY By: ----------------------------------------------- Address: 122 South Plymouth Boulevard Los Angeles, California 90005 Facsimile #: Number of Shares: 200 Purchase Price: $10,000 RICHARD HICKS By: ----------------------------------------------- Address: 21 Tanfield Road Tiburon, California 94920 Facsimile #: Number of Shares: 6,000 Purchase Price: $300,000 KATHRYN JERGENS TRUST By: ----------------------------------------------- Name: Title: Address: 1999 Avenue of the Stars, Suite 2530 Los Angeles, California 90067 Facsimile #: Attention: Kathryn Jergens Number of Shares: 250 Purchase Price: $12,500 DIANE JOHNSON By: ----------------------------------------------- Address: 9901 Manassas Place Tucson, Arizona 85748 Facsimile #: Number of Shares: 200 Purchase Price: $10,000 RICHARD M. KELLER By: ----------------------------------------------- Address: 101 South Las Palmas Avenue Los Angeles, California 90004 Facsimile #: Number of Shares: 500 Purchase Price: $25,000 STEPHEN M. KELLER By: ----------------------------------------------- Address: 30 East 81st Street, Apt. 7E New York, New York 10028 Facsimile #: Attention: Elizabeth Hughes Number of Shares: 500 Purchase Price: $25,000 STEPHEN F. KELLER PROFESSIONAL CORPORATION DEFINED BENEFIT PLAN By: ----------------------------------------------- Name: Title: Address: 101 S. Las Palmas Avenue Los Angeles, California 90004 Facsimile #: Attention: Stephen F. Keller Number of Shares: 1,500 Purchase Price: $75,000 PAUL KESSLER By: ----------------------------------------------- Address: 11777 San Vincente Boulevard, Suite 702 Los Angeles, California 90049 Facsimile #: Attention: Elizabeth Hughes Number of Shares: 3,750 Purchase Price: $187,500 SIDNEY KIMMEL By: ----------------------------------------------- Address: Apex Capital, LLC Pine Grove 4 Orinda Way, Suite 240-B Orinda, California 94563 Facsimile #: Attention: Sanford J. Colen Number of Shares: 125 Purchase Price: $6,250 THEODORE D. KONOPISOS By: ----------------------------------------------- Address: 17291 Irvine Boulevard, Suite 254 Tustin, California 92780 Facsimile #: Attention: Elizabeth Hughes Number of Shares: 1,250 Purchase Price: $62,500 PETER LAMM By: ----------------------------------------------- Address: 1655 El Camino Real Palo Alto, California 94306 Facsimile #: Number of Shares: 2,000 Purchase Price: $100,000 ROBERT LONDON By: ----------------------------------------------- Address: Cruttenden Roth 809 Presidio Avenue, Suite B Santa Barbara, California 93101 Facsimile #: Attention: Robert London Number of Shares: 6,000 Purchase Price: $300,000 JEFFREY S. MORGAN By: ----------------------------------------------- Address: Coldwell Banker 990 West 190th Street, Suite 100 Torrance, California 90502 Facsimile #: Attention: Jeffrey S. Morgan Number of Shares: 625 Purchase Price: $31,250 THE MUHL FAMILY TRUST By: ----------------------------------------------- Name: Phillip E. Muhl Title: Trustee By: ----------------------------------------------- Name: Kristin A. Muhl Title: Trustee Address: 500 South Buena Vista Burbank, California 91521-0312 Facsimile #: Attention: Phillip E. Muhl or Kristin A. Muhl Number of Shares: 625 Purchase Price: $31,250 PACIFIC SECURITY GROUP, INC. By: ----------------------------------------------- Name: Title: Address: 2224 Walsh Tarlton, Suite 200 Austin, Texas 78746 Facsimile #: Attention: Malcolm Fairbairn, c/o Emily Wang Number of Shares: 500 Purchase Price: $25,000 PERMAL U.S. OPPORTUNITIES LTD. By: ----------------------------------------------- Name: Title: Address: Apex Capital, LLC Pine Grove 4 Orinda Way, Suite 240-B Orinda, California 94563 Facsimile #: Attention: Sanford J. Colen Number of Shares: 1,000 Purchase Price: $50,000 PILOT HOLDINGS, L.P. By: SHED INVESTMENTS, LLC, its General Partner By: /s/ Thomas M. DeLitto ----------------------------------------------- Name: Thomas M. DeLitto Title: Managing Member Address: 177 Post Road West Westport, Connecticut 96880 Facsimile #: (203) 222-7187 Attention: Thomas M. DeLitto Number of Shares: 5,000 Purchase Price: $250,000 POINTE INVESTMENTS CAPITAL, LTD. By: ----------------------------------------------- Name: Title: Address: 638 N. Faring Los Angeles, California 90077 Facsimile #: Attention: Mohamed Hadid Number of Shares:2,000 Purchase Price: $100,000 POLLAT, EVANS & CO., INC. By: ----------------------------------------------- Name: Title: Address: Apex Capital, LLC Pine Grove 4 Orinda Way, Suite 240-B Orinda, California 94563 Facsimile #: Attention: Sanford J. Colen Number of Shares: 175 Purchase Price: $8,750 KEVIN AND ERIN PRZYBOCKI By: ----------------------------------------------- Name: Kevin Przybocki By: ----------------------------------------------- Name: Erin Przybocki Address: 336 South Hudson Avenue Los Angeles, California 90020 Facsimile #: Number of Shares: 200 Purchase Price: $10,000 CHARLES B. RUNNELS, JR. By: ----------------------------------------------- Address: 2029 Avenue of the Stars, Suite 2530 Los Angeles, California 90067 Facsimile #: Attention: Tyler Runnels Number of Shares: 625 Purchase Price: $31,250 CHARLES B. RUNNELS, III By: ----------------------------------------------- Address: 10095 East Charter Oak Scottsdale, Arizona 85260 Facsimile #: Number of Shares: 625 Purchase Price: $31,250 G. TYLER RUNNELS By: ----------------------------------------------- Address: 1999 Avenue of the Stars, Suite 2530 Los Angeles, California 90067 Facsimile #: Number of Shares: 8,000 Purchase Price: $400,000 LORD ROBIN RUSSELL By: ----------------------------------------------- Address: Park House Woburn Park Woburn Milton Keynes MK17 9PQ England Facsimile #: Number of Shares: 250 Purchase Price: $12,500 TIMOTHY MICHAEL WALLACE By: ----------------------------------------------- Address: 116 S. McCadden Place Los Angeles, California 90004 Facsimile #: Attention: Tyler Runnels Number of Shares: 2,500 Purchase Price: $125,000 WAVE ENTERPRISES, INC. By: ----------------------------------------------- Name: Title: Address: 24255 Pacific Coast Highway Malibu, California 90263-4458 Facsimile #: Attention: Mike E. O'Neal Number of Shares: 250 Purchase Price: $12,500 IRA WEINGARTEN By: ----------------------------------------------- Address: Equity Communications 1512 Grand Avenue, Suite 200 Santa Barbara, California 93103 Facsimile #: Attention: Ira Weingarten Number of Shares: 625 Purchase Price: $31,250 J.D. YATES By: ----------------------------------------------- Address: 1125 Lane 30 1/4 Pueblo, Colorado 81006 Facsimile #: Number of Shares: 250 Purchase Price: $12,500 ZAXIS PARTNERS, L.P. By: ----------------------------------------------- Name: Title: Address: Apex Capital, LLC Pine Grove 4 Orinda Way, Suite 240-B Orinda, California 94563 Facsimile #: Attention: Sanford J. Colen Number of Shares: 5,000 Purchase Price: $250,000 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. EX-99.3 4 AMENDED AND RESTATED STOCKHOLDERS AGREEMENT by and among KRAUSE'S FURNITURE, INC. and THE STOCKHOLDERS LISTED ON THE SIGNATURE PAGES HEREOF Dated as of January 14, 2000 TABLE OF CONTENTS PAGE 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 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 AMENDED AND RESTATED STOCKHOLDERS AGREEMENT This Amended and Restated Stockholders Agreement (this "Agreement") is made as of January 14, 2000 by and among Krause's Furniture, Inc., a Delaware corporation (the "Company") and each of the stockholders of the Company listed on the signature pages hereof (each, a "Signatory Stockholder" and collectively, the "Signatory Stockholders"). W I T N E S S E T H : WHEREAS, pursuant to a Securities Purchase Agreement between the Company and General Electric Capital Corporation (collectively, with GE Capital Equity Investments, Inc., "GECC") dated August 26, 1996 (the "1996 Securities Purchase Agreement"), GECC purchased from the Company 5,000,000 shares of the Company's common stock, par value $.001 per share (the "Common Stock"), for an aggregate purchase price of $5,000,000, the Company's 10% Subordinated Pay-in-Kind Notes due August 31, 2001, as described in the Securities Purchase Agreement (the "Notes"), in the initial principal amount of $5,000,000, and, in connection with the Notes, a warrant (the "First Warrant") to purchase 1,400,000 shares of Common Stock; WHEREAS, concurrently with such purchase by GECC, (i) Hawley Group purchased 1,000,000 shares of Common Stock for an aggregate purchase price of $1,000,000, (ii) certain other investors purchased 3,000,000 shares of Common Stock for an aggregate purchase price of $3,000,000 and (iii) Japan Omnibus Ltd. (formerly named Edson Investments Inc.) and certain other holders of indebtedness of the Company exchanged such indebtedness for shares of Common Stock, as more fully described in the Securities Purchase Agreement; WHEREAS, in connection with the 1996 Securities Purchase Agreement, the Company entered into a Stockholders Agreement with certain stockholders dated August 26, 1996 (the "Prior Stockholders Agreement"); WHEREAS, pursuant to a Supplemental Securities Purchase Agreement between the Company, GECC and Japan Omnibus LTD. ("JOL"), dated August 14, 1997, (i) the Company and GECC amended and restated the provisions of the Notes, (ii) GECC and JOL purchased certain additional notes, (iii) in connection with the Notes, GECC and JOL received warrants (the "Second Warrants") to purchase 1,300,000 shares of Common Stock and (iv) GECC and JOL received an additional 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 Purchas ers 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 "benefi cial ownership" of such securities (as determined pursuant to Rule 13d-3 under the Exchange Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing. "Board" has the meaning assigned to it in Section 2.1. "By-laws" means the By-laws of the Company as in effect on the date hereof, as they may be amended from time to time hereafter. "Capitalized Lease" shall mean, with respect to any person, any lease or any other agreement for the use of property which, in accordance with generally accepted accounting principals, should be capitalized on the lessee's or user's balance sheet. "Capitalized Lease Obligation" of any person shall mean and include, as of any date as of which the amount thereof is to be determined, the amount of the liability capitalized or disclosed (or which should be disclosed) in a balance sheet of such person in respect of a Capitalized Lease of such person. "Certificate" means the Certificate of Incorporation of the Company as in effect on the date stated hereof, as it may be amended from time to time hereafter. "Common Stock Equivalents" means rights, options, scrip, warrants or other securities convertible into, or exchangeable or exercisable for, shares of Common Stock. "Company" has the meaning assigned to it in the first paragraph hereof. "Current Market Price", when used with reference to shares of Common Stock for any given date, shall mean the closing price per share of Common Stock on such date. The closing price for each day shall be the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other system then in use, or, if on any such date the Common Stock or such other securities are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock or such other securities selected by the Board of Directors of the Company. If the Common Stock is listed or admitted to trading on a national securities exchange, the closing price shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Common Stock or such other securities are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Common Stock or such other securities are listed or admitted to trading. "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 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. "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 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. (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 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 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 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); (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); (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; (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 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. 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. 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 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): (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 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 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." "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. 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 (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. 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). 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. 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. 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. IN WITNESS WHEREOF, the parties hereto have executed this Stockholders Agreement on the day and year first above written. KRAUSE'S FURNITURE, INC. By: /s/ Robert A. Burton ----------------------------------------- Name: Robert A. Burton Title: Executive Vice President and Chief Financial Officer GE CAPITAL EQUITY INVESTMENTS, INC. By: /s/ George L. Hashbarger, Jr. ----------------------------------------- Name: George L. Hashbarger, Jr. Title: Senior Vice President GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ George L. Hashbarger, Jr. ----------------------------------------- Name: George L. Hashbarger, Jr. Title: Department Operations Manager PERMAL CAPITAL MANAGEMENT, INC. By: /s/ Thomas M. DeLitto ----------------------------------------- Name: Title: PERMAL SERVICES, INC. By: /s/ Thomas M. DeLitto ----------------------------------------- Name: Title: PERMAL CAPITAL PARTNERS, L.P. By: PERMAL MANAGEMENT CORPO RATION, its Investment Manager By: /s/ Thomas M. DeLitto ----------------------------------------- Name: Title: PERMAL ASSET MANAGEMENT By: /s/ Thomas M. DeLitto ----------------------------------------- Name: Title: PERMAL SPECIAL OPPORTUNITIES, LTD. By: /s/ James R. Hodge ----------------------------------------- Name: Title: JAPAN OMNIBUS LTD. By: /s/ James R. Hodge ----------------------------------------- Name: Title: JEAN R. PERRETTE By: /s/ Jean R. Perrette ----------------------------------------- ISAAC ROBERT SOUEDE By: /s/ Isaac Robert Souede ----------------------------------------- THOMAS M. DELITTO By: /s/ Thomas M. Delitto ----------------------------------------- THOMAS M. AND DONNA S. DELITTO By: /s/ Thomas M. Delitto ----------------------------------------- Name: Thomas M. DeLitto By: ----------------------------------------- Name: Donna S. DeLitto UNITED GULF BANK (B.S.C.) E.C. By: ----------------------------------------- Name: Title: KUWAIT INVESTMENT PROJECTS COMPANY By: ----------------------------------------- Name: Title: ATCO HOLDINGS, LTD. By: /s/ Kamal Abdelnour ----------------------------------------- Name: Title: ATCO DEVELOPMENT, INC. By: /s/ Kamal Abdelnour ----------------------------------------- Name: Title: PILOT HOLDINGS, L.P. By: SHED INVESTMENTS, LLC, its General Partner By: /s/ Thomas M. DeLitto ----------------------------------------- Name: Thomas M. DeLitto Title: Managing Member 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: DR. PHILIP M. HAWLEY, JR. By: ----------------------------------------- PHILIP M. HAWLEY By: ----------------------------------------- TH LEE.PUTNAM INTERNET PARTNERS, L.P. By: TH LEE.PUTNAM INTERNET FUND AD VISORS, 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 AD VISORS, L.P., its General Partner By: TH LEE.PUTNAM INTERNET FUND ADVISORS, LLC, its General Partner By: Christine Kim ----------------------------------------- Name: Christine Kim Title: Vice President 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: ----------------------------------------- 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 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 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 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 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: ----------------------------------------- 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: ----------------------------------------- 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: ----------------------------------------- ZAXIS PARTNERS, L.P. By: ----------------------------------------- Name: Title: 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 SCHEDULE B STOCKHOLDER INFORMATION [FINAL VERSION TO COME] 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. EX-99.4 5 AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT by and among KRAUSE'S FURNITURE, INC. and THE STOCKHOLDERS LISTED ON THE SIGNATURE PAGES HEREOF Dated as of January 14, 2000 Amended and Restated Registration Rights Agreement (this "Agree ment"), dated as of January 14, 2000, by and among Krause's Furniture, Inc., a Delaware corporation (the "Company"), and each of the stockholders of the Company listed on the signature pages hereto (the "Investors"). 1. Background. The Investors own shares of either the Company's common stock, par value $.001 per share (the "Common Stock") or the Company's Series A Convertible Preferred Stock, par value $.0001 per share, (the "Series A Preferred Stock"), which is convertible into Common Stock. In connection with a Securities Purchase Agreement between the Company and the purchasers listed thereto, dated August 26, 1996, the Company entered into a Registration Rights Agreement with certain stockholders dated August 26, 1996 (the "Prior Registration Rights Agreement"). Pursuant to a Securities Purchase Agreement among the Company and the purchasers listed thereto, dated the date hereof, the Company and the Investors have entered into this Agreement to amend, restate and supersede the Prior Registration Rights Agreement. 2. Registration Under Securities Act, Etc. -------------------------------------- 2.1 Registration on Request. ----------------------- (a) Request. Subject to Section 2.8 hereof, at any time and from time to time upon the written request of Holders (the "Initiating Holders") of not less than the Required Number of Shares that the Company effect the registration under the Securities Act (other than pursuant to a Shelf Registration Statement) of all or part of such Initiating Holders' Registrable Securities (provided that the Company shall not be obligated to register less than the Required Number of Shares pursuant to such request), the Company will promptly give written notice of such requested registration to all registered Holders, and thereupon the Company will use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Securities (representing not less than the Required Number of Shares) which the Company has been so requested to register by such Initiating Holders, and (ii) all other Registrable Securities which the Company has been requested to register by the Holders thereof (such Holders together with the Initiating Holders are hereinafter referred to as the "Selling Holders") by 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 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 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 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; (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 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 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 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 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 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. (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 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 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, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating the same), (i) in such proportion as is appropriate to reflect the relative fault of the Company and the prospective sellers of Registrable Securities covered by the registration statement which resulted in such loss, claims, damage or liability, or action in respect thereof, with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as shall be appropriate to reflect the relative benefits received by the Company and such prospective sellers from the offering of the securities covered by such registration statement. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Such prospective sellers' obligations to contribute as provided in this subparagraph (d) are several in proportion to the relative value of their respective Registrable Securities covered by such registration statement and not joint. In addition, no Person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such Person's consent, which consent shall not be unreasonably withheld. (e) Other Indemnification. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 2.7 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any Federal or state law or regulation of any governmental authority other than the Securities Act. (f) Indemnification Payments. The indemnification and contribution required by this Section 2.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. In any case in which it shall be judicially determined that a party is not entitled to indemnification or contribution, any payments previously received by such party hereunder shall be promptly reimbursed. 2.8 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. "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 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. 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; (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") 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. 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. IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. KRAUSE'S FURNITURE, INC. By: /s/ Robert A. Burton ----------------------------------- Name: Robert A. Burton Title: Executive Vice President and Chief Financial Officer GE CAPITAL EQUITY INVESTMENTS, INC. By: /s/ George L. Hashbarger, Jr. ------------------------------------- Name: George L. Hashbarger, Jr. Title: Senior Vice President GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ George L. Hashbarger, Jr. ------------------------------------- Name: George L. Hashbarger, Jr. Title: Department Operations Manager PERMAL CAPITAL MANAGEMENT, INC. By: /s/ Thomas M. DeLitto ------------------------------------- Name: Title: PERMAL SERVICES, INC. By: /s/ Thomas M. DeLitto ------------------------------------- Name: Title: PERMAL CAPITAL PARTNERS, L.P. By: PERMAL MANAGEMENT CORPO RATION, its Investment Manager By: /s/ Thomas M. DeLitto ------------------------------------- Name: Title: PERMAL ASSET MANAGEMENT By: /s/ Thomas M. DeLitto ------------------------------------- Name: Title: PERMAL SPECIAL OPPORTUNITIES, LTD. By: /s/ James R. Hodge ------------------------------------- Name: Title: JAPAN OMNIBUS LTD. By: /s/ James R. Hodge ------------------------------------- Name: Title: JEAN R. PERRETTE By: /s/ Jean R. Perrette ------------------------------------- ISAAC ROBERT SOUEDE By: /s/ Isaac Robert Souede ------------------------------------- THOMAS M. DELITTO By: /s/ Thomas M. DeLitto ------------------------------------- THOMAS M. AND DONNA S. DELITTO By: /s/ Thomas M. DeLitto ------------------------------------- Name: Thomas M. DeLitto By: ------------------------------------- Name: Donna S. DeLitto UNITED GULF BANK (B.S.C.) E.C. By: ------------------------------------- Name: Title: KUWAIT INVESTMENT PROJECTS COMPANY By: ------------------------------------- Name: Title: ATCO HOLDINGS, LTD. By: /s/ Kamal Abdelnour ------------------------------------- Name: Title: ATCO DEVELOPMENT, INC. By: /s/ Kamal Abdelnour ------------------------------------- Name: Title: PILOT HOLDINGS, L.P. By: SHED INVESTMENTS, LLC, its General Partner By: /s/ Thomas M. DeLitto ------------------------------------- Name: Thomas M. DeLitto Title: Managing Member 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: DR. PHILIP M. HAWLEY, JR. By: ------------------------------------- PHILIP M. HAWLEY By: ------------------------------------- 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: ------------------------------------- AARON J. COLEN, UTMA, CA By: ------------------------------------- Name: Sanford J. Colen Title: Custodian ELYSE L. COLEN, UTMA, CA By: ------------------------------------- Name: Title: SARA K. COX By: ------------------------------------- JOHN DAVIES By: ------------------------------------- DIAMOND A. PARTNERS, L.P. By: ------------------------------------- Name: Title: J. STEVEN EMERSON 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 Title: Trustee EDWARD M. HAWLEY By: ------------------------------------- Name: Title: GEORGE P. HAWLEY By: ------------------------------------- VICTOR F. HAWLEY By: ------------------------------------- RICHARD HICKS By: ------------------------------------- KATHRYN JERGENS TRUST By: ------------------------------------- Name: Title: DIANE JOHNSON 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 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: ------------------------------------- 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 Przbocki CHARLES B. RUNNELS, JR. By: ------------------------------------- CHARLES B. RUNNELS, III By: ------------------------------------- G. TYLER RUNNELS. By: ------------------------------------- LORD ROBIN RUSSELL By: ------------------------------------- TIMOTHY MICHAEL WALLACE By: ------------------------------------- WAVE ENTERPRISES, INC. By: ------------------------------------- Name: Title: IRA WEINGARTEN By: ------------------------------------- Name: Title: J.D. YATES By: ------------------------------------- Name: Title: ZAXIS PARTNERS, L.P. By: ------------------------------------- Name: Title: 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 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 Edward M. Hawley 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. 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. EX-99.5 6 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. 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. 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 (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. 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 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 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. (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 certificate, 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. ------------------------------ (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). (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 (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 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 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 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 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 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. 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. IN WITNESS WHEREOF, the Corporation has caused this Certificate 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 EX-99.6 7 AGREEMENT This Agreement (this "Agreement") is entered into this 11th day of January, 2000, by and among Krause's Furniture, Inc., a Delaware corporation (the "Company"), General Electric Capital Corporation, a New York corporation ("GECC"), and Japan Omnibus Ltd., an international business corporation incorporated under the laws of the British Virgin Islands ("JOL"). RECITALS GECC has purchased from the Company Notes dated (i) as of August 14, 1997, as amended as of March 31, 1999, in the outstanding principal amount of $5,501,091.20 (the "Initial Note"), (ii) as of August 14, 1997, as amended as of March 31, 1999, in the outstanding principal amount of $2,500,000 (the "August 1997 Note") and (iii) as of December 30, 1997, as amended as of March 31, 1999, in the outstanding principal amount of $2,500,000 (collectively with the Initial Note and the August 1997 Note, the "GECC Notes"). JOL has purchased from the Company Notes dated (i) as of August 14, 1997, as amended as of March 31, 1999, in the outstanding principal amount of $500,000 (the "JOL August 1997 Note") and (ii) as of December 30, 1997, as amended as of March 31, 1999, in the outstanding principal amount of $1,000,000 (together with the JOL August 1997 Note, the "JOL Notes"; the JOL Notes and the GECC Notes are referred to herein collectively as the "Notes"). The Company, GECC and JOL are parties to a Supplemental Securities Purchase Agreement dated as of August 14, 1997 (as amended on September 14, 1999 and December 14, 1999, the "Supplemental Purchase Agreement") relating to the Notes. Capitalized terms used herein without definition have the meanings set forth in the Supplemental Purchase Agreement. In connection with the transactions contemplated by the Krause's Furniture Inc. Series A Convertible Preferred Stock Securities Purchase Agreement dated as of January 11th, 2000 (the "2000 Securities Purchase Agreement"), the Company, GECC and JOL desire to amend certain provisions of the Notes and the Supplemental Purchase Agreement and to provide certain additional rights to the holders of the Notes. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: 1. Effective as of December 24, 1999, Section 6.2 of the Supplemental Purchase Agreement shall be amended in its entirety to read as follows: 6.2. Financial Covenants. For purposes of this Section 6.2, "fiscal year" and "fiscal quarter" are measured on the basis of a fiscal year ending on the Sunday closest to December 25 of the relevant calendar year.1 The Company's compliance with the financial covenants set forth below shall be determined based solely on the assets, liabilities and operating results of the Company's retail and hospitality operations, except that Indebtedness relating to the Company's e-commerce and business-to-business operations shall be taken into account for purposes of calculating compliance with the covenant in paragraph (b) and lease expense (other than lease expense previously approved by GECC) and interest expense relating to the Company's e-commerce and business-to-business operations shall be taken into account for purposes of calculating compliance with the covenant in paragraph (c). - --------------- 1 E.g., fiscal year 2000 is the twelve-month period ending December 24, 2000; the fiscal quarters of fiscal year 2000 are the quarterly periods ending March 26, June 25, September 24 and December 24 of such year. (a) The Company will not permit its Consolidated Net Worth at the end of any fiscal quarter to be less than the amount set forth below for such fiscal quarter, provided that, upon any public or private offering of capital stock of the Company for the Company's account, the amounts set forth below for fiscal quarters subsequent to such offering shall be adjusted upward by an amount equal to the net proceeds of any such offering multiplied by 0.9: Year Q1 Q2 Q3 Q4 ---- ------- ------- ------- ------- 1999 N/A N/A 8.8 MM 6.0 MM 2000 13.5 MM 14.0 MM 14.5 MM 16.0 MM 2001 17.5 MM 20.0 MM 22.0 MM 26.0 MM 2002 29.0 MM 32.0 MM 35.0 MM 40.0 MM 2003 40.0 MM 40.0 MM N/A N/A (b) The Company and its Subsidiaries will not incur, create, assume or permit to exist any Indebtedness at the end of any fiscal quarter if such Indebtedness would result in a ratio of Consolidated Total Indebtedness to Consolidated Net Worth of more than the amount for such fiscal quarter indicated set forth below: Year Q1 Q2 Q3 Q4 ---- ------- ------- ------- ------- 1999 N/A N/A 3.75 5.00 2000 1.95 1.95 1.95 1.60 2001 1.30 1.10 1.00 1.00 2002 1.00 1.00 1.00 1.00 2003 1.00 1.00 N/A N/A (c) The Company will not permit its Fixed Charge Ratio at the end of any fiscal quarter to be less than the amount set forth below for such fiscal quarter: Year Q1 Q2 Q3 Q4 ---- ------- ------- ------- ------- 1999 N/A N/A 0.75 0.45 2000 0.95 1.10 1.10 1.30 2001 1.20 1.20 1.20 1.35 2002 1.30 1.30 1.30 1.50 2003 1.40 1.40 N/A N/A (d) The Company and its Subsidiaries will not make capital expenditures (net of any sale leasebacks incurred within such fiscal year) for its retail and hospitality operations in excess of the amounts set forth below for the fiscal years indicated: 1999 $10,000,000 2000 $8,000,000 2001 $8,000,000 2002 $8,000,000 2003 2 $4,000,000 - --------------- 2 Applicable to the first two fiscal quarters of 2003. Any amount not spent in any one fiscal year may be spent in a succeeding fiscal year, subject to the Company's annual business plan. 2. Each of the Notes is hereby amended to provide that the payment date for each scheduled payment of principal under the Note shall be deferred for a period of eleven months from the date specified in such Note (i.e., the installment of principal currently payable on April 30, 2000 shall be due and payable on March 31, 2001 and each succeeding installment of principal shall be due and payable one year from the date specified in such Note, with the final installment of principal due and payable on June 30, 2003). 3. Notwithstanding paragraph 2 above, commencing with the Company's fiscal quarter ending March 31, 2000, 50% of the Company's quarterly "free cash flow from retail operations" (as defined below) up to a maximum of $4,000,000 in the aggregate shall be applied ratably to the Notes (in proportion to the outstanding principal amount of each Note) to prepay the outstanding principal amount of each Note in the inverse order of maturity of installments under each Note. For the purposes of this Agreement, "free cash flow from retail operations" means EBITDA of the Company's retail and hospitality operations, less debt service payments and less capital expenditures for the Company's retail and hospitality operations, determined as of the end of each fiscal quarter as promptly as practicable and in any event within 30 days after such quarter end. Any prepayments under the Notes required by this paragraph shall be made as promptly as practicable, and in any event within three days, after the determination of free cash flow from retail operations for the preceding fiscal quarter. 4. Commencing June 30, 2000, the Company and its Subsidiaries shall not enter into any contract or commitment to make any capital expenditure or make any capital expenditure not previously contracted for by the Company or any of its Subsidiaries relating to the retail or hospitality operations of the Company and its Subsidiaries (other than non-new store related retail capital expenditures not to exceed $250,000 in the aggregate per quarter) unless (i) such capital expenditure has previously been approved by GECC, (ii) the Company is not (and, after giving effect to such capital expenditure, will not be) in default of any obligation under the Notes, the Supplemental Purchase Agreement or this Agreement and (iii) after giving effect to such proposed capital expenditure, the Company's projected free cash flow from retail and hospitality operations (as set forth in the current business plan for the Company's retail and hospitality operations approved by the Board of Directors, and subject to any reductions reasonably necessary to reflect deviations from the targets established in such business plan), will be sufficient to make all payments of principal and interest under the Notes when due and payable. The Company shall provide to GECC prior to the end of each fiscal quarter a schedule listing all capital expenditures for retail or hospitality operations proposed to be committed or contracted for in the succeeding fiscal quarter. 5. Provided that no cash dividends shall have been paid in respect of shares of Series A Convertible Preferred Stock of the Company, the Company shall have the right to defer payments of interest under all (but not less than all) of the Notes for periods ending on or prior to December 31, 2000. Payments of interest under any Note deferred in accordance with the preceding sentence shall be due and payable, together with interest on each such deferred payment from and including the date on which such payment was otherwise (but for such deferral) due and payable under the Note to but excluding the date on which such payment is actually made by the Company as provided in this paragraph, at an annual rate of 9.5%, compounded quarterly on the basis of a 360-day year of 12 30-day months (the "Deferred Interest Amount"), at the option of the holder of such Note, either (a) on December 31, 2000, in shares of Series A Convertible Preferred Stock having an aggregate value (calculated based upon the Issue Price (as defined in the Certificate of Designation of the Series A Convertible Preferred Stock)) equal to the Deferred Interest Amount as of such date, or (b) on the date on which the final installment of principal of such Note is due and payable (after giving effect to any prepayments under such Note required by paragraph 3 of this Agreement) by the Company in accordance with such Note as amended hereby, in cash in an amount equal to the Deferred Interest Amount as of such date. 6. Except for any redemption of shares of Series A Convertible Preferred Stock permitted in accordance with Section 6.2 (a) of the 2000 Securities Purchase Agreement, no cash payments in respect of the Series A Convertible Preferred Stock, whether of dividends, payments upon redemption or repurchase by the Company, or upon any actual or deemed liquidation, dissolution or winding up of the Company, shall be made unless the entire outstanding principal amount of, and all accrued interest and other amounts payable under the Notes have been repaid in full and the Notes have been cancelled and retired. 7. The Company acknowledges and agrees 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 GECC and JOL 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. 8. 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. This Agreement may be amended as to GECC, JOL and their successors and assigns, and the Company may take any action herein prohibited, or omit to perform any act required to be performed by it, if the Company shall obtain the written consent of the registered holders of not less than 66 2/3% of the aggregate outstanding principal amount of the Notes then held by GECC, JOL and their successors or assigns; provided, however, that without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to or waiver of any terms of this Agreement shall change or affect the interest rate, maturity, principal amount, time of payment, currency of payment, or the amount or allocation of any prepayments of any Note. 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. Notwithstanding anything in this Agreement to the contrary, no provision of this Section 9 may be waived, changed or modified. 10. All covenants and agreements contained herein shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. This Agreement may be assigned by GECC or JOL to any transferee of Notes. This Agreement may not be assigned by the Company. 11. The Company agrees to pay GECC and JOL for all reasonable outside legal fees in connection with this Agreement. 12. This Agreement shall terminate upon the repayment in full of all amounts of principal, interest and other sums due and payable on all Notes. 13. 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 documents 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. 14. This Agreement shall be effective upon delivery of original signature pages or facsimile copies thereof executed by each of the parties hereto. 15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY CONSENTS TO SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES OF AMERICA, IN EACH CASE LOCATED IN THE COUNTY OF NEW YORK, FOR ANY ACTION, PROCEEDING OR INVESTIGATION IN ANY COURT OR BEFORE ANY GOVERNMENTAL AUTHORITY ("LITIGATION") ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY (AND AGREES NOT TO COMMENCE ANY LITIGATION RELATING THERETO EXCEPT IN SUCH COURTS), AND FURTHER AGREES THAT SERVICE OF ANY PROCESS, SUMMONS, NOTICE OR DOCUMENT BY U.S. REGISTERED MAIL TO ITS RESPECTIVE ADDRESS SET FORTH IN THIS AGREEMENT SHALL BE EFFECTIVE SERVICE OF PROCESS FOR ANY LITIGATION BROUGHT AGAINST IT IN ANY SUCH COURT. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF ANY LITIGATION ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY IN THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES OF AMERICA, IN EACH CASE LOCATED IN THE COUNTY OF NEW YORK, AND HEREBY FURTHER IRREVOCABLY AND UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHTS TO TRIAL BY JURY IN CONNECTION WITH ANY LITIGATION ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized. KRAUSE'S FURNITURE, INC. By: /s/ Robert A. Burton ------------------------------------------ Name: Robert A. Burton Title: Executive Vice President and Chief Financial Officer GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ George C. Hashburger, Jr. ------------------------------------------ Name: George L. Hashbarger, Jr. Title: Senior Vice President/ Department Operations Manager JAPAN OMNIBUS LTD. By: /s/ James R. Hodge ------------------------------------------ Name: Title: EX-99.7 8 POWER OF ATTORNEY The undersigned, General Electric Company, a New York corporation (hereinafter referred to as the "Corporation") does hereby make, constitute and appoint the persons listed below as the Corporation's true and lawful agent and attorney-in-fact (hereinafter referred to as the "Attorney") to act either together or alone in the name and on behalf of the Corporation for and with respect to the matters hereinafter described. Name of Attorney: Joan C. Amble Nancy E. Barton Jeffrey S. Werner Michael A. Gaudino J. Gordon Smith Michael E. Pralle Paul J. Licursi Each Attorney shall have the power and authority to do the following: To execute and deliver any Schedule 13D, Schedule 13G or Forms 3, 4 and 5 or any amendments thereto required to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 on behalf of the Corporation with regard to any securities owned by General Electric Capital Services, Inc., General Electric Capital Corporation or any of their subsidiaries. And, in connection with the foregoing, to execute and deliver all documents, acknowledgments, consents and other agreements and to take such further action as may be necessary or convenient for the Corporation in order to more effectively carry out the Intent and purpose of the foregoing. Agreements, commitments, documents, instruments, and other writings executed by the Attorney in accordance with the terms hereof shall be binding upon the Corporation without attestation and without affixation of the seal of the Corporation. The Power of Attorney conferred hereby shall not be delegable by any Attorney. The Attorney shall serve without compensation for acting in the capacity of agent and attorney-in-fact hereunder. Unless sooner revoked by the Corporation, this Power of Attorney shall be governed under the laws of the State of New York and the authority of the Attorney hereunder shall terminate on March 31, 2000. IN WITNESS WHEREOF, the Corporation has caused this Power of Attorney to be executed, attested and its corporate seal to be affixed pursuant to authority granted by the Corporation's board of directors, as of the 30th day of April, 1998. General Electric Company (Corporate Seal) By: /s/ Philip D. Ameen ------------------------------- Philip D. Ameen, Vice President Attest: /s/ Robert E. Healing - ---------------------------- Robert E. Healing, Attesting Secretary POWER OF ATTORNEY The undersigned, General Electric Capital Services, Inc., a Delaware corporation (hereinafter referred to as the "Corporation") does hereby make, constitute and appoint the persons listed below as the Corporation's true and lawful agent and attorney-in-fact (hereinafter referred to as the "Attorney") to act either together or alone in the name and on behalf of the Corporation and for and with respect to the matters hereinafter described. Name of Attorney: Michael A. Gaudino J. Gordon Smith Michael E. Pralle Paul J. Licursi Each Attorney shall have the power and authority to do the following: To execute and deliver any Schedule 13D, Schedule 13G or Forms 3, 4 and 5 or any amendments thereto required to be filed with the Security and Exchange Commission under the Securities Act of 1934 on behalf of the Corporation with regard to any securities owned by the Corporation, General Electric Capital Corporation of any of their subsidiaries. And, in connection with the foregoing, to execute and deliver all documents, acknowledgments, consents or other agreements and to take such further action as may be necessary or convenient for the Corporation in order to more effectively carry out the intent and purpose of the foregoing. Agreements, commitments, documents, instruments, and other writings executed by the Attorney in accordance with the terms hereof shall be binding upon the Corporation without attestation and without affixation of the seal of the Corporation. The Power of Attorney conferred hereby shall not be delegable by any Attorney. The Attorney shall serve without compensation for acting in the capacity of agent and attorney-in-fact hereunder. Unless revoked by the Corporation, this Power of Attorney shall be governed under the laws of the State of New York and the authority of the Attorney hereunder shall terminate on March 31, 2000. IN WITNESS WHEREOF, the Corporation has caused this Power of Attorney to be executed, attested and its corporate seal to be affixed pursuant to authority granted by the Corporation's board of directors, as of the 30th of April, 1998. General Electric Capital Services, Inc. (Corporate Seal) By: /s/ Nancy E. Barton ------------------------------------ Nancy E. Barton, Senior Vice President Attest: /s/ Brian T. MaAnaney - ------------------------- Brian T. McAnaney, Assistant Secretary -----END PRIVACY-ENHANCED MESSAGE-----