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EXHIBIT 4.2
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT
OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
KRAUSE'S FURNITURE, INC.
CONVERTIBLE PROMISSORY NOTE
SERIES 1996-I, NO. ___ PLEASANTON, CALIFORNIA
$____________ ___________, 1996
KRAUSE'S FURNITURE, INC. (the "Company"), a Delaware corporation, for
value received, hereby promises to pay to ____________________________ or order
(the "Holder"), on demand at any time on or after ____________, 1999 (the "Due
Date"), the principal amount of _________________________ Dollars ($________),
together with interest thereon at the annual rate of Ten Percent (10%) for the
first year after the date hereof. Thereafter, no interest shall accrue
hereunder. Payments of principal and interest shall be made in lawful money of
the United States of America at Holder's address set forth on the signature page
hereto or at such other place in the United States as Holder shall have
designated to the Company in writing. This Note may not be prepaid prior to the
first anniversary of the date of this Note but may be prepaid at any time after
the first anniversary of the date of this Note and before the Due Date only upon
thirty (30) days' advance written notice to Holder.
1. CONVERSION.
a. CONVERSION AT ELECTION OF HOLDER. Subject to adjustment as set
forth herein, the entire outstanding principal amount of this Note and all
accrued interest may be converted at the election of Holder into shares of the
Company's Common Stock at any time after the first anniversary of the date of
this Note.
b. CONVERSION AT ELECTION OF COMPANY. Subject to adjustment as set
forth herein, the entire outstanding principal amount of this Note and all
accrued interest may be converted at the election of the Company into shares of
the Company's Common Stock at any time after the date that is ninety (90) days
before the Due Date.
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c. NUMBER OF SHARES. The number of shares of the Company's Common
Stock into which this Note may be converted shall be determined by dividing the
total of the outstanding principal amount of the Note and the interest accrued
thereon by the Conversion Price, as defined in SECTION 1.d. Upon issuance of
such shares of the Company's Common Stock in accordance with the terms hereof,
such shares will be fully paid and nonassessable, and this Note shall become
null and void and shall cease to have any effect.
d. CONVERSION PRICE. The Conversion Price shall be an amount equal
to eighty percent (80)% of the average "Closing Price" of the Company's Common
Stock for the sixty (60) consecutive trading days immediately preceding the
first anniversary of the date of this Note. The foregoing notwithstanding but
subject only to appropriate adjustment pursuant to SECTION 3.a below, in no
event shall the Conversion Price be greater than $4.00 or less than $0.80. The
term "Closing Price" when used herein means the closing bid price of the Common
Stock of the Company reported by the National Association of Securities Dealers
Automated Quotation Systems, Inc. ("NASDAQ") or, if the shares of Common Stock
of the Company are then listed on a National Securities Exchange (registered
under the Securities Exchange Act of 1934), or the NASDAQ National Market System
or other comparable listing which lists last sale prices, the reported last sale
price per share or, in case no such reported sale takes place on such day, the
average of reported closing bid and asked prices per share, in either case on
such exchange, or if such prices are not recorded by NASDAQ and the shares of
Common Stock are not listed or admitted to trading on such a National Securities
Exchange, the mean between the closing bid and asked prices as furnished by any
member of the National Association of Securities Dealers, Inc. selected from
time to time by the Company for that purpose.
2. METHOD OF CONVERSION.
a. METHOD OF CONVERSION BY HOLDER. The exercise by Holder of its
conversion right hereunder shall be effected by the surrender of this Note,
together with a duly executed copy of a Holder Conversion Notice in the form
attached hereto as APPENDIX 1, to the Company at its principal office.
b. METHOD OF CONVERSION BY COMPANY. The exercise by the Company of
its conversion right hereunder shall be effected by its delivering to Holder a
duly-executed copy of a Company Conversion Notice in the form attached hereto as
APPENDIX 2. Upon its receipt of the Company Conversion Notice, Holder shall, as
promptly as practicable, surrender the Note to the Company at its principal
office. In the event Holder shall fail to so deliver the Note, the Company's
conversion rights shall nonetheless be effective, and this Note shall be deemed
paid in full and shall cease to have any further effect.
c. DELIVERY OF STOCK CERTIFICATES; FRACTIONAL SHARES. As promptly as
practicable after the conversion of this Note, the Company at its expense shall
issue and deliver to Holder a certificate or certificates for the number of full
shares of Company Stock
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issuable upon such conversion of the Note. In lieu of any fractional share to
which Holder would otherwise be entitled, the Company shall make a cash payment
equal to the then fair market value of such fractional share as determined by
the Company's Board of Directors.
3. CERTAIN ADJUSTMENTS.
a. ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be
subject to adjustment as set forth in this SECTION 3.a.
i. ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. In case
outstanding shares of the Company's Common Stock shall be subdivided into a
greater number of shares of Common Stock, the Conversion Price in effect at the
opening of business on the date following the day upon which such subdivision
becomes effective shall be proportionately reduced, and, conversely, in case
outstanding shares of the Company's Common Stock shall be combined into a
smaller number of shares of Common Stock, the Conversion Price in effect at the
opening of business on the date following the day upon which such combination
becomes effective shall be proportionately increased, such reductions or
increases to be effected as provided below. In the event of any such subdivision
or combination, the Conversion Price then in effect shall be reduced or
increased, as the case may be, by multiplying it by a fraction of which the
numerator shall be the number of shares of the Company's Common Stock
outstanding at the close of business on the date immediately preceding the
effective date of such subdivision or combination and the denominator shall be
the number of shares of Common Stock outstanding immediately after such
subdivision or combination becomes effective.
ii. ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the
event the Company, at any time or from time to time, makes or fixes a record
date for the determination of holders of shares of Common Stock entitled to
receive a dividend or other distribution payable in additional shares of Common
Stock, then and in each such event the Conversion Price then in effect shall be
reduced by multiplying the Conversion Price by a fraction (A) the numerator of
which shall be the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date and (B) the denominator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution; provided,
however, that if such record date is fixed and such dividend is not fully paid
or if such distribution is not fully made on the date fixed therefor, the
Conversion Price shall be recomputed accordingly as of the close of business on
such record date and thereafter the Conversion Price shall be adjusted pursuant
to this SECTION 3.a.ii as of the time of actual payment of such dividends or
distributions.
b. OTHER ADJUSTMENTS.
i. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the
event the Company at any time or from time to time makes, or fixes a record date
for the
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determination of holders of shares of Common Stock entitled to receive a
dividend or other distribution payable in securities of the Company other than
shares of Common Stock, then in each such event provision shall be made so that
Holder shall receive upon conversion of this Note, in addition to the number of
shares of Common Stock receivable thereupon, the amount of securities of the
Company which Holder would have received had this Note been converted into
shares of Common Stock on the date of such event and had Holder thereafter,
during the period from the date of such event to and including the date of
conversion, retained such securities receivable by it as aforesaid during such
period, subject to all other adjustments called for during such period under
this SECTION 3.
ii. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
If the shares of Common Stock issuable upon the conversion of this Note are
changed into the same or a different number of shares of any other class or
classes of stock, whether by recapitalization, reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend or a
reorganization, merger, consolidation or sale of assets, provided for elsewhere
in this SECTION 3), then and in any such event Holder shall have the right
thereafter to convert this Note into the kind and amount of stock and other
securities and property receivable upon such recapitalization, reclassification
or other change by holders of the number of shares of Common Stock into which
this Note might have been converted immediately prior to such recapitalization,
reclassification or change.
iii. REORGANIZATION, MERGER, CONSOLIDATION OR SALE OF ASSETS. If
at any time or from time to time there is a capital reorganization of the shares
of Common Stock (other than a recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this SECTION 3)
or a merger or consolidation of the Company with or into another corporation, or
the sale of all or substantially all of the Company's properties and assets to
any other person, then, as a part of such capital reorganization, merger,
consolidation or sale, provision shall be made so that Holder shall thereafter
be entitled to receive, upon conversion of this Note, the number of shares of
stock or other securities or property of the Company, or of the successor
corporation resulting from such merger, consolidation or sale, to which a holder
of shares of Common Stock deliverable upon conversion hereof would have been
entitled on such capital reorganization, merger, consolidation or sale. In any
such case (except to the extent any cash or property is received in such
transaction), appropriate adjustment shall be made in the application of the
provisions of this SECTION 3.b.iii with respect to the rights of Holder after
the capital reorganization, merger, consolidation or sale to the end that the
provisions of this SECTION 3.b.iii (including adjustment of the number of shares
of Common Stock issuable upon conversion of this Note) shall be applicable after
that event and be as nearly equivalent to the provisions hereof as may be
practicable.
c. NO IMPAIRMENT. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issuance or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or
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performed hereunder by the Company, but will at all times in good faith assist
in the carrying out of all the provisions of this SECTION 3 and in the taking of
all such action as may be necessary or appropriate in order to protect the
conversion rights of Holder against dilution or other impairment.
d. CERTIFICATE AS TO ADJUSTMENTS. Promptly following conversion, the
Company will compute such adjustments in accordance with the terms of SECTION
3.a and SECTION 3.b and cause a certificate setting forth all such adjustments
and showing in detail the facts upon which such adjustments are
based to be delivered to Holder.
4. RESERVATION OF SHARES OF COMMON STOCK. The Company shall at all
times have authorized and reserved, free from preemptive rights, a sufficient
number of shares of Common Stock to provide for the conversion of this Note. If
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of this Note, in addition to such
other remedies as shall be available to Holder, the Company shall use its
reasonable best efforts to take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purposes.
5. PRIVILEGE OF STOCK OWNERSHIP. Prior to the conversion of this Note,
Holder, by reason of its ownership of this Note, shall not be entitled to any
rights of a shareholder of the Company, including (without limitation) the right
to vote, receive dividends or other distributions or exercise preemptive rights.
6. INVESTMENT REPRESENTATIONS. Holder represents that:
a. PURCHASE FOR OWN ACCOUNT. This Note and the shares of Common
Stock to be received upon conversion of this Note are being acquired for
Holder's own account, not as a nominee or agent and not with a view to resale or
distribution of any part thereof, and Holder has no present intention of
selling, granting any participation in, or otherwise distributing the same.
Holder further represents that it does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to any third person with respect to this Note or the Common
Stock.
b. RESTRICTED SECURITIES. Holder understands that this Note and the
Common Stock may be characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in
transactions not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act"), only in certain limited
circumstances. In this connection, Holder represents that it is familiar with
SEC Rule 144, as presently in effect, and understands the resale limitations
imposed thereby and by the Act.
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c. RESTRICTIONS ON DISPOSITION. Without in any way limiting the
representations set forth above, Holder agrees not to make any disposition of
this Note or all or any portion of the Common Stock unless and until either of
the following applies:
i. There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement.
ii. Holder shall (1) have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and (2) if reasonably
requested, Holder shall have furnished the Company with an opinion of counsel,
reasonably satisfactory to the Company that such disposition will not require
registration of the Company Stock under the Act. It is agreed that the Company
will not require opinions of counsel for sale made pursuant to Rule 144 except
in unusual circumstances.
d. LEGEND. Holder understands the instruments evidencing the shares
of Common Stock to be issued upon conversion of this Note may bear the following
legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SAID SHARES MAY
NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS
THEY HAVE FIRST BEEN REGISTERED UNDER SAID ACT, OR UNLESS COUNSEL
SATISFACTORY TO THE CORPORATION HAS GIVEN AN OPINION THAT
REGISTRATION UNDER SAID ACT IS NOT REQUIRED.
7. REGISTRATION RIGHTS. The Holder and the Company shall, on the date
hereof, have executed and delivered a Registration Rights Agreement
substantially in the form attached hereto as APPENDIX 3.
8. MISCELLANEOUS.
a. TITLES AND SUBTITLES. The titles and subtitles used in this Note
are for convenience only and are not to be considered in construing or
interpreting this Note.
b. NOTICES. Any notice required or permitted under this Note shall
be given in writing and shall be deemed effectively given upon personal delivery
to the party to be notified or upon deposit with the United States Post Office,
by registered or certified mail, postage prepaid.
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c. AMENDMENTS AND WAIVERS. Any term of this Note may be amended and
the observance of any term of this Note may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Holder hereof. Any amendment or waiver
effected in accordance with this SECTION 8.c shall be binding upon Holder of
this Note and the Company.
d. SEVERABILITY. If one or more provisions of this Note are held to
be unenforceable under applicable law, such provision shall be excused from this
Note and the balance of the Note shall be interpreted as if such provision were
so excluded and shall be enforceable in accordance with its terms.
e. ATTORNEYS' FEES. If any legal action or any arbitration or other
proceeding is brought for the enforcement of this Note, or because of an alleged
dispute, breach, default or misrepresentation in connection with any of the
provisions of this Note, the successful or prevailing party or parties shall be
entitled to recover reasonable attorney fees and other costs incurred in that
action or proceeding, in addition to any other relief to which it or they may be
entitled.
f. GOVERNING LAW. This Note shall be governed by and constructed and
enforced in accordance with the laws of the State of California without giving
effect to conflicts of law principals.
KRAUSE'S FURNITURE, INC.
By____________________________
_________________ President
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