Document:

Exhibit 4.2

 

REGISTRATION
RIGHTS AGREEMENT

 

THIS REGISTRATION RIGHTS
AGREEMENT (this “Agreement”) is made and entered into as of August 12,
2004, by and between KKR Financial Corp., a Maryland corporation (the “Company”),
and Friedman, Billings, Ramsey & Co., Inc., a Delaware corporation (“FBR”)
for the benefit of the Holders (as defined below).

 

THE PARTIES ENTER THIS AGREEMENT
on the basis of the following facts, understandings and intentions:

 

A.                                    The
Company, FBR and KKR Financial Advisors LLC (“KKR Advisors”) entered into that
certain Purchase/Placement Agreement dated as of August 5, 2004 (the “Purchase
Agreement”) in connection with the offering and sale (the “Offering”) of up to
84,000,000 shares of common stock, par value $0.01 per share, of the Company (“Common
Stock”).

 

B.                                    In
order to induce the investors who are purchasing the Common Stock in the
Offering to purchase such Common Stock and FBR to enter into the Purchase
Agreement, the Company has agreed to provide the registration rights provided
for in this Agreement for the holders of Registrable Shares (as defined below).

 

C.                                    The
execution and delivery of this Agreement is a condition to the closing of the
transactions contemplated by the Purchase Agreement.

 

NOW, THEREFORE,
in consideration of the premises and the mutual covenants of the parties
hereto, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:

 

1.                                       Definitions.  As used in this Agreement, the following
terms shall have the following meanings:

 

Additional
Shares:  Shares or
other securities issued in respect of the Shares by reason of or in connection
with any stock dividend, stock distribution, stock split, or similar issuance.

 

Agreement:  As defined in the Introductory Paragraph of
this Agreement.

 

Affiliate:  As to any specified Person, (i) any Person
that directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the specified Person, (ii) any
executive officer, director, trustee, managing member or general partner of the
specified Person and (iii) any legal entity for which the specified Person acts
as an executive officer, director, trustee, managing member or general partner.  For purposes of this definition, “control”
(including the correlative meanings of the terms “controlled by” and “under
common control with”), as used with respect to any Person, shall mean the
possession, directly, or indirectly through one or more intermediaries, of the
power to direct or cause the direction of the management and policies of such
Person, whether by contract, through the ownership of voting securities,
partnership interests, membership interests or other equity interests or
otherwise.

 

Business
Day:  With respect to
any act to be performed hereunder, each Monday, Tuesday, Wednesday, Thursday
and Friday that is not a day on which banking institutions in New York, New
York are authorized or obligated by applicable law, regulation or executive
order to close.

 

 

Closing
Time:  August 12,
2004 or such other time or such other date as FBR and the Company may agree.

 

Commission:  The Securities and Exchange Commission.

 

Common
Stock:  As defined in
Recital A hereof.

 

Company:  As defined in the Introductory Paragraph of
this Agreement, and any successor thereto.

 

Controlling
Person:  As defined in Section 6(a)
hereof.

 

End of
Suspension Notice:  As
defined in Section 5(b) hereof.

 

Exchange
Act:  The Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated by
the Commission pursuant thereto.

 

FBR:  As defined in the Introductory Paragraph of
this Agreement, and any successor thereto.

 

Holder:  Each Participant and its direct or indirect
transferees, so long as such Participant or transferee owns any Registrable
Shares.

 

Indemnified
Party:  As defined in Section 6(c)
hereof.

 

Indemnifying
Party:  As defined in Section 6(c)
hereof.

 

IPO
Registration Statement: 
As defined in Section 2 hereof.

 

Liabilities:  As defined in Section 6(a) hereof.

 

Mandatory
Shelf Registration Statement: 
As defined in Section 2(a) hereof.

 

NASD:  The National Association of Securities
Dealers, Inc.

 

Offering:  As defined in Recital A hereof.

 

Participants:  The purchasers in the offering of (i) the
Regulation D Shares from the Company and (ii) Rule 144A Shares and Regulation S
Shares from FBR.

 

Person:  An individual, partnership, corporation,
limited liability company, trust, unincorporated organization, government or
agency or political subdivision thereof, or any other legal entity.

 

Prospectus:  The prospectus included in any Registration
Statement, including any preliminary prospectus, and all other amendments and
supplements to any such prospectus, including post-effective amendments, and
all material incorporated by reference or deemed to be incorporated by
reference, if any, in such prospectus.

 

Purchase
Agreement:  As defined
in Recital A of this Agreement, as amended from time to time.

 

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Purchaser
Indemnitee:  As defined
in Section 6(a) hereof.

 

Registrable
Shares:  Each of the
Shares and any Additional Shares, upon original issuance thereof, and at all
times subsequent thereto, including upon the transfer thereof by the original
holder or any subsequent holder, until, in the case of any such Shares or
Additional Shares, as applicable, the earliest to occur of:

 

(i)                                     the
second anniversary of the initial effective date of the Mandatory Shelf
Registration Statement;

 

(ii)                                  the
date on which such Shares have been sold pursuant to a Registration Statement
or distributed to the public pursuant to Rule 144;

 

(iii)                               the
date on which, in the opinion of counsel to the Company, such Shares not held
by Affiliates of the Company are saleable pursuant to subparagraph (k) of
Rule 144; or

 

(iv)                              the
date on which such Shares are sold to the Company or any of its subsidiaries.

 

Registration
Expenses:  Any and all
expenses of the Company incident to the Company’s performance of or compliance
with this Agreement, including, without limitation:  (i) all Commission, securities exchange, NASD
registration, listing, inclusion and filing fees, (ii) all fees and expenses
incurred in connection with compliance with international, federal or state
securities or blue sky laws (including, without limitation, any registration,
listing and filing fees and reasonable fees and disbursements of counsel in
connection with blue sky qualification of any of the Registrable Shares and the
preparation of a blue sky memorandum and compliance with the rules of the
NASD), (iii) all expenses of any Persons in preparing or assisting in
preparing, word processing, duplicating, printing, delivering and distributing
any Registration Statement, any Prospectus, any amendments or supplements
thereto, any underwriting agreements, securities sales agreements, certificates
and any other documents relating to the performance of the Company under and
compliance of the Company with this Agreement, (iv) all fees and expenses
incurred in connection with the listing or inclusion of any of the Registrable
Shares on any securities exchange or the Nasdaq Stock Market pursuant to Section 4(m)
of this Agreement, (v) the fees and disbursements of counsel for the Company
and of the independent public accountants of the Company (including, without
limitation, the expenses of any special audit and “cold comfort” letters
required by or incident to such performance), and reasonable fees and
disbursements of one counsel for the selling Holders to review the Mandatory
Shelf Registration Statement, any Subsequent Shelf Registration Statement, and,
if the Company notifies the Holders pursuant to Section 2(b) hereof of its
intent to file an IPO Registration Statement within one year of the date of
this Agreement, the IPO Registration Statement, and (vi) any fees and
disbursements customarily paid by issuers in issues and sales of securities
(including the fees and expenses of any experts retained by the Company in
connection with any Registration Statement), provided, however,
that Registration Expenses shall exclude brokers’ or underwriters’ discounts
and commissions and transfer taxes or transfer fees, if any, relating to the
sale or disposition of Registrable Shares by a Holder and the fees and
disbursements of any counsel to the Holders other than as provided for in
subparagraph (v) above.

 

Registration
Statement:  Any Shelf
Registration Statement or the IPO Registration Statement (to the extent that it
covers the resale of any Registrable Shares), including the Prospectus,
amendments and supplements to such registration statement or Prospectus,
including

 

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pre-and
post-effective amendments, all exhibits thereto and all material incorporated
by reference or deemed to be incorporated by reference, if any, in such
registration statement.

 

Regulation
D:  Regulation D (Rules
501-508) promulgated by the Commission under the Securities Act, as such rules
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission as a replacement thereto having substantially the
same effect as such regulation.

 

Regulation
D Shares:  Shares
initially sold by the Company in accordance with the Purchase Agreement in
accordance with Regulation D and pursuant to the Subscription Agreement (as
defined in the Purchase Agreement).

 

Regulation
S:  Regulation S (Rules
901-905) promulgated by the Commission under the Securities Act, as such rules
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission as a replacement thereto having substantially the
same effect as such regulation.

 

Regulation
S Shares:  Shares
initially sold by the Company to FBR and resold by FBR to “non U.S. persons” in
accordance with Regulation S in an “offshore transaction” in accordance with
Regulation S.

 

Rule 144:  Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission as a
replacement thereto having substantially the same effect as such rule.

 

Rule 144A:  Rule 144A promulgated by the Commission
pursuant to the Securities Act, as such rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission as a
replacement thereto having substantially the same effect as such rule.

 

Rule 144A
Shares:  Shares
initially sold by the Company to FBR and resold by FBR to “qualified
institutional buyers” (as such term is defined in Rule 144A).

 

Rule 158:  Rule 158 promulgated by the Commission
pursuant to the Securities Act, as such rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission as a
replacement thereto having substantially the same effect as such rule.

 

Rule 415:  Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission as a
replacement thereto having substantially the same effect as such rule.

 

Rule 424:  Rule 424 promulgated by the Commission
pursuant to the Securities Act, as such rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission as a replacement
thereto having substantially the same effect as such rule.

 

Rule 429:  Rule 429 promulgated by the Commission
pursuant to the Securities Act, as such rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission as a
replacement thereto having substantially the same effect as such rule.

 

Securities
Act:  The Securities
Act of 1933, as amended, and the rules and regulations promulgated by the
Commission thereunder.

 

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Shares:  The Rule 144A Shares, the Regulation S Shares
and the Regulation D Shares sold pursuant to the terms and conditions of the
Purchase Agreement or the Subscription Agreement (as defined in the Purchase
Agreement).

 

Shelf
Registration Statement: 
The Mandatory Shelf Registration Statement or any Subsequent Shelf
Registration Statement.

 

Subsequent
Shelf Registration Statement: 
As defined in Section 2(c) hereof.

 

Suspension
Event:  As defined in Section 5(b)
hereof.

 

Suspension
Notice:  As defined in Section 5(b)
hereof.

 

Underwritten
Offering:  A sale of
securities of the Company to an underwriter or underwriters for reoffering to
the public.

 

2.                                       Registration
Rights.

 

(a)                                  Mandatory Shelf Registration.  As set forth in Section 4 hereof, the
Company agrees to file with the Commission as soon as reasonably practicable
but in no event later than May 2, 2005, a shelf Registration Statement on Form
S-11 or such other form under the Securities Act then available to the Company
providing for the resale pursuant to Rule 415 from time to time by the Holders
of any and all Registrable Shares (including for the avoidance of doubt any
Additional Shares that are issued prior to the effectiveness of such shelf
registration statement) (such registration statement, including the Prospectus,
amendments and supplements to such registration statement or Prospectus,
including pre- and post-effective amendments, all exhibits thereto and all
material incorporated by reference or deemed to be incorporated by reference,
if any, in such registration statement, the “Mandatory Shelf Registration
Statement”).  The Company shall use its
commercially reasonable efforts to cause such Shelf Registration Statement to
be declared effective by the Commission as promptly as practicable following
such filing, and for this purpose, the Company shall be entitled to consider
the advice of the managing underwriter or underwriters of an initial public
offering of the Common Stock which is then pending as to the effect that the
effectiveness of the Shelf Registration Statement could reasonably be expected
to have on the marketing of the initial public offering.  Any Shelf Registration Statement shall
provide for the resale from time to time, and pursuant to any method or
combination of methods legally available (including, without limitation, an
Underwritten Offering (provided, that
such Underwritten Offering shall raise at least $20,000,000 of gross proceeds
and provided, further, that an Underwritten
Offering of Registrable Shares in connection with a primary underwritten
offering by the Company shall not be required to raise any amount of gross
proceeds), a direct sale to purchasers, a sale through brokers or agents, or a
sale over the internet) by the Holders of any and all Registrable Shares.

 

(b)                                 IPO Registration.  If,
prior to the Mandatory Shelf Registration Statement being declared effective by
the Commission, the Company proposes to file a registration statement on Form
S-11 or such other form under the Securities Act providing for the initial
public offering of shares of Common Stock (such registration statement,
including the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto and all material incorporated by reference or deemed to be
incorporated by reference, if any, in such registration statement, the “IPO
Registration Statement”), the Company will notify each Holder of the filing
(including notifying each Holder of the identity of the managing underwriters
of such initial public offering), within five (5) Business Days after such
filing, and afford each Holder an opportunity to include in such IPO
Registration Statement all or any part of the Registrable Shares then held by such
Holder.  Each Holder desiring to include
in any such IPO Registration Statement all or part of the

 

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Registrable
Shares held by such Holder shall, within ten (10) days after delivery of the
above-described notice by the Company, so notify the Company in writing, and in
such notice shall inform the Company of the number of Registrable Shares such
Holder wishes to include in such IPO Registration Statement.  Any election by any Holder to include any
Registrable Shares in such IPO Registration Statement will not affect the
inclusion of such Registrable Shares in the Shelf Registration Statement until
such Registrable Shares have been sold under the IPO Registration Statement; provided, however, that at such time, the Company shall have
the right to remove from the Shelf Registration Statement the Registrable
Shares sold pursuant to the IPO Registration Statement.

 

(i)                                     Right to Terminate IPO Registration.  At any time, the Company shall have the right
to terminate or withdraw any IPO Registration Statement referred to in this Section 2(b)
whether or not any Holder has elected to include Registrable Shares in such
registration.

 

(ii)                                  Underwriting. The right of any such Holder’s Registrable
Shares to be included in any IPO Registration Statement pursuant to this Section 2(b)
shall be conditioned upon such Holder’s participation in such Underwritten
Offering and the inclusion of such Holder’s Registrable Shares in the
Underwritten Offering to the extent provided herein.  All Holders proposing to distribute their
Registrable Shares through such Underwritten Offering shall enter into an
underwriting agreement in customary form with the managing underwriters
selected for such underwriting and complete and execute any questionnaires,
powers of attorney, indemnities, securities escrow agreements and other
documents reasonably required under the terms of such underwriting, and furnish
to the Company such information in writing as the Company may reasonably
request for inclusion in the Registration Statement; provided,
however, that no Holder shall be required to make any
representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements as are
customary and reasonably requested by the underwriters.  Notwithstanding any other provision of this
Agreement, if the managing underwriters determine in good faith that marketing
factors require a limitation on the number of shares to be included, then the
managing underwriters may exclude shares (including Registrable Shares) from
the IPO Registration Statement and the Underwritten Offering and any Shares
included in the IPO Registration Statement and the Underwritten Offering shall
be allocated, first, to the Company, and second, to each of the
Holders requesting inclusion of their Registrable Shares in such IPO
Registration Statement on a pro rata basis based on the total number of
Registrable Shares then held by each such Holder which is requesting inclusion.  If any Holder disapproves of the terms of any
Underwritten Offering, such Holder may elect to withdraw therefrom by written
notice to the Company and the underwriter, delivered at least ten (10) Business
Days prior to the effective date of the IPO Registration Statement, provided, that if, in the opinion of counsel, such
withdrawal would necessitate a re-circulation of the Prospectus to investors,
such Holder shall be required to deliver such written notice at least twenty
(20) Business Days prior to the effective date of the IPO Registration
Statement.  Any Registrable Shares
excluded or withdrawn from such Underwritten Offering shall be excluded and
withdrawn from the IPO Registration Statement.

 

(iii)                               Hold-Back Agreement. 
By electing to include Registrable Shares in the IPO Registration
Statement, if any, the Holder shall be deemed to have agreed not to effect any
sale or distribution of securities of the Company of the same or similar class
or classes of the securities included in the Registration Statement or any
securities convertible into or exchangeable or exercisable for such securities,
including a sale

 

6

 

pursuant to Rule
144 or Rule 144A under the Securities Act, during such periods as reasonably
requested (but in no event for a period longer than sixty (60) days following
the effective date of the IPO Registration Statement, provided each of the
executive officers and directors of the Company and KKR Advisors that hold
shares of Common Stock of the Company or securities convertible into or
exchangeable or exercisable for shares of Common Stock of the Company are
subject to the same restriction for the entire time period required of the
Holders hereunder) by the representatives of the underwriters of the Underwritten
Offering pursuant to the IPO Registration Statement.

 

(iv)                              Shelf Registration not Impacted by IPO Registration Statement.  The Company’s obligation to file any Shelf
Registration Statement shall not be affected by the filing or effectiveness of
the IPO Registration Statement unless and to the extent Registrable Shares are
sold in the Underwritten Offering, in which case the Company shall have the
right to remove from the Shelf Registration Statement the Registrable Shares
sold pursuant to the IPO Registration Statement.

 

(c)                                  Expenses.  The Company
shall pay all Registration Expenses in connection with the registration of the
Registrable Shares pursuant to this Agreement. 
Each Holder participating in a registration pursuant to this Section 2
shall bear such Holder’s proportionate share (based on the total number of
Registrable Shares sold in such registration) of all discounts and commissions
payable to underwriters or brokers and all transfer taxes and transfer fees in
connection with a registration of Registrable Shares pursuant to this Agreement
and any other expense of the Holders not specifically allocated to the Company
pursuant to this Agreement relating to the sale or disposition of such Holder’s
Registrable Shares pursuant to any Registration Statement.

 

3.                                       Rules
144 and 144A Reporting.

 

With a view to making
available the benefits of certain rules and regulations of the Commission that
may permit the sale of the Registrable Shares to the public without
registration, the Company agrees to, so long as any Holder owns any Registrable
Shares:

 

(a)                                  at
all times after the effective date of the first registration under the
Securities Act filed by the Company for an offering of its securities to the
general public, use its commercially reasonable efforts to make and keep public
information available, as those terms are understood and defined in Rule 144(c)
under the Securities Act;

 

(b)                                 use
its commercially reasonable efforts to file with the Commission in a timely
manner all reports and other documents required to be filed by the Company
under the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements); and

 

(c)                                  if
the Company is not required to file reports and other documents under the
Securities Act and the Exchange Act, it will make available other information
as required by, and so long as necessary to permit sales of Registrable Shares
pursuant to, Rule 144A and in any event shall provide to each Holder a copy of:

 

(i)                                     the
Company’s annual consolidated financial statements (including at least balance
sheets, statements of profit and loss, statements of stockholders’ equity and
statements of cash flows) prepared in accordance with U.S. generally accepted
accounting principles, accompanied by an audit report of the Company’s
independent accountants, no later than ninety (90) days after the end of each
fiscal year of the Company, and

 

7

 

(ii)                                  the
Company’s unaudited quarterly financial statements (including at least balance
sheets, statements of profit and loss, statements of stockholders’ equity and
statements of cash flows) prepared in a manner consistent with the preparation
of the Company’s annual financial statements, no later than forty-five (45)
days after the end of each fiscal quarter of the Company.

 

4.                                       Registration
Procedures.

 

In connection with the
obligations of the Company with respect to any registration pursuant to this
Agreement, the Company shall:

 

(a)                                  prepare
and file with the Commission, as specified in this Agreement, a Mandatory Shelf
Registration Statement, which Mandatory Shelf Registration Statement shall
comply in all material respects as to form with the requirements of the
applicable form and include all financial statements required by the Commission
to be filed therewith, and use its commercially reasonable efforts to cause
such Mandatory Shelf Registration Statement to become effective as promptly as
practicable following such filing as specified in Section 4(a) and to remain
effective, subject to Section 5 hereof, until the date on which no Holders
hold Registrable Shares, provided, however,
that if the Company has an effective Shelf Registration Statement on Form S-11
under the Securities Act and becomes eligible to use Form S-3 or such other
short-form registration statement under the Securities Act, the Company shall
use its commercially reasonable efforts to register any Registrable Shares
registered but not yet distributed under the effective Shelf Registration Statement
on such a short-form Shelf Registration Statement and, once the short-form
Shelf Registration Statement is declared effective, de-register such shares
under the previous Registration Statement or transfer filing fees from the
previous Registration Statement pursuant to Rule 429;

 

(b)                                 subject
to Section 4(i) hereof, (i) prepare and file with the Commission such
amendments and post-effective amendments to the Mandatory Shelf Registration
Statement as may be necessary to keep the Mandatory Shelf Registration
Statement effective for the period described in Section 4(a) hereof, (ii)
cause each Prospectus contained therein to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424,
and (iii) comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by the Shelf Registration Statement
during the applicable period in accordance with the method or methods of
distribution by set forth in the “Plan of Distribution” section of the
Prospectus;

 

(c)                                  furnish
to the Holders, without charge, as many copies of each Prospectus, including
each preliminary Prospectus, and any amendment or supplement thereto and such
other documents as such Holder may reasonably request, in order to facilitate
the public sale or other disposition of the Registrable Shares; the Company
consents, subject to Section 5, to the lawful use of such Prospectus,
including each preliminary Prospectus, by the Holders, if any, in connection
with the offering and sale of the Registrable Shares covered by any such
Prospectus;

 

(d)                                 use
its commercially reasonable efforts to register or qualify, or obtain exemption
from registration or qualification for, all Registrable Shares by the time the
applicable Registration Statement is declared effective by the Commission under
all applicable state securities or “blue sky” laws of such domestic United
States jurisdictions as FBR or any Holder covered by a Registration Statement
shall reasonably request in writing, keep each such registration or
qualification or exemption effective during the period such Registration
Statement is required to be kept effective pursuant to Section 4(a) and do
any and all other acts and things that may be reasonably necessary or advisable
to enable such Holder to consummate the disposition in each such jurisdiction
of such Registrable Shares covered by the Registration Statement; provided, however, that the Company shall not be required to
take any action to

 

8

 

comply
with this Section 4(d) if it would require the Company or any of its
subsidiaries to (i) qualify generally to do business in any jurisdiction or to
register as a broker or dealer in such jurisdiction where it would not
otherwise be required to qualify but for this Section 4(d) and except as
may be required by the Securities Act, (ii) subject itself to taxation in
any such jurisdiction, or (iii) submit to the general service of process in any
such jurisdiction;

 

(e)                                  use
its commercially reasonable efforts to cause all Registrable Shares covered by
such Registration Statement to be registered and approved by such other
domestic governmental agencies or authorities, if any, as may be necessary to
enable the Holders thereof to consummate the disposition of such Registrable
Shares; provided, however, that the Company
shall not be required to take any action to comply with this Section 4(e)
if it would require the Company or any of its subsidiaries to (i) qualify
generally to do business in any jurisdiction or to register as a broker or
dealer in such jurisdiction where it would not otherwise be required to qualify
but for this Section 4(e) and except as may be required by the Securities
Act, (ii) subject itself to taxation in any such jurisdiction, or (iii) submit
to the general service of process in any such jurisdiction;

 

(f)                                    notify
FBR and each Holder with Registrable Shares covered by a Registration Statement
promptly and, if requested by FBR or any such Holder, confirm such advice in writing
at the address determined in accordance with Section 9(b), (i) when such
Registration Statement has become effective and when any post-effective
amendments thereto become effective or upon the filing of a supplement to any
prospectus, (ii) of the issuance by the Commission or any state securities
authority of any stop order suspending the effectiveness of such Registration
Statement or the initiation of any proceedings for that purpose, (iii) of any
request by the Commission or any other federal or state governmental authority
for amendments or supplements to such Registration Statement or related
Prospectus or for additional information, and (iv) of the happening of any
event during the period such Registration Statement is effective as a result of
which such Registration Statement or the related Prospectus or any document
incorporated by reference therein contains any 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 or, in the case of the
Prospectus, contains any 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, in light of the circumstances under which they were made,
not misleading (which information shall be accompanied by an instruction to
suspend the use of the Registration Statement and the Prospectus until the
requisite changes have been made);

 

(g)                                 during
the period of time referred to in Section 4(a) above, use its commercially
reasonable efforts to avoid the issuance of, or if issued, to obtain the
withdrawal of, any order enjoining or suspending the use or effectiveness of
the Mandatory Shelf Registration Statement or suspending the qualification (or
exemption from qualification) of any of the Registrable Shares for sale in any
jurisdiction, as promptly as practicable;

 

(h)                                 upon
request, furnish to each requesting Holder with Registrable Shares covered by a
Registration Statement, without charge, at least one (1) conformed copy of such
Registration Statement and any post-effective amendment or supplement thereto
(without documents incorporated therein by reference or exhibits thereto,
unless requested);

 

(i)                                     except
as provided in Section 5, upon the occurrence of any event contemplated by
Section 4(f)(iv) hereof, use its commercially reasonable efforts to
promptly prepare a supplement or post-effective amendment to the Mandatory
Shelf Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Shares, such
Prospectus will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to

 

9

 

make
the statements therein, in the light of the circumstances under which they were
made, not misleading, and, upon request, promptly furnish to each requesting
Holder a reasonable number of copies each such supplement or post-effective
amendment;

 

(j)                                     if
requested by the representative of the underwriters, if any, or any Holders of
Registrable Shares being sold in connection with an Underwritten Offering, (i)
as promptly as practicable incorporate in a Prospectus supplement or
post-effective amendment such material information as the representative of the
underwriters, if any, or such Holders indicate in writing relates to them and
(ii) use its commercially reasonable efforts to make all required filings of
such Prospectus supplement or such post-effective amendment as soon as
practicable after the Company has received written notification of the matters
to be incorporated in such Prospectus supplement or post-effective amendment;

 

(k)                                  enter
into customary agreements (including in the case of an Underwritten Offering,
an underwriting agreement in customary form and reasonably satisfactory to the
Company) and take all other reasonable action in connection therewith in order
to expedite or facilitate the distribution of the Registrable Shares included
in such Registration Statement and, in the case of an Underwritten Offering,
make representations and warranties to the Holders of Registrable Shares
covered by such Registration Statement and to the underwriters in such form and
scope as are customarily made by issuers to selling stockholders and
underwriters in underwritten offerings, respectively, and confirm the same to
the extent customary if and when requested;

 

(l)                                     in
connection with an Underwritten Offering, use its commercially reasonable
efforts to make available for inspection by one representative appointed by the
Holders of a majority of the Registrable Shares and, with respect to an
Underwritten Offering, the representative of any underwriters participating in
any disposition pursuant to a Registration Statement and one law firm retained
by each representative of such Holders or underwriters, respectively,  during normal business hours and upon reasonable
notice, all financial and other records, pertinent corporate documents and
properties of the Company and cause the respective officers, directors and
employees of the Company to supply all information reasonably requested by any
such representative of the Holders, the representative of the underwriters or
counsel thereto in connection with a Shelf Registration Statement; provided, however, that such records, documents or
information that the Company determines, in good faith, to be confidential and
notifies such representative of the Holders, representative of the underwriters
or counsel thereto are confidential shall not be disclosed by the
representative of the Holders, representative of the underwriters or counsel
thereto unless (i) the disclosure of such records, documents or information is
necessary to avoid or correct a material misstatement or omission in a
Registration Statement or Prospectus, (ii) the release of such records,
documents or information is ordered pursuant to a subpoena or other order from
a court of competent jurisdiction, or (iii) such records, documents or
information have been generally made available to the public by the Company; provided further, that to the extent practicable, the
foregoing inspection and information gathering shall be coordinated on behalf
of the Holders and the other parties entitled thereto by one counsel designated
by and on behalf of the Holders and the other parties, which counsel the
Company reasonably determines to be acceptable.

 

(m)                               use
its best commercially reasonable efforts (including, without limitation,
seeking to cure in the Company’s listing or inclusion application any
deficiencies cited by the exchange or market) to list or include all
Registrable Shares on the New York Stock Exchange or the Nasdaq Stock Market;

 

(n)                                 use
its commercially reasonable efforts to prepare and file in a timely manner all
documents and reports required by the Exchange Act ;

 

(o)                                 provide
a CUSIP number for all Registrable Shares, not later than the effective date of
the Registration Statement;

 

10

 

(p)                                 (i)
otherwise use its commercially reasonable efforts to comply with all applicable
rules and regulations of the Commission, (ii) make generally available to its
stockholders, as soon as reasonably practicable, earnings statements covering
at least twelve (12) months that satisfy the provisions of Section 11(a)
of the Securities Act and Rule 158 (or any similar rule promulgated under the
Securities Act ) thereunder, no later than ninety (90) days after the end of
each fiscal year of the Company and (iii) delay the effectiveness of any
Registration Statement to which any Holder of Registrable Shares covered by
such Registration Statement shall have, based upon the written opinion of
counsel, objected on the grounds that such Registration Statement does not
comply in all material respects with the requirements of the Securities Act,
such Holder having been furnished with a copy thereof at least two (2) Business
Days prior to the effectiveness thereof, provided that the Company may request
effectiveness of such Registration Statement following such time as the Company
shall have used its commercially reasonable efforts to resolve any such issue
with the objecting Holder and shall have advised the Holder in writing of its
reasonable belief that such filing complies with the requirements of the
Securities Act;

 

(q)                                 provide
and cause to be maintained a registrar and transfer agent for all Registrable
Shares covered by any Registration Statement from and after a date not later
than the effective date of such Registration Statement;

 

(r)                                    in
connection with any sale or transfer of the Registrable Shares (whether or not
pursuant to a Registration Statement) that will result in the security being
delivered no longer being Registrable Shares, cooperate with the Holders and
the representative of the underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing the Registrable Shares to
be sold, which certificates shall not bear any transfer restrictive legends
(other than as required by the Company’s charter) and to enable such
Registrable Shares to be in such denominations and registered in such names as
the representative of the underwriters, if any, or the Holders may reasonably
request at least three (3) Business Days prior to any sale of the Registrable
Shares; and

 

(s)                                  upon
effectiveness of the first registration statement filed by the Company, the
Company will take such actions and make such filings as are necessary to effect
the registration of the Common Stock under the Exchange Act simultaneously with
or as soon as practicable following the effectiveness of the Registration
Statement.

 

The Company may require
the Holders to furnish to the Company such information regarding the proposed
distribution by such Holder as the Company may from time to time reasonably
request in writing or as shall be required to effect the registration of the
Registrable Shares and no Holder shall be entitled to be named as a selling
stockholder in any Registration Statement and no Holder shall be entitled to
use the Prospectus forming a part thereof if such Holder does not provide such
information to the Company.  Any Holder
that sells Registrable Shares pursuant to a Registration Statement or as a
selling stockholder pursuant to an Underwritten Offering pursuant to the IPO
Registration Statement shall be required to be named as a selling stockholder
in the related prospectus and to deliver a prospectus to purchasers.  Each Holder further agrees to furnish
promptly to the Company in writing all information required from time to time
to make the information previously furnished by such Holder not misleading.

 

Each Holder agrees that,
upon receipt of any notice from the Company of the happening of any event of
the kind described in Section 4(f)(ii), 4(f)(iii) or 4(f)(iv) hereof, such
Holder will immediately discontinue disposition of Registrable Shares pursuant
to a Registration Statement until such Holder’s receipt of copies of the
supplemented or amended Prospectus.  If
so directed by the Company, such Holder will deliver to the Company (at the
reasonable expense of the Company) all copies in its possession, other than
permanent file copies then in such Holder’s possession, of the Prospectus
covering such Registrable Shares current at the time of receipt of such notice.

 

11

 

5.                                       Black-Out
Period.

 

(a)                                  Subject
to the provisions of this Section 5, the Company shall have the right, but
not the obligation, from time to time to suspend the use of the Registration
Statement following the effectiveness of a Registration Statement (and the
filings with any international, federal or state securities commissions), if a
Suspension Event (as defined below) occurs. 
If the Company elects to suspend the effectiveness and/or use of a
Registration Statement following the occurrence of a Suspension Event, the
Company, by written notice to FBR and by written notice, email transmission or
such other means that the Company reasonably believes to be a reliable means of
communication (a “Suspension Notice”), shall notify the Holders, that the
effectiveness of the Registration Statement has been suspended and shall direct
the Holders to suspend sales of the Registrable Shares pursuant to the
Registration Statement until the Suspension Event has ended.  A Suspension Event shall be deemed to have
occurred if: (i) the representative of the underwriters of an Underwritten
Offering of common stock of the Company has advised the Company that the offer
or sale of Registrable Shares pursuant to the Registration Statement would have
a material adverse effect on the Company’s Underwritten Offering; (ii) the
Board of Directors of the Company in good faith has determined that the offer
or sale of any Registrable Shares would materially impede, delay or interfere
with any proposed financing, offer or sale of securities, acquisition,
corporate reorganization or other significant transaction involving the
Company; or (iii) the Board of Directors of the Company has determined in
good faith, that it is required by law, or that it is in the best interests of
the Company, to supplement the Registration Statement or file a post-effective
amendment to the Registration Statement in order to ensure that the Prospectus
included in the Registration Statement (1) contains the financial information
required under Section 10(a)(3) of the Securities Act; (2) discloses any
fundamental change in the information included in the Prospectus; or (3)
discloses any material information with respect to the plan of distribution not
disclosed in the Registration Statement or any material change to such
information.  Upon the occurrence of any
Suspension Event, the Company shall use its commercially reasonable efforts to
cause the Registration Statement to become effective or to promptly amend or
supplement the Registration Statement or to take such action as is necessary to
make resumed use of the Registration Statement compatible with the Company’s best
interests, as applicable, so as to permit the Holders to resume sales of the
Registrable Shares as soon as practicable. 
In no event shall the Company be permitted to suspend the use of a
Registration Statement in any twelve (12) month period for more than forty-five
(45) consecutive days or for more than an aggregate of ninety (90) days, except
as a result of a refusal by the Commission to declare any post-effective
amendment to the Registration Statement effective after the Company has used
all commercially reasonable efforts to cause such post-effective amendment to
be declared effective, in which case the Company shall terminate the suspension
of the use of the Registration Statement immediately following the effective
date of the post-effective amendment.

 

(b)                                 If
the Company gives a Suspension Notice to the Holders to suspend sales of the
Registrable Shares following a Suspension Event, the Holders shall not effect
any sales of the Registrable Shares pursuant to such Registration Statement (or
such filings) at any time after it has received a Suspension Notice from the
Company and prior to receipt of an End of Suspension Notice (as defined
below).  If so directed by the Company,
each Holder will deliver to the Company (at the expense of the Company) all
copies other than permanent file copies then in such Holder’s possession of the
Prospectus covering the Registrable Shares at the time of receipt of the
Suspension Notice.  The Holders may
recommence effecting sales of the Registrable Shares pursuant to the
Registration Statement (or such filings) upon delivery by the Company of notice
that the Suspension Event or its potential effects are no longer continuing (an
“End of Suspension Notice”), which End of Suspension Notice shall be given by
the Company to the Holders and FBR in the same manner as the Suspension Notice
promptly following the conclusion of any Suspension Event and its effect.

 

12

 

6.                                       Indemnification
and Contribution.

 

(a)                                  The
Company agrees to indemnify and hold harmless (i) FBR and each Holder, (ii)
each Person, if any, who controls (within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act), any of the foregoing
(any of the Persons referred to in this clause (ii) being hereinafter referred
to as a “Controlling Person”), and (iii) the respective officers, directors,
partners, employees, representatives and agents of FBR and each Holder or any
Controlling Person (any Person referred to in clause (i), (ii) or (iii) may
hereinafter be referred to as a “Purchaser Indemnitee”) from and against any
and all claims, liabilities, losses, claims, damages, judgments, actions, and
expenses (including, without limitation, reasonable attorney’s fees and any and
all reasonable out-of-pocket expenses actually incurred in investigating,
preparing, pursuing or defending any litigation or any investigation or
proceeding by any governmental agency or body, commenced or formally
threatened) (the “Liabilities”) arising out of or in connection with any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement or Prospectus (as amended or supplemented if the Company
shall have furnished to such Purchaser Indemnitee any amendments or supplements
thereto), or any preliminary Prospectus or any other document prepared by the
Company used to sell the Registrable Shares, 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 under
which they were made, not misleading, except insofar as such Liabilities arise
out of or are based upon (i) any untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with information
relating to any Purchaser Indemnitee furnished to the Company or any
underwriter in writing by such Purchaser Indemnitee expressly for use therein,
or (ii) any untrue statement contained in or omission from a preliminary Prospectus
if a copy of the Prospectus (as then amended or supplemented, if the Company
shall have furnished to or on behalf of the Holder participating in the
distribution relating to the relevant Registration Statement any amendments or
supplements thereto) was not sent or given by or on behalf of such Holder to
the Person asserting any such Liabilities who purchased Shares, if such
Prospectus (or Prospectus as amended or supplemented) is required by law to be
sent or given at or prior to the written confirmation of the sale of such
Shares to such Person and the untrue statement contained in or omission from
such preliminary Prospectus was corrected in the Prospectus (or the Prospectus
as amended or supplemented) or (iii) use of any Registration Statement or Prospectus
during a period when a stop order has been issued in respect thereof or any
action or proceedings for that purpose have been initiated, or use of a
Registration Statement or a Prospectus or any preliminary Prospectus has been
suspended pursuant to Section 4(f)(ii), 4(f)(iii) or 4(f)(iv).

 

(b)                                 In
connection with any Registration Statement in which a Holder is participating
and as a condition to such participation, such Holder agrees, severally and not
jointly, to indemnify and hold harmless the Company, each Person who signs the
Registration Statement, each Person who controls the Company within the meaning
of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act and the respective partners, directors, officers, members, representatives,
employees and agents of the Company, such Person or Controlling Person to the
same extent as the foregoing indemnity from the Company to each Purchaser
Indemnitee, but only with reference to untrue statements or omissions or
alleged untrue statements or omissions made in reliance upon and in strict
conformity with information relating to such Purchaser Indemnitee furnished to
the Company in writing by such Purchaser Indemnitee expressly for use in any
Registration Statement or Prospectus, any amendment or supplement thereto, or
any preliminary Prospectus.  The
liability of any Purchaser Indemnitee pursuant to this paragraph shall in no
event exceed the net proceeds received by such Purchaser Indemnitee from sales of
Registrable Shares giving rise to such obligations.  If the Holder elects to include Registrable
Shares in an Underwritten Offering pursuant to the IPO Registration Statement,
the Holder shall be required to agree to such customary indemnification provisions
as may reasonably be required by the underwriter in connection with such
Underwritten Offering.

 

13

 

(c)                                  If
any action is brought against any Person or entity (each an “Indemnified Party”),
in respect of which indemnity may be sought pursuant to (a) or (b) above, such
Person (the “Indemnified Party,” or if more than one Indemnified Party, the “Indemnified
Parties”) shall promptly notify the Person against whom such indemnity may be
sought (each an “Indemnifying Party”) in writing of the institution of such
action and the Indemnifying Party shall have the right, but not the obligation,
to assume the defense of such action, including the employment of counsel and
payment of expenses; provided that the failure so to notify the Indemnifying
Party will not relieve the Indemnifying Party from any liability which the
Indemnifying Party may have under this Section 6, to any Indemnified Party
unless and to the extent the Indemnifying Party did not otherwise know of such
action and such failure results in the forfeiture by the Indemnifying Party of
rights and defenses that would have had material value in the defense.  The Indemnified Party(ies) shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of the Indemnified Party
unless the employment of such counsel shall have been authorized in writing by
the Indemnifying Party in connection with the defense of such action or the
Indemnifying Party shall not have employed counsel to have charge of the
defense of such action within a reasonable time or such Indemnified Party(ies)
shall have reasonably concluded (based on the advice of counsel) that counsel
selected by the Indemnifying Party has an actual conflict of interest or there
may be defenses available to the Indemnified Party(ies) which are different
from or additional to those available to the Indemnifying Party (in which case
the Indemnifying Party shall not have the right to direct the defense of such
action on behalf of the Indemnified Party(ies)), in any of which events, any
such reasonable fees and expenses of such counsel related to such action shall
be borne by the Indemnifying Party and paid as actually incurred; provided,
however, that the Indemnifying Party shall not be liable for the fees and
expenses of more than one separate firm of counsel (in addition to local
counsel) for all such Indemnified Parties in any one action or series of
related actions arising out of the same general allegations or circumstances representing
the Indemnified Parties who are parties to such action). Anything in this
paragraph to the contrary notwithstanding, the Indemnifying Party shall not be
liable for any settlement of any such claim or action effected without its
written consent.  The Indemnifying Party
shall have the right to settle any such claim or action for itself and any
Indemnified Party so long as the Indemnifying Party pays any settlement payment
and such settlement (i) includes an unconditional release of the Indemnified
Party from all Liabilities with respect to any claims that are the subject
matter of such action and (ii) does not include a statement as to, or an
admission of, fault, culpability or a failure to act by or on behalf of the
Indemnified Party.

 

(d)                                 If
the indemnification provided for in paragraphs (a) and (b) of this Section 6
is for any reason held to be unavailable to an Indemnified Party in respect of
any Liabilities referred to therein (other than by reason of the exceptions
provided therein) or is insufficient to hold harmless a party indemnified
thereunder, then each Indemnifying Party under such paragraphs, in lieu of
indemnifying such Indemnified Party thereunder, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Liabilities (i)
in such proportion as is appropriate to reflect the relative benefits of the
Indemnified Party on the one hand and the Indemnifying Parties on the other in
connection with the statements or omissions that resulted in such Liabilities,
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Indemnifying Parties and the Indemnified Party, as well as any other
relevant equitable considerations.  The
relative fault of the Indemnifying Party, on the one hand, and any Indemnified
Party(ies), on the other hand, shall be determined by reference to, among other
things, whether the untrue statement or alleged untrue statement of a material
fact or omission or alleged omission relates to information supplied by the
Indemnifying Party on the one hand or by the Indemnified Party(ies) on the
other hand.  The amount paid or payable
by a party as a result of the losses, claims, damages and liabilities referred
to above shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or defending
any claim or action.

 

14

 

(e)                                  The
parties agree that it would not be just and equitable if contribution pursuant
to this Section 6 were determined by pro rata allocation (even if such
indemnified parties were treated as one entity for such purpose), or by any
other method of allocation that does not take account of the equitable
considerations referred to in paragraph 6(d) above.  Notwithstanding the provisions of this Section 6,
in no event shall a Purchaser Indemnitee be required to contribute any amount
in excess of the amount by which proceeds received by such Purchaser Indemnitee
from sales of Registrable Shares exceeds the amount of any damages that such
Purchaser Indemnitee has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission.  For purposes of this Section 6, each
Person, if any, who controls (within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act) FBR or a Holder shall have the same
rights to contribution as FBR or such Holder, as the case may be, and each
Person, if any, who controls (within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act) the Company, and each
officer, director, partner, employee, representative, agent or manager of the
Company shall have the same rights to contribution as the Company.  Any party entitled to contribution will,
promptly after receipt of notice of commencement of any Proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties, notify each party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation
it or they may have under this Section 6 or otherwise, except to the
extent that any party is materially prejudiced by the failure to give
notice.  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.

 

(f)                                    The
indemnity and contribution agreements contained in this Section 6 will be
in addition to any liability which the indemnifying parties may otherwise have
to the indemnified parties referred to above. 
The Purchaser Indemnitee’s obligations to contribute pursuant to this Section 6
are several in proportion to the respective number of Shares sold by each of the
Purchaser Indemnitees hereunder and not joint.

 

7.                                       Market
Stand-off Agreement.

 

Each Holder hereby agrees
that it shall not, to the extent requested by the Company or an underwriter of
securities of the Company, directly or indirectly sell, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell (including without limitation any short sale), grant any
option, right or warrant for the sale of or otherwise transfer or dispose of
any Registrable Shares or other shares of Common Stock of the Company or any
securities convertible into or exchangeable or exercisable for shares of Common
Stock of the Company then owned by such Holder (other than to donees or
partners of the Holder who agree to be similarly bound) within thirty (30) days
prior to and sixty (60) days following the effective date of the IPO
Registration Statement of the Company filed under the Securities Act; provided, however, that:

 

(a)                                  with
respect to the 60-day restriction that follows the effective date of the IPO
Registration Statement, such agreement shall not be applicable to Registrable
Shares sold pursuant to such IPO Registration Statement;

 

(b)                                 all
executive officers and directors of the Company and KKR Advisors then holding shares
of Common Stock or securities convertible into or exchangeable or exercisable
for shares of Common Stock of the Company shall enter into similar agreements
for not less than the entire time period required of the Holders hereunder; and

 

(c)                                  the
Holders shall be allowed any concession or proportionate release allowed to any
executive officer or director that entered into similar agreements.

 

15

 

In order to enforce the
foregoing covenant, the Company shall have the right to place restrictive
legends on the certificates representing the securities subject to this Section 7
and to impose stop transfer instructions with respect to the Registrable Shares
and such other securities of each Holder (and the securities of every other
Person subject to the foregoing restriction) until the end of such period.

 

8.                                       Termination
of the Company’s Obligations.

 

The Company shall have no
further obligations pursuant to this Agreement at such time as no Registrable
Shares are outstanding, provided, however,
that the Company’s obligations under Sections 3, 6 and 9(a) through and
including 9(k) of this Agreement shall remain in full force and effect
following such time.

 

9.                                       Miscellaneous.

 

(a)                                  Amendments
and Waivers.  The provisions of this
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to or departures from the
provisions hereof may not be given, without the written consent of the Company
and Holders beneficially owning not less than fifty percent (50%) of the then
outstanding Registrable Shares. 
Notwithstanding the foregoing, a waiver or consent to or departure from
the provisions hereof with respect to a matter that relates exclusively to the
rights of a Holder whose securities are being sold pursuant to a Registration
Statement and that does not directly or indirectly affect, impair, limit or
compromise the rights of other Holders may be given by such Holder; provided that the provisions of this sentence may not be
amended, modified or supplemented except in accordance with the provisions of
the immediately preceding sentence.

 

(b)                                 Notices.  All notices and other communications,
provided for or permitted hereunder shall be made in writing by delivered by
facsimile (with receipt confirmed), overnight courier or registered or
certified mail, return receipt requested, or by telegram

 

(i)                                     if
to a Holder, at the most current address given by the transfer agent and
registrar of the Shares to the Company; and

 

(ii)                                  if
to the Company, at the offices of the Company at 9 West 57th Street,
New York, NY 10019, Attention:  David A.
Netjes.

 

(c)                                  Successors
and Assigns; Third Party Beneficiaries. 
This Agreement shall inure to the benefit of and be binding upon the successors
and assigns of each of the parties hereto and shall inure to the benefit of
each Holder.  The Company agrees that the
Holders shall be third party beneficiaries to the agreements made hereunder by
FBR and the Company, and each Holder shall have the right to enforce such
agreements directly to the extent it deems such enforcement necessary or
advisable to protect its rights hereunder; provided, however,
that no Holder shall have the right to enforce such agreements unless and until
such Holder fulfills all of its obligations hereunder.

 

(d)                                 Stock
Legend.  In addition to any other
legend that may appear on the stock certificates evidencing the Registrable
Shares, for so long as any Shares remain Registrable Shares each stock
certificate evidencing such Registrable Shares shall contain a legend to the
following effect:  “THE SHARES EVIDENCED
BY THIS CERTIFICATE ARE SUBJECT TO AND ENTITLED TO THE BENEFITS OF A CERTAIN
REGISTRATION RIGHTS AGREEMENT, DATED AUGUST 12, 2004.”

 

16

 

 

 

(e)           Counterparts.  This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.

(f)            Governing Law.  THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO CONFLICTS OF LAW PRINCIPLES THAT WOULD REQUIRE THE APPLICATION OF THE LAW OF
ANY OTHER STATE.

(g)           Severability.  If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their commercially reasonable efforts to find and
employ an alternative means to achieve the same or substantially the same
result as that contemplated by such term, provision, covenant or
restriction.  It is hereby stipulated and
declared to be the intention of the parties hereto that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.

(h)           Entire
Agreement.  This Agreement, together
with the Purchase Agreement, is intended by the parties hereto as a final
expression of their agreement, and is intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect
of the subject matter contained herein and therein.

(i)            Registrable
Shares Held by the Company or its Affiliates.  Whenever the consent or approval of Holders
of a specified percentage of Registrable Shares is required hereunder,
Registrable Shares held by the Company or its Affiliates shall not be counted
in determining whether such consent or approval was given by the Holders of
such required percentage.

(j)            Survival.  This Agreement is intended to survive the
consummation of the transactions contemplated by the Purchase Agreement.  The indemnification and contribution
obligations under Section 6 of this Agreement shall survive the termination of
the Company’s obligations under Section 2 of this Agreement.

(k)           Headings.  The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
provisions of this Agreement.  All references
made in this Agreement to “Section” refer to such Section of this Agreement,
unless expressly stated otherwise.

(l)            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, as determined by
the court, shall be entitled to recover its reasonable attorneys’ fees in
addition to any other available remedy.

[Remainder of this Page Intentionally Left Blank]

 

17

IN WITNESS WHEREOF, the parties
have executed this Agreement as of the date first above written.

 

	
   

  	
  KKR FINANCIAL CORP.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DAVID A. NETJES

  
	
   

  	
     Name:

  	
  David A. Netjes

  
	
   

  	
     Title:

  	
  Chief Operating Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  FRIEDMAN, BILLINGS, RAMSEY & CO., INC., for
  itself and on behalf of the Holders

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ JAMES R. KLEEBLATT

  
	
   

  	
     Name:

  	
  James R. Kleeblatt

  
	
   

  	
     Title:

  	
  Senior Managing Director

  
	
   

  	
   

  	
   

  
				

 

 

 

 

 

 

 

18Exhibit 10.1

 

MANAGEMENT
AGREEMENT

 

THIS
MANAGEMENT AGREEMENT is made as of August 12, 2004 by and among KKR FINANCIAL
CORP., a Maryland corporation (the “Company”), and KKR FINANCIAL
ADVISORS LLC, a Delaware limited liability company (together with its permitted
assignees, the “Manager”).

 

WHEREAS, the
Company is a newly organized corporation that has elected to be taxed as a real
estate investment trust for federal income tax purposes; and

 

WHEREAS, the
Company desires to retain the Manager to provide investment advisory services
to the Company on the terms and conditions hereinafter set forth, and the
Manager wishes to be retained to provide such services.

 

NOW THEREFORE,
in consideration of the mutual agreements herein set forth, the parties hereto
agree as follows:

 

SECTION 1.                                DEFINITIONS.
The following terms have the meanings assigned them:

 

(a)  “Agreement”
means this Management Agreement, as amended from time to time.

 

(b)  “Base
Management Fee” means the base management fee, calculated and paid monthly
in arrears, in an amount equal to (i) 1/12 of Equity multiplied by (ii) 1.75%; provided that the foregoing calculation of
the Base Management Fee shall be adjusted to exclude one-time events pursuant
to changes in GAAP, as well as non-cash charges after discussion between the
Manager and the Independent Directors and approval by a majority of the
Independent Directors in the case of non-cash charges.

 

(c)  “Board
of Directors” means the Board of Directors of the Company.

 

(d)  “Change
of Control” means the occurrence of any of the following:

 

(i)    the sale, lease or
transfer, in one or a series of related transactions, of all or substantially
all of the assets of the Manager, taken as a whole, to any Person other than
Kohlberg Kravis Roberts & Co. L.P. or any of its affiliates; or

 

(ii)  the acquisition by any Person or group (within the
meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any
successor provision), including any group acting for the purpose of acquiring,
holding or disposing of securities (within the meaning of Rule 13d-5(b)(1)
under the Exchange Act), other than Kohlberg Kravis Roberts & Co. L.P. and
its affiliates, in a single transaction or in a related series of transactions,
by way of merger, consolidation or other business combination or purchase of
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act,
or any successor provision) of 50% or more of the total voting power of the
voting capital interests of the Manager.

 

(e)  “Code”
means the Internal Revenue Code of 1986, as amended.

 

 

(f)  “Common
Share” means a share of capital stock of the Company now or hereafter
authorized as common voting stock of the Company.

 

(g)  “Equity”
means, for purposes of calculating the Base Management Fee, for any month the
sum of the net proceeds from any issuance of the Company’s Common Shares, after
deducting any underwriting discounts and commissions and other expenses and
costs relating to the issuance, plus the Company’s retained earnings at the end
of such month (without taking into account any non-cash equity compensation
expense incurred in current or prior periods), which amount shall be reduced by
any amount that the Company pays for repurchases of Common Shares; provided that the foregoing calculation of
Equity shall be adjusted to exclude one-time events pursuant to changes in
GAAP, as well as non-cash charges after discussion between the Manager and the
Independent Directors and approval by a majority of the Independent Directors
in the case of non-cash charges.

 

(h)  “Exchange
Act” means the Securities Exchange Act of 1934, as amended.

 

(i)  “Federal
Reserve Board” means the Board of Governors of the Federal Reserve System.

 

(j)  “GAAP”
means generally accepted accounting principles, as applied in the United
States.

 

(k)  “Governing
Instruments” means, with regard to any entity, the articles of
incorporation and bylaws in the case of a corporation, certificate of limited
partnership (if applicable) and the partnership agreement in the case of a
general or limited partnership, the articles of formation and the operating
agreement in the case of a limited liability company, the trust instrument in
the case of a trust, or similar governing documents, in each case as amended
from time to time.

 

(l)  “Incentive
Compensation” means an incentive management fee calculated and payable each
fiscal quarter in an amount, not less than zero, equal to the product of: (i)
twenty-five percent (25%) of the dollar amount by which (A) the Company’s Net
Income, before Incentive Compensation, for such quarter per Common Share (based
on the weighted average number of Common Shares outstanding for such quarter)
exceeds (B) an amount equal to (1) the weighted average of the price per share
of the Common Shares in the initial offering by the Company and the prices per
share of the Common Shares in any subsequent offerings by the Company, in each
case at the time of issuance thereof, multiplied by (2) the greater of (a)
2.00% and (b) 0.50% plus one-fourth of the Ten Year Treasury Rate for such
quarter, multiplied by (ii) the weighted average number of Common Shares
outstanding during such quarter; provided that
the foregoing calculation of Incentive Compensation shall be adjusted to
exclude one-time events pursuant to changes in GAAP, as well as non-cash
charges after discussion between the Manager and the Independent Directors and
approval by a majority of the Independent Directors in the case of non-cash
charges.

 

(m)  “Independent
Directors” means the members of the Board of Directors who are not officers
or employees of the Manager or any Person directly or indirectly controlling or
controlled by the Manager, and who are otherwise “independent” in accordance
with the

 

2

 

Company’s Governing Instruments and, if applicable, the rules of any
national securities exchange on which the Common Shares are listed.

 

(n)  “Investment
Company Act” means the Investment Company Act of 1940, as amended.

 

(o)  “Investments”
means the investments of the Company.

 

(p)  “Net
Income” shall be determined by calculating the net income available to
owners of Common Shares before non-cash equity compensation expense, in
accordance with GAAP.

 

(q)  “Person”
means any individual,
corporation, partnership, joint venture, limited liability company, estate,
trust, unincorporated association, any federal, state, county or municipal
government or any bureau, department or agency thereof and any fiduciary acting
in such capacity on behalf of any of the foregoing.

 

(r)  “Purchase
and Placement Agent Agreement” means the purchase and placement
agent agreement, dated as of August 5, 2004 between the Company and Friedman,
Billings, Ramsey & Co., Inc.

 

(s)  
“Registration Rights Agreement” means the registration rights
agreement, dated as of August 12, 2004 between the Company and Friedman,
Billings, Ramsey & Co., Inc.

 

(t)  
“REIT” means a “real estate investment trust” as defined under the Code.

 

(u)  “Subsidiary”
means any subsidiary of the Company; any partnership, the general partner of
which is the Company or any subsidiary of the Company; and any limited
liability company, the managing member of which is the Company or any
subsidiary of the Company.

 

(v)  “Ten
Year Treasury Rate” means the average of weekly average yield to maturity
for U.S. Treasury securities (adjusted to a constant maturity of ten (10)
years) as published weekly by the Federal Reserve Board in publication H.15, or
any successor publication, during a fiscal quarter.

 

(w)  “Treasury
Regulations” means the regulations promulgated under the Code from time to
time, as amended.

 

SECTION 2.                                APPOINTMENT
AND DUTIES OF THE MANAGER.

 

(a)  The
Company hereby appoints the Manager to manage the assets of the Company subject
to the further terms and conditions set forth in this Agreement and the Manager
hereby agrees to use its commercially reasonable efforts to perform each of the
duties set forth herein. The appointment of the Manager shall be exclusive to
the Manager except to the extent that the Manager otherwise agrees, in its sole
and absolute discretion, and except to the extent that the Manager elects,
pursuant to the terms of this Agreement, to cause the duties of the Manager
hereunder to be provided by third parties.

 

3

 

(b)  The
Manager, in its capacity as manager of the assets and the day-to-day operations
of the Company, at all times will be subject to the supervision of the Company’s
Board of Directors and will have only such functions and authority as the
Company may delegate to it including, without limitation, the functions and
authority identified herein and delegated to the Manager hereby. The Manager
will be responsible for the day-to-day operations of the Company and will
perform (or cause to be performed) such services and activities relating to the
assets and operations of the Company as may be appropriate, including, without
limitation:

 

(i)  serving as the Company’s consultant with respect to the
periodic review of the investment criteria and parameters for Investments,
borrowings and operations, any modifications to which shall be approved by a
majority of the Independent Directors (such policy guidelines as initially
approved, as the same may be modified with such approval, the “Guidelines”)
and other policies for approval by the Board of Directors;

 

(ii)  investigation, analysis and selection of investment
opportunities;

 

(iii)  with respect to prospective investments by the Company
and dispositions of Investments, conducting negotiations with sellers and
purchasers and their respective agents, representatives and investment bankers;

 

(iv)  engaging and supervising, on behalf of the Company and
at the Company’s expense, independent contractors which provide investment
banking, mortgage brokerage, securities brokerage and other financial services
and such other services as may be required relating to the Investments;

 

(v)  negotiating on behalf of the Company for the sale,
exchange or other disposition of any Investments;

 

(vi)  coordinating and managing operations of any joint
venture or co-investment interests held by the Company and conducting all
matters with the joint venture or co-investment partners;

 

(vii)  providing executive and administrative personnel,
office space and office services required in rendering services to the Company;

 

(viii)  administering the day-to-day operations of the
Company and performing and supervising the performance of such other
administrative functions necessary in the management of the Company as may be
agreed upon by the Manager and the Board of Directors, including, without
limitation, the collection of revenues and the payment of the Company’s debts
and obligations and maintenance of appropriate computer services to perform
such administrative functions;

 

(ix)  communicating on behalf of the Company with the holders
of any equity or debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies or
trading markets and to maintain effective relations with such holders;

 

4

 

(x)  counseling the Company in connection with policy
decisions to be made by the Board of Directors;

 

(xi)  evaluating and recommending to the Board of Directors
hedging strategies and engaging in hedging activities on behalf of the Company,
consistent with such strategies, as so modified from time to time, with the
Company’s status as a REIT, and with the Guidelines;

 

(xii)  counseling the Company regarding the maintenance of
its status as a REIT and monitoring compliance with the various REIT
qualification tests and other rules set out in the Code and Treasury
Regulations thereunder;

 

(xiii)  counseling the Company regarding the maintenance of
its exemption from the Investment Company Act and monitoring compliance with
the requirements for maintaining an exemption from that Act;

 

(xiv)  assisting the Company in developing criteria for asset
purchase commitments that are specifically tailored to the Company’s investment
objectives and making available to the Company its knowledge and experience
with respect to mortgage loans, real estate, real estate securities, other real
estate-related assets and non-real estate related assets;

 

(xv)  representing and making recommendations to the Company
in connection with the purchase and finance of, and commitment to purchase and
finance, mortgage loans (including on a portfolio basis), real estate, real
estate securities, other real estate-related assets and non-real estate related
assets, and in connection with the sale and commitment to sell such assets;

 

(xvi)  monitoring the operating performance of the
Investments and providing periodic reports with respect thereto to the Board of
Directors, including comparative information with respect to such operating
performance and budgeted or projected operating results;

 

(xvii)  investing and re-investing any moneys and securities
of the Company (including investing in short-term Investments pending
investment in Investments, payment of fees, costs and expenses, or payments of
dividends or distributions to stockholders and partners of the Company) and
advising the Company as to its capital structure and capital raising;

 

(xviii)  causing the Company to retain qualified accountants
and legal counsel, as applicable, to assist in developing appropriate
accounting procedures, compliance procedures and testing systems with respect
to financial reporting obligations and compliance with the provisions of the
Code applicable to REITs and non-taxable REIT subsidiaries and to conduct
quarterly compliance reviews with respect thereto;

 

(xix)  causing the Company to qualify to do business in all
applicable jurisdictions and to obtain and maintain all appropriate licenses;

 

5

 

(xx)  assisting the Company in complying with all regulatory
requirements applicable to the Company in respect of its business activities,
including preparing or causing to be prepared all financial statements required
under applicable regulations and contractual undertakings and all reports and
documents, if any, required under the Exchange Act;

 

(xxi)  taking all necessary actions to enable the Company to
make required tax filings and reports, including soliciting stockholders for
required information to the extent provided by the provisions of the Code
applicable to REITs and non-taxable REIT subsidiaries;

 

(xxii)  handling and resolving all claims, disputes or
controversies (including all litigation, arbitration, settlement or other
proceedings or negotiations) in which the Company may be involved or to which
the Company may be subject arising out of the Company’s day-to-day operations,
subject to such limitations or parameters as may be imposed from time to time
by the Board of Directors;

 

(xxiii)  using commercially reasonable efforts to cause
expenses incurred by or on behalf of the Company to be commercially reasonable
or commercially customary and within any budgeted parameters or expense
guidelines set by the Board of Directors from time to time;

 

(xxiv)  performing such other services as may be required
from time to time for management and other activities relating to the assets of
the Company as the Board of Directors shall reasonably request or the Manager
shall deem appropriate under the particular circumstances; and

 

(xxv)  using commercially reasonable efforts to cause the
Company to comply with all applicable laws.

 

Without
limiting the foregoing, the Manager will perform portfolio management services
(the “Portfolio Management Services”) on behalf of the Company with
respect to the Investments. Such services will include, but not be limited to,
consulting with the Company on the purchase and sale of, and other investment
opportunities in connection with, the Company’s portfolio of assets; the
collection of information and the submission of reports pertaining to the
Company’s assets, interest rates and general economic conditions; periodic
review and evaluation of the performance of the Company’s portfolio of assets;
acting as liaison between the Company and banking, mortgage banking, investment
banking and other parties with respect to the purchase, financing and
disposition of assets; and other customary functions related to portfolio
management. Additionally, the Manager will perform monitoring services (the “Monitoring
Services”) on behalf of the Company with respect to any loan servicing
activities provided by third parties. Such Monitoring Services will include,
but not be limited to, negotiating servicing agreements; acting as a liaison
between the servicers of the assets and the Company; review of servicers’
delinquency, foreclosure and other reports on assets; supervising claims filed
under any insurance policies; and enforcing the obligation of any servicer to
repurchase assets.

 

6

 

(c)  The
Manager may enter into agreements with other parties, including its affiliates,
for the purpose of engaging one or more parties for and on behalf, and at the
sole cost and expense, of the Company to provide property management, asset
management, leasing, development and/or other services to the Company
(including, without limitation, Portfolio Management Services and Monitoring
Services) pursuant to agreement(s) with terms which are then customary for
agreements regarding the provision of services to companies that have assets
similar in type, quality and value to the assets of the Company; provided that (i) any such agreements
entered into with affiliates of the Manager shall be (A) on terms no more
favorable to such affiliate then would be obtained from a third party on an arm’s-length
basis and (B) to the extent the same do not fall within the provisions of the
Guidelines, approved by a majority of the Independent Directors, (ii) with
respect to Portfolio Management Services, (A) any such agreements shall be
subject to the Company’s prior written approval and (B) the Manager shall
remain liable for the performance of such Portfolio Management Services, and
(iii) with respect to Monitoring Services, any such agreements shall be subject
to the Company’s prior written approval.

 

(d)  The
Manager may retain, for and on behalf, and at the sole cost and expense, of the
Company, such services of accountants, legal counsel, appraisers, insurers,
brokers, transfer agents, registrars, developers, investment banks, financial
advisors, banks and other lenders and others as the Manager deems necessary or
advisable in connection with the management and operations of the Company.
Notwithstanding anything contained herein to the contrary, the Manager shall
have the right to cause any such services to be rendered by its employees or
affiliates. The Company shall pay or reimburse the Manager or its affiliates
performing such services for the cost thereof; provided
that such costs and reimbursements are no greater than those which would be
payable to outside professionals or consultants engaged to perform such
services pursuant to agreements negotiated on an arm’s-length basis.

 

(e)  As
frequently as the Manager may deem necessary or advisable, or at the direction
of the Board of Directors, the Manager shall, at the sole cost and expense of
the Company, prepare, or cause to be prepared, with respect to any Investment,
reports and other information with respect to such Investment as may be
reasonably requested by the Company.

 

(f)  The
Manager shall prepare, or cause to be prepared, at the sole cost and expense of
the Company, all reports, financial or otherwise, with respect to the Company
reasonably required by the Board of Directors in order for the Company to
comply with its Governing Instruments or any other materials required to be
filed with any governmental body or agency, and shall prepare, or cause to be
prepared, all materials and data necessary to complete such reports and other
materials including, without limitation, an annual audit of the Company’s books
of account by a nationally recognized independent accounting firm.

 

(g)  The
Manager shall prepare regular reports for the Board of Directors to enable the
Board of Directors to review the Company’s acquisitions, portfolio composition
and characteristics, credit quality, performance and compliance with the
Guidelines and policies approved by the Board of Directors.

 

(h)  Notwithstanding
anything contained in this Agreement to the contrary, except to the extent that
the payment of additional moneys is proven by the Company to have been

 

7

 

required as a direct result of the Manager’s acts or omissions which
result in the right of the Company to terminate this Agreement pursuant to
Section 15 of this Agreement, the Manager shall not be required to expend money
(“Excess Funds”) in connection with any expenses that are required to be
paid for or reimbursed by the Company pursuant to Section 9 in excess of that
contained in any applicable Company Account (as herein defined) or otherwise
made available by the Company to be expended by the Manager hereunder. Failure
of the Manager to expend Excess Funds out-of-pocket shall not give rise or be a
contributing factor to the right of the Company under Section 13(a) of this
Agreement to terminate this Agreement due to the Manager’s unsatisfactory
performance.

 

(i)  In
performing its duties under this Section 2, the Manager shall be entitled to
rely reasonably on qualified experts and professionals (including, without
limitation, accountants, legal counsel and other professional service
providers) hired by the Manager at the Company’s sole cost and expense.

 

SECTION 3.                                DEVOTION
OF TIME; ADDITIONAL ACTIVITIES.

 

(a)  The
Manager will provide the Company with a management team, including a Chief
Executive Officer, Chief Financial Officer and Chief Operating Officer, along
with appropriate support personnel, to provide the management services to be
provided by the Manager to the Company hereunder, the members of which team
shall have as their primary responsibility the management of the Company and
shall devote such of their time to the management of the Company as the Board
of Directors reasonably deems necessary and appropriate, commensurate with the
level of activity of the Company from time to time.  The Chief Financial Officer provided by the
Manager shall be exclusively dedicated to the operations of the Company.

 

(b)  The
Manager hereby agrees that neither the Manager nor any entity controlled by or
under common control with the Manager shall raise, advise or sponsor any new
investment fund, company or vehicle, including a REIT, that invests primarily
in domestic mortgage-backed securities; provided that for purposes of
the foregoing limitation, a portfolio company of any private equity fund
controlled by Kohlberg Kravis Roberts & Co. L.P. shall be deemed not to be
an entity under common control with the Manager.  The Company shall have the benefit of the
Manager’s best judgment and effort in rendering services and, in furtherance of
the foregoing, the Manager shall not undertake activities which, in its
judgment, will substantially and adversely affect the performance of its
obligations under this Agreement.

 

(c)  Except
to the extent set forth in clauses (a) and (b) above, nothing herein shall
prevent the Manager or any of its affiliates or any of the officers and
employees of any of the foregoing from engaging in other businesses or from
rendering services of any kind to any other person or entity, including
investment in, or advisory service to others investing in, any type of
investment, including investments which meet the principal investment
objectives of the Company.

 

(d)  Managers,
members, partners, officers, employees and agents of the Manager or affiliates
of the Manager may serve as directors, officers, employees, agents, nominees or
signatories for the Company or any Subsidiary, to the extent permitted by their
Governing

 

8

 

Instruments or by any resolutions duly adopted by the Board of
Directors pursuant to the Company’s Governing Instruments. When executing
documents or otherwise acting in such capacities for the Company, such persons
shall use their respective titles in the Company.

 

SECTION 4.           AGENCY.
The Manager shall act as agent of the Company in making, acquiring, financing
and disposing of Investments, disbursing and collecting the Company’s funds,
paying the debts and fulfilling the obligations of the Company, supervising the
performance of professionals engaged by or on behalf of the Company and
handling, prosecuting and settling any claims of or against the Company, the
Board of Directors, holders of the Company’s securities or the Company’s
representatives or properties.

 

SECTION 5.           BANK
ACCOUNTS. At the direction of the Board of Directors, the Manager may
establish and maintain one or more bank accounts in the name of the Company or
any Subsidiary (any such account, a “Company Account”), and may collect
and deposit funds into any such Company Account or Company Accounts, and
disburse funds from any such Company Account or Company Accounts, under such
terms and conditions as the Board of Directors may approve; and the Manager
shall from time to time render appropriate accountings of such collections and
payments to the Board of Directors and, upon request, to the auditors of the
Company or any Subsidiary.

 

SECTION 6.           RECORDS;
CONFIDENTIALITY. The Manager shall maintain appropriate books of accounts
and records relating to services performed under this Agreement, and such books
of account and records shall be accessible for inspection by representatives of
the Company or any Subsidiary at any time during normal business hours upon one
(1) business day’s advance written notice. The Manager shall keep confidential
any and all information obtained in connection with the services rendered under
this Agreement and shall not disclose any such information (or use the same
except in furtherance of its duties under this Agreement) to nonaffiliated
third parties except (i) with the prior written consent of the Board of
Directors, (ii) to legal counsel, accountants and other
professional advisors; (iii) to appraisers, financing sources and others
in the ordinary course of the Company’s business; (iv) to governmental
officials having jurisdiction over the Company; (v) in connection with any
governmental or regulatory filings of the Company or disclosure or
presentations to Company investors; or (vi) as required by law or legal
process to which the Manager or any Person to whom disclosure is permitted
hereunder is a party. The foregoing shall not apply to information which has
previously become publicly available through the actions of a Person other than
the Manager not resulting from the Manager’s violation of this Section 6.
The provisions of this Section 6 shall survive the expiration or earlier
termination of this Agreement for a period of one year.

 

SECTION 7.           OBLIGATIONS
OF MANAGER; RESTRICTIONS.

 

(a)  The
Manager shall require each seller or transferor of investment assets to the
Company to make such representations and warranties regarding such assets as
may, in the judgment of the Manager, be necessary and appropriate. In addition,
the Manager shall take such other action as it deems necessary or appropriate
with regard to the protection of the Investments.

 

(b)  The
Manager shall refrain from any action that, in its sole judgment made in good
faith, (i) is not in compliance with the Guidelines, (ii) would adversely
affect the status of

 

9

 

the Company as a REIT under the Code or (iii) would violate any law,
rule or regulation of any governmental body or agency having jurisdiction over the
Company or any Subsidiary or that would otherwise not be permitted by the
Company’s Governing Instruments. If the Manager is ordered to take any such
action by the Board of Directors, the Manager shall promptly notify the Board
of Directors of the Manager’s judgment that such action would adversely affect
such status or violate any such law, rule or regulation or the Governing
Instruments. Notwithstanding the foregoing, the Manager, its directors,
officers, stockholders and employees shall not be liable to the Company or any
Subsidiary, the Board of Directors, or the Company’s or any Subsidiary’s
stockholders or partners, for any act or omission by the Manager, its
directors, officers, stockholders or employees except as provided in Section 11
of this Agreement.

 

(c)  The
Manager shall not (i) consummate any transaction which would involve the
acquisition by the Company of an asset in which the Manager or any affiliate
thereof has an ownership interest or the sale by the Company of an asset to the
Manager or any affiliate thereof, or (ii) under circumstances where the Manager
is subject to an actual or potential conflict of interest, in the reasonable
judgment of the Manager, because it manages both the Company and another Person
(not an affiliate of the Company) with which the Company has a contractual
relationship, take any action constituting the granting to such Person of a
waiver, forbearance or other relief, or the enforcement against such Person of
remedies, under or with respect to the applicable contract, unless such
transaction or action, as the case may be and in each case, is approved by a
majority of the Independent Directors.

 

(d)  The
Board of Directors periodically reviews the Guidelines and the Company’s
portfolio of Investments but will not review each proposed investment,
except as otherwise provided herein. If a majority of the Independent
Directors determine in their periodic review of transactions that a particular
transaction does not comply with the Guidelines (including as a result of
violation of the provisions of Section 7(c) above), then a majority of the
Independent Directors will consider what corrective action, if any, can be
taken. The Manager shall be
permitted to rely upon the direction of the Secretary of the Company to evidence
the approval of the Board of Directors or the Independent Directors with
respect to a proposed investment.

 

(e)  The
Manager shall at all times during the term of this Agreement maintain “errors
and omissions” insurance coverage and other insurance coverage which is
customarily carried by property, asset and investment managers performing
functions similar to those of the Manager under this Agreement with respect to
assets similar to the assets of the Company, in an amount which is comparable
to that customarily maintained by other managers or servicers of similar
assets.

 

SECTION 8.           COMPENSATION.

 

(a)  During
the Initial Term of this Agreement, as the same may be extended from time to
time, the Company shall pay the Manager the Base Management Fee monthly in
arrears commencing with the month in which this Agreement was executed (with
such initial payment pro-rated based on the number of days during such month
that this Agreement was in effect).

 

10

 

(b)  The
Manager shall compute each installment of the Base Management Fee within
fifteen (15) business days after the end of the calendar month with respect to
which such installment is payable. A copy of the computations made by the
Manager to calculate such installment shall thereafter, for informational
purposes only and subject in any event to Section 13(a) of this Agreement,
promptly be delivered to the Board of Directors and, upon such delivery,
payment of such installment of the Base Management Fee shown therein shall be
due and payable no later than the date which is twenty (20) business days after
the end of the calendar month with respect to which such installment is
payable.

 

(c)  The
Base Management Fee is subject to adjustment pursuant to and in accordance with
the provisions of Sections 8(f) and 13(a) of this Agreement.

 

(d)  In
addition to the Base Management Fee otherwise payable hereunder, the Company
shall pay the Manager quarterly Incentive Compensation. The Incentive
Compensation calculation and payment shall be made for each fiscal quarter in
arrears.

 

(e)  Subject
to Section 8(f) below, the Manager shall compute each installment of the
Incentive Compensation within 30 days after the end of each fiscal quarter with
respect to which such installment is payable. 
A copy of the computations made by the Manager to calculate such
installment shall thereafter, for informational purposes only and subject in
any event to Section 13(a) of this Agreement, promptly be delivered to the
Board of Directors and, upon such delivery, payment of such installment of the
Incentive Compensation shown therein shall be due and payable no later than the
date which is five (5) business days after the date of delivery to the Board of
Directors of such computations.

 

(f)  In
the event that a registration statement is not filed with the United States
Securities and Exchange Commission on or before May 2, 2005 pursuant to Section
2(a) of the Registration Rights Agreement, the Manager shall forfeit the Base
Management Fee in respect of the period from and after that date until the
initial registration statement is filed. 
In addition, during such period all payments of Incentive Compensation
shall be deferred until such initial registration statement is filed.

 

(g)  In addition to the Base Management Fee and
Incentive Compensation, the Manager shall be granted (i) options to purchase
3,500,000 Common Shares, with an exercise price equal to $10.00 per share and
(ii) 2,100,000 restricted Common Shares, in each case pursuant to the terms and
conditions set forth in the Company’s 2004 Stock Incentive Plan.  Such awards shall be subject to upward
adjustment on a pro rata basis if Friedman, Billings, Ramsey & Co., Inc
elects to exercise its over-allotment option pursuant to Sections 2(b) and 2(d)
of the Purchase and Placement Agent Agreement. 
The Manager shall have the right to allocate the awards granted to it
pursuant to this Section 8(g) at its sole and absolute discretion.  To the extent that such awards (or the Common
Shares relating thereto) are not eligible to be registered for sale pursuant to
a Registration Statement on Form S-8 relating to the 2004 Stock Incentive Plan,
at the request of the Manager the Company agrees to file with the Securities
and Exchange Commission as soon as reasonably practicable a shelf registration
statement providing for the sale of such awards (or the Common Shares relating
thereto) and to use its commercially reasonably efforts to cause such
registration statement to be declared effective as promptly as practicable
following such filing.

 

11

 

SECTION 9.           EXPENSES
OF THE COMPANY. The Company shall pay all of its expenses and shall
reimburse the Manager for documented expenses of the Manager incurred on its behalf
(collectively, the “Expenses”). Expenses include all costs and expenses
which are expressly designated elsewhere in this Agreement as the Company’s,
together with the following:

 

(a)  expenses
in connection with the rent, issuance and transaction costs incident to the
acquisitions, disposition and financing of Investments;

 

(b)  costs
of legal, tax, accounting, consulting, auditing, administrative and other
similar services rendered for the Company by providers retained by the Manager
or, if provided by the Manager’s employees, in amounts which are no greater
than those which would be payable to outside professionals or consultants
engaged to perform such services pursuant to agreements negotiated on an arm’s-length
basis;

 

(c)  the
compensation and expenses of the Company’s directors and the cost of liability
insurance to indemnify the Company’s directors and officers;

 

(d)  costs
associated with the establishment and maintenance of any credit facilities and
other indebtedness of the Company (including commitment fees, accounting fees,
legal fees, closing and other costs) or any securities offerings of the
Company;

 

(e)  expenses
connected with communications to holders of securities of the Company or its
Subsidiaries and other bookkeeping and clerical work necessary in maintaining
relations with holders of such securities and in complying with the continuous
reporting and other requirements of governmental bodies or agencies, including,
without limitation, all costs of preparing and filing required reports with the
Securities and Exchange Commission, the costs payable by the Company to any
transfer agent and registrar in connection with the listing and/or trading of
the Company’s stock on any exchange, the fees payable by the Company to any
such exchange in connection with its listing, costs of preparing, printing and
mailing the Company’s annual report to its stockholders and proxy materials
with respect to any meeting of the stockholders of the Company;

 

(f)  costs
associated with any computer software or hardware, electronic equipment or
purchased information technology services from third party vendors that is used
solely for the Company;

 

(g)  expenses
incurred by managers, officers, employees and agents of the Manager for travel
on the Company’s behalf and other out-of-pocket expenses incurred by managers,
officers, employees and agents of the Manager in connection with the purchase,
financing, refinancing, sale or other disposition of an Investment or
establishment and maintenance of any credit facilities and other indebtedness
or any securities offerings of the Company;

 

(h)  costs
and expenses incurred with respect to market information systems and
publications, research publications and materials, and settlement, clearing and
custodial fees and expenses;

 

12

 

(i)  compensation
and expenses of the Company’s custodian and transfer agent, if any;

 

(j)  the
costs of maintaining compliance with all federal, state and local rules and
regulations or any other regulatory agency;

 

(k)  all
taxes and license fees;

 

(l)  all
insurance costs incurred in connection with the operation of the Company’s
business except for the costs attributable to the insurance that the Manager
elects to carry for itself and its employees;

 

(m)  costs
and expenses incurred in contracting with third parties, including affiliates
of the Manager, for the servicing and special servicing of assets of the
Company;

 

(n)  all
other costs and expenses relating to the Company’s business and investment
operations, including, without limitation, the costs and expenses of acquiring,
owning, protecting, maintaining, developing and disposing of Investments,
including appraisal, reporting, audit and legal fees;

 

(o)  expenses
relating to any office(s) or office facilities, including but not limited to
disaster backup recovery sites and facilities, maintained for the Company or
Investments separate from the office or offices of the Manager;

 

(p)  expenses
connected with the payments of interest, dividends or distributions in cash or
any other form authorized or caused to be made by the Board of Directors to or
on account of the holders of securities of the Company or its Subsidiaries,
including, without limitation, in connection with any dividend reinvestment
plan;

 

(q)  any
judgment or settlement of pending or threatened proceedings (whether civil,
criminal or otherwise) against the Company or any Subsidiary, or against any
trustee, director or officer of the Company or of any Subsidiary in his
capacity as such for which the Company or any Subsidiary is required to
indemnify such trustee, director or officer by any court or governmental
agency, or settlement of pending or threatened proceedings;

 

(r)  the
Company’s pro rata portion of rent, telephone, utilities, office furniture,
equipment,  machinery and other office,
internal and overhead expenses of the Manager and its affiliates required for
the Company’s operations; and

 

(s)  all
other expenses actually incurred by the Manager which are reasonably necessary
for the performance by the Manager of its duties and functions under this
Agreement.

 

The provisions of this
Section 9 shall survive the expiration or earlier termination of this
Agreement to the extent such expenses have previously been incurred or are
incurred in connection with such expiration or termination.

 

13

 

SECTION 10.         CALCULATIONS
OF EXPENSES.

 

The Manager shall prepare a statement
documenting the Expenses of the Company and the Expenses incurred by the
Manager on behalf of the Company during each calendar month, and shall deliver
such statement to the Company within 20 days after the end of each calendar
month. Expenses incurred by the Manager on behalf of the Company shall be
reimbursed by the Company to the Manager on the first business day of the month
immediately following the date of delivery of such statement; provided, however, that such
reimbursements may be offset by the Manager against amounts due to the Company.
The provisions of this Section 10 shall survive the expiration or earlier
termination of this Agreement.

 

SECTION 11.         LIMITS
OF MANAGER RESPONSIBILITY; INDEMNIFICATION.

 

(a)  The
Manager assumes no responsibility under this Agreement other than to render the
services called for under this Agreement in good faith and shall not be
responsible for any action of the Board of Directors in following or declining
to follow any advice or recommendations of the Manager, including as set forth
in Section 7(b) of this Agreement. The Manager, its members, managers, officers
and employees will not be liable to the Company or any Subsidiary, to the Board
of Directors, or the Company’s or any Subsidiary’s stockholders or partners for
any acts or omissions by the Manager, its members, managers, officers or
employees, pursuant to or in accordance with this Agreement, except by reason
of acts constituting bad faith, willful misconduct, gross negligence or
reckless disregard of the Manager’s duties under this Agreement. The Company
shall, to the full extent lawful, reimburse, indemnify and hold the Manager,
its members, managers, officers and employees and each other Person, if any,
controlling the Manager (each, an “Indemnified Party”), harmless of and
from any and all expenses, losses, damages, liabilities, demands, charges and
claims of any nature whatsoever (including attorneys’ fees) in respect of or
arising from any acts or omissions of such Indemnified Party made in good faith
in the performance of the Manager’s duties under this Agreement and not
constituting such Indemnified Party’s bad faith, willful misconduct, gross
negligence or reckless disregard of the Manager’s duties under this Agreement.

 

(b)  The
Manager shall, to the full extent lawful, reimburse, indemnify and hold the
Company, its stockholders, directors, officers and employees and each other
Person, if any, controlling the Company (each, a “Company Indemnified Party”),
harmless of and from any and all expenses, losses, damages, liabilities,
demands, charges and claims of any nature whatsoever (including attorneys’
fees) in respect of or arising from the Manager’s bad faith, willful
misconduct, gross negligence or reckless disregard of its duties under this
Agreement.

 

SECTION 12.         NO
JOINT VENTURE. Nothing in this Agreement shall be construed to make the
Company and the Manager partners or joint venturers or impose any liability as
such on either of them.

 

SECTION 13.                          TERM;
TERMINATION.

 

(a)  Until
this Agreement is terminated in accordance with its terms, this Agreement shall
be in effect until December 31, 2006 (the “Initial Term”) and shall be
automatically renewed for a one-year term each anniversary date thereafter (a “Renewal
Term”)

 

14

 

unless at least two-thirds of the Independent Directors or the holders
of a majority of the outstanding Common Shares agree that (i) there has been
unsatisfactory performance by the Manager that is materially detrimental to the
Company or (ii) the compensation payable to the Manager hereunder is unfair; provided that the Company shall not have
the right to terminate this Agreement under clause (ii) above if the Manager
agrees to continue to provide the services under this Agreement at a fee that
at least two-thirds of the Independent Directors determines to be fair pursuant
to the procedure set forth below. If the Company elects not to renew this
Agreement at the expiration of the Initial Term or any such one-year extension
term as set forth above, the Company shall deliver to the Manager prior written
notice (the “Termination Notice”) of the Company’s intention not to
renew this Agreement based upon the terms set forth in this Section 13(a) not
less than 180 days prior to the expiration of the then existing term. If the
Company so elects not to renew this Agreement, the Company shall designate the
date (the “Effective Termination Date”), not less than 180 days from the
date of the notice, on which the Manager shall cease to provide services under
this Agreement and this Agreement shall terminate on such date; provided, however, that in the event that
such Termination Notice is given in connection with a determination that the
compensation payable to the Manager is unfair, the Manager shall have the right
to renegotiate such compensation by delivering to the Company, no fewer than
forty-five (45) days prior to the prospective Effective Termination Date,
written notice (any such notice, a “Notice of Proposal to Negotiate”) of
its intention to renegotiate its compensation under this Agreement. Thereupon, the
Company (represented by the Independent Directors) and the Manager shall
endeavor to negotiate in good faith the revised compensation payable to the
Manager under this Agreement. Provided that the Manager and at least two-thirds
of the Independent Directors agree to the terms of the revised compensation to
be payable to the Manager within 45 days following the receipt of the Notice of
Proposal to Negotiate, the Termination Notice shall be deemed of no force and
effect and this Agreement shall continue in full force and effect on the terms
stated in this Agreement, except that the compensation payable to the Manager
hereunder shall be the revised compensation then agreed upon by the parties to
this Agreement. The Company and the Manager agree to execute and deliver an
amendment to this Agreement setting forth such revised compensation promptly
upon reaching an agreement regarding same. In the event that the Company and
the Manager are unable to agree to the terms of the revised compensation to be
payable to the Manager during such 45 day period, this Agreement shall
terminate, such termination to be effective on the date which is the later of
(A) ten (10) days following the end of such 45 day period and (B) the Effective
Termination Date originally set forth in the Termination Notice.

 

(b)  In
the event that this Agreement is terminated in accordance with the provisions
of Section 13(a) of this Agreement, the Company shall pay to the Manager, on
the date on which such termination is effective, a termination fee (the “Termination
Fee”) equal to the amount of four times the sum of the average annual Base
Management Fee and the average annual Incentive Compensation earned by the
Manager during the two 12-month periods immediately preceding the date of such
termination, calculated as of the end of the most recently completed fiscal
quarter prior to the date of termination. The obligation of the Company to pay
the Termination Fee shall survive the termination of this Agreement.

 

(c)  No
later than 180 days prior to the anniversary date of this Agreement of any year
during the Initial Term or Renewal Term, the Manager may deliver written notice
to the Company informing it of the Manager’s intention to decline to renew this
Agreement,

 

15

 

whereupon this Agreement shall not be renewed and extended and this
Agreement shall terminate effective on the anniversary date of this Agreement
next following the delivery of such notice.

 

(d)  If
this Agreement is terminated pursuant to this Section 13, such termination
shall be without any further liability or obligation of either party to the
other, except as provided in Sections 6, 9, 10, 13(b) and 16 of this Agreement.
In addition, Sections 8(g) and 11 of this Agreement shall survive termination
of this Agreement.

 

SECTION 14.                          ASSIGNMENT.

 

(a)  Except
as set forth in Section 14(b) of this Agreement, this Agreement shall terminate
automatically in the event of its assignment, in whole or in part, by the
Manager, unless such assignment is consented to in writing by the Company with
the consent of a majority of the Independent Directors; provided, however, that no such consent
shall be required in the case of an assignment by the Manager to an entity
whose day-to-day business and operations are managed and supervised by Messrs.
Fanlo and Netjes (collectively, the “Principals”). Any such permitted
assignment shall bind the assignee under this Agreement in the same manner as
the Manager is bound, and the Manager shall be liable to the Company for all
errors or omissions of the assignee under any such assignment. In addition, the
assignee shall execute and deliver to the Company a counterpart of this
Agreement naming such assignee as Manager. This Agreement shall not be assigned
by the Company without the prior written consent of the Manager, except in the
case of assignment by the Company to another REIT or other organization which
is a successor (by merger, consolidation or purchase of assets) to the Company,
in which case such successor organization shall be bound under this Agreement
and by the terms of such assignment in the same manner as the Company is bound
under this Agreement.

 

(b)  Notwithstanding
any provision of this Agreement, the Manager may subcontract and assign any or
all of its responsibilities under Sections 2(b), 2(c) and 2(d) of this
Agreement to any of its affiliates in accordance with the terms of this
Agreement applicable to any such subcontract or assignment, and the Company
hereby consents to any such assignment and subcontracting. In addition,
provided that the Manager provides prior written notice to the Company for
informational purposes only, nothing contained in this Agreement shall preclude
any pledge, hypothecation or other transfer of any amounts payable to the
Manager under this Agreement.

 

SECTION 15.                          TERMINATION
FOR CAUSE.

 

(a)  The
Company may terminate this Agreement effective upon thirty (30) days’ prior
written notice of termination from the Company to the Manager, without payment
of any Termination Fee, if (i) the Manager materially breaches any provision of
this Agreement and such breach shall continue for a period of 30 days after
written notice thereof specifying such breach and requesting that the same be
remedied in such 30 day period, (ii) the Manager engages in any act of fraud,
misappropriation of funds, or embezzlement against the Company, (iii) there is
an event of any gross negligence on the part of the Manager in the performance
of its duties under this Agreement, (iv) there is a commencement of any
proceeding relating to the Manager’s

 

16

 

bankruptcy or insolvency, (v) there is a dissolution of the Manager or
(vi) there is a Change of Control of the Manager.

 

(b)  The
Manager may terminate this Agreement effective upon sixty (60) days’ prior
written notice of termination to the Company in the event that the Company
shall default in the performance or observance of any material term, condition
or covenant contained in this Agreement and such default shall continue for a
period of 30 days after written notice thereof specifying such default and
requesting that the same be remedied in such 30 day period.

 

(c)  The
Manager may terminate this Agreement, without payment of any Termination Fee,
in the event the Company becomes regulated as an “investment company” under the
Investment Company Act, with such termination deemed to have occurred
immediately prior to such event.

 

SECTION 16.         ACTION
UPON TERMINATION. From and after the effective date of termination of this
Agreement, pursuant to Sections 13, 14, or 15 of this Agreement, the Manager
shall not be entitled to compensation for further services under this
Agreement, but shall be paid all compensation accruing to the date of
termination and, if terminated pursuant to Section 13 or Section 15(b), the
applicable Termination Fee. Upon such termination, the Manager shall forthwith:

 

(i)  after deducting any accrued compensation and
reimbursement for its expenses to which it is then entitled, pay over to the
Company or a Subsidiary all money collected and held for the account of the
Company or a Subsidiary pursuant to this Agreement;

 

(ii)  deliver to the Board of Directors a full accounting,
including a statement showing all payments collected by it and a statement of
all money held by it, covering the period following the date of the last
accounting furnished to the Board of Directors with respect to the Company or a
Subsidiary; and

 

(iii)  deliver to the Board of Directors all property and
documents of the Company or any Subsidiary then in the custody of the Manager.

 

SECTION 17.         RELEASE
OF MONEY OR OTHER PROPERTY UPON WRITTEN REQUEST. The Manager agrees that
any money or other property of the Company or Subsidiary held by the Manager
under this Agreement shall be held by the Manager as custodian for the Company
or Subsidiary, and the Manager’s records shall be appropriately marked clearly
to reflect the ownership of such money or other property by the Company or such
Subsidiary. Upon the receipt by the Manager of a written request signed by a
duly authorized officer of the Company requesting the Manager to release to the
Company or any Subsidiary any money or other property then held by the Manager
for the account of the Company or any Subsidiary under this Agreement, the
Manager shall release such money or other property to the Company or any
Subsidiary within a reasonable period of time, but in no event later than sixty
(60) days following such request. The Manager shall not be liable to the
Company, any Subsidiary, the Independent Directors, or the Company’s or a
Subsidiary’s stockholders or partners for any acts performed or omissions to
act by the Company or any Subsidiary in connection with the money

 

17

 

or other property released to the Company or any Subsidiary in
accordance with the second sentence of this Section 17. The Company and any
Subsidiary shall indemnify the Manager and its members, managers, officers and
employees against any and all expenses, losses, damages, liabilities, demands,
charges and claims of any nature whatsoever, which arise in connection with the
Manager’s release of such money or other property to the Company or any
Subsidiary in accordance with the terms of this Section 17. Indemnification
pursuant to this provision shall be in addition to any right of the Manager to
indemnification under Section 11 of this Agreement.

 

SECTION 18.         NOTICES.
Unless expressly provided otherwise in this Agreement, all notices, requests,
demands and other communications required or permitted under this Agreement
shall be in writing and shall be deemed to have been duly given, made and
received when delivered against receipt or upon actual receipt of (i) personal
delivery, (ii) delivery by reputable overnight courier, (iii) delivery by
facsimile transmission with telephonic confirmation or (iv) delivery by
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:

 

(a)  If
to the Company:

 

KKR Financial Corp.

9 West 57th Street

New York, New York 10019

Attention: Chief Financial Officer

 

(b)  If
to the Manager:

 

KKR Financial Advisors LLC 

9 West 57th Street

New York, New York 10019

Attention: Chief Operating Officer

 

Either party
may alter the address to which communications or copies are to be sent by
giving notice of such change of address in conformity with the provisions of
this Section 18 for the giving of notice.

 

SECTION 19.         BINDING
NATURE OF AGREEMENT; SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and permitted assigns as provided in this
Agreement.

 

SECTION 20.         ENTIRE
AGREEMENT. This Agreement contains the entire agreement and understanding
among the parties hereto with respect to the subject matter of this Agreement,
and supersedes all prior and contemporaneous agreements, understandings,
inducements and conditions, express or implied, oral or written, of any nature
whatsoever with respect to the subject matter of this Agreement. The express
terms of this Agreement control and supersede any course of performance and/or
usage of the trade inconsistent with any of the terms of this Agreement. This
Agreement may not be modified or amended other than by an agreement in writing
signed by the parties hereto.

 

18

 

SECTION 21.         GOVERNING
LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

 

SECTION 22.         NO
WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay in
exercising, on the part of any party hereto, any right, remedy, power or
privilege hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude
any other or further exercise thereof or the exercise of any other right,
remedy, power or privilege.  The rights,
remedies, powers and privileges herein provided are cumulative and not
exclusive of any rights, remedies, powers and privileges provided by law.  No waiver of any provision hereto shall be
effective unless it is in writing and is signed by the party asserted to have
granted such waiver.

 

SECTION 23.         HEADINGS.
The headings of the sections of this Agreement have been inserted for
convenience of reference only and shall not be deemed part of this Agreement.

 

SECTION 24.         COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original as against any party whose signature appears
thereon, and all of which shall together constitute one and the same
instrument. This Agreement shall become binding when one or more counterparts
of this Agreement, individually or taken together, shall bear the signatures of
all of the parties reflected hereon as the signatories.

 

SECTION 25.         SEVERABILITY.
Any provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction

 

SECTION 26.         GENDER.
Words used herein regardless of the number and gender specifically used, shall
be deemed and construed to include any other number, singular or plural, and
any other gender, masculine, feminine or neuter, as the context requires.

 

19

 

IN WITNESS
WHEREOF, the parties hereto have executed this Agreement as of the date first
written above.

 

	
   

  	
  KKR FINANCIAL CORP.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  SATURNINO S. FANLO

  
	
   

  	
   

  	
  Name:

  	
  Saturnino S. Fanlo

  
	
   

  	
   

  	
  Title:

  	
  Chief Operating Officer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  KKR FINANCIAL ADVISORS LLC

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DAVID A.
  NETJES

  
	
   

  	
   

  	
  Name:

  	
  David A. Netjes

  
	
   

  	
   

  	
  Title:

  	
  Chief Operating Officer

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