<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
-----------------------------------------------------
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
---------------------- -----------------------
Commission file number 0-17868
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KRAUSE'S FURNITURE, INC.
- --------------------------------------------------------------------------------
Exact name of registrant as specified in its charter)
Delaware 77-0310773
- ----------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5980 Stoneridge Drive, Suite 109, Pleasanton, California 94588
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 460-6201
---------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of February 28, 1995, the aggregate market value of Registrant's
$.001 par value Common Stock held by non-affiliates was approximately $9,700,000
based on the closing price for the stock.
As of February 28, 1995 there were 11,054,953 shares of $.001 par value
Common Stock outstanding.
<PAGE> 2
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
Set forth below is a list of the directors and executive officers of
the Company, and their respective business experience over the last five years.
Directors
Jean R. Perrette, age 63, has been Chairman of the Board since June
1991, President and Chief Executive Officer from June 1991 through July 1992
and a director since May 1988. Mr. Perrette has been President and a director
of Worms & Co., Inc., an investment management firm in New York, since July
1986. Mr. Perrette has served in various capacities for Maison Worms & Cie (a
Paris-based investment firm which has investments in the insurance, banking,
shipping and other industries) and its United States affiliates since 1961. He
currently serves as a director of Re Capital Corporation.
Thomas M. DeLitto, age 42, has been Vice Chairman of the Board since
December 1994, Chief Executive Officer since April 1995 and a director since
June 1991. He was President and Chief Executive Officer from July 1992 to
December 1994 and he was Executive Vice President and Chief Operating Officer
from June 1991 to July 1992. Mr. DeLitto has been President of Worms Capital
Management, Inc., a wholly-owned subsidiary of Worms & Co., Inc., since October
1990; in this capacity he oversees operations of that company's direct
investment activities. Since July 1988 Mr. DeLitto has also been President of
TMD Management Services, a management consulting firm providing services in the
areas of strategic planning, finance and operations.
Collectors' Guild International ("CGI"), as well as its subsidiaries,
Collectors' Guild Ltd., a Delaware corporation, and A.P.F. Inc., a New York
corporation, filed bankruptcy under Chapter 11 of the U.S. Bankruptcy Code on
June 12, 1990, in the Southern District of New York - New York City (case
numbers: 90-11842 HCB, 90-11843 HCB, and 90-11844 HCB, respectively). CGI's
plans for reorganization were rejected by its creditors, and the court ordered
an immediate liquidation. The assets of CGI were accordingly auctioned on
October 15, 1990.
Mr. DeLitto was hired by CGI for the positions of director, President
and Chief Executive Officer, effective June 1, 1990 (12 days prior to filing).
CGI's owners hired him specifically for his expertise in crisis management in
order to manage the process of taking CGI into bankruptcy. Mr. DeLitto was in no
way responsible for the events that led to CGI's filing and was subsequently
hired by the investment firm which owned and controlled CGI.
Gary S. Vandeweghe, age 56, has been secretary and a director since
July 1987. Mr. Vandeweghe is an attorney admitted in the States of California
and New York, and has been in private practice with the firm of Rankin,
Luckhardt, Vandeweghe, Landsness & Lahde and predecessor firms in San Jose,
California since 1973. Mr. Vandeweghe currently serves as director of SJNB
Financial Corp., the bank holding company for the San Jose National Bank, and of
Cobra Golf Incorporated.
Kamal G. Abdelnour, age 58, has been a director since February 1993.
Mr. Abdelnour has been President and Chief Executive Officer of ATCO
Development, Inc. ("ATCO") since 1980. ATCO is engaged in the business of
investments, real estate ownership and management, and export sales. Mr.
Abdelnour currently serves as a director of First National Bankshares, Inc. Mr.
Abdelnour has been nominated in accordance with a contractual undertaking by the
Company to do so.
Bernadette Castro, age 50, has been a director since September 1993.
Ms. Castro has been Commissioner, New York State Parks, Recreation and Historic
Preservation since January 1995. Ms. Castro also has been President and Chief
Executive Officer of Pentagon Group, Inc. ("Pentagon"), formerly Castro
Convertible Corporation, since January 1990; prior thereto, she was Senior
Executive Vice President. Pentagon formerly was a manufacturer of sofabed
mechanisms that also operated retail stores selling upholstered sofabeds, which
retail business was acquired by Krause's Sofa Factory in May 1993. See Item 13.
<PAGE> 3
J. Richard Cordsen, age 42, has been a director since May 1990. Mr.
Cordsen has been Senior Vice President of United Gulf Management, Inc., or
related entities since September 1988 and held various other positions with the
same group of entities since January 1983. Mr. Cordsen is responsible for direct
investment activities. Prior to his association with United Gulf Management,
Inc., Mr. Cordsen held various positions with Chase Manhattan Bank in London,
Saudi Arabia and New York.
Michael W. Gibbons, age 39, has been a director since July 1992. He was
President and Chief Executive Officer of the Company from December 1994 to April
1995. Mr. Gibbons was part of management of Krause's Sofa Factory ("KSF") the
Company's wholly-owned operating subsidiary, from May 1986 to April 1995. After
serving on a temporary basis as Chief Financial Officer and Chief Operating
Officer, he became the President and Chief Executive Officer of KSF in April
1989. From 1983 to 1991, Mr. Gibbons was a co-owner of Equivest Partners, Inc.,
a private merchant banking firm.
Isaac Robert Souede, age 43, has been a director since August 1986. Mr.
Souede is currently President and Chief Executive Officer of Worms Asset
Management, a division of Worms & Co., Inc., an investment management firm, and
has been Executive Vice President of Worms & Co., Inc. since October 1985.
Executive Officers Who Are Not Directors
Stephen Anderson, age 44, has been President and Chief Operating
Officer since April 1995, and has been President and Chief Operating Officer of
KSF since November 1994. Prior to his association with the Company and KSF, Mr.
Anderson held various executive positions with The Stanley Works. He was
President and General Manager of Stanley Door Systems Division from January
1991 until February 1994 and Vice President of The Garage Door Division from
August 1989 to January 1991.
Robert G. Sharpe, age 59, has been Executive Vice President Corporate
Development and Treasurer since April 1995. He was Chief Financial Officer and
Treasurer from July 1987 to April 1995, and served as a director from July 1987
to May 1993.
Mark J. Gill, age 38, has been Chief Financial Officer since
April 1995, and has been Chief Financial Officer of KSF since October 1989.
<PAGE> 4
ITEM 11. EXECUTIVE COMPENSATION.
The following table discloses compensation received by the Company's
Chief Executive Officer and the two other executive officers whose annual
compensation exceeded $100,000 and who were executive officers at the end of
the year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
---------------
Annual Compensation Securities All Other
------------------- Underlying Compensation
Name and Principal Position Year Salary($) Bonus($) Options/SARs(#) ($)(3)
--------------------------- ---- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Thomas M. DeLitto(1) 1994 5,000 15,000
President, Chief Executive 1993 2,500 14,500
Officer and Director 1992 2,500 17,855
Michael W. Gibbons(2) 1994 222,237 14,125
Director, President and 1993 217,767 178,200 14,500
Chief Executive Officer 1992 203,748 5,708
of KSF
Robert G. Sharpe 1994 155,187 30,000 10,000
Chief Financial Officer 1993 142,083 30,000 25,000 5,300
and Director (5) 1992 131,667 30,000 10,000 17,125
</TABLE>
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(1) Worms Capital Management, Inc., of which Mr. DeLitto is President, performed
certain executive management services on behalf of the Company (Mr. DeLitto
is currently Vice Chairman and Chief Executive Officer and was President and
Chief Executive Officer of the Company until December 1994) during 1994 and
received $200,000 for such services. See Item 13.
(2) Mr. Gibbons entered into a three year employment agreement with KSF on April
29, 1991. The agreement provided an annual salary of $198,000, $208,000, and
$218,000 in the first, second and third years, respectively. The agreement
also provided for an annual bonus based on KSF's pre-tax income which
exceeds $1 million. Effective April 29, 1994 Mr. Gibbons and KSF entered
into a new employment agreement, which provided for a base annual salary of
$225,000 in the first year and a discretionary bonus. No annual bonus has
been paid or accrued through 1994 under the employment agreements. Mr.
Gibbons resigned as President and Chief Executive Officer in April 1995.
See Item 13.
(3) Other annual compensation represents directors' fees from the Company and
from KMC Enterprises, Inc., a subsidiary of the Company prior to its merger
with the Company on July 31, 1992.
(4) Options to purchase common stock of KSF at $5.00 per share converted into
the right to purchase the Company's common stock at $1.54 per share upon
KSF's merger with the Company.
(5) Mr. Sharpe was a director of the Company until May 1993.
<PAGE> 5
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Number of % of Total Value at Assumed
Securities Options/ Annual Rates of
Underlying SARs Stock Price
Options/ Granted to Exercise Appreciation
SARs Employees or Base for Option Term
Granted in Fiscal Price Expiration ------------------
(#) Year (1) ($/Sh) Date 5%($) 10%($)
Name ---------- ---------- -------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Thomas M. DeLitto . . . . . . . . 5,000 5.1% 2.00 07/31/04 16,289 25,937
Michael W. Gibbons . . . . . . . None
Robert G. Sharpe . . . . . . . . 10,000 10.3% 2.37 06/16/04 38,605 61,472
</TABLE>
- -----------
(1) The Company granted options for a total of 37,500 shares to directors and
60,003 shares to employees of the Company and KSF during 1994.
AGGREGATED OPTION/SAR EXERCISES IN 1994
AND YEAR-END OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs
at Fiscal Year-End at Fiscal Year End(2)
-------------------------------- -------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Name
- ----
<S> <C> <C> <C> <C>
Thomas M. DeLitto 5,000 5,000 $ 2,826 $ 625
Michael W. Gibbons 369,360 106,920 174,377 -
Robert G. Sharpe 36,000 9,000 25,075 -
</TABLE>
- ------------
(1) No options or SARs were exercised by the above-named executives in 1994.
(2) Based on closing price of common stock as quoted on NASDAQ of $2.125 on
December 30, 1994.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee's policy is to review and make recommendations to
the Board of Directors on cash compensation and other compensation for the
Company's executive officers. The Committee takes into account many factors in
making the determination of aggregate compensation, including awards of stock
options. Such factors include (1) the financial results of the Company for the
preceding fiscal year, (2) the performance of the Company's stock, (3) the
experience level and performance of the executive officers, (4) compensation
paid to executive officers in prior years and (5) compensation of executive
officers employed by companies in industries similar to that of the Company. The
Committee also considers and intends to set executive compensation policies in
order to preserve qualifying compensation deductions under Section 162(m) of the
Internal Revenue Code which could limit certain deductions for executive
compensation. This provision will not apply to the Company in 1994.
The Committee awards stock options to employees based on salary levels,
special circumstances such as promotions and contractual commitments, as well as
the performance, experience and level of responsibility of each executive. The
Company's executive officers have a significant equity ownership in the Company,
and the Committee is of the view that this has been and continues to be a key
factor in focusing the efforts of management in building stockholder value.
<PAGE> 6
In 1994, the compensation to executive officers was comprised of (1) annual
salary, (2) a cash bonus based on performance of the executive, and (3) other
employee benefits, including stock options. See Item 11.
Thomas M. DeLitto, the Chief Executive Officer of the Company until December
1994, did not receive compensation (other than directors fees) from the Company.
Worms Capital Management, Inc., which employed Mr. DeLitto, was paid an annual
management fee approved by the Board of Directors. The management fee totaled
$200,000 for 1994.
Compensation of KSF's Chief Executive Officer, and the Company's Chief
Executive Officer in December 1994 Michael W. Gibbons, was determined in
accordance with Employment Agreements entered into in April 1991 and 1994.
COMPENSATION COMMITTEE. Jean R. Perrette (Chairman), Bernadette Castro, J.
Richard Cordsen, and Gary S. Vandeweghe were the members of the Compensation
Committee during 1994.
PERFORMANCE GRAPH
KRAUSE'S FURNITURE, INC., NASDAQ (U.S. COMPANIES) AND
NASDAQ HOME FURNITURE AND FURNISHINGS STORES
COMPARISON OF CUMULATIVE TOTAL RETURN FROM JULY 3, 1990 TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
Krause's NASDAQ Home Furniture and
Date Furniture, Inc. (U.S. Companies) Furnishings Stores
---- --------------- ---------------- ------------------
<S> <C> <C> <C>
07/03/90 100.0 100.0 100.0
12/31/90 39.5 82.6 66.8
12/31/91 20.4 132.6 139.0
12/31/92 26.3 154.3 148.1
12/31/93 44.7 176.1 137.6
12/31/94 44.7 172.2 122.1
</TABLE>
The above graph shows the cumulative total return assuming $100 invested
(and reinvestment of dividends) on July 3, 1990, the date on which the Company's
common stock commenced trading on NASDAQ.
The following graph shows the cumulative total return from April 30, 1991,
the day after the Company acquired control of Krause's Sofa Factory. This return
measure is more indicative of performance related to the Company's current
business and to the selected peer groups.
<PAGE> 7
PERFORMANCE GRAPH
COMPARISON OF CUMULATIVE TOTAL RETURN FROM APRIL 30, 1991 TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
Krause's NASDAQ Home Furniture and
Date Furniture, Inc. (U.S. Companies) Furnishings Stores
---- --------------- ---------------- ------------------
<S> <C> <C> <C>
04/30/91 100.0 100.0 100.0
12/31/91 77.5 122.8 137.1
12/31/92 100.0 142.8 146.1
12/31/93 170.0 164.0 135.7
12/31/94 170.0 160.3 120.5
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors are Jean
R. Perrette, Chairman of the Board of the Company, Bernadette Castro,
Commissioner, New York State Office of Parks, Recreation and Historic
Preservation, J. Richard Cordsen, Senior Vice President of United Gulf
Management, Inc., and Gary S. Vandeweghe, Secretary of the Company. Mr. Perrette
is chairman of the Compensation Committee.
Mr. Perrette is President and a director of Worms & Co., Inc. ("Worms"). Mr.
DeLitto is President of Worms Capital Management, Inc. ("WCMI"), a wholly-owned
subsidiary of Worms & Co., Inc. WCMI provided various services for the Company
and its subsidiaries in 1994, including the services of Mr. DeLitto as the
Company's Chief Executive Officer. WCMI will also provide such services in 1995.
See Item 13.
Mr. Vandeweghe performed certain legal services for the Company during 1994.
The fees for such services amounted to less than 5% of his gross revenue for
1994.
<PAGE> 8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS MANAGEMENT.
Based on the Company's records and other information obtained from Schedules
13G and 13D and Forms 4 filed with the Securities and Exchange Commission, the
following table sets forth as of April 1, 1995 all persons known to be
beneficial owners of more than 5% of the Company's voting securities as well as
share ownership of all executive officers and directors individually and as a
group.
<TABLE>
<CAPTION>
SHARES PERCENT OF SHARES
BENEFICIALLY OWNED (7) OUTSTANDING (7)
---------------------------------------- -----------------------
NAME AND ADDRESS OF COMMON SERIES A COMMON SERIES A
BENEFICIAL OWNER STOCK PREFERRED STOCK(11) STOCK PREFERRED STOCK
------------------- ------ ------------------- ------ ---------------
<S> <C> <C> <C> <C>
Maison Worms & Cie . . . . . . . . . . . . . . . 3,475,646(1) 191,533(12) 31.2% 52.5%
c/o Worms Co., Inc.
900 Third Avenue
New York, NY 10022
Permal Capital Partners, L.P. . . . . . . . . . . 1,610,913(9) 76,839 14.5% 21.1%
c/o Worms Management Corporation.
900 Third Avenue
New York, NY 10022
Michael W. Gibbons . . . . . . . . . . . . . . . 1,495,156(2) 11,698 13.1% 3.2%
Worms Capital Management, Inc. . . . . . . . . . 1,304,035 7,111 11.8% 1.9%
900 Third Avenue
New York, NY 10022
Kuwait Investment Projects Company Ltd . . . . . 869,270(9) 9,099 7.8% 2.5%
c/o United Gulf Management
176 Federal Street
Boston, MA 02110
Apex Capital, LLC . . . . . . . . . . . . . . . . 753,868 ___ 6.8% ___
Pine Grove
4 Orinda Way, Suite 240-B
Orinda, CA 94563
Kalman and Bernelle Krause . . . . . . . . . . . 615,600 ___ 5.6% ___
20620 Chatsboro Drive
Woodland Hills, CA 91364
Jean R. Perrette . . . . . . . . . . . . . . . . 576,157(3)(4)(5) 15,555 5.2% 4.3%
Robert G. Sharpe . . . . . . . . . . . . . . . . 255,266(8) 1,100 2.3% *
Bernadette Castro . . . . . . . . . . . . . . . . 207,500(15) ___ 1.8% ___
Isaac Robert Souede . . . . . . . . . . . . . . . 170,879(3)(5)(10) 5,555 1.5% 1.5%
J. Richard Cordsen . . . . . . . . . . . . . . . 151,412(3)(5) ___ 1.4% ___
Kamal G. Abdelnour . . . . . . . . . . . . . . . 73,096(3)(14) ___ * ___
</TABLE>
<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C>
Thomas M. DeLitto . . . . . . . . . . . . . . . . 65,399(3)(5) 1,637 * *
Gary S. Vandeweghe . . . . . . . . . . . . . . . 7,000(5) ___ * ___
Kenneth W. Keegan . . . . . . . . . . . . . . . . 6,310(5) ___ * ___
All executive officers and directors as
a group (10 persons) . . . . . . . . . . . . 7,763,356(6) 236,177(13) 64.3% 64.7%
</TABLE>
- ----------
*Less than 1%
(1) Maison Worms & Cie, through its affiliates, is deemed to be the
beneficial owner of shares and warrants described in this footnote.
Includes 74,928 shares owned by PFA Tiard, 485,770 shares owned by
Permal Special Opportunities Ltd., 1,304,035 shares owned by Worms
Capital Management, Inc. and 1,528,946 shares owned by Permal Capital
Partners, L.P., all of which are affiliates of Maison Worms & Cie, as
to all of which shares Maison Worms & Cie disclaims beneficial
ownership. Also includes a warrant to purchase 81,967 shares of common
stock at $3.05 per share owned by Permal Capital Partners, L.P.
(2) Includes options to purchase 369,360 shares of common stock.
(3) Jean R. Perrette and Isaac Robert Souede are executive officers of
Worms & Co., Inc., a wholly-owned subsidiary of Maison Worms & Cie.
Thomas M. DeLitto is President of Worms Capital Management, Inc., a
wholly-owned subsidiary of Worms & Co., Inc. Kamal G. Abdelnour and J.
Richard Cordsen are directors of Worms Management Corporation, an
indirect wholly-owned subsidiary of Worms & Co., Inc.
(4) Includes 1,000 shares owned by Mr. Perrette's wife and 41,000 shares
owned by Mr. Perrette's children, as to which Mr. Perrette disclaims
beneficial ownership. Also includes 100,000 shares held by Hopewell
Holdings, Inc., a family corporation controlled by Mr. Perrette.
(5) Includes an option to purchase 2,500 shares of common stock at $1.03
per share and an option to purchase 2,500 shares at $2.09 per share.
(6) Includes 3,393,679 shares of common stock and warrants to purchase
81,967 shares of common stock deemed beneficially held by Maison Worms
& Cie and its affiliates, 787,303 shares and warrants to purchase
81,967 shares held by Kuwait Investment Projects Company Ltd. and
affiliates, and 410,265 shares held beneficially by ATCO Holdings
Limited.
(7) Outstanding warrants and options held by each of the principal
stockholders, officers and directors which are exercisable currently or
within 60 days are deemed to be outstanding shares of common stock
for their respective calculations.
(8) Includes a warrant to purchase 100,000 shares of common stock at $2.00
per share.
(9) Includes a warrant to purchase 81,967 shares of common stock at $3.05
per share.
(10) Includes 52,440 shares held by Mr. Souede's wife, as to which shares
Mr. Souede disclaims beneficial ownership. Also includes 1,250 shares
held by Souede & Evans, a general partnership in which Mr. Souede holds
a 50% general partnership interest.
(11) Each share of Series A preferred stock is convertible into 10 shares of
common stock.
(12) Shares are held by affiliates of Maison Worms & Cie.
<PAGE> 10
(13) Includes shares deemed beneficially owned by Maison Worms & Cie and
Kuwait Investment Projects Company Ltd. since directors of the Company
are affiliated with those entities.
(14) Includes option to purchase 2,500 shares of common stock at $1.75 per
share, option to purchase 2,500 shares at $2.50 per share, and a
warrant to purchase 68,096 shares of common stock at $1.50 per share
held by IMC Associates, a general partnership in which Mr. Abdelnour
holds a 50% interest.
(15) Includes option to purchase 2,500 shares of common stock at $2.78 per
share and a warrant to purchase 200,000 shares of common stock at $5.00
per share held by Pentagon, in which a trust of which Ms. Castro is a
trustee and beneficiary holds a 50% interest.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and
holders of more than 10% of the Company's common stock to file with the
Commission initial reports of ownership and reports of changes in ownership of
common stock and other equity securities of the Company. The Company believes
that during the fiscal year ended December 31, 1994, its officers, directors and
holders of more than 10% of the Company's common stock complied with all Section
16(a) filing requirements, with the following exceptions: Director Bernadette
Castro filed a Form 5 on March 24, 1995 reporting directors' option for 5,000
shares of common stock granted September 21, 1994. This Form 5 was due February
14, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1994 there were a number of transactions which occurred between the
Company and its subsidiaries and certain directors and their affiliates. The
Company believes that each such arrangement was as fair as could have been
obtained from unaffiliated persons.
Financing Transactions. In May 1993 KSF entered into a $5 million secured
revolving credit arrangement with lenders including Michael W. Gibbons
($200,000), Worms ($1,000,000), Permal Capital Partners L.P. ("PCP")
($1,400,000), Permal Investment Holdings N.V., a fund managed by Worms
($2,000,000), and the Company ($400,000). Subsequently the Company purchased the
Worms position and the PCP note was reduced to $500,000. The notes were due no
later than January 15, 1995, but were paid in full in August and September 1994.
Interest at the annual rate of 17% was payable quarterly by KSF. Worms
Management Corporation, an indirect subsidiary of Worms, as agent for the
lenders, received an agency fee from the lenders equal to 1.5% per annum based
on the principal amount of notes outstanding.
In December 1992 the Company issued $15 million of Senior Secured Term Notes
to purchasers including Mr. Gibbons ($500,000), Worms ($1,200,000), PCP
($2,000,000), Permal Special Opportunities Ltd. ("PSO") ($500,000), ATCO
Holdings Limited ("ATCO") ($5,000,000) and other entities which may be deemed
affiliates of the Company. The notes were due no later than January 18, 1995
with interest, payable quarterly, at 8.5% except for the ATCO note which carried
interest at prime plus 2.5%. In late 1993 certain lenders including Mr. Gibbons,
Worms, PCP and PSO exchanged their right to receive interest in cash from
October 1, 1993 through maturity of the notes for shares of the Company's Series
A preferred stock. The notes were paid in full on August 30, 1994.
Transactions with Kenneth W. Keegan. In May 1992 KMC sold the outstanding
capital stock of its subsidiary KGE, Inc. ("KGE") to Kenneth W. Keegan, who was
the President of KMC and KGE and a director of the Company presently not
standing for reelection to the Board of Directors. The consideration for the
sale included a $300,000 five-year term note from KGE. The note bears interest
at prime plus 2% and is secured by the pledge of the outstanding stock of KGE.
Terms of the note were amended in March 1994 to provide for additional
collateral and adjusted payment terms. In April 1995 the Company received and
accepted $100,000 in full settlement of the obligations of KGE.
<PAGE> 11
Transactions with Michael W. Gibbons. On December 18, 1992 Mr. Gibbons
purchased $500,000 of the Company's Senior Secured Term Notes. In May 1993 he
loaned $200,000 to KSF as part of a $5 million secured revolving credit
arrangement with various lenders. These notes were both repaid in full in August
1994. On January 3, 1994 Mr. Gibbons received 2,455 shares of the Company's
Series A preferred stock at $22.50 per share, for interest payable from October
1, 1993 through maturity of the note. In 1994 Mr. Gibbons received $20,250 for
interest on the secured revolving credit note. See "Financing Transactions"
above.
Mr. Gibbons and KSF entered into an Employment Agreement effective April 29,
1994 providing for salary and bonus. Under the Employment Agreement Mr. Gibbons
served as Chief Executive Officer of KSF. The Agreement provided for a base
salary of $225,000 in the first year with minimum annual increases of $5,000. No
bonus has been paid or accrued to date under the agreement.
Mr. Gibbons resigned as Chief Executive Officer of the Company and KSF in
April 1995. Pursuant to a severance agreement between the Company and Mr.
Gibbons, he is to receive certain severance payments. In addition, so long as
Mr. Gibbons continues to own at least 500,000 shares of the Company's common
stock, management of the Company shall include Mr. Gibbons among its slate of
nominees for election to the Company's Board of Directors and shall use its best
efforts to cause any shares under the control of management and its affiliates
to vote in favor of the election of Mr. Gibbons to the Board. The severance
arrangements also confer a put option on Mr. Gibbons, entitling him, at his
option, over a period expiring April 30, 2002, to sell his shares to the Company
at a price of $1.60 per share, with downward adjustments in certain instances.
The Company must accept an exercise of the put option in a minimum aggregate
purchase price for the shares being put in any month of $20,000 or after January
1996, of $25,000. The Company's obligation to purchase shares in excess of the
minimum, up to a maximum of $80,000 in any given month, is tied to a formula of
available cash. The Company is also given a call option with respect to Mr.
Gibbons' shares, which entitles the Company to purchase his shares at an initial
price of $2.07 per share; the call purchase price increases by 15% as of May 1
each year during the seven-year put/call option term.
Transactions with Bernadette Castro. In May 1993 KSF purchased for $3.3
million the retail assets of Castro Convertible Corporation, which name was
subsequently changed to Pentagon Group, Inc. ("Pentagon"). In connection with
this purchase KSF and Ms. Castro entered into a one-year consulting agreement
providing for compensation of $100,000 and a five-year non-competition
agreement. During 1994 KSF paid a total of $140,000 to Ms. Castro pursuant to
the consulting and non-competition agreements.
KSF leases 13 showrooms from Ms. Castro, her family and various entities
controlled by the Castro family. During 1994 KSF paid approximately
$945,000 for rents under these leases. In addition KSF purchased certain
products and sofabed mechanisms from Pentagon. Purchases by KSF of such products
and components totalled approximately $262,000 in 1994.
Transactions with Kalman and Bernelle Krause. KSF leases eight showrooms
from Kalman and Bernelle Krause and through an entity controlled by Mr. and Mrs.
Krause. During 1994 KSF paid approximately $1,400,000 for rents under these
leases.
Transactions with WCMI. In 1994 WCMI provided various management services
for the Company and its subsidiaries for which WCMI received $200,000. WCMI's
executive management services (Thomas M. DeLitto, President of WCMI, served as
President and Chief Executive Officer of the Company from January to December
1994 and is presently serving as Chief Executive Officer since April 1995)
included significant assistance with regard to the Company's financial,
strategic, and merger, acquisition and divestiture activities during the year.
See "Financing Transactions" above.
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KRAUSE'S FURNITURE, INC.
Date: May 1, 1995 By: /s/ Robert G. Sharpe
------------------------------
Robert G. Sharpe
Executive Vice President
Corporate Development
and Treasurer
