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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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 February 2, 1997
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
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.)
200 NORTH BERRY STREET, BREA, CALIFORNIA 92821-3903
(Address of principal executive offices) (Zip Code)
(714) 990-3100
(Registrant's telephone number, including area code)
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
As of March 31, 1997 the aggregate market value of Registrant's $.001
par value Common Stock held by non-affiliates was approximately $13,500,000
based on the closing price for the stock. As of March 31, 1997 there were
19,020,539 shares of $.001 par value Common Stock outstanding.
Documents Incorporated by Reference: Proxy Statement for 1997 Annual
Meeting of Stockholders with respect to information required in Part III.
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This Report on Form 10-K contains certain forward-looking statements
that are based on current expectations. In light of the important factors that
can materially affect results, including those set forth in this Form 10-K, the
inclusion of forward-looking information herein should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company may encounter competitive,
financial and business challenges making it more difficult than expected to
continue to develop, market, manufacture and ship products on a timely basis;
competitive conditions may change adversely; demand for the Company's products
may weaken; the market may not accept the Company's merchandising strategies
and products; the Company may be unable to retain existing key management
personnel; the Company's forecasts may not accurately anticipate customer
demand; and there may be other material adverse changes in the Company's
operations or business. Certain important factors affecting the
forward-looking statements made herein include, but are not limited to (i)
timely identifying, designing, and delivering new products as well as enhancing
existing products, (ii) implementing current strategic plans, (iii) accurately
forecasting capital expenditures, and (iv) obtaining new sources of external
financing. Assumptions relating to budgeting, marketing, advertising, product
development and other management decisions are subjective in many respects and
thus susceptible to interpretations and periodic revisions based on actual
experiences and business developments, the impact of which may cause the
Company to alter its marketing, advertising, capital expenditure or other
budgets, which may in turn affect the Company's financial position and results
of operations.
PART I
ITEM 1. BUSINESS
CORPORATE HISTORY. Krause's Furniture, Inc. (the "Company") is a
Delaware corporation which is publicly traded on the Nasdaq Small Cap Market
(trading symbol SOFA). The Company changed its name to Krause's Furniture,
Inc. in December 1994. The former name was Worth Corporation, which had a
NASDAQ trading symbol of WRTH until December 12, 1994. The Company's executive
offices are located at 200 North Berry Street, Brea, California 92821-3903, its
telephone number is (714) 990-3100 and its facsimile number is (714) 990-3561.
The Company's business is primarily conducted through its wholly owned
subsidiary, Krause's Sofa Factory ("Krause's"), a manufacturer and retailer of
made-to-order upholstered furniture. In April 1991 the Company acquired a
controlling interest in Krause's for approximately $6.2 million. On October
31, 1993, the Company acquired by merger the then outstanding minority interest
in Krause's through an exchange of stock. Each of Krause's minority
shareholders received 3.24 shares of the Company's common stock for each share
of Krause's capital stock. Krause's was started in San Diego, California in
1973. Originally incorporated as The Sofa Factory, it changed its name to
Krause's Sofa Factory in 1984.
In May 1993 Krause's acquired certain assets related to the retail
operations of Castro Convertible Corporation, including the "Castro
Convertibles" tradename and trademark and retail store locations. Castro
Convertibles, which was started in 1931, has been known throughout the East
Coast for its quality sofabed products and was an early pioneer in developing
the tri-fold sofabed mechanism. Krause's manufactures products for sale
through the Castro stores and dealerships. Descriptions of the businesses,
products, manufacturing and other information of Krause's are outlined in the
following sections of this report.
In August 1994 the Company sold its 18% ownership interest in Mr.
Coffee, inc. ("Mr. Coffee") to Health o meter Products, Inc. for cash totaling
$23.3 million. The Company had purchased its equity position in Mr. Coffee
through various stock purchases and exchanges commencing in February 1988. Mr.
Coffee was the leading producer of automatic drip coffeemakers in the United
States and also manufactured other small kitchen appliances.
In April 1995 the Company changed from a calendar year-end to a fiscal
year-ending on the last Sunday of January as determined by the 52/53 retail
fiscal year. The Company's 1996 fiscal year ended February 2, 1997.
On August 26, 1996 and September 10, 1996, the Company completed
transactions with investors in which the Company received cash proceeds of
$15,669,000 from financings through issuances of $10,669,000 of common stock, at
$1 per share, and a $5,000,000 subordinated note with a warrant to purchase
1,400,000 shares of common stock at $.001 per share. In addition, $3,066,251 of
convertible and demand notes and related interest was exchanged for 3,066,251
shares of common stock and outstanding Series A preferred stock was converted
into 1,176,950 shares of common stock Subsequent to the financing, the Company's
management underwent a substantial restructuring and a new strategic plan was
developed for the business.
BUSINESS. Krause's manufactures made-to-order sofas, sofabeds,
loveseats and chairs, and retails these products (as well as externally-sourced
furniture and home furnishings products) through its own chain of retail
showrooms as well as licensed dealerships. As of February 2, 1997 there were
82 company-owned showrooms and two dealers in 12 states. The distinctive
competitive characteristic of Krause's is its ability to manufacture and supply
competitively priced made-to-order upholstered
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furniture in two to four weeks from the date ordered by the customer.
PRODUCTS. Krause's focus is the manufacture and sale of high-quality,
affordably-priced made-to-order upholstered furniture. Its product line
consists primarily of upholstered (woven fabric and leather) sofas, sofabeds,
chairs and sectionals, in a wide variety of styles and sizes. Except for a few
styles of occasional and reclining chairs, Krause's manufactures virtually all
of its upholstered furniture, which in fiscal year 1996 accounted for
approximately 94% of its net sales. Krause's manufactured upholstered
furniture is currently sold exclusively through its own leased retail showrooms
and licensed dealers. In addition to its exclusive upholstered furniture line,
Krause's retails an assortment of tables, occasional chairs, dining sets, area
rugs, lamps and other accessories. Merchandise purchased from other suppliers
in fiscal year 1996 accounted for approximately 6% of net sales.
Customers of Krause's may choose from approximately 60 different
styles, 40 sizes, 800 fabrics, 50 leather choices, and various weltings. The
upholstered furniture product line consists of the following:
SOFAS. Stationary upholstered sofas account for the largest
proportion of Krause's sales. Sofa styles range from classic
traditional, to contemporary, to country, to Eurostyles.
INCLINERS. Krause's manufactures its own design of incliners, which
are sofas, loveseats or chairs which include a modified incliner
footrest mechanism built directly into the unit. Krause's believes
it is the only retailer which offers an incliner option in the
customer's choice of style, size and fabric.
RECLINERS. Fully reclining sofas and chairs are offered as an option
in a number of sofas and chairs manufactured by Krause's. It offers
not only fully reclining sofas but also a complete line of reclining
chairs. Krause's believes it offers more reclining options in the
customer's choice of style, size and fabrics than most competitors.
SECTIONALS. Sectionals are modular units of upholstered furniture
which can be combined or separated to form any variety of seating
arrangements desired. Krause's offers and manufactures a sectional
option for most styles of its sofas.
SOFABEDS. Krause's has developed an enhanced sofabed mechanism to take
advantage of its unique position in sofabed retailing. Krause's
offers a super-queen mattress, which Krause's believes is wider than
most other sofabed mattresses offered in the United States. Although
producing only for its own retail outlets and licensed dealers,
Krause's believes it is one of the top 10 retailers of sofabeds in the
U.S.
CHAIRS. Krause's manufactures a complementary line of upholstered
chairs, which coordinate or match with most of the sofa styles it
offers. Usually these chairs are sold in sets with a sofa, loveseat,
incliner, recliner and/or sofabed. Krause's also manufactures
occasional chairs for customers who desire a chair which coordinates
with but does not match the style or fabric of their primary
furnishings.
In order to respond to customer needs and desires as well as to
display its own sofas and upholstered products in room settings, Krause's
showrooms offer a variety of complementary products purchased from outside
vendors. Some of these products may not be customized. Because of its
made-to-order strategy, Krause's does not require a substantial amount of
finished goods, whether they are manufactured by Krause's or purchased from
outside sources.
RETAIL OPERATIONS. Krause's sells its products through company-owned
and licensed retail showrooms in 12 states. Retail showrooms located in
California, Colorado, Arizona, Nevada, Texas, New Mexico, Washington and
Illinois are operated under the name KRAUSE'S SOFA FACTORY(R) or KRAUSE'S
SOFAS(R). Retail showrooms in New York, New Jersey, Connecticut and Florida
are operated under the name CASTRO CONVERTIBLES(R). Showroom locations are
selected on the basis of strictly defined criteria, including expected
population growth, desirable target consumer demographics and psychographics,
high visibility with easy access from major thoroughfares, adequate parking
facilities and proximity to other furniture retailers.
Retail showrooms vary in size from 1,700 square feet to 24,000 square
feet, with an average size of 13,500 square feet. The typical showroom
displays approximately 50 to 60 styles in coordinated furniture groupings to
illustrate the diversity and availability of contemporary and traditional
upholstered furniture.
When a customer makes a selection, a down payment is collected and
the order is immediately entered in the computer system at Krause's by means of
an on-line terminal at the showroom. The order, reflecting the customer's
exact specifications as
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to style, color, size, configuration and fabric, is then registered and
scheduled at Krause's manufacturing facility and the manufacturing or outside
purchasing process begins.
When an order has completed the manufacturing and/or outside
purchasing process, it is shipped to a regional warehouse. The manager at this
warehouse has responsibility for the final preparation and delivery of the
order to the customer. Outside delivery services, as well as Krause's
personnel in certain areas, are utilized for this process.
MANUFACTURING. Krause's manufacturing facilities, located in Brea,
California, produce upholstered furniture for sale through Krause's and Castro
Convertibles showrooms. Manufacturing begins with the purchase of lumber
(hardwood and softwood), which is kiln dried for extra strength and
straightness. Mill workers cut the component pieces for each different style,
working to precise standards. Craftsmen, using pneumatic and power tools, take
the wooden parts and assemble them into frames for different furniture models.
All corners are blocked and glued for added strength and proper distribution of
weight and stress.
Krause's primarily uses a one-piece frame method in which the entire
frame is built before any upholstering occurs. This method results in superior
frame strength for a finer tailored appearance. Frame construction is
completed with the installation of metal springs, which contributes to the
continued comfort, durability and appearance of the upholstered furniture.
While the frame is being built, the chosen fabric or leather for that
particular customer order is cut and sewn. Krause's employs quilters as well
as special seamstresses for sewing zippers, bolster covers, ruffles, skirts
and pleats. The pillow back, chair back, and ottoman cushions are assembled
prior to proceeding to the upholstery stage.
Upholstery is performed using an assembly line technique. Several
individuals work on each frame, each specializing in an area of responsibility
- - springs, outside body, seat, arm, inside body and so on. As the frame is
being upholstered, seat cushions are filled with a Foreverflex(TM) insert
(Krause's proprietary seating material). The Foreverflex(R) cushion insert is
a high-density foam cushion which is injection molded with springs suspended
within the foam. The Foreverflex(TM) cushion insert is manufactured by an
outside supplier to strict specifications set by Krause's and carries a
lifetime guarantee.
Placement of the upholstered cushions on the furniture completes the
manufacturing process. Every piece of finished upholstered furniture undergoes
a quality control inspection during production and again prior to shipment from
the factory to the local distribution center or retail showroom.
Krause's builds approximately 500 pieces of upholstered furniture per
day in a single shift. This represents approximately 75% of single shift
manufacturing capacity. The level of production is primarily determined by
customer orders, since Krause's builds only minor amounts of units for
inventory. Krause's turns its manufacturing backlog approximately every 23 to
28 days. Backlog as of February 2, 1997 was approximately $5.7 million
compared to $7.3 million at the end of January 1996.
Many suppliers currently provide Krause's with the materials used in
the manufacture of its upholstered furniture products. Krause's ten largest
suppliers provided it with 70% of its purchased raw materials during the year
ended February 2, 1997, including one such supplier that provided approximately
18% and another that provides 9% of such raw materials. Krause's is dependent
on the continued supply of components and raw materials, including fabrics,
leather, foam and sofabed and motion mechanisms. Management constantly seeks
new suppliers and better prices through competitive bidding and the
qualification of alternative sources of supply. Inability to develop
alternative sources of supply if and as required or to obtain sufficient single
source products, components and raw materials would adversely affect the
Company's sales and operating results.
TRADEMARKS AND PATENTS. The Company holds trademarks and patents
registered in the United States for various products and processes. Krause's
has a registered trademark in the United States for the Krause's Sofa
Factory(R) and Castro Convertibles(R) names and logos. These trademarks, which
the Company considers important to its business, have expiration dates ranging
from May 13, 2002 to November 30, 2004, but are each renewable in perpetuity.
Krause's also has other trademarks, both registered and unregistered, that the
Company believes are not material to its business or to any ongoing product
lines.
GOVERNMENT REGULATIONS. The Company's facilities are subject to
numerous federal, state and local laws and regulations designed to protect the
environment from waste emissions and from hazardous substances. The Company is
also subject to the federal Occupational Safety and Health Act and other laws
and regulations affecting the safety and health of employees in the production
areas of its facilities. Management believes that it is in compliance in all
material respects with all applicable environmental and occupational safety
regulations.
EMPLOYEES. The majority of Krause's employees are not unionized and
many have been with Krause's for over 10 years.
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Approximately 50 retail employees in the greater New York area are covered by a
union contract which was negotiated in connection with the acquisition of
Castro Convertibles, and which expires in May 1998. At February 2, 1997, the
total work force numbers approximately 960 with approximately 355 engaged in
manufacturing activities, 535 in its retail/warehousing operations and 70 in
administration.
COMPETITION. The home furnishings industry is highly competitive and
fragmented, and includes competition from traditional furniture retailers,
department stores and discount and warehouse outlets. Certain companies which
compete directly with the Company have greater financial and other resources
than the Company. The Company competes on a national level with Ethan Allen
Inc., Levitz Furniture, Leather Center, Inc., Expressions and traditional
department stores, among others. The Company also competes on a regional
basis. In New York, New Jersey and Chicago, the Company's primary competitor
is Jennifer Convertibles, Inc., and in the Western United States the Company's
primary regional competitors include Homestead House, Inc., The Leather Factory
and Norwalk Furniture Corporation (the latter of which also competes in the
Midwest market). In Houston, Texas, the Company's primary regional competitor
is Star Furniture Company. Expressions, Norwalk Furniture Corporation and
Ethan Allen Inc., like the Company, manufacture their own upholstered products
and offer "made-to-order" customization similar to that provided by the
Company. Levitz Furniture primarily addresses the low to middle end "as shown"
market, whereas traditional department stores typically focus on the middle to
upper end "as shown" market.
INSURANCE. The Company purchases occurrence-based product liability
insurance in the aggregate amount of $17 million. Management believes that
based upon its historical liability experience, the amount of insurance it
carries is adequate.
ITEM 2. PROPERTIES
The Company maintains its administrative offices and manufacturing
plant in a leased 250,000 sq. ft. facility at 200 North Berry Street, Brea,
California. The lease has a remaining term of 12 years with four five-year
options and grants Krause's certain options to purchase the facility. Krause's
also leases approximately 275,000 sq. ft. for warehouse and distribution
facilities. Retail showrooms are all leased with rents either fixed or with
fixed minimums coupled with contingent rents based on the Consumer Price Index
or a percentage of sales. Krause's 82 company-operated showrooms occupy
approximately one million sq. ft. of space.
ITEM 3. LEGAL PROCEEDINGS
On May 27, 1994, the Company was served with a complaint in the case
captioned Miriam Brown v. Mr. Coffee, inc. et al. (Civil Action No. 13531), in
the Delaware Court of Chancery, New Castle County. The complaint names the
Company, Mr. Coffee and certain individuals including Jean R. Perrette and
Kenneth W. Keegan, both former directors and officers of the Company, as
defendants in a purported class action lawsuit. The complaint alleges that the
individuals named as co-defendants breached their fiduciary duties as directors
of Mr. Coffee by, among other things, their alleged efforts to entrench
themselves in office and prevent Mr. Coffee's public shareholders from
maximizing the value of their holdings, engaging in plans and schemes
unlawfully to thwart offers and proposals from third parties, and approving or
causing the Company and others to agree to vote in favor of a merger with
Health o meter Products, Inc. The Company is alleged to have participated in
and advanced the alleged breaches. The plaintiff originally sought to enjoin
the merger; however, plaintiff withdrew such action and the merger was
completed in August 1994. The Company and the Mr. Coffee directors filed
motions to dismiss the complaint on August 11, 1994. On October 9, 1996, the
plaintiff filed a second amended complaint. All defendants subsequently joined
in filing a motion to dismiss the complaint. The plaintiff seeks compensatory
damages and costs and disbursements in connection with the action, including
attorneys' and experts' fees, and such other further relief as the court deems
just and proper.
For a number of reasons, including the extensive solicitation and
negotiation process which preceded the acceptance by Mr. Coffee's Board of
Directors of the Health o meter offer, the Company believes that the
plaintiff's allegations are without merit. Management believes that any
liability in the event of final adverse determination of any of this matter
would not be material to the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the Nasdaq Small-Cap Market under
the ticker symbol SOFA. The following table sets forth the high (ask) and low
(bid) per share prices for the Company's common stock for each quarter during
the 1996 (53 weeks ended February 2, 1997) and 1995 (52 weeks ended January 28,
1996) fiscal years. Quotations are as reported by NASDAQ, adjusted for
periods prior to August 1, 1995 to reflect a one for three reverse stock split,
effective on that date.
<TABLE>
<CAPTION>
1996 1995
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Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C>
First . . . . . . . . . $2.56 $ .88 $6.75 $4.87
Second . . . . . . . . . 1.63 .69 6.37 3.00
Third . . . . . . . . . 2.19 .50 4.37 2.00
Fourth . . . . . . . . . 2.13 1.00 3.00 1.63
</TABLE>
As of February 2, 1997, there were approximately 400 holders of record
of the Company's common stock. The Company has paid no dividends to date and
does not expect to do so in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following data for each of the five years in the period ending
February 2, 1997 and for the month ended January 29, 1995, has been derived
from consolidated financial statements that have been audited by Ernst & Young
LLP, independent auditors. The information set forth below for the month ended
January 30, 1994 is unaudited. The information set forth below is not
necessarily indicative of the results of future operations and should be read
in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Fiscal Year Ended Month Ended
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February 2, January 28, December 31, December 31, December 31, January 29, January 30,
1997 (4) 1996 (4) 1994 1993 1992 1995 1994 (5)
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(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales $112,737 $122,319 $116,471 $ 96,894 $ 87,045 $ 7,179 $ 7,326
Gross profit 56,247 62,467 62,949 50,792 45,688 3,532 3,807
Loss from operations (12,447) (9,388) (2,398) (7,852) (5,982) (3,231) (2,041)
Gain from sale of Mr. Coffee
stock (2) - - 12,115 - - - -
Income (loss) before
extraordinary items (13,389) (8,715) 5,831 (9,751) (3,641) (3,221) (2,185)
Extraordinary items (3) - - (436) (221) 3,330 - -
Net income (loss) (13,389) (8,715) 5,395 (9,972) (311) (3,221) (2,185)
Income (loss) per share (1):
Income (loss) before
extraordinary items (1.28) (2.21) 1.08 (3.88) (1.84) (.87) (.63)
Extraordinary items - - (0.08) (0.09) 1.68 - -
Numbert of shares used in $ (1.28) $ (2.21) $ 1.00 $ (3.97) $ (0.16) $ (0.87) $ (.63)
computing income (loss)
per share (1) 10,445 3,950 5,394 2,510 1,982 3,685 3,490
</TABLE>
<TABLE>
<CAPTION>
February 2, January 28, January 29, December 31, December 31,
1997 1996 1995 1993 1992
----------- ----------- ----------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $43,087 $46,866 $53,750 $64,749 $47,730
Inventories 14,013 14,627 18,016 14,690 11,468
Working capital deficiency (2,182) (6,878) (3,751) (1,404) (3,603)
Intangible assets 16,890 18,236 19,910 22,826 16,425
Short-term debt (2) 41 19 17 1,147 458
Long-term debt (2) 6,306 5,584 2,181 17,700 15,500
Stockholders' equity 15,543 13,985 22,700 20,626 11,170
</TABLE>
- -----------------------
1. Previously reported share and per share amounts have been restated to
reflect a one-for three reverse stock split effected August 1, 1995.
2. In August 1994 the Company sold its ownership of 1,500,548 shares of Mr.
Coffee common stock for cash of $23.3 million. Proceeds from this sale were
used to retire debt of $18.3 million and pay income taxes of $2.1 million
with the remainder used for working capital.
3. Represents gain or loss from early debt retirement.
4. In April 1995 the Company changed from a calendar year-end to a fiscal year
ending on the last Sunday in January as determined by the 52/53 week retail
fiscal year. In connection with the change in fiscal periods, the Company
reported a net loss of $3,221,000 for the month ended January 29, 1995. The
fiscal year ended February 2, 1997 is a 53-week period and the fiscal year
ended January 28, 1996 is a 52-week period.
5. Average weekly sales (shipments) in January are lower than other months due
to seasonally low order rates in the last three weeks of December.
Therefore, the operating loss reported in January is higher than other
months in the fiscal years presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere herein.
The Company has reported losses from operations in each of the past
five years due to inefficiencies within its operations and due to an
industry-wide softness in retail sales. As a result of such losses, the
Company had an accumulated deficit of $34,350,000 and a working capital
deficiency of $2,182,000 at February 2, 1997. The Company expects operating
losses in fiscal year 1997.
The Company's management, which underwent a substantial restructuring
after the 1996 financings, has developed a strategic plan for the business
which provides, among other things, for remodeling showrooms to provide a more
appealing setting for customers, increasing product prices to competitive
levels, reducing promotional discounting, reconfiguring selling commissions,
remerchandising, refocusing advertising, improving the manufacturing processes
and reducing expenses through budgetary controls. Many of these plans were
implemented in the latter part of fiscal 1996 and are expected to contribute
significantly to reducing losses and ultimately returning the Company to
profitability; however, there can be no assurance that the Company will achieve
profitability. Management believes that the Company has sufficient sources of
financing to continue operations throughout fiscal 1997. However, the
Company's long-term success is dependent upon management's ability to
successfully execute its strategic plan and, ultimately, to achieve sustained
profitable operations
LIQUIDITY AND CAPITAL RESOURCES
As of February 2, 1997, the Company had cash and cash equivalents of
$1,227,000 and borrowing capacity under its revolving credit agreement of
$4,057,000. Cash flow activity for the fiscal years ended February 2, 1997,
January 28, 1996 and December 31, 1994 and the months ended January 29, 1995
and January 30, 1994, is presented in the Consolidated Statements of Cash
Flows.
1996 Cash Flow. During fiscal 1996 cash and cash equivalents
decreased by $109,000. Operating activities used net cash of $14,315,000,
principally from a cash loss from operations of $10,210,000 (the cash loss from
operations for the first half of fiscal 1996 was $8,638,000 and $1,572,000 for
the second half) and decreases in accounts payable and other liabilities of
$6,081,000, offset principally by a decrease in inventories of $614,000 and
collections of income tax refund receivables of $1,467,000. Investing
activities during the year included capital expenditures of $806,000,
principally for additions to leasehold improvements at certain retail
showrooms. Financing activities during fiscal 1996 were comprised principally
of proceeds from issuances of common stock of $10,669,000 less expenses of
$448,000, proceeds of $2,950,000 from issuances of convertible and demand notes
(subsequently converted into common stock, together with interest of $116,000)
and the issuance of a subordinated note of $5,000,000, offset by net payments
of $3,516,000 under the Company's revolving credit facility.
1995 Cash Flow. During fiscal 1995 cash and cash equivalents
decreased by $616,000. Operating activities used net cash of $3,177,000,
principally from a cash loss from operations of $4,752,000 offset by a net
change in operating assets and liabilities of $1,575,000. Inventories and
other operating assets were reduced by $3,389.000 and $147,000, respectively,
while accounts payable and accrued liabilities were reduced by $1,961,000.
Investing activities during the year included capital expenditures of
$1,883,000, primarily related to the opening of four new showrooms and
remodeling of four showrooms partially offset by $1,039,000 of proceeds from
the sale-leaseback of a showroom in Texas. Financing activities in fiscal 1995
of $3,405,000 were principally net borrowings under Krause's revolving credit
agreement which was entered into in January 1995.
1994 Cash Flow. In August 1994 the Company sold its ownership of
1,500,548 shares of Mr. Coffee common stock for cash of $23,258,000. Proceeds
from this sale were used to retire debt of $18,317,000 and pay income taxes of
$2,100,000, with the remainder used for working capital.
During 1994 cash and cash equivalents decreased by $4,685,000.
Operating activities used net cash of $6,877,000, principally from a cash loss
from operations of $2,986,000 and a change in operating assets and liabilities
of $3,891,000. Inventories and other operating assets increased by $2,567,000
and $813,000, respectively, while accounts payable and accrued liabilities were
reduced by $511,000. Investing activities provided cash of $20,935,000 in 1994
including the Mr. Coffee sale proceeds mentioned above, offset by capital
expenditures of $2,323,000, primarily related to Krause's opening of 10 new
showrooms and remodeling of three showrooms during the year. Financing
activities used net cash of $18,743,000 and were
8
<PAGE> 9
comprised primarily of debt repayments to related parties.
Other Matters. In fiscal 1997, management plans to remodel and
upgrade certain of its showrooms at a cost of approximately $1,500,000. Such
capital expenditures are expected to be funded by internally generated cash and
borrowings under the Company's revolving credit facility. The Company is not
committed to any significant capital expenditures.
The aggregate annual maturities of long-term debt during each of the
five fiscal years subsequent to February 2, 1997 are approximately as follows:
$41,000 in 1997, $74,000 in 1998, $4,111,000 in 1999, $2,098,000 in 2000, and
$1,286,000 in 2001. Management anticipates such payments will be made out of
operating cash flow.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
from the Company's Consolidated Statement of Operations as a percentage of net
sales.
<TABLE>
<CAPTION>
Fiscal Year Ended Month Ended
------------------------------------------ -------------------------
February 2, January 28, December 31, January 29, January 30,
1997 1996 1994 1995 1994
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 50.1 48.9 46.0 50.8 48.0
------ ------ ------ ------ ------
Gross profit 49.9 51.1 54.0 49.2 52.0
Operating expenses:
Selling 51.1 49.3 45.9 75.9 67.4
General and administrative 9.0 8.7 9.3 17.1 11.3
Amortization of goodwill 0.9 0.8 0.9 1.2 1.2
------ ------ ------ ------ ------
61.0 58.8 56.1 94.2 79.9
------ ------ ------ ------ ------
Loss from operations (11.1) (7.7) (2.1) (45.0) (27.9)
Interest expense (1.1) (0.6) (1.8) (0.2) (3.5)
Other income 0.3 0.1 10.8 0.3 1.6
------ ------ ------ ------ ------
Income (loss) before income taxes
and extraordinary items (11.9) (8.2) 6.9 (44.9) (29.8)
Provision (benefit) for income taxes (1.1) 1.9 - -
------ ------ ------ ------ ------
Income (loss) before extraordinary items (11.9) (7.1) 5.0 (44.9) (29.8)
Extraordinary items - - (0.4) - -
------ ------ ------ ------ ------
Net income (loss) (11.9)% (7.1)% 4.6% (44.9)% (29.8)%
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
STORE (SHOWROOM) DATA Fiscal Year Ended Month Ended
------------------------------------------ -------------------------
February 2, January 28, December 31, January 29, January 30,
1997 1996 1994 1995 1994
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stores open at beginning of period
83 89 87 89 87
Stores opened during period
1 4 10 - -
Stores closed during period
------ ------ ------ ------ ------
2 10 8 1 -
Stores open at end of period
82 83 89 88 87
Average sales per showroom(1) $1,361 $1,432 $1,373 $ 82 $ 84
Comparable store sales increase (decrease)(2) (6.0%) (2.9%) 11.7% (8.6%) (1.1%)
</TABLE>
(1) Based upon the weighted average number of stores open during the period
indicated.
(2) Comparable store sales are calculated by excluding the net sales of any
store for any month of the period if the store was not open during the
same month of the prior period. Also, a store opened at any time during
the month is deemed to have been open for the entire month.
9
<PAGE> 10
53 WEEKS ENDED FEBRUARY 2, 1997 (FISCAL 1996) AS COMPARED TO 52 WEEKS ENDED
JANUARY 28, 1996 (FISCAL 1995)
Net Sales. Sales were $112,737,000 in fiscal 1996, a decrease of 7.8%
from sales in fiscal 1995; same store sales decreased 6.0% between years. The
sales decrease was due to a combination of factors including (1) an
industry-wide softness in retail sales, (2) insufficient cash during the first
eight months of fiscal 1996 to timely purchase raw materials needed for the
manufacture of customer orders, and (3) the Company's decision in the third
quarter of fiscal 1996 to raise prices to competitive levels and reduce
promotional discounting.
Gross Profit. Gross profit was 49.9% of net sales in fiscal 1996 as
compared to 51.1% in fiscal 1995. Lower gross profit in fiscal 1996 resulted
from extensive promotional discounting during the first half of 1996 and
changes in the mix of products sold. As noted above, the Company increased
product prices and reduced promotional discounting in the second half of
fiscal 1996 which contributed to an overall improvement in gross profit from
47.1% for the 26 weeks ended July 28, 1996 to 52.7% for the 27 weeks ended
February 2, 1997.
Operating Expenses. Selling expenses for fiscal 1996 were $57,573,000,
representing a decrease of $2,684,000 from fiscal 1995. Selling expenses were
51.1% of net sales in fiscal 1996 as compared to 49.3% in fiscal 1995. Selling
expenses increased as a percentage of sales primarily due to fixed showroom
expenses applied to lower sales volume. Also, commissions, delivery expenses
and advertising expenses were higher as a percentage of sales, offset in part by
certain expenses which were lower as a result of having fewer stores operating
in fiscal 1996. Showroom preopening expenses are a component of the Company's
selling expenses. The Company has historically capitalized these expenses and
amortized them over periods ranging from 12-24 months subsequent to the opening
of the showroom. In future periods the Company intends to amortize these
expenses for new showrooms over a period of not more than 12 months subsequent
to opening of the showroom. Management believes that had it reduced the
amortization period to a minimum of 12 months in any of the periods presented in
the consolidated financial statements, such reduction would not have had a
material effect on the Company's consolidated financial position or results of
operations.
General and Administrative Expense. General and administrative
expenses increased as a percentage of sales from 8.7% to 9.0% due primarily to
a lower sales base in fiscal 1996; however, in total dollars, general and
administrative expenses decreased by $477,000 due principally to general cost
reductions offset somewhat by higher employee termination expenses and
professional fees.
Interest Expense. Interest expense in fiscal 1996 increased by
$509,000, due principally to higher average debt outstanding compared to the
prior year.
Income Taxes. Income tax benefits of $1,327,000 in fiscal 1995 represent
refundable income taxes available from carryback of 1995 losses. There were no
carryback benefits recorded in fiscal 1996 and none are available in future
periods.
As of February 2, 1997 the Company has federal net operating loss
carryforwards of approximately $32 million which begin to expire in 2003, if
not utilized. As a result of various equity transactions, one of the Company's
subsidiaries has experienced change of ownership as defined in the Internal
Revenue Code. As a result of these ownership changes and other provisions of
the Internal Revenue Code, utilization of approximately $10 million of these
net operating loss carryforwards is limited to the future income of one of the
Company's subsidiaries and is further limited to approximately $1 million per
year on a cumulative basis. As of February 2, 1997, approximately $3 million
of the limited losses were available. In addition, the Company had state net
operating loss carryforwards of approximately $14 million which begin to expire
in the year 1997, if not utilized.
The valuation allowance for deferred tax assets totaled $8,310,000 at
January 28, 1996 and $13,643,000 at February 2, 1997. The valuation allowance
increased since the realization of net deferred tax assets is uncertain.
Net Loss. Although net loss in fiscal 1996 increased to $13,389,000 from
$8,715,000 in fiscal 1995, an increase of 54%, net loss per share decreased to
$1.28 in fiscal 1996 as compared to $2.21 in fiscal 1995, a decrease of 42%.
The discrepancy is due to the increase in the weighted average number of
Company shares outstanding from 3,950,000 in fiscal 1995 to 10,445,000 in
fiscal 1996 attributable to the issuance of 14,912,000 shares of the Company's
common stock in connection with the August and September 1996 financings
discussed above.
10
<PAGE> 11
52 WEEKS ENDED JANUARY 28, 1996 (FISCAL 1995) AS COMPARED TO YEAR ENDED
DECEMBER 31, 1994
Net Sales. Sales were $122,319,000 in fiscal 1995, an increase of 5.0%
from sales in 1994. The sales increase was primarily from sales of stores
opened in late 1994 and early 1995, which were offset somewhat by a decrease in
sales of stores open more than one year. Management believes that the sales
increase was not significantly attributable to increases in prices or increases
in sales volume for goods sold in existing stores or to the introduction of new
products being sold in comparable stores. During fiscal 1995 the Company opened
four new stores, relocated four stores and closed ten underperforming stores.
A comparable store sales decline of 2.9% was primarily the result of general
economic conditions in fiscal 1995 compared to 1994.
Cost of Sales and Gross Profits. Cost of sales was higher by
approximately 11.8% in fiscal 1995 compared to 1994. Gross profits in fiscal
1995 were 51.1% compared to 54.0% in 1994. Lower gross profits in fiscal 1995
were due to price discounting and clearance merchandise sales necessary to
generate sales due to increased competition and generally poor economic
conditions in the Company's two major markets, California and New York. In
addition, the Company provided approximately $760,000 to reduce certain
showroom inventory to its estimated net realizable value in fiscal 1995.
During the fourth quarter of fiscal 1995, the Company experienced a shortage of
fabric for expected production. This fabric out-of-stock position caused a
disruption in operations, which had the effect of increasing labor costs per
unit and thereby reducing profits. Profit erosion also occurred since
additional discounts were given to customers due to delivery delays. The
out-of- stock position returned to normal levels in fiscal 1996.
Operating Expenses. Selling expenses were $60,257,000 in fiscal 1995, an
increase of approximately 12.7% from 1994. Selling expenses were 49.3% of
sales compared to 45.9% in 1994. The increase in total selling expenses was
principally attributable to higher sales incentives and operating costs
associated with new stores. Variable selling expenses and advertising expenses
as a percentage of sales are expected to decline in future periods.
General and administrative expenses declined by $289,000 and as a
percentage of sales declined to 8.7% from 9.3%. Exclusive of employee
severance costs in fiscal 1995 of approximately $800,000, general and
administrative expenses were 8% of sales. General and administrative expenses,
exclusive of employee severance costs, declined by over $1,000,000 principally
from reductions in payroll and related expenses.
Interest Expense. Interest expense decreased by $1,419,000 in fiscal 1995
due to significantly less debt outstanding. In August and September 1994 the
Company paid off approximately $18,300,000 million of debt with proceeds from
the sale of its investment in Mr. Coffee.
Investment in Mr. Coffee: The Company's investment in Mr. Coffee was
accounted for by the equity method which resulted in equity in earnings of
$316,000 in 1994. The Company sold its investment in Mr. Coffee in August
1994.
Income Taxes. Income tax benefits of $1,327,000 represent refundable
income taxes available from the carryback of fiscal 1995 losses.
MONTH ENDED JANUARY 29, 1995 COMPARED TO MONTH ENDED JANUARY 30, 1994
Results of operations for the month of January are not indicative of
results for the full year since January has the lowest average weekly shipments
of any month due to seasonally low orders during the last three weeks of
December. The late December orders are normally shipped January when the sale
is recorded. The low January sales and profits are not sufficient to cover
certain fixed selling expenses and general and administrative expenses, which
resulted in substantial operating losses during the respective periods.
Net sales for January 1995 were $7,179,000 which was a decrease of
approximately 2.0% from net sales in January 1994. The decrease was primarily
attributable to a lower backlog position in the 1995 period.
Gross profit was 49.2% of net sales in January 1995 compared to 52.0% in
January 1994. The lower gross profits resulted from more product discounting
and higher freight costs associated with proportionately higher sales in the
East and a higher level of customer credits.
11
<PAGE> 12
Selling expenses were $5,446,000 in January 1995 and $4,935,000 in January
1994. The increase was principally due to higher advertising expenses in 1995
offset by lower selling expenses attributable to lower sales volume.
General and administrative expenses increased by $404,000 to $1,317,000 in
January 1995 from the prior year period. General administrative expenses were
higher in the 1995 period principally because of higher personnel costs and
employee termination expenses.
Interest expense decreased by $246,000 in January 1995 compared to January
1994 due principally to significantly less debt outstanding in 1995.
The Company's investment in Mr. Coffee was accounted for by the equity
method and the Company recorded equity in earnings from Mr. Coffee of $93,000
in January 1994. The Company sold its investment in Mr. Coffee in August 1994.
As a result of the above factors, the net loss was $3,221,000 in January
1995 compared to a net loss of $2,185,000 in January 1994. Net loss per share
in January 1995 was $.87 based on 3,865,000 average shares outstanding. In the
comparable 1994 period, the net loss per share was $.63 on 3,490,000 average
shares outstanding.
No tax benefits were available for the January 1995 or 1994 operating
losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Items 10 through 13 of this Part is
incorporated by reference from the Company's Proxy Statement, under the
captions "Election of Directors", "Security Ownership of Certain Beneficial
Owners and Management", "Compensation of Executive Officers" and "Certain
Relationships and Related Transactions", which Proxy Statement will be mailed
to stockholders in connection with the Company's annual meeting of stockholders
which is scheduled to be held on May 29, 1997.
12
<PAGE> 13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 16
Consolidated Balance Sheet at February 2, 1997 and January 28, 1996 17
Consolidated Statement of Operations for the years ended February 2, 1997,
January 28, 1996 and December 31, 1994 18
Consolidated Statement of Stockholders' Equity for the period from December 31, 1993 to
February 2, 1997 19
Consolidated Statement of Cash Flows for the years ended February 2, 1997,
January 28, 1996 and December 31, 1994 20
Consolidated Statement of Operations for the months ended January 29, 1995 and
January 30, 1994 21
Consolidated Statement of Cash Flows for the months ended January 29, 1995 and
January 30, 1994. 22
Notes to Consolidated Financial Statements 23
Schedule II - Valuation and Qualifying Accounts 33
Schedules I, III, IV, and V have been omitted since they are not applicable.
</TABLE>
13
<PAGE> 14
(a) (3) EXHIBITS
<TABLE>
<S> <C>
3.1 Certificate of Incorporation. (1)
3.1(a) Certificate of Amendment of Certificate of Incorporation dated November 28, 1994. (5)
3.1(b) Certificate of Amendment of Certificate of Incorporation dated August 1, 1995.(6)
3.1(c) Certificate of Amendment of Certificate of Incorporation dated June 7,1996.(7)
3.1(d) Certificate of Amendment of Certificate of Incorporation dated August 1, 1996.(7)
3.2 By Laws.(1)
4.1 Loan and Security Agreement dated January 20, 1995 by and between Congress Financial
Corporation (Western) and Krause's Sofa Factory and Castro Convertible Corporation.
(3)
4.1(a) First Amendment to Loan and Security Agreement dated as of May 10, 1996 by and
between Congress Financial Corporation (Western) and Krause's Sofa Factory and Castro
Convertible Corporation.(6)
4.1(b) Second Amendment to Loan and Security Agreement dated as of August 26, 1996 by and
between Congress Financial Corporation (Western) and Krause's Sofa Factory and Castro
Convertible Corporation.
4.1(c) Third Amendment to Loan and Security Agreement dated as of November 25, 1996 by and
between Congress Financial Corporation (Western) and Krause's Sofa Factory and Castro
Convertible Corporation.
4.1(d) Amended and Restated Subordination Agreement dated as of August 26, 1996 by and between
Congress Financial Corporation (Western) and Krause's Furniture, Inc..
4.2 Guarantee dated January 20, 1995 by Krause's Furniture, Inc. to Congress Financial
Corporation (Western). (3)
4.5 Certificate of Designations of Preferred Stock. (4)
10.1 1994 Directors Stock Option Plan. (5)
10.2 1990 Employees Stock Option Plan. (2)
10.3 Form of Securities Purchase Agreement between the Company, GECC and certain other
stockholders of the Company dated as if August 26, 1996.(8)
10.4 Form of $5,000,000 10% Subordinated Pay-In-Kind Note due August 31, 2001.(8)
10.5 Form of Warrant to Purchase 1,400,000 Shares of Common Stock.(8)
10.6 Form of Securities Purchase Agreement between the Company and Certain Stockholders
dated as of August 26, 1996.(8)
10.7 Form of Stockholders Agreement among the Company, GECC and certain other stockholders
of the Company dated as of August 26, 1996.(8)
10.8 Form of Registration Rights Agreement among the Company and GECC and certain other
stockholders of the Company dated as of August 26, 1996.(8)
10.9 Employment agreement with Philip M. Hawley.(8)
10.10 1997 Stock Incentive Plan. (9)
11 Statement regarding computation of per share earnings.
21 Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
</TABLE>
(1) Incorporated herein by reference to Exhibits to Registrant's Form S-4 dated
June 19, 1992 (File No. 33-48725). (2) Incorporated herein by reference to
Exhibit 10.2 to Registrant's Form 10-K for the year ended December 31, 1990
(File No. 0-17868).
(3) Incorporated herein by reference to Exhibit to Registrant's Form 8-K dated
as of January 20, 1995 (File No. 0-17868).
(4) Incorporated herein by reference to Exhibit 4.3 to Registrant's Form 8-K
dated as of October 7, 1993 (File No. 0-17868).
(5) Incorporated herein by reference to Exhibit 10.1 to Registrant's Form 10-K
dated as of December 31, 1994 (File No. 0-17868).
(6) Incorporated herein by reference to Exhibits to Registrant's Form 10-K dated
as of January 28, 1996 (File No. 0-17868).
(7) Incorporated herein by reference to Exhibits to Registrant's Form 10-Q dated
as of July 28, 1996 (File No. 0-17868).
(8) Incorporated herein by reference to Exhibits to Registrant's Form 8-K dated
as of August 26, 1996 (File No. 0-17868).
(9) Incorporated herein by reference to Exhibits to Registrant's Form S-1 dated
March 12, 1997 (File No. 333-19485).
(b) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the last
quarter of the period covered by this report.
14
<PAGE> 15
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 2, 1997 By: /s/ PHILIP M. HAWLEY
---------------------------------
Philip M. Hawley
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: May 2, 1997 /s/ PHILIP M. HAWLEY
-------------------------------------------------
Philip M. Hawley
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: May 2, 1997 /s/ THOMAS M. DELITTO
-------------------------------------------------
Thomas M. DeLitto
Director and Vice Chairman of the Board
Date: May 2, 1997 /s/ ROBERT A. BURTON
-------------------------------------------------
Robert A. Burton
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date: May 2, 1997 /s/ KAMAL G. ABDELNOUR
-------------------------------------------------
Kamal G. Abdelnour
Director
Date: May 2, 1997 /s/ JEFFREY H. COATS
-------------------------------------------------
Jeffrey H. Coats
Director
Date: May 2, 1997 /s/ PETER H. DAILEY
-------------------------------------------------
Peter H. Dailey
Director
Date: May 2, 1997 /s/ JOHN A. GAVIN
-------------------------------------------------
John A. Gavin
Director
</TABLE>
15
<PAGE> 16
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Krause's Furniture, Inc.
We have audited the accompanying consolidated balance sheets of Krause's
Furniture, Inc. as of February 2, 1997 and January 28, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the fiscal years ended February 2, 1997, January 28, 1996, and December 31,
1994 and for the month ended January 29, 1995. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Krause's Furniture, Inc. at February 2, 1997 and January 28, 1996, and the
consolidated results of its operations and its cash flows for the fiscal years
ended February 2, 1997, January 28, 1996, and December 31, 1994 and the month
ended January 29, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
March 28, 1997
16
<PAGE> 17
KRAUSE'S FURNITURE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
February 2, January 28,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,227 $ 1,336
Accounts receivable, net of allowance for doubtful accounts of $327
($291 at January 28, 1996) 1,120 786
Inventories 14,013 14,627
Prepaid expenses 1,193 386
Income tax refund receivable - 1,467
-------- --------
Total current assets 17,553 18,602
Property, equipment, and leasehold improvements, net 6,389 6,738
Goodwill, net 15,386 16,406
Leasehold interests, net 1,504 1,830
Other assets 2,255 3,290
-------- --------
$ 43,087 $ 46,866
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,506 $ 12,036
Accrued payroll and related expenses 1,468 1,696
Other accrued liabilities 5,099 4,715
Customer deposits 5,621 7,014
Notes payable 41 19
-------- --------
Total current liabilities 19,735 25,480
Long-term liabilities:
Notes payable 6,306 5,584
Other 1,503 1,817
-------- --------
Total long-term liabilities 7,809 7,401
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value; 666,667 shares
no shares outstanding (117,694 at January 28, 1996) at stated value - 7,523
Common stock, $.001 par value; 35,000,000 shares authorized,
19,020,539 shares outstanding (4,120,810 at January 28, 1996) 19 4
Capital in excess of par value 49,874 27,419
Accumulated deficit (34,350) (20,961)
-------- --------
Total stockholders' equity 15,543 13,985
-------- --------
$ 43,087 $ 46,866
======== ========
</TABLE>
See accompanying notes.
17
<PAGE> 18
KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------------
February 2, January 28, December 31,
1997 1996 1994
----------- ----------- ------------
<S> <C> <C>
Net sales $ 112,737 $ 122,319 $ 116,471
Cost of sales 56,490 59,852 53,522
--------- --------- ---------
Gross profit 56,247 62,467 62,949
Operating expenses:
Selling 57,573 60,257 53,460
General and administrative 10,101 10,578 10,867
Amortization of goodwill 1,020 1,020 1,020
--------- --------- ---------
68,694 71,855 65,347
--------- --------- ---------
Loss from operations (12,447) (9,388) (2,398)
Interest expense (1,230) (721) (2,140)
Other income 288 67 109
Gain from sale of Mr. Coffee stock - - 12,115
Equity in earnings of Mr. Coffee - - 316
--------- --------- ---------
Income (loss) before income taxes and extraordinary item (13,389) (10,042) 8,002
Provision (benefit) for income taxes - (1,327) 2,171
--------- --------- ---------
Income (loss) before extraordinary item (13,389) (8,715) 5,831
Extraordinary loss from debt retirement, net of income
tax benefit of $291 - - (436)
--------- --------- ---------
Net income (loss) $ (13,389) $ (8,715) $ 5,395
========= ========= =========
Income (loss) per share:
Income (loss) before extraordinary item $ (1.28) $ (2.21) $ 1.08
Extraordinary loss - - (0.08)
--------- --------- ---------
Net income (loss) $ (1.28) $ (2.21) $ 1.00
========= ========= =========
Number of shares used in computing income
(loss) per share 10,445 3,950 5,394
========= ========= =========
</TABLE>
See accompanying notes.
18
<PAGE> 19
KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Convertible Capital in
Preferred Stock Common Stock Excess of Total
------------------------------------------- Par Accumulated Stockholders'
Shares Amount Shares Amount Value Deficit Equity
------ -------- -------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 547 $ 11,856 $ 10,469 $ 10 $ 23,180 $ (14,420) $ 20,626
Conversion of Series A preferred
stock (63) (1,401) 636 1 1,400 - -
Repurchase of common stock - - (55) - (105) - (105)
Issuance of common stock related
to exercise of stock options - - 5 - 5 - 5
Net income - - - - - 5,395 5,395
---- -------- -------- ------- --------- ---------- ---------
Balance at December 31, 1994 484 10,455 11,055 11 24,480 (9,025) 25,921
Net loss - - - - - (3,221) (3,221)
---- -------- -------- ------- --------- ---------- ---------
Balance at January 29, 1995 484 10,455 11,055 11 24,480 (12,246) 22,700
Conversion of Series B preferred
stock (119) (2,674) 1,190 1 2,673 - -
Reverse stock split (235) - (8,163) (8) 8 - -
Conversion of Series A preferred
stock (12) (258) 39 - 258 - -
Net loss - - - - - (8,715) (8,715)
---- -------- -------- ------- --------- ---------- ---------
Balance at January 28, 1996 118 7,523 4,121 4 27,419 (20,961) 13,985
Conversion of Series A preferred
stock (118) (7,523) 1,177 1 7,522 - -
Exchange of notes payable and
Related interest for common stock - - 3,066 3 3,063 - 3,066
Issuance of common stock for cash,
net of expenses of $448 - - 10,669 11 10,210 - 10,221
Issuance of common stock
purchase warrant - - - - 1,400 - 1,400
Compensation expense on
stock option grant - - - - 293 - 293
Repurchase of common stock - - (12) - (33) - (33)
Net loss - - - - - (13,389) (13,389)
---- -------- -------- ------- --------- ---------- ---------
Balance at February 2, 1997 - $ - $ 19,021 $ 19 $ 49,874 $ (34,350) $ 15,543
==== ======== ======== ======= ========= ========== =========
</TABLE>
See accompanying notes.
19
<PAGE> 20
KRAUSE'S FURNITURE, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------------
February 2, January 28, December 31,
1997 1996 1994
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (13,389) $ (8,715) $ 5,395
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization 2,561 2,760 3,501
Deferred income taxes - 920 (920)
Gain from sale of Mr. Coffee stock - - (12,115)
Other non-cash charges 618 283 1,153
Change in assets and liabilities
Accounts receivable (334) 404 340
Inventories 614 3,389 (2,567)
Prepaid expenses and other assets 229 1,210 (1,153)
Income tax refund receivable 1,467 (1,467) -
Accounts payable and accrued liabilities (4,688) (2,166) 6
Customer deposits 1,393) 205 (517)
---------- ---------- ----------
Net cash used by operating activities 14,315) (3,177) (6,877)
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (806) (1,883) (2,323)
Proceeds from sale-leaseback - 1,039 -
Proceeds from sale of Mr. Coffee stock - - 23,258
---------- ---------- ----------
Net cash provided (used) by investing activities (806) (844) 20,935
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings (payments) on short-term notes 390 (18) (1,093)
Proceeds from long-term borrowings 142,612 141,371 100
Principal payments on long-term debt (138,178) (137,948) (17,700)
Proceeds from issuance of common stock 10,221 - -
Other (33) - (50)
---------- ---------- ----------
Net cash provided (used) by financing activities 15,012 3,405 (18,743)
---------- ---------- ----------
Net decrease in cash (109) (616) (4,685)
Cash and cash equivalents at beginning of year 1,336 1,952 6,302
---------- ---------- ----------
Cash and cash equivalents at end of year $ 1,227 $ 1,336 $ 1,617
========== ========== ==========
Supplemental disclosures of cash flow information -
Cash paid during the year for:
Interest $ 466 $ 543 $ 915
Income taxes 9 - 2,100
Noncash investing and financing activities:
Preferred stock converted into common stock 7,523 2,932 1,401
Exchange of notes payable and related accrued
interest for common stock 3,066 - -
Issuance of common stock purchase warrant 1,400 - -
</TABLE>
See accompanying notes.
20
<PAGE> 21
KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Month Ended Month Ended
January 29, January 30,
1995 1994
-------------- -----------
(unaudited)
<S> <C>
Net sales $ 7,179 $ 7,326
Cost of sales 3,647 3,519
-------------- -----------
Gross profit 3,532 3,807
Operating expenses:
Selling 5,446 4,935
General and administrative 1,317 913
-------------- -----------
6,763 5,848
-------------- -----------
Loss from operations (3,231) (2,041)
Equity in earnings of Mr. Coffee - 93
Interest expense (12) (258)
Other income 22 21
-------------- -----------
Net loss $ (3,221) $ (2,185)
============== ===========
Net loss per share $ (.87) $ (.63)
Number of shares used in computing loss per share 3,685 3,490
</TABLE>
See accompanying notes.
21
<PAGE> 22
KRAUSE'S FURNITURE INC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Month Ended Month Ended
January 29, January 30,
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities: (unaudited)
Net loss $ (3,221) $ (2,185)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 217 321
Equity in earnings of Mr. Coffee - (93)
Change in assets and liabilities:
Accounts receivable 81 (160)
Inventories (759) (1,396)
Prepaid expenses and other assets (719) (196)
Accounts payable and accrued liabilities 343 (1,899)
Customer deposits 3,113 2,349
Income taxes payable - 42
--------- ---------
Net cash used by operating activities (945) (3,217)
--------- ---------
Cash flows from investing activities:
Capital expenditures (764) (60)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 2,092 -
Principal payments on long-term debt (48) -
--------- ---------
Net cash provided by financing activities 2,044 -
--------- ---------
Net increase (decrease) in cash
Cash and cash equivalents at beginning of month 335 (3,277)
Cash and cash equivalents at end of month 1,617 6,302
--------- ---------
$ 1,952 $ 3,025
========= =========
Supplemental disclosures of cash flow information -
Cash paid during the period for:
Interest $ - $ 351
Noncash investing and financing activities:
Note receivable reduction in exchange for common stock and - 50
</TABLE>
See accompanying notes.
22
<PAGE> 23
KRAUSE'S FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of Krause's
Furniture, Inc., (the "Company") and its wholly owned subsidiaries, including
the Company's principal subsidiary, Krauses Sofa Factory ("Krauses"). In April
1995, the Company changed its fiscal year from a calendar year-end to a fiscal
year ending on the last Sunday of January as determined by the 52/53 week
retail fiscal year. The Company's 1996 fiscal year (53 weeks) ended February
2, 1997. All significant intercompany transactions and balances have been
eliminated.
On August 1, 1995, the Company effected a one-for-three reverse split
of its common and preferred stock. Except for share amounts prior to August 1,
1995 appearing in the accompanying consolidated statement of stockholders'
equity, all share and per share data presented in this report have been
restated to reflect the reverse split.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Certain reclassifications of previously reported financial information
were made to conform to the fiscal 1996 presentation.
Business
Krause's manufactures made-to-order sofas, sofabeds, loveseats and
chairs, and sells these products (as well as externally-sourced products)
through its own chain of retail showrooms, and two licensed dealerships. As
of February 2, 1997 there were 82 company-owned showrooms, all of which are
leased, located in 12 states.
Cash and cash equivalents
Cash and cash equivalents include U.S. Treasury bills, government
agency securities and commercial paper with original maturities of less than
three months, carried at cost, which approximates fair value.
Fair values of financial instruments
Fair values of cash and cash equivalents approximate cost due to the
short period of time to maturity. The fair values of the secured revolving
credit note, the subordinated note, and other notes are based on borrowing
rates currently available to the Company for loans with similar terms or
maturity and approximate the carrying amounts reflected in the accompanying
consolidated financial statements.
23
<PAGE> 24
Inventories
Inventories are carried at the lower of cost or market using the
first-in, first-out method and are comprised of the following:
<TABLE>
<CAPTION>
February 2, January 28,
1997 1996
----------- -----------
(in thousands)
<S> <C> <C>
Finished goods $ 10,693 $ 12,345
Work in progress 254 297
Raw materials 3,066 1,985
--------- ---------
$ 14,013 $ 14,627
========= =========
</TABLE>
Showroom pre-opening expenses
Showroom pre-opening expenses are capitalized and amortized over
periods of up to 12 (previously 12-24) months subsequent to opening of the
showroom
Closed store expenses
Future expenses, such as rent and real estate taxes, net of estimated
sublease recovery, relating to closed showrooms are charged to operations upon
a formal decision to close the showroom.
Property, equipment and leasehold improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which range
from three to five years. Leasehold improvements are amortized on a straight
line basis over the shorter of the estimated useful life or the term of the
lease. Depreciation and amortization expense was $1,073,000 in fiscal 1996,
$1,100,000 in fiscal 1995, and $928,000 in fiscal 1994. Property, equipment
and leasehold improvements are summarized as follows:
<TABLE>
<CAPTION>
February 2, January 28,
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Leasehold improvements $ 9,241 $ 8,985
Construction in progress 463 214
Machinery and equipment 2,962 2,855
Office and store furniture 872 923
-------- --------
13,538 12,977
Less accumulated depreciation and amortization (7,149) (6,239)
-------- --------
$ 6,389 $ 6,738
======== ========
</TABLE>
During late 1994 and early 1995, the Company constructed a showroom in
Dallas, Texas on leased land. The building was sold in May 1995 for $1,039,000
to an unrelated party and leased back for a period of 250 months. The sale
resulted in a gain of $364,000, which was deferred and is being amortized over
the term of the lease.
24
<PAGE> 25
Goodwill
Goodwill, which represents the excess of purchase price over the fair
value of net assets acquired, is being amortized on a straight-line basis over
20 years. Accumulated amortization amounted to $4,940,000 as of February 2,
1997 and $3,920,000 as of January 28, 1996.
Long-lived assets and certain identifiable intangibles held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Based upon its analysis, management believes that no impairment
of the carrying value of its long-lived assets inclusive of goodwill exists at
February 2, 1997. The Company's analysis at February 2, 1997 is based on an
estimate of future undiscounted cash flows using forecasts contained in the
Company's operating plan. Should the results of the operating plan not be
achieved, future analyses may indicate insufficient future undiscounted net
cash flows to recover the carrying value of the Company's long-lived assets, in
which case the carrying value of such assets should be written down to fair
value. The Company's historical results of operations and its cash flows in
fiscal years 1996, 1995, and 1994 indicate that it is at least reasonably
possible that such circumstances could arise in fiscal 1997.
Leasehold interests
Leasehold interests represent the present value of the excess of fair
market value lease rates on certain retail facility leases as compared to the
stated lease rates contained in the leases as determined at the date the
leases were acquired. Amortization of leasehold interests is on a
straight-line basis over the remaining lease terms. Accumulated amortization
amounted to $1,819,000 as of February 2, 1997 and $1,493,000 as of January 28,
1996.
Revenue recognition
Sales are recorded when goods are delivered to the customer. The
Company provides for estimated customer returns and allowances by reducing
sales or by a charge to operations, as appropriate, in the period of the sale.
Advertising expenses
Advertising costs, which are principally newspaper ads, mail inserts
and radio spots, are charged to expense as incurred. Advertising expenses in
the fiscal years ended February 2, 1997, January 28, 1996 and December 31,
1994, were $11,184,000, $11,181,000 and $10,029,000, respectively.
Warranty costs
Estimated amounts for future warranty obligations for furniture sold
are charged to operations in the period the products are sold.
Income taxes
The Company provides for income taxes under the liability method.
Accordingly, deferred income tax assets and liabilities are computed for
differences between financial reporting and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income; valuation allowances are established
when necessary to reduce deferred tax assets to amounts which are more likely
than not to be realized.
25
<PAGE> 26
Income (loss) per share
Per share amounts for 1994 were computed based on the weighted average
number of common and common equivalent shares outstanding. Common equivalent
shares arise from dilutive stock options and warrants and convertibility of
preferred stock into common stock. Loss per share for 1996 and 1995 were
computed based on the weighted average number of common shares outstanding
during each period since common stock equivalents were antidilutive. If the
conversions of preferred stock during the years ended February 2, 1997 and
January 28, 1996, had occurred at the beginning of the years, the net loss per
share for the fiscal years 1996 and 1995 would have been $1.20 and $2.11,
respectively.
Credit risk
Finance options are offered to customers through non-affiliated third
parties, at no material risk to the Company. Non-financed retail consumer
receivables are collected during the normal course of operations. There is no
significant concentration of credit risk and credit losses have been minimal.
2. OPERATIONS
The Company has reported losses from operations in each of the past
five years due to inefficiencies within its operations and due to an
industry-wide softness in retail sales. As a result of such losses, the
Company had an accumulated deficit of $34,350,000 and a working capital
deficiency of $2,182,000 at February 2, 1997. The Company expects to incur
operating losses in fiscal year 1997.
On August 26, 1996 and September 10, 1996, the Company completed
transactions with investors in which the Company received cash proceeds of
$15,669,000 from financings through issuances of $10,669,000 of common stock,
at $1 per share, and a $5,000,000 subordinated note with a warrant to purchase
1,400,000 shares of common stock at $.001 per share. In addition, $950,000 of
convertible notes and $2,000,000 of demand notes (issued between May 13, 1996
and July 2, 1996 to related parties) together with accrued interest of $116,251
were exchanged for 3,066,251 shares of common stock and outstanding Series A
preferred stock was converted into 1,176,950 shares of common stock. Also the
Company's revolving credit agreement was amended to extend the expiration date,
reduce the interest rate and provide for an increase in borrowing availability.
The Company's management, which underwent a substantial restructuring
after the financings described above, has developed a strategic plan for the
business which provides, among other things, for remodeling showrooms to
provide a more appealing setting for customers, increasing product prices to
competitive levels, reducing promotional discounting, reconfiguring selling
commissions, remerchandising, refocusing advertising, improving the
manufacturing process and reducing expenses through budgetary controls. Many
of these plans were implemented in the latter part of fiscal 1996 and are
expected to contribute significantly to reducing losses and, ultimately,
returning the Company to profitability; however, there can be no assurance that
the Company will achieve profitability. Management believes that the Company
has sufficient sources of financing to continue operations throughout fiscal
1997. However, the Company's long-term success is dependent upon management's
ability to successfully execute its strategic plan and, ultimately, to achieve
sustained profitable operations.
3. INVESTMENT - MR. COFFEE, INC.
On August 17, 1994, the Company sold all of its Mr. Coffee common stock
(1,500,548 shares) for $15.50 per share for a total cash consideration of
$23,258,000. The sale was completed pursuant to a merger of Mr. Coffee with
Health o meter Products, Inc. and resulted in a pretax gain to the Company of
$12,115,000. Since the Company and Mr. Coffee had certain members of the Board
of Directors in common, the investment in Mr. Coffee was accounted for using
the equity method. The Company's share of Mr. Coffee's earnings in 1994 up to
the time of the merger was $316,000.
26
<PAGE> 27
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
February 2, January 28,
1997 1996
----------- -----------
(in thousands)
<S> <C> <C>
Secured revolving credit notes $ 1,999 $ 5,515
Subordinated note payable to shareholder 5,133 -
Unamortized debt discount, net of accumulated
amortization of $137,000 (1,263) -
Other notes 478 88
---------- ---------
6,347 5,603
Less current portion 41 19
---------- ---------
$ 6,306 $ 5,584
========== =========
</TABLE>
The secured revolving credit notes were issued under a revolving
credit agreement between Krause's and a financial institution that expires in
January 2000. The credit agreement provides for revolving loans of up to $10
million based on the value of inventories. As of February 2, 1997, borrowing
under the revolving credit facility was limited to approximately $6.0 million
as defined in the agreement. Substantially all of Krause's assets are pledged
as collateral for the loans which are guaranteed by the Company. Interest on
the loans as of February 2, 1997 was payable monthly at the rate of 1.0% in
excess of the prime rate (8.25% at February 2, 1997).
The subordinated note payable to shareholder was issued August 26,
1996 and bears interest at 10% per annum, payable in additional subordinated
notes for the first two years after which interest is payable quarterly.
Interest aggregating approximately $133,000 was added to the principal balance
of the subordinated note during fiscal 1996. Semi-annual mandatory redemptions
of $1,015,336 are required beginning February 28, 1999 through final maturity
on August 31, 2001. The subordinated note was issued with a warrant to
purchase 1,400,000 shares of common stock at $.001 per share at any time
through August 31, 2006. The fair value of the warrant of $1,400,000 was
reflected in the consolidated financial statements as a discount on the
subordinated note and an increase in capital in excess of par value. This
discount is being amortized to interest expense using the effective interest
method over the term of the subordinated note.
Pursuant to the terms of the Revolving Credit Agreement and the
Subordinated Note, the Company and Krause's are required to maintain certain
financial ratios and minimum levels of tangible net-worth and working capital.
In addition, the Company and Krause's are restricted from entering into certain
transactions or making certain payments and dividend distributions without the
prior consent of the lenders. As of February 2, 1997, the Company was in
compliance with all the terms and conditions of its Note Payable and Revolving
Credit Agreement.
The aggregate annual maturities of long-term debt during each of the
five fiscal years subsequent to February 2, 1997 are approximately as follows:
$41,000 in 1997, $74,000 in 1998, $4,111,000 in 1999, $2,098,000 in 2000, and
$1,286,000 in 2001.
27
<PAGE> 28
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Years Ended
January 28, December 31,
1996 1994
----------- ------------
Current (in thousands)
<S> <C> <C>
Federal $ (2,247) $ 2,413
State - 678
--------- ---------
(2,247) 3,091
Deferred federal 920 (920)
--------- ---------
$ (1,327) $ 2,171
========= =========
</TABLE>
The provision for income taxes differs from the amounts computed by
applying the federal statutory rate of 34% to income (loss) before income
taxes, as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------
February 2, January 28, December 31,
1997 1996 1994
---------- ----------- ------------
(in thousands)
<S> <C> <C> <C>
Tax at federal statutory rate $ (4,552) $ (3,414) $ 2,721
Goodwill amortization 347 346 350
Adjustment of valuation allowance 5,333 2,144 (920)
Benefit of net operating loss carryforwards - - (752)
State income tax, net of federal benefit (742) (557) 630
Other (386) 154 142
--------- --------- ---------
$ - $ (1,327) $ 2,171
========= ========= =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
February 2, January 28,
1997 1996
----------- ---------
(in thousands)
<S> <C> <C>
Deferred tax liabilities $ - $ 200
Deferred tax assets:
Net operating loss carryforwards 12,075 7,510
Reserves and accruals not currently deductible for tax purposes 1,443 900
Other 125 100
----------- ---------
Total deferred tax assets 13,643 8,510
Valuation allowance for deferred tax assets (13,643) (8,310)
----------- ---------
Net deferred tax assets - 200
----------- ---------
Net deferred taxes $ - $ -
=========== =========
</TABLE>
The change in the valuation allowance was a net increase of $5,333,000 for
the fiscal year ended February 2, 1997, and a net increase of $2,144,000 for
the fiscal year ended January 28, 1996. The valuation allowance was increased
since the realization of net deferred tax assets is uncertain.
28
<PAGE> 29
As of February 2, 1997 the Company has federal net operating loss
carryforwards of approximately $32 million which begin to expire in 2003, if
not utilized. As a result of various equity transactions, one of the Company's
subsidiaries has experienced a change of ownership, as defined in the Internal
Revenue Code. As a result of these ownership changes and other provisions of
the Internal Revenue Code, utilization of approximately $10 million of these
net operating loss carryforwards is limited to the future income of one of the
Company's subsidiaries and is further limited to approximately $1 million per
year on a cumulative basis. As of February 2, 1997, approximately $3 million
of the limited loss carryforwards was available. In addition, the Company had
state net operating loss carryforwards of approximately $14 million, which
begin to expire in the year 1997, if not utilized.
STOCKHOLDERS' EQUITY
At February 2, 1997, there were outstanding warrants to purchase
1,754,956 shares of the Company's common stock. One million four hundred
thousand of such shares are subject to a warrant, issued as part of the 1996
financing (Note 2), at a exercise price of $.001 per share exercisable in whole
or in part at any time or from time to time until August 31, 2006. Warrants to
purchase an additional 354,956 shares of the Company's common stock at exercise
prices ranging from $1.33 to $15.00 per share with expiration dates ranging
from May 1998 to June 2005 are also outstanding. The warrants generally
provide for certain antidilution adjustments.
As of February 2, 1997, 4,688,956 shares of the company's common stock
are reserved for issuance upon exercise of warrants and stock options (see Note
7).
1. STOCK OPTION PLANS
The Company has elected to follow APB 25, "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS 123, "Accounting for Stock- Based Compensation"
requires use of option valuation models that were not developed for use in
valuing employee stock options.
The 1997 Stock Incentive Plan was approved by the Board of Directors in
January 1997 and is scheduled to be presented to stockholders at the next
annual meeting of stockholders for their approval. Until stockholder approval
is obtained all awards under this plan are specifically conditioned upon
obtaining stockholder approval and, if the approval is not obtained, will be
canceled. The 1997 plan provides for the issuance of awards covering up to
800,000 shares to employees, officers, directors, and consultants. Awards
under this plan can consist of options, stock appreciation rights, dividend
equivalent rights, restricted stock, performance shares, deferred stock units
or other stock based awards.
Directors who are not employees of the Company, other than one
non-employee director who has indicated that he cannot accept an award because
of his current employment by a stockholder, receive automatic grants of
deferred stock units covering shares having a fair market value of $10,000 for
each year of service as a director. These awards provide deferred compensation
to directors equivalent to an investment in shares on the date the award is
effective. Payout of the award is made in stock following a director's
retirement from the Board of Directors or death. Normally the payment is made
in five annual installments, but a director may elect to receive a single
payment.
In August 1996, the Company awarded the Chief Executive Officer of the
Company an option to purchase 1,234,000 shares of common stock at an exercise
price of $1.00 per share with vesting to occur over three years. Compensation
expense was recorded in fiscal 1996 in the amount of $293,000 based upon the
vesting provisions and the market value of the stock on the date of grant.
29
<PAGE> 30
Options to purchase the Company's common stock are outstanding under
the Company's 1990 Employees Stock Option Plan, 1994 Directors Stock Option
Plan, and various plans established by Krause's prior to the time it was
acquired by the Company. All of these plans have been cancelled and no further
grants may be made under them.
Pro forma information regarding net income (loss) and earnings (loss)
per share is required by SFAS 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995; risk-free interest rates of 6.85% and 6.79%,
dividend yields of 0% for both periods, volatility factors of the expected
market price of the Company's common stock of .68% for both periods; and a
weighted-average life of the options of 6.5 and 6.0 years. respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimates, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The pro
forma disclosures are not likely to be representative of the effects on
reported net income (loss) for future years. The Company's pro forma
information follows (in thousands, except for earnings per share information):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Pro forma net loss $13,188 $8,715
Pro forma net loss per share $ 1.26 $ 2.21
</TABLE>
As of February 2, 1997, under all option plans, a total of 2,934,000
shares of common stock are reserved for future issuance, options to purchase
1,722,457 shares of common stock were outstanding, options to purchase 409,222
were exercisable, at a weighted average exercise price of $1.25, and options
for 1,211,543 shares were available for future grants.
The following table reflects option activity and related exercise
prices, actual and weighted average, under all stock option plans from December
31, 1993 to February 2, 1997.
<TABLE>
<CAPTION>
Weighted
Number of Actual Average
Options Exercise Price Exercise Price
---------- -------------- --------------
<S> <C> <C> <C>
Outstanding December 31, 1993 329,020 $3.09 - $8.34 -
Granted 35,501 $6.00 - $7.13 -
Exercised (4,678) $3.09 -
---------
Outstanding December 31, 1994 359,843 $3.09 - $8.34 -
Granted 140,828 $2.16 - $6.48 $2.73
Forfeited (140,298) $3.09 - $6.38 $5.02
---------
Outstanding January 28, 1996 360,373 $2.16 - $8.34 $4.48
Granted 1,617,000 $ .78 - $1.62 $1.12
Forfeited (254,916) $ .78 - $8.34 $4.32
---------
Outstanding February 2, 1997 1,722,457 $ .78 - $7.13 $1.35
=========
</TABLE>
30
<PAGE> 31
The weighted-average grant-date fair value of options granted during
1996 and 1995, for options where the exercise price on the date of grant was
equal to the stock price on that date, was $2.14 and $1.09, respectively. The
weighted average grant date fair value of options granted during 1996 for
options where the exercise price on the date of grant was less than the stock
price on that date was $1.29.
The following table reflects the weighted average exercise price of
options outstanding, weighted average remaining contractual life of options
outstanding, number of shares exercisable and the weighted average exercise
price of exercisable options as of February 2, 1997.
<TABLE>
<CAPTION>
Weighted
Weighted Average Exercise
Number of Actual Weighted Average Number of Price of
Options Exercise Average Remaining Options Exercisable
Outstanding Price Range Exercise Price Contractual Life Exercisable Options
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
1,592,000 $ .78 - $1.95 $1.13 9.7 years 310,167 $1.00
69,832 $1.96 - $4.00 $2.52 .9 years 48,503 $2.55
60,625 $4.01 - $7.13 $5.71 2.1 years 50,552 $5.66
--------- -------
1,722,457 $ .78 - $7.13 $1.35 9.0 years 409,222 $1.25
========= ========
</TABLE>
8. RETIREMENT PLAN
The Company has a 401(k) retirement plan (effective January 1, 1994) to
which eligible employees may contribute up to 18% of their annual earnings. At
its discretion the Company matches employees' contributions. The Company's
contributions were immaterial in fiscal 1996, 1995 and 1994.
9. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease production, office and retail
facilities and equipment under operating leases. Lease terms range from three
to 25 years and most leases contain renewal options and certain leases contain
purchase options. The Company's administrative offices and manufacturing
facilities lease has a remaining term of 12 years with four five-year renewal
options. Retail showrooms are all leased with rents either fixed or with fixed
minimums coupled with contingent rents based on the Consumer Price Index or a
percentage of sales.
Commitments as of February 2, 1997 under operating leases require
approximate future minimum annual rental payments as follows:
<TABLE>
<CAPTION>
Total
-----
Fiscal Year (in thousands)
<S> <C>
1997 $14,777
1998 13,811
1999 12,061
2000 10,283
2001 7,729
Thereafter 23,739
-------
$82,400
=======
</TABLE>
Total rent expense under all operating leases was approximately
$15,389,000, $15,631,000, and
31
<PAGE> 32
$14,965,000 for the fiscal years ended February 2, 1997, January 28, 1996 and
December 31, 1994, respectively.
The Company and its subsidiaries are also parties to various legal
actions and proceedings incident to normal business activity. Management
believes that any liability in the event of final adverse determination of any
of these matters would not be material to the Company's consolidated financial
position, liquidity or results of operations.
10. RELATED PARTY TRANSACTIONS
In fiscal 1996, 1995, and 1994, Permal Capital Management, Inc. (PCMI)
provided various management services for the Company and its subsidiaries, for
which PCMI received $58,333, $100,000, and $200,000, respectively. PCMI's
services for the Company included assistance with regard to executive
management, financial consulting and strategic planning. Thomas M. DeLitto,
President of PCMI, served as President and Chief Executive Officer of the
Company from January to December 1994, served as Chief Executive Officer from
April 1995 to August 1996 and is currently Vice Chairman of the Company's Board
of Directors.
32
<PAGE> 33
KRAUSE'S FURNITURE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED FEBRUARY 2, 1997 AND JANUARY 28, 1996, MONTH ENDED
JANUARY 29, 1995 AND YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
Additions
Balance Charged to Charged Balance
Allowance for Beginning Cost and to Other End
Doubtful Accounts of Period Expenses Accounts Deductions(a) of Period
- ---------------------------- ---------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1996 $ 291,487 $ 244,613 $ 00,000 $ 209,295 $ 326,807
Fiscal 1995 616,148 218,414 - 543,075 291,487
Month ended January 29, 1995 591,744 24,404 - - 616,148
Fiscal 1994 395,322 566,000 (320,000) (b) 49,578 591,744
</TABLE>
(a) Represents accounts written off.
(a) Represents allowance for sales returns reclassified to accrued
liabilities to conform to the presentation for the fiscal year ended
January 28, 1996.
33
<PAGE> 1
EXHIBIT 4.1(b)
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (the
"Amendment"), dated as of August 26, 1996, is entered into between CONGRESS
FINANCIAL CORPORATION (WESTERN), a California corporation ("Lender"), with a
place of business at 225 South Lake Avenue, Suite 1000, Pasadena, California
91101 and KRAUSE'S SOFA FACTORY, a California corporation, and its wholly owned
subsidiary, CASTRO CONVERTIBLE CORPORATION, a New York corporation (jointly and
severally, "Borrower"), with its chief executive office located at 200 N. Berry
Street, Brea, California 92621.
RECITAL
A. Borrower and Lender have previously entered into that certain
Loan and Security Agreement dated as of January 20, 1995, as amended by that
certain First Amendment to Loan and Security Agreement dated as of May 10, 1996
(collectively, the "Loan Agreement"), pursuant to which Lender has made certain
loans and financial accommodations available to Borrower. Terms used herein
without definition shall have the meaning ascribed to them in the Loan
Agreement.
B. Simultaneously with the execution of this Amendment, Borrower
is (i) receiving an additional contribution of equity capital from its parent
company, Krause's Furniture, Inc., a Delaware corporation ("Parent") in the
amount of Five Million Dollars ($5,000,000) and (ii) borrowing Five Million
Dollars ($5,000,000) in cash from Parent, such additional indebtedness to be
evidenced by a promissory note of even date herewith issued by Borrower,
payable to the order of Parent (said additional equity capital and indebtedness
hereafter referred to as the "Recapitalization").
C. Borrower has requested Lender to consent to the
Recapitalization and in connection therewith, to waive certain financial
covenant defaults, modify certain financial covenants, amend the advance rate
on raw materials, decrease the interest rate on the Obligations and extend the
term of the Loan Agreement.
D. Lender is willing to further amend the Loan Agreement under
the terms and conditions set forth in this Amendment. Borrower is entering
into this Amendment with the understanding and agreement that, except as
specifically provided herein, none of Lender's rights or remedies as set forth
in the Loan Agreement is being waived or modified by the terms of this
Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
<PAGE> 2
1. Adjustment to Advance Rate. Section 2.1 (a) of the Loan
Agreement is amended to read in its entirety as follows:
"(a) Subject to, and upon the terms and conditions contained
herein, Lender agrees to make Revolving Loans to Borrower from
time to time in amounts requested by Borrower up to the amount
equal to the sum of:
(i) sixty percent (60%) of the Value of Eligible
Inventory;
(ii) notwithstanding the exclusion of raw materials from
the definition of Eligible Inventory, the lesser of (x) fifty
percent (50%) of the Value of raw materials consisting of
fabric and leather ("Eligible Raw Materials") or (y) One
Million Dollars ($1,000,000); less
(iii) any Availability Reserves;
provided, however, at no time shall aggregate advances under
clauses (i) and (ii) above exceed the sum of eighty percent
(80%) of the Value of Eligible Inventory multiplied by the
appraised net recovery percentage of Eligible Inventory (net
of all costs and expenses anticipated to be incurred in
liquidating the Eligible Inventory), plus eighty percent (80%)
of the Value of Eligible Raw Materials multiplied by the
appraised net recovery percentage of Eligible Raw Materials
(net of all costs and expenses anticipated to be incurred in
liquidating the Eligible Raw Materials), each as determined
from time to time by an appraiser acceptable to Lender in a
manner consistent with the determination of net recovery by
BGA Consulting as set forth in Subject IV to their Inventory
Liquidation Analysis of the Borrower dated December 22, 1994."
2. Adjustment to Interest Rate. The first sentence of
Section 3.1 (a) of the Loan Agreement is hereby amended to
read in its entirety as follows:
"Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the rate
of one (1) percentage point per annum, in excess of the Prime
Rate, except that Borrower shall pay to Lender interest, at
Lender's option, without notice, at the rate of three (3)
percentage points per annum in excess of the Prime Rate: (i)
on the noncontingent Obligations for the period from and after
the date of termination or non-renewal hereof, or the date of
the occurrence of an Event of Default, and for so long as such
Event of Default is continuing as determined by Lender or
until such time as the Event of Default has been cured by
Borrower or waived by
2
<PAGE> 3
Lender or Lender has received full and final payment of all
such Obligations (notwithstanding entry of any judgment
against Borrower) and (ii) on the Loans at any time
outstanding in excess of the amounts available to Borrower
under Section 2 (whether or not such excess(es), arise or are
made with or without Lender's knowledge or consent and whether
made before or after an Event of Default)."
3. Unused Line Fee. The following is added as a new Section 3.4
of the Loan Agreement:
"3.4 Unused Line Fee. Borrower shall pay to Lender monthly an
unused line fee at a rate equal to one-quarter percent (.25%)
per annum calculated upon the amount by which $8,000,000
exceeds the average daily principal balance of the outstanding
Revolving Loans and Letter of Credit Accommodations during the
immediately preceding months (or part thereof) while this
Agreement is in effect and for so long thereafter as any of
the Obligations are outstanding, which fee shall be payable on
the first day of each month in arrears."
4. Additional Indebtedness. Paragraph (d) of Section 9.9 of the
Loan Agreement is hereby amended to read in its entirety as follows:
"(d) so long as no Event of Default then exists, additional
unsecured indebtedness of Borrower not to exceed $5,000,000 in
aggregate principal outstanding at any time; provided,
however, that Borrower shall provide Lender thirty (30) days
prior notice of the incurrence of any such additional
unsecured indebtedness; and"
5. Permitted Indebtedness. Paragraph (e) of Section 9.9 of the Loan
Agreement is hereby amended to read in its entirety as follows:
"(e) unsecured indebtedness of Borrower to Parent in a maximum
amount of $10,450,000 consisting of: (i) $2,700,000 evidenced
by that certain amended and restated Promissory Note, dated as
of January 20, 1995, issued by Borrower payable to Parent,
which amount is the result of reducing the outstanding
principal amount of such indebtedness of $4,700,000 as of
January 20, 1995 by $2,000,000 funded from the initial advances
hereunder; (ii) up to $1,000,000 in payment under Borrower's
agreement to indemnify Parent from any loss, cost, expense or
liability incurred by Parent in providing cash collateral for
the issuance of a $1,000,000 standby letter of credit for the
benefit of the landlord of Borrower's Brea, California
facility, which letter of credit expires in 1999 and, if
3
<PAGE> 4
drawn prior to its expiry, will be treated as a bullet loan
from Parent to Borrower due January 20, 2000 in the amount of
any draw thereunder; (iii) $1,750,000 of additional
indebtedness advanced by Parent to Borrower during the period
from January 20, 1995 through August 22, 1996, evidenced by
those certain Promissory Notes, dated, respectively: as of
September 22, 1995 in the original principal amount of
$500,000; as of May 3, 1996 in the original principal amount
of $500,000; and as of May 22, 1996 in the original amount of
$750.000, each issued by Borrower payable to Parent; and (iv)
$5,000,000 of further additional indebtedness evidenced by
that certain Promissory Note, dated as of August 26, 1996,
issued by Borrower payable to Parent; all of which
indebtedness is subject to, and subordinate in right of
payment to, the right of Lender to receive the prior payment
in full of all of the Obligations; provided, that: (i)
Borrower shall not, directly or indirectly, make any payments
in respect of such indebtedness, including, but not limited
to, any prepayments or other non-mandatory payments, except
that until an Event of Default, or event which with notice or
passage of time or both would constitute an Event of Default,
shall exist or have occurred and be continuing, Borrower may
make payments of principal and interest in accordance with the
terms of that certain Amended and Restated Subordination
Agreement between Parent and Lender dated August 26, 1996 (the
"Subordination Agreement"), (ii) Borrower shall not, directly
or indirectly, (A) amend, modify, alter or change any terms of
such indebtedness or any agreement, document or instrument
related thereto, or (B) redeem, retire, defease, purchase or
otherwise acquire such indebtedness, or set aside or otherwise
deposit or invest any sums for such purpose, except as
permitted by the Subordination Agreement, and (iii) Borrower
shall furnish to Lender all notices, demands or other
materials concerning such indebtedness either received by
Borrower or on its behalf, promptly after receipt thereof, or
sent by Borrower or on its behalf, concurrently with the
sending thereof, as the case may be."
6. Working Capital. Section 9.13 of the Loan Agreement is hereby
amended effective as of October 1, 1996 to read in its entirety as follows:
"9.13 Working Capital. Borrower shall at all times, maintain
Working Capital of not less than a negative $8,000,000."
Any breach by Borrower of Section 9.13 of the Loan Agreement through August 30,
1996, is hereby waived.
4
<PAGE> 5
7. Adjusted Net Worth. Section 9.14 of the Loan Agreement is
hereby amended effective as of October 1, 1996 to read in its entirety as
follows:
"9.14 Adjusted Net Worth. Borrower shall at all times
maintain Adjusted Net Worth of not less than negative
$1,500,000."
Any breach by Borrower of Section 9.14 of the Loan Agreement through August 30,
1996 is hereby waived.
8. Extension of Term. The first sentence of Section 12.1(a) of
the Loan Agreement is hereby amended to read in its entirety as follows:
"This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page
hereof and shall continue in full force and effect for a term
ending on January 20, 2000 (the "Renewal Date"), and from year
to year thereafter, unless sooner terminated pursuant to the
terms hereof."
9. Early Termination Fee. The first sentence of Section
12.1(c) of the Loan Agreement is hereby amended to read in its entirety as
follows:
"If for any reason this Agreement is terminated, except by
Lender in bad faith, prior to the end of the then current term
or renewal term of this Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual
damages and by mutual agreement of the parties as to a
reasonable calculation of Lender's lost profits as a result
thereof, Borrower agrees to pay to Lender, upon the effective
date of such termination, an early termination fee in the
amount of two percent (2%) of the Maximum Credit if this
Agreement is terminated during the period from the date
hereafter through January 20, 1998, and in the amount of one
percent (1%) of the Maximum Credit if this Agreement is
terminated at any time thereafter."
10. Effectiveness of this Amendment. Lender must have received
the following items, in form and substance acceptable to Lender, or evidence of
the occurrence thereof, before this Amendment is effective and before Lender is
required to extend any credit to Borrower as provided for by this Amendment.
The date on which all of the following conditions have been satisfied is the
"Closing Date".
(a) Amendment. This Amendment fully executed in a
sufficient number of counterparts for distribution to Lender and
Borrower.
5
<PAGE> 6
(b) Authorizations. Evidence that the execution,
delivery and performance by Borrower and each guarantor or
subordinating creditor of this Amendment and any instrument or
agreement required under this Amendment have been duly authorized.
(c) Representations and Warranties. The Representations
and Warranties set forth in the Loan Agreement must be true and
correct.
(d) Other Required Documentation. All other documents
and legal matters in connection with the transactions contemplated by
this Amendment shall have been delivered or executed or recorded and
shall be in form and substance satisfactory to Lender.
(e) Subordinated Debt. In connection with the
Recapitalization, Borrower shall have received from Parent a cash
capital contribution in the minimum amount of Ten Million Dollars
($10,000,000), Five Million Dollars ($5,000,000) of which shall be
contributed as subordinated debt and Five Million Dollars ($5,000,000)
of which shall be contributed as equity, all on terms acceptable to
Lender, and Parent shall have acknowledged in a manner acceptable to
Lender, that any such subordinated debt or equity other than common
stock is "Junior Debt" subject to the terms and conditions of that
certain Amended and Restated Subordination Agreement between Parent
and Lender dated as of the date hereof (the "Subordination
Agreement").
(f) Payment of Modification Fee. Lender shall have
received from Borrower a Modification Fee of Twenty-Five Thousand
Dollars ($25,000) for the processing and approval of this Amendment,
which fee shall be fully earned upon receipt, plus reimbursement of
out-of-pocket costs and expenses, including attorneys' fees incurred
in the preparation of this Amendment.
11. Choice of Law. The validity of this Amendment, its
construction, interpretation and enforcement, the rights of the parties
hereunder, shall be determined under, governed by, and construed in accordance
with the internal laws of the State of California governing contracts only to
be performed in that State.
12. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties and separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute one and the same instrument.
13. Due Execution. The execution, delivery and performance of
this Amendment are within the power of Borrower, have been duly authorized by
all necessary corporate action, have received all necessary governmental
approval, if any, and do not contravene any law or any contractual restrictions
binding on Borrower.
14. Effect of Amendment. Except as set forth expressly herein,
all terms of the Loan Agreement and the other Financing Agreements shall be and
remain in full force and effect and shall constitute the legal, valid, binding
and enforceable obligations of Borrower to Lender. To the extent that any
terms and conditions in any of the Financing Agreements
6
<PAGE> 7
shall contradict or be in conflict with any terms or conditions of the
Agreements, after giving effect to this Amendment, such terms and conditions
are hereby deemed modified and amended accordingly to reflect the terms and
conditions of the Loan Agreement as modified and amended hereby.
15. Ratification. Borrower hereby restates, ratifies and
reaffirms each and every term and condition set forth in the Loan Agreement, as
amended hereby, and the Financing Agreements effective as of the date hereof.
16. Estoppel. To induce Lender to enter into this Amendment and
to continue to make advances to Borrower under the Loan Agreement, Borrower
hereby acknowledges and agrees that, after giving effect to this Amendment, as
of the date hereof, there exists no Event of Default and no right of offset,
defense, counterclaim or objection in favor of Borrower as against Lender with
respect to the Obligations.
IN WITNESS WHEREOF, the parties have entered into this Amendment as of
the date first above written.
KRAUSE'S SOFA FACTORY,
a California corporation
By: [SIG]
---------------------------
Title: [TITLE]
-------------------------
CASTRO CONVERTIBLE
CORPORATION,
a New York corporation
By: [SIG]
----------------------------
Title: [TITLE]
-------------------------
CONGRESS FINANCIAL
CORPORATION (WESTERN),
a California corporation
By: [SIG]
-----------------------------
Title: Assistant Vice President
--------------------------
7
<PAGE> 8
ACKNOWLEDGMENT
The undersigned Krause Furniture, Inc., a Delaware corporation, parent
of Krause's Sofa Factory ("Krause"), in consideration of Congress Financial
Corporation (Western) ("Congress") continued extension of credit to Krause and
Castro Convertible Corporation, hereby consents to the foregoing Second
Amendment to Loan and Security Agreement and acknowledges and confirms that its
Guarantee dated January 20, 1995 (the "Guarantee") in favor of Congress remains
in full force and effect. Although Congress informed us of the matters set
forth above, and we have acknowledged same, we understand and agree that
Congress has no duty under the Loan Agreement as defined above, the Guarantee
or any other agreement with us to so notify us or to seek such an
acknowledgment, and nothing contained herein is intended to or shall create
such a duty as to any advances or transactions hereafter.
Dated: August 26, 1996 KRAUSE'S FURNITURE, INC.
a Delaware corporation
By: [SIG]
-----------------------------
Title: Executive Vice President
--------------------------
8
<PAGE> 1
EXHIBIT 4.1(c)
THIRD AMENDMENT TO LOAN AND
SECURITY AGREEMENT
THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), dated as of November 25, 1996, is entered into by and between
CONGRESS FINANCIAL CORPORATION (WESTERN), a California corporation ("Lender"),
with a place of business at 225 South Lake Avenue, Suite 1000, Pasadena,
California 91101 and KRAUSE'S SOFA FACTORY, a California corporation, and its
wholly owned subsidiary, CASTRO CONVERTIBLE CORPORATION, a New York corporation
(jointly and severally, "Borrower"), with its chief executive office located at
200 N. Berry Street, Brea, California 92621.
RECITALS
A. Borrower and Lender have previously entered into that certain
Loan and Security Agreement dated as of January 20, 1995, as amended by that
certain First Amendment to Loan and Security Agreement dated as of May 10,
1996, and as further amended by that certain Second Amendment to Loan and
Security Agreement dated as of August 26, 1996 (collectively, the "Loan
Agreement"), pursuant to which Lender has made certain loans and financial
accommodations available to Borrower. Terms used herein without definition
shall have the meanings ascribed to them in the Loan Agreement.
B. Borrower has requested Lender to extend a $2,500,000 letter of
credit subline under the Loan Agreement.
C. Lender is willing to further amend the Loan Agreement under
the terms and conditions set forth in this Amendment. Borrower is entering
into this Amendment the understanding and agreement that, except as
specifically provided herein, none of Lender's rights or remedies as set forth
in the Loan Agreement is being waived or modified by the terms of this
Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants here contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Defined Terms. Any and all initially capitalized terms used in this
Amendment without definition shall have the meaning ascribed thereto in the
Loan Agreement.
1
<PAGE> 2
2. New Definition. Section 1 of the Loan Agreement is hereby
amended to add the following definition in alphabetical and numerical order:
"1. 'Letter of Credit Accommodations' shall mean the
standby letters of credit or guarantees of standby letters of
credit which are from time to time either (i) issued or opened
by Lender for the account of Borrower or (ii) with respect to
which Lender has agreed to indemnify the issuer or guaranteed
to the issuer the performance by Borrower of its obligations
to such issuer."
3. Amendment of Definition of "Availability Reserves". The
definition of "Availability Reserves" shall be amended in its entirety to read
as follows:
1.3 "Availability Reserves" shall mean, as of any date of
determination, such amounts as Lender may from time to time
establish and revise in good faith reducing the amount of
Revolving Loans, Letter of Credit Accommodations and advances
under the Equipment Acquisition Facility which would otherwise
be available to Borrower under the lender formula(s) provided
for herein: (a) to reflect events, conditions, contingencies
or risks which, as determined by Lender in good faith, do or
may affect either (i) the Collateral or any other property
which is security for the Obligations or its value, (ii) the
assets, business or prospects of Borrower or any Obligor or
(iii) the security interests and other rights of Lender in the
Collateral (including the enforceability, perfection and
priority thereof) or (b) to reflect Lender's good faith belief
that any collateral report or financial information furnished
by or on behalf of Borrower or any Obligor to Lender is or may
have been incomplete, inaccurate or misleading in any material
respect or (c) in respect of any state of facts which Lender
determines in good faith constitutes an Event of Default or
may, with notice or passage of time or both, constitute an
Event of Default or (d) an amount equal to two (2) months
gross rent for each leased premises of Borrower which is
located in a state where a landlord may be entitled to a
priority lien on Collateral to secure unpaid rent and with
respect to each such property the landlord has not executed a
form of waiver and consent acceptable to Lender. The amount
of any Availability Reserves established by Lender shall have
a reasonable relationship as determined by Lender to the
matter which is the basis for it."
4. Amendment of Definition of "Obligations". Section 1.25 of the Loan
Agreement is hereby amended to read in its entirety as follows:
"1.25 'Obligations' shall mean any and all Revolving Loans,
Letter of Credit Accommodations and advances under the
Equipment Acquisition
2
<PAGE> 3
Facility, and all other obligations, liabilities and
indebtedness of every kind, nature and description owing by
Borrower to Lender and/or its affiliates, including principal,
interest, charges, fees, costs and expenses, however
evidenced, whether as principal, surety, endorser, guarantor
or otherwise, whether arising under this Agreement or
otherwise, whether now existing or hereafter arising, whether
arising before, during or after the initial or any renewal
term of this Agreement or after the commencement of any case
with respect to Borrower under the United States Bankruptcy
Code or any similar statute (including, without limitation,
the payment of interest and other amounts which would accrue
and become due but for the commencement of such case), whether
direct or indirect, absolute or contingent, joint or several,
due or not due, primary or secondary, liquidated or
unliquidated, secured or unsecured, and however acquired by
Lender."
5. Amendment of Section 2.1. Section 2.1 of the Loan Agreement
is hereby amended to add the following new paragraph (c):
"(c) Except in Lender's discretion, the aggregate amount of
the Loans and the Letter of Credit Accommodations outstanding
at any time shall not exceed the Maximum Credit. In the event
that the outstanding amount of any component of the Loans and
Letter of Credit Accommodations, exceed the amounts available
under the lending formulas, the sublimits for Letter of Credit
Accommodations set forth in Section 2.2(c) or the Maximum
Credit, as applicable, such event shall not limit, waive or
otherwise affect any rights of Lender in that circumstance or
on any future occasions and Borrower shall, upon demand by
Lender, which may be made at any time or from time to time,
immediately repay to Lender the entire amount of any such
excess(es) for which payment is demanded.
6. New Section 2.4. Existing Section 2.3 of the Loan Agreement is
hereby renumbered as Section 2.4 and revised to read in its entirety as
follows:
"2.4. Except in Lender's discretion, the aggregate amount of
the Loans and the Letter of Credit Accommodations outstanding
under Sections 2.1 through 2.3 at any time shall not exceed
the Maximum Credit. In the event that the outstanding amount
of any component of the Loans, or the aggregate amount of the
outstanding Loans and Letter of Credit Accommodations, exceed
the amounts available under the lending formulas, the sublimit
or Letter of Credit Accommodations set forth in Section 2.3(d)
or the Maximum Credit, as applicable, such event shall not
limit, waive or otherwise affect any rights of Lender in that
circumstance or on any future occasions and Borrower shall,
upon demand by Lender, which may be made at any time or from
time to
3
<PAGE> 4
time, immediately repay to Lender the entire amount of any
such excess(es) for which payment is demanded."
7. Letter of Credit Accommodations. The Loan Agreement is
hereby amended to add a new Section 2.3 as follows:
"Section 2.3 Letter of Credit Accommodations.
(a) Subject to, and upon the terms and conditions
contained herein, at the request of Borrower, Lender agrees to
provide or arrange for Letter of Credit Accommodations for the
account of Borrower containing terms and conditions acceptable
to Lender and the issuer thereof. Any payments made by Lender
to any issuer thereof and/or related parties in connection
with the Letter of Credit Accommodations shall constitute
additional Loans to Borrower pursuant to this Section 2.
(b) In addition to any charges, fees or expenses
charged by any bank or issuer in connection with the Letter of
Credit Accommodations, Borrower shall pay to Lender a letter
of credit fee at a rate equal to one and one-half percent
(1-1/2%) per annum on the daily outstanding balance of the
Letter of Credit Accommodations for the immediately preceding
month (or part thereof), payable in arrears as of the first
day of each succeeding month. Such letter of credit fee shall
be calculated on the basis of a three hundred sixty (360) day
year and actual days elapsed and the obligation of Borrower to
pay such fee shall survive the termination or non-renewal of
this Agreement.
(c) No Letter of Credit Accommodations shall be
available unless on the date of the proposed issuance of any
Letter of Credit Accommodations, the Loans available to
Borrower under this Section 2 (subject to the Maximum Credit
and Availability Reserves) are equal to or greater than one
hundred (100%) percent of the face amount of such Letter of
Credit Accommodations and all other commitments and obligations
made or incurred by Lender with respect thereto. Effective on
the issuance of each Letter of Credit Accommodation, the
amount of Loans which might otherwise be available to Borrower
shall be reduced by one hundred percent (100%) of the face
amount of the Letter of Credit Accommodation.
(d) Except in Lender's discretion, (i) the amount
of all outstanding Letter of Credit Accommodations and all
other commitments and obligations made or incurred by Lender
in connection therewith, shall not at any time exceed
$2,500,000. At any time an Event of Default exists or has
occurred and is continuing, upon Lender's request. Borrower
will either furnish cash collateral to secure the
reimbursement obligations to the issuer in connection with any
Letter of Credit Accommodations or furnish cash collateral to
Lender
4
<PAGE> 5
for the Letter of Credit Accommodations, and in either case,
the Revolving Loans otherwise available to Borrower shall not
be reduced as provided in Section 2.3(c) to the extent of such
cash collateral.
(e) Borrower shall indemnify and hold Lender
harmless from and against any and all losses, claims, damages,
liabilities, costs and expenses which Lender may suffer or
incur in connection with any Letter of Credit Accommodations
and any documents, drafts or acceptances relating thereto,
including, but not limited to, any losses, claims, damages,
liabilities, costs and expenses due to any action taken by
any issuer or correspondent with respect to any Letter of
Credit Accommodation. Borrower assumes all risks with respect
to the acts or omissions of the drawer under or beneficiary of
any Letter of Credit Accommodation and for such purposes the
drawer or beneficiary shall be deemed Borrower's agent.
Borrower assumes all risks for, and agrees to pay, all
foreign, Federal, State and local taxes, duties and levies
relating to any goods subject to any Letter of Credit
Accommodations or any documents, drafts or acceptances
thereunder. Borrower hereby releases and holds Lender
harmless from and against any acts, waivers, errors, delays or
omissions, whether caused by Borrower, by any issuer or
correspondent or otherwise with respect to or relating to any
Letter of Credit Accommodation. The provisions of this
Section 2.3(e) shall survive the payment of the Obligations
and the termination or non-renewal of this Agreement.
(f) Nothing contained herein shall be deemed or
construed to grant Borrower any right or authority to pledge
the credit of Lender in any manner. Lender shall have no
liability of any kind with respect to any Letter of Credit
Accommodation provided by an issuer other than Lender unless
Lender has duly executed and delivered to such issuer the
application or a guarantee or indemnification in writing with
respect to such Letter of Credit Accommodation. Borrower
shall be bound by any interpretation made in good faith by
Lender, or any other issuer, or correspondent under or in
connection with any Letter of Credit Accommodation or any
documents, drafts or acceptances thereunder, notwithstanding
that such interpretation may be inconsistent with any
instructions of Borrower. Lender shall have the sole and
exclusive right and authority to, and Borrower shall not: (i)
at any time an Event of Default exists or has occurred and is
continuing, (A) approve or resolve any questions of
non-compliance of documents, (B) give any instructions as to
acceptance or rejection of any documents or goods or (C)
execute any and all applications for steamship or airway
guaranties, indemnities or delivery orders, and (ii) at all
times. (A) grant any extensions of the maturity of, time of
payment for, or time or presentation of, any drafts,
acceptances, or documents, and (B) agree to any amendments,
renewals, extensions, modifications, changes or cancellations
of any of the terms or conditions of any of the
5
<PAGE> 6
applications, Letter of Credit Accommodations, or documents,
drafts or acceptances thereunder or any letters of credit
included in the Collateral. Lender may take such actions
either in its own name or in Borrower's name.
(g) Any rights, remedies, duties or obligations
granted or undertaken by, Borrower to any issuer or
correspondent in any application for any Letter of Credit
Accommodation, or any other agreement in favor of any issuer
or correspondent relating to any Letter of Credit
Accommodation, shall be deemed to have been granted or
undertaken by Borrower to Lender. Any duties or obligations
undertaken by Lender to any issuer or correspondent in any
application for any Utter of Credit Accommodation, or any
other agreement by Lender in favor of any issuer or
correspondent relating to any Letter of Credit Accommodation,
shall be deemed to have been undertaken by Borrower to Lender
and to apply in all respects to Borrower.
8. Amendment of Section 4.2. Section 4.2 is hereby amended to
read in its entiretv as follows:
"4.2 Conditions Precedent to All Loans and Letter of
Credit Accommodations. Each of the following is an additional
condition precedent to Lender making Loans and/or providing
Letter of Credit Accommodations to Borrower:
(a) all representations and warranties
contained herein and in the other Financing
Agreements shall be true and correct in all material
respects with the same effect as though such
representations and warranties had been made on and
as of the date of the making of each such Loan or
providing each such Letter of Credit Accommodation or
providing each such advance under the Equipment
Acquisition Facility and after giving effect thereto;
and
(b) no Event of Default and no event or
condition which, with notice or passage of time or
both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of
the date of the making of such Loan or providing each
such Letter of Credit Accommodation or providing each
such advance under the Equipment Acquisition Facility
and after giving effect thereto."
9. Amendment of Section 6.1. Section 6.1 of the Loan Agreement
is hereby amended to read in its entirety as follows:
"6.1 Borrower's Loan Account. Lender shall maintain
one or more loan account(s) on its books in which shall be
recorded (a) all Loans, Letter of Credit Accommodations,
advances under the Equipment Acquisition Facility and other
Obligations and the Collateral, (b) all payments made by or on
6
<PAGE> 7
behalf of Borrower and (c) all other appropriate debits and
credits as provided in this Agreement, including, without
limitation, fees, charges, costs, expenses and interest. All
entries in the loan account(s) shall be made in accordance
with Lender's customary practices as in effect from time to
time."
10. Amendment of Section 6.5. Section 6.5 of the Loan Agreement is
hereby amended to read in its entirety as follows:
"6.5 Authorization to Make Loans. Lender is
authorized to make the Loans and provide the Letter of Credit
Accommodations based upon telephonic or other instructions
received from anyone purporting to be an officer of Borrower or
other authorized person or, at the discretion of Lender, if
such Loans are necessary to satisfy any Obligations. All
requests for Loans, Letter of Credit Accommodations or advances
under the Equipment Acquisition Facility hereunder shall
specify the date on which the requested advance is to be made
or Letter of Credit Accommodations established (which day shall
be a business day) and the amount of the requested Loan. Lender
is authorized to provide a Letter of Credit Accommodation based
upon written instruction from Borrower specifying (i) the date
on which the Letter of Credit Accommodation is to be
established (which day shall be a business day), (ii) the face
amount of the Letter of Credit Accommodation, (iii) the
expiration date of the Letter of Credit Accommodation; (iv) the
name and address of the beneficiary, (v) the verbatim text of
the proposed Letter of Credit Accommodation or the proposed
terms and conditions thereof, including a precise description
of any documents and the verbatim text of any certificates to
be presented by the beneficiary which, if presented by the
beneficiary prior to the expiration date of the Letter of
Credit Accommodation, would require Lender or the issuer of the
Letter of Credit Accommodation to make payment under the Letter
of Credit Accommodation, and (vi) such other documents and
information as Lender or any issuer of the Letter of Credit
Accommodation may reasonably require in connection with the
issuance of such Letter of Credit Accommodation. Requests
received after 10:30 a.m. Los Angeles time on any day shall be
deemed to have been made as of the opening of business on the
immediately following business day. All Loans, Letter of
Credit Accommodations and advances under the Equipment
Acquisition Facility under this Agreement shall be conclusively
presumed to have been made to, and at the request of and for
the benefit of, Borrower when deposited to the credit of
Borrower or otherwise disbursed or established in accordance
with the instructions of Borrower or in accordance with the
terms and conditions of this Agreement. Borrower agrees to
establish and maintain a single designated deposit account for
the purpose of receiving the proceeds of advances requested by
Borrower and made by Lender hereunder. Unless otherwise agreed
in writing by Lender and Borrower, any advances requested by
Borrower and made by Lender shall be made to such designated
deposit account."
11. Amendment of Section 6.6. The second sentence of
Section 6.6 of the Loan Agreement is hereby amended to read in its entirety as
follows:
7
<PAGE> 8
"All other Loans or Letters of Credit Accommodations
made or advances under the Equipment Acquisition
Facility provided by Lender to Borrower pursuant to
the provisions hereof shall be used by Borrower only
for general operating, working capital and other
proper corporate purposes of Borrower not otherwise
prohibited by the terms hereof."
12. Amendment of Section 8. The preamble of Section 8 of the Loan
Agreement is hereby amended to read in its entirety as follows:
"Borrower hereby represents and warrants to Lender
the following (which shall survive the execution and delivery
of this Agreement), the truth and accuracy of which are a
continuing condition of the making of Loans and providing
Letter of Credit Accommodations and providing advances under
the Equipment Acquisition Facility by Lender to Borrower:'
13. Amendment of Section 9.16. Section 9.16 of the Loan Agreement
is hereby amended to redesignate existing clause (g) as clause (h) and to add a
new clause (g) as follows:
"(g) charges, fees or expenses changed by any bank
or issuer in connection with the Letter of Credit Accommodations;"
14. Amendment of Section 9.17. Section 9.17 is hereby amended to
read in its entirety as follows:
"9.17 Further Assurances. At the request of Lender
at any time and from time to time, Borrower shall, at its
expense, duly execute and deliver, or cause to be duly
executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as
may be necessary or proper to evidence, perfect, maintain and
enforce the security interests and the priority thereof in the
Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing
Agreements. Lender may at any time and from time to time
request a certificate from an officer of Borrower representing
that all conditions precedent to the making of Loans and
providing Letter of Credit Accommodations contained herein are
satisfied. In the event of such request by Lender. Lender
may, at its option, cease to make any further Loans or
provide any further Letter of Credit Accommodations until
Lender has received such certificate and, in addition, Lender
has determined that such conditions are satisfied. Where
permitted by law, Borrower hereby authorizes Lender to execute
and file one or more UCC financing statements signed only by
Lender."
15. Amendment of Section 10.2(d). Section 10.2(d) is hereby
amended to read in its entirety as follows:
8
<PAGE> 9
"(d) Without limiting the foregoing, upon the
occurrence of an Event of Default or an event which with
notice or passage of time or both would constitute an Event of
Default, Lender may, at its option, without notice, (i) cease
making Loans or arranging for Letter of Credit Accommodations
or reduce the lending formulas or amounts of Revolving Loans
and Letter of Credit Accommodations available to Borrower
and/or (ii) terminate any provision of this Agreement
providing for any future Loans or Letter of Credit
Accommodations to be made by Lender to Borrower."
16. Amendment of Section 12.1(a). The third sentence of Section
12.1(a) of the Loan Agreement is hereby amended to read in its entirety as
follows:
"Upon the effective date of termination or non-renewal of the
Financing Agreements, Borrower shall pay to Lender, in full,
all outstanding and unpaid Obligations and shall furnish cash
collateral to Lender in such amounts as Lender determines are
reasonably necessary to secure Lender from loss, cost, damage
or expense, including attorneys' fees and legal expenses, in
connection with any contingent Obligations, including issued
and outstanding Letter of Credit Accommodations and checks or
other payments provisionally credited to the Obligations
and/or as to which Lender has not yet received final and
indefeasible payment."
17. Amendment of Section 12.4. The second sentence of Section 12.4
of the Loan Agreement is hereby amended to read in its entirety as follows:
"Lender may, after notice to Borrower, assign its rights and
delegate its obligations under this Agreement and the other
Financing Agreements and further may assign, or sell
participations in, all or any part of the Loans, the Letter of
Credit Accommodations or any other interest herein to another
financial institution or other person, in which event, the
assignee or participant shall have, to the extent of such
assignment or participation, the same rights and benefits as
it would have if it were the Lender hereunder, except as
otherwise provided by the terms of such assignment or
participation.
18. Effectiveness of this Amendment. Lender must have received
the following items, in form and substance acceptable to Lender, or evidence of
the occurrence thereof, before this Amendment is effective and before Lender is
required to extend any credit to Borrower as provided for by this Amendment.
The date on which all of the following conditions have been satisfied is the
"Closing Date".
(a) Amendment. This Amendment fully executed in
a sufficient number or counterparts for distribution to Lender
and Borrower.
(b) Authorizations. Evidence that the execution,
delivery and performance by Borrower and each guarantor or
subordinating creditor of this
9
<PAGE> 10
Amendment and any instrument or agreement required under this
Amendment have been duly authorized.
(c) Representations and Warranties. The
Representations and Warranties set forth in the Loan Agreement
must be true and correct.
(d) Other Required Documentation. All other
documents and legal matters in connection with the
transactions contemplated by this Amendment shall have been
delivered or executed or recorded and shall be in form and
substance satisfactory to Lender.
19. Choice of Law. The validity of this Amendment, its
construction, interpretation and enforcement, and the rights of the parties
hereunder, shall be determined under, governed by, and construed in accordance
with the laws of the State of California governing contracts wholly to be
performed in that State.
20. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties on separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute but one and the same instrument.
21. Due Execution. The execution, delivery and performance of
this Amendment are within the powers of the Borrower, have been duly authorized
by all necessary corporate action, have received all necessary governmental
approval, if any, and do not contravene any law or any contractual restrictions
binding on Borrower.
22. Otherwise Not Affected. In the event of any conflict or
inconsistency between the Loan Agreement and the provisions of this Amendment,
the Provisions of this Amendment shall govern. Except to the extent set forth
herein, the Loan Agreement shall remain in full force and effect.
23. Ratification. Borrower hereby restates, ratifies and
reaffirms each and every term and condition set forth in the Loan Agreement, as
amended hereby, and the Financing Agreements effective as of the date hereof.
24. Estoppel. To induce Lender to enter into this Amendment and
to continue to make advances to Borrower under the Loan Agreement, Borrower
hereby acknowledges and agrees that, after giving effect to this Amendment, as
of the date hereof, there exists no Event of Default and no right of offset,
defense, counterclaim or objection in favor of Borrower as against Lender with
respect to the Obligations.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the day and year first above written.
KRAUSE'S SOFA FACTORY,
a California corporation
By: /s/ Judith O. Lasker
-----------------------------
Title: General Counsel, Secretary
--------------------------
CASTRO CONVERTIBLE
CORPORATION,
a New York corporation
By: /s/ Judith O. Lasker
-----------------------------
Title: General Counsel, Secretary
--------------------------
CONGRESS FINANCIAL
CORPORATION (WESTERN),
a California corporation
By:
-----------------------------
Title:
--------------------------
11
<PAGE> 12
ACKNOWLEDGMENT
The undersigned Krause Furniture, Inc., a Delaware corporation, parent
of Krause's Sofa Factory ("Krause"), in consideration of Congress Financial
Corporation (Western) ("Congress") continued extension of credit to Krause and
Castro Convertible Corporation, hereby consents to the foregoing Third
Amendment to Loan and Security Agreement and acknowledges and confirms that its
Guarantee dated November 25, 1996 (the "Guarantee") in favor of Congress
remains in full force and effect. Although Congress informed us of the matters
set forth above, and we have acknowledged same, we understand and agree that
Congress has no duty under the Loan Agreement as defined above, the Guarantee
or any other agreement with us to so notify us or to seek such an
acknowledgment, and nothing contained herein is intended to or shall create
such a duty as to any advances or transactions hereafter.
Dated: November 25, 1996 KRAUSE'S FURNITURE INC.,
a Delaware corporation
By: /s/ Judith O. Lasker
-----------------------------
Name: Judith O. Lasker
----------------------------
Title: General Counsel, Secretary
--------------------------
Title: General Counsel, Secretary
12
<PAGE> 1
EXHIBIT 4.1(d)
AMENDED AND RESTATED
SUBORDINATION AGREEMENT
BETWEEN
KRAUSE'S FURNITURE, INC.
AND
CONGRESS FINANCIAL CORPORATION (WESTERN)
AUGUST 26, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
a. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
b. Other Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Representations, Warranties, and Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
a. Amount of Junior Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
b. Junior Debt Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
c. No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
d. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
e. Further Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
a. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
b. Payments to Subordinating Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
c. Priority of Interests in Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4. Restrictions on Subordinating Lender's Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6. No Action to Violate Senior Lender Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7. No Amendment of Junior Debt Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
8. Extensions, Compromises, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
9. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
10. No Constraint on Senior Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
11. Impact of Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
12. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
a. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
b. Binding Effect; Governing Law; Venue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
c. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
d. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
e. Attorneys' Fees; etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
f. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
g. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
h. Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
i. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
j. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
i
<PAGE> 3
EXHIBIT 4.1(d)
AMENDED AND RESTATED
SUBORDINATION AGREEMENT
THIS AMENDED AND RESTATED SUBORDINATION AGREEMENT (the "Agreement"),
dated as of August 26, 1996, is entered into by and between KRAUSE'S FURNITURE,
INC., a Delaware corporation ("Subordinating Lender"), and CONGRESS FINANCIAL
CORPORATION (WESTERN) ("Senior Lender"), with reference to the following facts:
RECITALS
A. Krause's Sofa Factory, a California corporation ("Borrower"),
has entered into the Junior Debt Documents (as defined below) with
Subordinating Lender, pursuant to which Subordinating Lender has extended
certain financial accommodations to Borrower on the terms and conditions set
forth in such Junior Debt Documents.
B. Senior Lender has entered into various agreements with
Borrower, including that certain Loan and Security Agreement between Senior
Lender and Borrower and its wholly owned subsidiary, Castro Convertible
Corporation, a New York corporation, as co-borrowers, and other agreements,
documents and instruments, dated as of January 20, 1995, (the Loan and Security
Agreement as amended by that certain First Amendment to Loan and Security
Agreement dated as of May 10, 1996 and that certain Second Amendment to Loan
and Security Agreement dated as of even date herewith), as subsequently amended
or modified from time to time (collectively, the "Senior Loan Agreement"),
pursuant to which Senior Lender has agreed to extend certain revolving and
equipment acquisition term loans to Borrower. In order to induce Senior Lender
to enter into the Senior Loan Agreement, Subordinating Lender entered into that
certain Subordination Agreement with Borrower dated as of January 20, 1995 (the
"Original Subordination Agreement").
C. Simultaneously with the execution of this Agreement, Borrower
is (i) receiving an additional contribution of equity capital from
Subordinating Lender in the amount of Five Million Dollars ($5,000,000) and
(ii) borrowing Five Million Dollars ($5,000,000) in cash from Subordinating
Lender, such additional indebtedness to be evidenced by a promissory note dated
as of even date herewith issued by Borrower payable to the order of
Subordinating Lender (said additional equity contribution and additional
indebtedness being hereafter referred to as the "Recapitalization");
D. Senior Lender is unwilling to consent to the Recapitalization
unless Subordinating Lender enters into this Agreement amending and restating
the terms of the Original Subordination Agreement in their entirety.
E. Subordinating Lender is interested in the financial success of
Borrower and will benefit by the loans which Senior Lender has extended and
continues to extend to Borrower under the Senior Loan Agreement.
1
<PAGE> 4
F. Accordingly, to induce Senior Lender to enter into the Senior Loan
Agreement with Borrower and to extend to Borrower the loans contemplated
thereunder, Subordinating Lender is willing to enter into this Agreement with
Senior Lender.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. Certain Defined Terms.
a. General: When used in this Agreement, the following
terms have the following respective meanings:
"Agreement" has the meaning set forth in the introduction
hereto.
"Borrower" has the meaning set forth in the recitals of this
Agreement.
"Junior Debt" means all present and future indebtedness and
other obligations (direct or indirect) owing by Borrower to Subordinating
Lender, including, but not limited to:
(i) Indebtedness in the aggregate amount of Nine Million Four
Hundred Fifty Thousand Dollars ($9,450,000), itemized as follows: (A) Two
Million Seven Hundred Thousand Dollars ($2,700,000), which amount is the result
of reducing the outstanding principal amount of outstanding indebtedness of
Four Million Seven Hundred Thousand Dollars ($4,700,000) as of January 20, 1995
by Two Million Dollars ($2,000,000) funded from the initial advances by Senior
Lender to Borrower under the Senior Loan Agreement, (B) aggregate indebtedness
in the amount of One Million Seven Hundred Fifty Thousand Dollars ($1,750,000)
advanced to Borrower by Subordinating Lender during the period from January 20,
1995 through August 22, 1996, and (C) indebtedness in the amount of Five
Million Dollars ($5,000,000) advanced to Borrower by Subordinating Lender in
connection with the Recapitalization (collectively, the "Note Indebtedness"),
and
(ii) Up to One Million Dollar ($1,000,000) in payment under
Borrower's agreement to indemnify Subordinating Lender from any loss, cost,
expense or liability incurred by Subordinating Lender in providing cash
collateral for the issuance of a One Million Dollar ($1,000,000) standby letter
of credit for the benefit of the landlord of Borrower's Brea, California
facility, which letter of credit expires in 1999, and if drawn prior to its
expiry, will be treated as a bullet loan from Subordinating Lender to Borrower
due and payable on January 20, 2000 in the amount of any draw thereunder (the
"LC Indebtedness"). "Junior Debt" includes (without limitation) indebtedness
owed under the Junior Debt Documents, together with any other debts, demands,
monies, indebtedness, liabilities, and obligations now or hereafter owed by
Borrower to Subordinating Lender, including interest, principal, costs, and
other charges, together with all claims, rights, causes of action, judgments,
decrees and other obligations.
2
<PAGE> 5
"Junior Debt Documents" means all instruments and agreements
evidencing the Junior Debt, including (i) that certain Amended and Restated
Promissory Note, dated as of January 20, 1995, in the original principal amount
of Two Million Seven Hundred Thousand Dollars ($2,700,000), executed by Borrower
to the order of Subordinating Lender, (ii) those certain Promissory Note in the
aggregate original principal amount One Million Seven Hundred Fifty Thousand
Dollars ($1,750,000), dated, respectively: as of September 22, 1995 in the
original principal amount of $500,000; as of May 3, 1996 in the original
principal amount of $500,000; and as of May 22, 1996 in the original amount of
$750,000, each executed by Borrower to the order of Subordinating Lender, (iii)
that certain Promissory Note in the original principal amount of Five Million
Dollars ($5,000,000) dated as of August 26, 1996 executed by Borrower to the
order of Subordinating Lender, and (iv) that certain Promissory Note, amended
and restated as of January 20, 1995, evidencing the LC Indebtedness in the
original principal amount of One Million Dollars ($1.000.000), copies of which
are attached hereto as Exhibit A and incorporated herein by this reference.
"Senior Debt" has the meaning set forth in Section 3(a) of
this Agreement.
"Senior Lender" has the meaning set forth in the introduction
of this Agreement.
"Senior Loan Agreement" has the meaning set forth in the
recitals of this Agreement.
"Subordinating Lender" has the meaning set forth in the
introduction of this Agreement.
b. Other Terms. Unless otherwise defined in this
Agreement, any and all initially capitalized terms set forth in this Agreement
shall have the meaning ascribed thereto in the Senior Loan Agreement.
2. Representations, Warranties, and Covenants. Subordinating
Lender and Borrower represent, warrant, and covenant (jointly and severally) to
Senior Lender that:
a. Amount of Junior Debt. As of the date of this
Agreement, the aggregate outstanding balance (principal plus interest) of the
Note Indebtedness is Nine Million Four Hundred Fifty Thousand Dollars
($9,450,000), and the maximum financial exposure of Borrower to Subordinating
Lender under Borrower's indemnify obligations to Subordinating Lender under the
LC Indebtedness is One Million Dollars ($1,000,000).
b. Junior Debt Documents. Upon Senior Lender's request,
to be given by notice to Borrower and Subordinating Lender: (i) a copy of all
Junior Debt Documents shall be delivered to Senior Lender; and/or (ii) all
Junior Debt Documents shall be conspicuously marked with substantially the
following legend:
3
<PAGE> 6
"Subject to that certain Amended and Restated Subordination Agreement
(Investor), dated as of August 26, 1996, between Krause's Furniture,
Inc., a Delaware corporation, and Congress Financial Corporation
(Western)"
and after being so marked, the originals of the Junior Debt Documents shall be
exhibited to Senior Lender and a copy of the marked Junior Debt Documents shall
be delivered to Senior Lender.
c. No Default. Borrower is not in default under any
Junior Debt Document.
d. Notice of Default. Subordinating Lender and Borrower
shall each promptly notify Senior Lender of all defaults, events of default,
and events which with the giving of notice or the passage of time, or both,
would become events of default ("unmatured events of default") under any Junior
Debt Document.
e. Further Action. Upon Senior Lender's request,
Subordinating Lender will promptly take all actions which Senior Lender
believes appropriate to carry out the purposes of this Agreement.
3. Subordination.
a. General. As more fully provided in the remainder of
this Article 3, the Junior Debt is hereby subordinated and made junior to all
obligations now or hereafter owing to Senior Lender by Borrower. The
obligations referred to in the preceding sentence as being owing to Senior
Lender are referred to in this Agreement as the "Senior Debt," and include the
Obligations, all present and future representations, warranties, covenants,
agreements, indemnities, and other obligations which Borrower or its successors
and assigns may incur to Senior Lender, including (without limitation) those
incurred after the filing of a bankruptcy petition or commencement of a
bankruptcy case by or against Borrower.
b. Payments to Subordinating Lender. If no default or
event of default by Borrower under any present or future instrument or
agreement (including the Senior Loan Agreement) between Borrower and Senior
Lender shall have occurred, Borrower may make the following payments against
the Junior Debt:
(i) Note Indebtedness: Quarterly payments of
interest at one and one-half (1.5) percentage points in excess of the
Prime Rate, as defined in the Senior Loan Agreement, commencing August
31, 1996; and semi-annual payments of principal, commencing December
31, 1996, in an amount not to exceed fifty percent (50%) of Excess
Cash Flow for the applicable semi-annual period, if any (for the
purposes of this Section 3(b)(i), "Excess Cash Flow" shall mean, for
any applicable semi-annual period, net income after tax, exclusive of
extraordinary gains, plus depreciation and any other non-cash
4
<PAGE> 7
items to the extent deducted from the revenues of Borrower in the
calculation of net income or loss, and less any capital expenditures
that are actually made and not financed during such period); provided,
however, that principal payments shall not be permitted unless,
notwithstanding the availability of Excess Cash Flow, after giving
effect to such principal payment, Borrower has a minimum of One
Million Dollars ($1,000,000) Excess Availability, as defined under the
Senior Loan Agreement, as of the last day of the applicable
semi-annual period. Borrower shall be permitted to pay the
semi-annual principal payments upon receipt and review by Lender of
Borrower's financial statements for the semi-annual period to which
the requested payment relates, which financial statements shall be
prepared in accordance with GAAP consistently applied subject to
normal year-end audit adjustments and shall show sufficient Excess
Cash Flow to permit the principal payment and the required minimum
Excess Availability.
(ii) LC Indebtedness: In the event that the letter
of credit for which the Subordinating Lender provided cash collateral
is drawn by such landlord of Borrower's Brea, California facility,
prior to its expiry date in 1999, any amounts so drawn shall be
treated as the outstanding principal amount of a bullet loan from
Subordinating Lender to Borrower, all principal and unpaid interest
being due and payable by Borrower to Subordinating Lender on January
20, 2000; and prior to the expiration date of the letter of credit or
the date of a draw thereunder, whichever shall first occur, the amount
of the cash collateral provided by Subordinating Lender, and after a
draw against the letter of credit, the amount of the draw shall bear
interest at one and one-half (1.5) percentage points per annum in
excess of the Prime Rate, and Borrower may pay quarterly interest
payments of such interest commencing on March 31, 1995 until all
amounts due by Borrower to Subordinating Lender under the LC
Indebtedness have been repaid;
provided further, however, that after giving effect to any such payment to
Subordinating Lender, no default or event of default by Borrower under any
present or future instrument or agreement (including the Senior Loan Agreement
between Borrower and Senior Lender) shall have occurred. Except as provided in
this Agreement, Borrower and Subordinating Lender agree (and Subordinating
Lender acknowledges such agreement) that Borrower shall neither: (i) make
any payments to Subordinating Lender in respect of the Junior Debt; nor (ii)
without Senior Lender's prior written consent, execute or deliver any
negotiable instruments as evidence of the Junior Debt.
c. Priority of Interests in Collateral. Subordinating
Lender currently holds no security interest or lien in the Collateral, or in
any other assets of Borrower, as security for Borrower's payment and
performance of its obligations to Subordinating Lender under the Junior Debt
Documents, and no security interest or lien in the Collateral or in any other
assets of Borrower will be granted by Borrower to Subordinating Lender prior to
the termination of the Senior Loan Agreement. Not withstanding the foregoing,
in the event Subordinating Lender hereafter acquires any security interest,
lien, or other right or interest in the Collateral, such security interest,
lien, or other
5
<PAGE> 8
right or interest shall at all times prior to the indefeasible payment in full
of the Senior Debt be junior, subordinate and subject to any security interest,
lien or other right or interest Senior Lender now has or may hereafter acquire
in the Collateral. The subordination provided in this Section 3(c) shall apply
irrespective of the time or order of attachment or perfection of any security
interest, irrespective of the time or order of filing of any financing
statement or other document, and irrespective of any statute, rule, law, or
court decision to the contrary.
4. Restrictions on Subordinating Lender's Actions. Unless it
shall have obtained Senior Lender's prior written consent, until the Senior
Debt has been paid in full Subordinating Lender will not: (i) demand or accept
any payment upon the Junior Debt, except as may be permitted by this Agreement;
(ii) foreclose or realize upon any collateral hereafter securing the Junior
Debt (whether such collateral constitutes part of the Collateral or consists of
other assets of Borrower), or otherwise enforce any security agreement,
mortgage, lien instrument, or other encumbrance hereafter securing the Junior
Debt; or (iii) commence, prosecute, or participate in any administrative,
legal, or equitable action that in Senior Lender's judgment might adversely
affect Borrower's business or Borrower's ability to pay the Senior Debt.
5. Remedies. If Borrower or Subordinating Lender attempts to
violate Section 3(b) or Clause (i) of Article 4, or if Subordinating Lender in
any other manner receives any funds which by virtue of this Agreement it is
precluded from receiving, Subordinating Lender shall be deemed to hold any
payment or distribution it receives in trust for Senior Lender's benefit. In
such case, Subordinating Lender shall immediately remit such payment or
distribution to Senior Lender. If Subordinating Lender attempts to violate
Clause (ii) of Article 4, Senior Lender (in Senior Lender's or Borrower's name)
or Borrower may seek injunctive or other equitable relief to prevent or stop
Subordinating Lender's actions, it being agreed that legal remedies may be
inadequate. If Subordinating Lender attempts to violate Clause (iii) of
Article 4, Borrower may interpose as a defense or plea the making of this
Agreement, and Senior Lender may intervene and interpose such defense or plea
in its own or Borrower's name. The remedies provided in this Article 5 are not
exclusive; Senior Lender shall be entitled to all other remedies available at
law or in equity.
6. No Action to Violate Senior Lender Agreements. Subordinating
Lender shall not take any action which in Senior Lender's judgment might cause
Borrower to violate the Senior Loan Agreement or any other agreement between
Borrower and Senior Lender.
7. No Amendment of Junior Debt Documents. Unless Senior Lender's
prior written consent shall have been obtained, no Junior Debt Document may be
amended or modified.
8. Extensions, Compromises, etc. Without having to obtain either
Borrower's or Subordinating Lender's consent, Senior Lender may grant to
Borrower extensions of the time of payment or performance, and may enter into
compromises (including releases of collateral and settlements) with Borrower
with respect to the Senior Debt.
6
<PAGE> 9
9. Waiver. Subordinating Lender waives any right it may now or
hereafter have to require Senior Lender to marshall assets, to exercise rights
or remedies in a particular manner, or to forbear from exercising such rights
and remedies in any particular manner or order.
10. No Constraint on Senior Lender. Nothing contained in this
Agreement shall preclude Senior Lender from discontinuing its extension of
credit to Borrower (whether under the Senior Loan Agreement or otherwise) or
from taking (without notice to Subordinating Lender, Borrower, or any other
individual or entity) any other action in respect of the Senior Debt or the
Collateral which Senior Lender is otherwise entitled to take with respect to
the Senior Debt or the Collateral. Among the actions which Lender may take in
accordance with this Article 10 are: renewing, extending, and increasing the
amount of the Senior Debt; otherwise changing the terms of the Senior Debt;
settling, releasing, compromising, and collecting on the Senior Debt; making
(and refraining from making) other secured and unsecured loans and advances to
Borrower; amending any present or future agreement between Senior Lender and
Borrower; and all other actions which Senior Lender deems advisable.
11. Impact of Bankruptcy. If a voluntary or involuntary
bankruptcy petition shall be filed respecting Borrower: (a) this Agreement
(including the subordination provisions contained in Article 3) shall continue
in full force and effect; (b) Subordinating Lender shall take no action in the
bankruptcy proceeding which might (in Senior Lender's opinion) adversely affect
Senior Lender's rights and interests respecting the Senior Debt; and (c)
Subordinating Lender shall take all actions reasonably requested by Senior
Lender to protect Senior Lender's interests during the course of such
bankruptcy proceedings.
12. Miscellaneous.
a. Amendment. No amendment or waiver of this Agreement
shall be effective unless in a writing signed by each party hereto.
b. Binding Effect; Governing Law; Venue. This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns. This Agreement shall be governed by
and construed in accordance with the internal laws of the State of California.
All actions and proceedings arising in connection with this Agreement shall be
tried and litigated only in state or federal courts located in Los Angeles
County, California, or (at Senior Lender's sole option) in any other court in
which Senior Lender may initiate legal or equitable proceedings, so long as
such court has subject matter jurisdiction. Subordinating Lender and Borrower
each waive any right it may have to plead forum non-conveniens or otherwise to
object to venue, and hereby consents to any court-ordered relief.
c. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which
together shall constitute one agreement.
7
<PAGE> 10
d. Headings. The headings contained in this Agreement
are for convenience only. They shall not affect the interpretation of this
Agreement.
e. Attorneys' Fees: etc. In any suit or action brought
to enforce this Agreement or to obtain an adjudication (declaratory or
otherwise) of rights or obligations hereunder, the losing party shall pay to the
prevailing party reasonable attorneys' fees and other costs and expenses
incurred by the prevailing party.
f. Severability. Any provision of this Agreement that
is prohibited by law or unenforceable in any jurisdiction shall be ineffective
in that jurisdiction to the extent of such prohibition or unenforceability,
without invalidating the remaining provisions hereof or affecting the validity
or enforceability of such provision in any other jurisdiction. To the extent
permissible, the parties waive any law that renders this Agreement prohibited
or unenforceable.
9. Entire Agreement. This Agreement constitutes the entire agreement
between and among the parties regarding the subject matter hereof. This
Agreement supersedes all prior and contemporaneous agreements between or among
the parties with respect to the subject matter hereof.
h. Notice. All notices or demands by any party
hereunder must be in writing and personally delivered or sent by registered or
certified mail, postage prepaid, return receipt requested, or by a nationally
recognized overnight courier, as follows:
Senior Lender: CONGRESS FINANCIAL CORPORATION (WESTERN)
225 South Lake Avenue, Suite 1000
Pasadena, California 91101
Attn: Thomas J. Stoltz, Vice President
with a copy to: KELLEY DRYE & WARREN
515 S. Flower Street, Suite 1100
Los Angeles, California 90071
Attn: James D. Prendergast, Esq.
Subordinating
Lender: KRAUSE'S FURNITURE, INC.
5980 Stoneridge Drive, Suite 109
Pleasanton, California 94588
Attn: President
Borrower: KRAUSE'S SOFA FACTORY
200 North Berry Street
Brea, California 92621-3903
Attn: Chief Financial Officer
8
<PAGE> 11
The parties may change the address at which they receive notice by giving
notice to each other in the foregoing manner. Notices or demands sent in
accordance with this Section shall be deemed to be received on the earlier of
the date of actual receipt or five (5) calendar days after deposit in the
United States mail.
i. Termination. This Agreement shall continue in full
force and effect until Borrower has satisfied in full the Senior Debt.
j. Rules of Construction. As used in this Agreement, the
singular includes the plural; the plural includes the singular. References
to one gender include all genders. Unless otherwise specified, references to
Articles, Sections, Exhibits, and parties refer to Articles, Sections,
Exhibits, and parties of or to this Agreement. The words "include,"
"including," and similar words are not intended to be limiting.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective duly authorized officers, as of the date first
above written.
KRAUSE'S FURNITURE, INC.
a Delaware corporation
By: ROBERT G. SHARPE
----------------------------
Robert G. Sharpe
Executive Vice President
CONGRESS FINANCIAL CORPORATION
(WESTERN)
By: [SIG]
-----------------------------
9
<PAGE> 12
BORROWER'S ACKNOWLEDGMENT
The undersigned Borrower hereby approves of, and agrees and consents
to, the foregoing Amended and Restated Subordination Agreement, dated as of
August 26, 1996, between Krause's Furniture, Inc. and Congress Financial
Corporation (Western) (the "Amended and Restated Subordination Agreement").
Unless otherwise defined in this Acknowledgment, terms defined in the Amended
and Restated Subordination Agreement have the same meanings when used in this
Acknowledgment.
Borrower agrees to be bound by the Amended and Restated Subordination
Agreement. Borrower further agrees that the Amended and Restated Subordination
Agreement may be amended by Senior Lender and Subordinating Lender without
notice to, or the consent of, Borrower.
KRAUSE'S SOFA FACTORY,
a California corporation
By: STEPHEN P. ANDERSON
----------------------------
Stephen P. Anderson
President and Chief Executive
Officer
10
<PAGE> 1
EXHIBIT 11
KRAUSE'S FURNITURE, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Years Ended Months Ended
----------------------------------------- --------------------------
February 2, January 28, December 31, January 29, January 30,
1997 1996 1994 1995 1994
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Income (loss) before extraordinary items $ (13,389) $ (8,715) $ 5,831 $ (3,221) $ (2,185)
Extraordinary items - - (436) - -
--------- --------- --------- --------- ---------
Net income (loss) $ (13,389) $ (8,715) $ 5,395 $ (3,221) $ (2,185)
========= ========= ========= ========= =========
Weighted average number of
shares outstanding:
Common stock 10,445 3,950 3,523 3,685 3,490
Common stock equivalents (A):
Convertible preferred stock - - 1,778 - -
Stock options (B) - - 80 - -
Warrants (B) - - 13 - -
--------- --------- --------- --------- ---------
Total 10,445 3,950 5,394 3,685 3,490
========= ========= ========= ========= =========
Income (loss) per share:
Income (loss) before extraordinary items $ (1.28) $ (2.21) $ 1.08 $ - $ (0.63)
Extraordinary items - - (0.08) - -
--------- --------- --------- --------- ---------
Net income (loss) per share $ (1.28) $ (2.21) $ 1.00 $ (0.87) $ (0.63)
========= ========= ========= ========= =========
</TABLE>
(A) Common stock equivalents are excluded from the calculation in
loss years since they are anti-dilutive.
(B) Computations of dilutive stock options and warrants is based on
the treasury stock method using the average market price.
(C) All share and per share amounts have been restated to reflect a
one-for-three reverse stock split effected August 1, 1995.
34
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
<S> <C>
Krause's Sofa Factory California
(business operated under the names
"Krause's Sofa Factory" and "Castro Convertibles")
KMC Enterprises, Inc. Delaware
</TABLE>
35
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-81168) of Krause's Furniture, Inc. and in the related
Prospectus of our report dated March 28, 1996, with respect to the consolidated
financial statements and schedule of Krause's Furniture, Inc. included in this
Annual Report (Form 10-K) for the year ended February 2, 1997.
/s/ ERNST & YOUNG LLP
- -----------------------
Ernst & Young LLP
Orange County, California
April 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-02-1997
<PERIOD-START> JAN-29-1996
<PERIOD-END> FEB-02-1997
<CASH> 1,227
<SECURITIES> 0
<RECEIVABLES> 1,447
<ALLOWANCES> 327
<INVENTORY> 14,013
<CURRENT-ASSETS> 17,553
<PP&E> 13,538
<DEPRECIATION> 7,149
<TOTAL-ASSETS> 43,087
<CURRENT-LIABILITIES> 19,735
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 15,524
<TOTAL-LIABILITY-AND-EQUITY> 43,087
<SALES> 112,737
<TOTAL-REVENUES> 112,737
<CGS> 56,490
<TOTAL-COSTS> 56,490
<OTHER-EXPENSES> 68,694
<LOSS-PROVISION> 327
<INTEREST-EXPENSE> 1,230
<INCOME-PRETAX> (13,389)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,389)
<EPS-PRIMARY> (1.28)
<EPS-DILUTED> 0
</TABLE>
