<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer Identification No.)
of incorporation)
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)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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. [x] Yes [ ] No
As of June 1, 1997 the Registrant had 19,020,539 shares of common stock
outstanding.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated balance sheets 3
- Consolidated statement of operations (unaudited) 4
- Consolidated statement of cash flows (unaudited) 5
- Notes to consolidated financial statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
PART II OTHER INFORMATION
Items 1,2,3
and 5 Not Applicable
Item 4. Submission of Matters to a Vote of Security
Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
2
<PAGE> 3
.
KRAUSE'S FURNITURE, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
May 4,
1997 February 2,
(unaudited) 1997
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents
$ 480 $ 1,227
Accounts receivable, net of allowance of $15 for
doubtful accounts ($327 at February 2, 1997) 856 1,120
Inventories 15,782 14,013
Prepaid expenses 766 1,193
--------- --------
Total current assets 17,884 17,553
Property, equipment, and leasehold improvements, net 6,323 6,389
Goodwill, net 15,131 15,386
Leasehold interests, net 1,425 1,504
Other assets 2,180 2,255
--------- --------
$ 42,943 $ 43,087
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,891 $ 7,506
Accrued payroll and related expenses 1,320 1,468
Other accrued liabilities 3,918 5,099
Customer deposits 5,216 5,621
Notes payable 41 41
--------- --------
Total current liabilities 19,386 19,735
Long-term liabilities:
Notes payable 8,031 6,306
Other 1,499 1,503
--------- --------
Total long-term liabilities 9,530 7,809
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value;
667,667 authorized,
no shares outstanding - -
Common stock, $.001 par value; 35,000,000 shares
authorized, 19,020,539 shares outstanding 19 19
Capital in excess of par value 49,925 49,874
Accumulated deficit (35,917) (34,350)
--------- --------
Total stockholders' equity 14,027 15,543
--------- --------
$ 42,943 $ 43,087
========= ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
------------------------
May 4, April 28,
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 27,642 $ 29,637
Cost of sales 13,275 15,723
-------- --------
Gross profit 14,367 13,914
Operating expenses:
Selling 13,028 14,469
General and administrative 2,296 2,696
Amortization of goodwill 255 255
-------- --------
15,579 17,420
-------- --------
Loss from operations (1,212) (3,506)
Interest expense (340) (182)
Other income (expense) (15) 51
-------- --------
Net loss
$ (1,567) $ (3,637)
======== ========
Net loss per share
$ (.08) $ (0.88)
======== ========
Number of shares used in computing loss 19,021 4,121
per share ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
KRAUSE'S FURNITURE, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
------------------------
May 4, April 28,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,567) $(3,637)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 596 742
Other non-cash charges 262 -
Change in assets and liabilities
Accounts receivable 264 69
Inventories (1,769) 164
Prepaid expenses and other assets 503 20
Income tax refund receivable - 1,467
Accounts payable and other liabilities 52 2,909
Customer deposits (405) (607)
----------- -----------
Net cash provided (used) by operating activities (2,064) 1,127
----------- -----------
Cash flows from investing activities:
Capital expenditures (197) (219)
----------- -----------
Net cash used by investing activities (197) (219)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term borrowings 33,862 33,124
Principal payments on long-term borrowings (32,348) (33,112)
----------- -----------
Net cash provided by financing activities 1,514 12
----------- -----------
Net increase (decrease) in cash (747) 920
Cash and cash equivalents at beginning of period 1,227 1,336
----------- -----------
Cash and cash equivalents at end of period $ 480 $ 2,256
=========== ===========
Supplemental disclosures of cash flow information-
Cash paid during the period for interest
$ 114 $ 163
</TABLE>
See accompanying notes.
5
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KRAUSE'S FURNITURE, INC
--------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements of Krause's Furniture,
Inc. (the "Company") and its wholly owned subsidiaries, including the Company's
principal subsidiary, Krause's Sofa Factory ("Krause's"), have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and reflect all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation for the periods reported. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules or regulations, although
management believes that the disclosures made are adequate to make the
information presented not misleading.
These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended February 2, 1997. The
results of operations for the thirteen weeks ended May 4, 1997 are not
necessarily indicative of results to be expected in future periods.
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 revenue and expenses during the reported
periods. Actual results could differ from those estimates.
2. The Company has reported losses from operations in each of the past five
years and for the first quarter of fiscal 1997 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 $35,917,000 and a working
capital deficiency of $1,502,000 at May 4,, 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
6
<PAGE> 7
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. 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>
May 4, February 2,
1997 1997
------------ ------------
(in thousands)
<S> <C> <C>
Finished goods $ 10,706 $ 10,693
Work in progress 278 254
Raw materials 4,798 3,066
----------- -----------
$ 15,782 $ 14,013
=========== ===========
4. Notes payable consists of the following:
May 4, February 2,
1997 1997
------------ ------------
(in thousands)
Secured revolving credit notes $ 3,533 $ 1,999
Subordinated note payable to
shareholder 5,259 5,133
Unamortized debt discount, net of
accumulated amortization of
$222 ($137 at February 2, 1997) (1,178) (1,263)
Other notes 458 478
----------- -----------
8,072 6,347
Less current portion 41 41
----------- -----------
$ 8,031 $ 6,306
=========== ===========
</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 May 4, 1997, borrowing under the
revolving credit facility was limited to approximately $6.2 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
May 4, 1997 was payable monthly at the rate of 1.0% in excess of the prime rate
(8.50% at May 4, 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 $126,000 was added to the principal balance of the
subordinated note during the first quarter of fiscal 1997. Semi-annual mandatory
7
<PAGE> 8
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 May 4, 1997, the Company was in compliance
with all the terms and conditions of its subordinated note payable and revolving
credit agreement.
5. Net loss per share amounts were computed based on the weighted average
number of common shares outstanding during the periods reported. Common
equivalent shares are not included in the computation since such share
equivalents are antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. Since the effect of stock
options is already excluded in the computation of net loss per share, the
adoption of Statement 128 will not result in any change in the loss per share
amounts reported for the quarters ended May 4, 1997 or April 28, 1996.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q and particularly the Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in this report
contain forward-looking statements within the meaning of the Private Securities
Reform Act of 1995. These statements can be identified by the use of
forward-looking terminology such as "may", "will", "expect", "anticipate",
"continue", "estimate", or the negative of these terms or other comparable
terminology. Various factors noted in this Form 10-Q and in filings recently
made by the Company with the Securities and Exchange Commission, including the
Company's Form 10-K and a Registration Statement on Form S-1, constitute
cautionary statements that identify risks and uncertainties that could cause
actual results to differ materially from those contained in the forward-looking
statements.
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 $35,917,000 and a working capital deficiency of
$1,502,000 at May 4, 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 May 4, 1997, the Company had $480,000 in cash and cash equivalents
and borrowing capacity under its revolving credit agreement of $2,700,000. Cash
flow activity for the quarters ended May 4, 1997 and April 28, 1996 is presented
in the Consolidated Statement of Cash Flows.
Cash Flow - Thirteen Weeks Ended May 4, 1997
During the quarter ended May 4, 1997, cash and cash equivalents decreased
by $747,000. Operating activities used net cash of $2,064,000, principally from
a cash loss from operations of $709,000, a decrease in customer deposits of
$405,000, and an increase in inventories of $1,769,000, all of which were
partially offset by decreases in prepaid expenses of $503,000 and accounts
receivable of $264,000. Investing activities during the period included capital
9
<PAGE> 10
expenditures of $197,000, principally for additions to leasehold improvements at
certain retail showrooms. Financing activities during the period consisted
principally of net borrowings of $1,534,000 under the Company's revolving credit
facility.
During the first quarter of fiscal 1997, capital spending totaled
$197,000, compared to $219,000 during the same period of fiscal 1996. 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.
Cash Flow - Thirteen Weeks Ended April 28, 1996
Cash and cash equivalents increased by $920,000 during the period.
Operating activities provided net cash of $1,127,000, principally from an
increase in accounts payable and other liabilities of $2,909,000 and collections
of income tax refund receivables of $1,467,000, offset by a cash loss from
operations of $2,895,000 and a decrease in customer deposits of $607,000.
Investing activities during the period were capital expenditures of $219,000,
principally for additions to leasehold improvements at certain retail showrooms.
Financing activities during the period were net borrowings of $17,000 under the
Company's revolving credit facility.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of net sales to
certain items included in the Consolidated Statement of Operations:
<TABLE>
<CAPTION>
13 Weeks Ended
---------------------------
May 4, April 28,
1997 1996
----------- -----------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 48.0 53.1
---------- ----------
Gross profit 52.0 46.9
Operating expenses:
Selling 47.2 48.8
General and administrative 8.3 9.1
Amortization of goodwill 0.9 0.9
---------- ----------
Total operating expenses 56.4 58.8
---------- ----------
Loss from operations (4.4) (11.9)
Interest expense (1.2) (0.6)
Other income (expense) ( .1) 0.2
---------- ----------
Net loss (5.7%) (12.3%)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Store (Showroom) Data 13 Weeks Ended
---------------------------
May 4, April 28,
1997 1996
----------- -----------
<S> <C> <C>
Stores open at beginning of period 82 83
Stores opened during period - -
Stores closed during period 2 -
---------- ----------
Stores open at end of period 80 83
Average sales per showroom (1) $337 $357
Comparable store sales increase (6.5%) (10.2%)
(decrease) (2)
</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.
11
<PAGE> 12
Thirteen Weeks Ended May 4, 1997 Compared to Thirteen Weeks Ended
April 28, 1996
Net Sales. Net sales for the first quarter of fiscal 1997 were $27,642,000
which was a decrease of 6.7% from the comparable quarter of fiscal 1996. The
sales decrease was primarily attributable to a 6.5% decrease in same-store
sales. Such decrease was primarily the result of the Company's strategy to
optimize the mix of its business and improve gross profit.
Gross Profit. Gross profit was 52.0% of net sales in the first quarter of
fiscal 1997 as compared to 46.9% of sales in the first quarter of fiscal 1996.
The improvement in gross profit resulted primarily from increased product
prices, reduced promotional discounting, and lower sales of clearance
merchandise.
Selling Expenses. Selling expenses were $13,028,000 or 47.2% of sales in
the first quarter of fiscal 1997 as compared to $14,469,000 or 48.8% of sales in
the same period last year. The decrease of $1,441,000 in selling expenses was
primarily due to a decrease of $696,000 in variable selling payroll resulting
from a new commission structure, a decrease of $421,000 in store non-payroll
expenses resulting from tighter cost controls and a decrease of $324,000 in
delivery expenses resulting from lower volume and tighter cost controls.
General and Administrative Expenses. General and administrative expenses
for the quarter ended May 4, 1997 decreased by $400,000 compared with the same
period in the prior fiscal year primarily as a result of lower computer rental
and maintenance costs, lower professional fees and tighter cost controls.
Interest Expense. Interest expense in the first quarter of fiscal 1997
increased by $158,000 over the same quarter in the prior fiscal year due
primarily to higher average debt outstanding.
Income Taxes. No tax benefits were available for first quarter of
fiscal 1997 or fiscal 1996.
Net Loss. As a result of the above factors, the net loss was $1,567,000
for the quarter ended May 4, 1997 as compared to a loss of $3,637,000 in the
same period of the prior fiscal year. Net loss per share in the 1997 quarter was
$.08 based on 19,021,000 shares outstanding. In the comparable 1996 quarter the
net loss per share was $.88 based on 4,121,000 average shares outstanding. The
per share loss for the first quarter of fiscal 1997, as compared to fiscal 1996,
decreased 91%, although the net loss decreased only 57%. This anomaly is due to
the increase in weighted average number of Company shares outstanding from
4,121,000 in the first quarter of fiscal 1996 to 19,020,539 in the first quarter
of fiscal 1997, attributable to the issuance of 14,912,000 shares of the
Company's common stock in connection with the refinancing that took place in
August and September of fiscal 1996.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
The Company held its Annual Meeting of Stockholders on May 29, 1997. At the
meeting the stockholders;
(i) elected a Board of Directors to serve for the ensuing year.
(ii) approved the Company's 1997 Stock Incentive Plan. There were
13,960,439 affirmative votes, 64,157 negative votes and 1,615,331
abstaining or non-votes with respect to this matter.
(iii) approved a stock option granted to the Chairman of the Board and
Chief Executive Officer of the Company, Mr. Philip M. Hawley, as
part of his agreement to join the Company. There were 14,006,341
affirmative votes, 17,747 negative votes and 1,615,839 abstaining
or non-votes with respect to this matter.
(iv) approved the selection of Ernst & Young to serve as independent
auditors to examine the Company's financial statements for the
fiscal year ending February 1, 1998. There were 15,637,235
affirmative votes, 56 negative votes and 2,636 abstaining with
respect to this matter
Item 6. Exhibits and Reports on Form 8-K filed during the quarter
ended May 4, 1997
(a) Exhibits
Exhibit 10.11 - Option Agreement between the Company and
Philip M. Hawley, Chairman of the Board and Chief Executive
Officer of the Company.
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the
quarter covered by this report.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and 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.
(Registrant)
Date: June 17, 1997 /s/ PHILIP M. HAWLEY
--------------------------------
Philip M. Hawley
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
Date: June 17, 1997 /s/ ROBERT A. BURTON
--------------------------------
Robert A. Burton
Senior Vice President and Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
14
<PAGE> 1
Exhibit 10.11
OPTION AGREEMENT dated as of the 26th day of August, 1996, by and
between Krause's Furniture, Inc., a Delaware corporation (the "Company") and
Philip M. Hawley ("Optionee") and is entered into to memorialize the options
granted to Optionee by the Employment Agreement dated as of August 26, 1996.
It is hereby agreed as follows:
1. For good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and pursuant to that certain
employment agreement between Optionee and the Company, effective as of August
26, 1996 (the "Employment Agreement"), the Company hereby grants to Optionee
options (the "Options") to purchase an aggregate of 1,234,000 shares (the
"Shares") of the Company's common stock, par value $.001 per share, ("Common
Stock") at an exercise price of $1.00 per share.
2. The Options granted to Optionee will vest and become fully
exercisable 25% of the total original grant on August 26, 1996, 50% of the total
original grant on August 26, 1997, 75% of the total original grant on August 26,
1998 and 100% of the total original grant on August 26, 1999. Notwithstanding
the foregoing vesting schedule, vesting of certain Options may be delayed until
August 26, 1999 in accordance with the following terms and conditions:
(a) For purposes hereof, the "Trust Shares" mean the 950,000
shares of Common Stock acquired on or about August 26, 1996 by five
trusts established by or for the benefit of certain members of
Optionee's family (the "Hawley Trusts");
(b) If any of the Hawley Trusts sell any of the Trust Shares
at any time prior to August 26, 1998, the number of shares as to which
Options vest on the August 26 next following such sale shall be reduced
by an amount equal to the number of Trust Shares sold; provided,
however, if Optionee, or any of his siblings or lineal descendants, or
any of their spouses or any trusts established by or for the benefit of
any of them purchases any shares of Common Stock after August 26, 1996
and continues to hold such shares
<PAGE> 2
on August 26, 1998, the amount of the foregoing reduction shall be
decreased by the number of shares so purchased.
(c) If the amount of reduction in vesting on August 26, 1997
is greater than the amount scheduled for vesting on such date, the
balance of such reduction shall be applied to the amount scheduled for
vesting on August 26, 1998.
(d) Any Options as to which vesting is so delayed shall vest
on August 26, 1999 and subject to the terms hereof.
Notwithstanding any other provision herein with respect to vesting of the
Options, if Mr. Hawley's service as Chairman of the Board and Chief Executive
Officer is terminated for any reason other than for Cause or due to Optionee's
"Voluntary Resignation" (each as defined in the Employment Agreement), or if
the Company terminates Optionee's obligation to serve as Chairman of the Board
and Chief Executive Officer (but not his status as an employee of the Company)
in the manner contemplated in the Employment Agreement, all unvested Options
shall immediately become vested and fully exercisable.
3. Notwithstanding any other provision herein, or the
occurrence of a Change of Control (as defined in the Employment Agreement) or
at such time as General Electric Capital Corporation ("GECC") owns less than
2,000,000 shares of Common Stock, all Options granted to Optionee will
accelerate and will be vested and exercisable immediately prior to the
consummation of such Change of Control or at the time of the transaction
resulting in GECC's owning less than 2,000,000 shares. In any such event, Mr.
Hawley shall, on exercise of the Options, be entitled to participate in the
transactions as a shareholder of the Company pari passu with all other
shareholders. If any payment, or portion thereof, or benefit received or to be
received by Optionee in connection with a Change of Control, including but not
limited to any benefit derived in connection with the immediate vesting of all
outstanding Options, whether payable to or inuring to the benefit of the
Optionee pursuant to the terms of this Agreement or otherwise (together, the
"Total Payment"), would be considered an "excess
2
<PAGE> 3
parachute payment," within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), the number of Options vesting on account
of such Change of Control shall be reduced, but not below zero, until no
portion of the Total Payment is considered an "excess parachute payment." For
this purpose, the value of any non-cash benefit or any deferred payment or
benefit included in the Total Payments shall be determined in accordance with
the principles of Sections 280G(d)(3) and (4) of the Code.
4. The Options, to the extent they are vested, may be exercised
from time to time, in whole or in part (but not as to a fractional share). The
Options shall expire on August 26, 2006 (the "Expiration Date"). To the extent
that the Options shall not have been exercised at or before the Expiration
Date, they shall expire and become void and of no further effect.
5. The Options and all rights hereunder shall be nonassignable and
nontransferable and are intended solely for the benefit of Optionee as
compensation for services rendered to the Company. Notwithstanding the
foregoing, following Optionee's death or disability, the Optionee's conservator
or personal representative, or the representative of his estate or his heirs,
as the case may be, shall be permitted to exercise the Options, to the extent
permitted by the terms hereof.
6. The Options may be exercised from time to time by delivery to
the Company of a notice of exercise of the Options duly signed by Optionee, and
upon payment to the Company of the purchase price of the Shares purchased in
any manner acceptable under any option plan or incentive plan providing for
options that previously has been or is after the date hereof adopted by the
Company. Notwithstanding the foregoing, the Options may not be exercised at any
time when the Options or the exercise thereof violates any law or governmental
order or regulation including, but not limited to, Section 16 of the Securities
Act of 1933, as amended (the "33 Act"). Optionee shall indicate in his or her
notice the number of Shares for which the Options are being exercised.
7. Within a reasonable time after the due exercise of the Options,
the
3
<PAGE> 4
Company shall cause to be delivered to Optionee an instrument evidencing the
Common Stock purchased pursuant to the exercise of the Options. As promptly as
is practicable following the execution hereof, the Company shall cause the
shares of Common Stock receivable by Optionee on exercise of the Options to be
registered under the 33 Act and applicable state "blue sky" laws. However, if
any shares of Common Stock acquired by Optionee upon exercise of any Options are
"restricted securities" (as used in the 33 Act and rules promulgated
thereunder), Optionee shall be entitled, with respect to such Common Stock, to
be subject to the registration rights granted to Optionee pursuant to that
certain Registration Rights Agreement, dated as of August 26, 1996, between the
Company and certain stockholders (including Optionee) who are signatories
thereto.
8. The number of shares of Common Stock covered by the Options,
and the number of shares of Common Stock which have been authorized for
issuance under the Options, shall be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other similar event resulting in
an increase or decrease in the number of issued shares of Common Stock. Except
as expressly provided herein, no issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason hereof shall be made with respect to, the
number or price of shares of Common Stock subject to the Options.
9. The Company hereby represents and covenants with Optionee that
it shall, at all times up to and including the Expiration Date, authorize and
keep available enough shares of Common Stock to be sufficient to satisfy the
requirements of the Option. The Company further represents and warrants that
the Options represented by this Agreement have been granted and approved by a
committee of the Company's Board of Directors consisting entirely of directors
who at the time the grant was made were not, and at no time previously had
<PAGE> 5
been, employees of the Company or of any of its subsidiaries and affiliates and
who in all respect conformed to the requirements of independent directors under
Section 162(m) of the code and the regulations promulgated thereunder.
10. All notices, requests, demands and communications provided
for by this Agreement shall be in writing and shall be deemed to have been
given at the time when deposited with the United States Postal Service,
enclosed in a certified postage paid envelope, return receipt requested, and
addressed to the addresses stated below or to such other addresses as may have
been fixed by notice; provided, however, that a notice of any change of
address shall be effective only upon receipt:
If to the Company: Krause's Furniture, Inc.
200 North Berry Street
Brea, CA 92821-3903
Attn: Judith O. Lasker
General Counsel
If to Optionee: Philip M. Hawley
PM Hawley, Inc.
400 South Hope Street, Suite 1900
Los Angeles, CA 90071
11. This Agreement shall be governed by and construed in
accordance the laws of the State of California without giving effect to
principles of conflict of laws.
12. THIS AGREEMENT AND THE OPTIONS GRANTED UNDER THIS
AGREEMENT ARE SUBJECT TO AND CONTINGENT UPON THE APPROVAL OF A MAJORITY OF THE
HOLDERS OF THE COMPANY'S COMMON STOCK PRESENT IN PERSON OR BY PROXY AT A
MEETING HELD ON OR BEFORE AUGUST 25, 1997. IF THIS APPROVAL IS NOT OBTAINED ON
OR BEFORE THE REQUIRED DATE THIS AGREEMENT AND THE OPTIONS SHALL BE VOID AND OF
NO FORCE AND EFFECT. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT NO
OPTION MAY BE EXERCISED UNTIL SUCH APPROVAL IS OBTAINED.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
KRAUSE'S FURNITURE, INC.
By: /s/ Thomas M. DeLitto
---------------------------------
Name: Thomas M. DeLitto
Title: Vice Chairman of the Board
AGREED TO:
/s/ P. M. Hawley
- -----------------
Philip M. Hawley
6
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<S> <C>
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<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-START> FEB-03-1997
<PERIOD-END> MAY-04-1997
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0
0
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<INCOME-PRETAX> (1,567)
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