<PAGE> 1
KRAUSE'S FURNITURE, INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 28, 1998
To the Stockholders of
KRAUSE'S FURNITURE, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Krause's
Furniture, Inc., a Delaware corporation, will be held on May 28, 1998, at the
offices of the Company at 200 North Berry Street, Brea, California 92821-3903 at
10:00 a.m., local time, for the following purposes:
(1) To elect a Board of six directors to serve for the ensuing year.
(2) To consider and approve an increase of 1,000,000 shares in the
Company's 1997 Stock Incentive Plan.
(3) To consider and ratify the appointment of Arthur Andersen LLP as
independent public accountants for the fiscal year ending January 31, 1999.
(4) To transact such other business that may properly be brought
before the meeting or any adjournment or postponement thereof.
Nominees for directors are set forth in the enclosed Proxy Statement. The
Board of Directors has fixed the close of business on May 1, 1998 as the record
date for the determination of stockholders entitled to receive notice of and to
vote at the Annual Meeting. Your proxy will be revocable at any time prior to
its exercise.
BY ORDER OF THE BOARD OF DIRECTORS
JUDITH OLSON LASKER
Secretary
Dated: May 4, 1998.
IMPORTANT
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN,
DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE ANNUAL
MEETING, YOU MAY VOTE IN PERSON IF YOU HAVE NOTIFIED THE SECRETARY OF YOUR
INTENTION TO DO SO, EVEN THOUGH YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
<PAGE> 2
KRAUSE'S FURNITURE, INC.
200 NORTH BERRY STREET
BREA, CALIFORNIA 92821
------------------------
PROXY STATEMENT
------------------------
The accompanying proxy is solicited by the Board of Directors of Krause's
Furniture, Inc. (the "Company"), for use at the Annual Meeting of Stockholders
(the "Annual Meeting") to be held at 10:00 a.m. local time on May 28, 1998, at
the Company's offices, and at any adjournment or postponement thereof, for the
purposes set forth in the attached Notice. If a choice is not specified in the
proxy, the shares represented thereby will be voted FOR the actions proposed. A
stockholder giving a proxy has the power to revoke it at any time prior to its
exercise by filing with the Secretary of the Company a written revocation or a
duly executed proxy bearing a later date, or by attending the Annual Meeting and
electing to vote in person.
The cost of solicitation of proxies will be borne by the Company. In
addition to solicitation by mail, officers and directors of the Company may
solicit proxies by telephone, telegraph or personal interview.
The close of business on May 1, 1998 has been fixed as the record date for
determining stockholders entitled to vote at the Annual Meeting. On that date,
the Company had outstanding and entitled to vote 21,984,428 shares of Common
Stock. Each share of Common Stock entitles the holder to one vote on all matters
to come before the Annual Meeting.
This Proxy Statement and accompanying form of proxy were first sent to
stockholders on or about May 4, 1998. The Company's Annual Report accompanies
this Proxy Statement.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
All directors are elected annually by the stockholders. The Company's
Bylaws provide for six directors. Six individuals are being nominated to serve
as directors until the next Annual Meeting. Unless marked to the contrary,
proxies received will be voted for the following six nominees: Kamal G.
Abdelnour, Jeffrey H. Coats, Peter H. Dailey, Thomas M. DeLitto, John A. Gavin
and Philip M. Hawley, all of whom are incumbent directors. All of the nominees
have agreed to serve if elected. If any of such persons is unable or unwilling
to stand for election at the date of the Annual Meeting or any adjournment
thereof, the proxy holders will vote for a substitute nominee in their
discretion. Those nominees receiving the largest number of votes will be elected
as directors. Officers of the Company are appointed by the Board of Directors
and serve at the pleasure of the Board.
Under Delaware law and the Company's Certificate of Incorporation and
Bylaws, if a quorum is present, directors are elected by a plurality of the
votes of the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors. A majority of the outstanding
shares entitled to vote, present in person or represented by proxy, constitutes
a quorum. Shares represented by proxies or ballots withholding votes from one or
more directors and "broker non-votes", if the broker's proxy is voted for at
least one proposal, will be counted for purposes of determining a quorum.
NAME, AGE AND BUSINESS EXPERIENCE OF EACH NOMINEE FOR
DIRECTOR AND EACH EXECUTIVE OFFICER
Set forth below is a summary of the business experience over the last five
years of the six nominees for director and the executive officers who are not
directors.
1
<PAGE> 3
Nominees for Election as Directors
KAMAL G. ABDELNOUR, age 61, has been a director since September 1996. He
had been a director from February 1993 to August 1996 when he resigned in
connection with the Company's recapitalization. Mr. Abdelnour has been
President, Chief Executive Officer and a director of ATCO Development, Inc.
("ATCO") since 1980. ATCO is engaged in the business of investments, real estate
ownership and management, and export sales. Mr. Abdelnour currently serves as a
director of Permal Management Corporation.
JEFFREY H. COATS, age 40, has been a Director since August 1996. He has
been a Managing Director of GE Capital Equity Capital Group, Inc., a wholly
owned subsidiary of General Electric Capital Corporation, since April 1996. He
was also a Managing Director of GE Capital Corporate Finance Group, Inc., a
wholly owned subsidiary of General Electric Capital Corporation, from June 1987
to April 1993. From March 1994 to April 1996, Mr. Coats was President of
Maverick Capital Equity Partners, LLC and from April 1993 to January 1994, he
was Managing Director and a Partner of Veritas Capital, Inc., both of which are
investment firms. Mr. Coats is the Chairman of the Board of The Hastings Group,
Inc., a clothing retailer, which filed for bankruptcy in October 1995. The
Hastings Group, Inc. currently is in the process of formulating a plan of
liquidation under Chapter 11.
HON. PETER H. DAILEY, age 68, has been a director since September 1996. He
served as Ambassador to Ireland from 1982 to 1984, and was special Presidential
envoy to NATO countries. From 1985 to 1988, Mr. Dailey served as counselor to
the Director of the Central Intelligence Agency. From 1985 to 1992 he was a
member of President's Advisory Committee on Arms Control and Disarmament. He
serves as founder and Chairman of the Board of Enniskerry Financial, Inc., a
private investment company founded in 1968, and has been a principal of Gavin,
Dailey and Partners, an international capital and consulting firm, since 1991.
Mr. Dailey is a member of the Board of Directors of Chicago Title and Trust
Company, Sizzler, Inc., Pinkerton's, Inc., and Jacobs Engineering Group, Inc.
Prior to returning to government service, he served as a director of the Walt
Disney Co. and the Interpublic Group of Companies. He served as the Chairman of
the Board and Chief Executive Officer of Memorex Telex, NV, a worldwide
technology company headquartered in Amsterdam, the Netherlands from April 1996
to January 1997. Memorex Telex Corp., the U.S. Subsidiary of Memorex Telex, NV,
filed for bankruptcy in 1996 and is in the process of liquidation. Sizzler, Inc.
a family style restaurant chain, filed for bankruptcy in 1996 and is in the
process of formulating a plan of reorganization.
THOMAS M. DELITTO, age 45, has been Vice Chairman of the Board since
December 1994 and a director since June 1991. He was Chief Executive from April
1995 to August 1996, President and Chief Executive Officer from July 1992 to
December 1994, and Executive Vice President and Chief Operating Officer from
June 1991 to July 1992. Mr. DeLitto has been a director and President of Permal
Capital Management, Inc., a wholly owned subsidiary of Worms & Co., Inc., since
October 1990; in this capacity he oversees operations of that company's direct
investment activities. He has been Executive Vice President of Worms & Co., Inc.
since February 1996.
HON. JOHN A. GAVIN, age 67, has been a director since September 1996. He is
the founder and Chairman of Gamma Services Corporation and has been a principal
of Gavin, Dailey and Partners, both international capital and consulting firms,
since 1968 and 1991, respectively. He has also been affiliated with Hicks, Muse,
Tate and Furst (Latin America) as Managing Director since 1995. Mr. Gavin is a
member of the Board of Directors of Atlantic Richfield Company, Dresser
Industries, Pinkerton's, Inc., International Wire Group, KAP Resources, and
Fedco.
PHILIP M. HAWLEY, age 72, has been Chairman of the Board and Chief
Executive Officer since August 1996. He served as Chairman and Chief Executive
Officer of The Broadway Stores, Inc. (formerly Carter Hawley Hale Stores, Inc.)
from 1977 to 1993, and has been President and Chief Executive Officer of P. M.
Hawley, Inc., since 1993. Mr. Hawley is also a director of Weyerhaeuser Company
and Aeromovel, U.S.A.
2
<PAGE> 4
Executive Officers Who are not Directors
ROBERT A. BURTON, age 57, has been Senior Vice President and Chief
Financial Officer since December 1996. Mr. Burton was an independent financial
consultant from January 1995 to November 1996, and from November 1987 to
December 1994 he was Senior Vice President and Chief Financial Officer of John
Breuner Company, a home furnishings company. In October 1993, John Breuner
Company filed for bankruptcy and emerged in July 1994.
KLAUS TABAR, age 44, is Senior Vice President of Real Estate and
Construction. Mr. Tabar was Senior Vice President of Development, Store Planning
and Construction from April 1997 to December 1997 and Senior Vice President of
Real Estate and Administration from April 1996 to April 1997. He joined the
Company as Vice President of Real Estate in January 1989.
HERBERT J. FRIEDMAN, age 47, has been Senior Vice President of
Merchandising, Product Development, Marketing and Stores since April 1997. Mr.
Friedman was Senior Vice President of Strategic Planning from April 1995 to
April 1997 and Vice President of Merchandising from June 1989 to April 1995.
K. JAMES MCTAGGART, age 36, has been Senior Vice President of Manufacturing
and Distribution since April 1996. Mr. McTaggart was Vice President of
Distribution and Logistics from February 1996 to March 1996. Mr. McTaggart was
formerly the Vice President of Distribution/Logistics at Stanley Works-Door
Systems from March 1995 to February 1996, and served in other positions in
Stanley Works-Door Systems from November 1985 to March 1995.
3
<PAGE> 5
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of April 10, 1998 by (i)
each person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii) each of the
Company's directors and executive officers, and (iii) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
SHARES PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) SHARES OWNED
------------------------------------ --------------------- ------------
<S> <C> <C>
GECC.................................................. 7,400,000(2) 30.3
260 Long Ridge Road
Stamford, CT 06927
Worms & Cie........................................... 3,182,707(3) 14.2
55 rue la Boetie
75008 Paris, France
Japan Omnibus Ltd. (JOL).............................. 300,000(4) 1.3
Tropic Isle Building
Road Town, Tortola
British Virgin Islands
John F. Hawley and Barbara H. Hawley, as Trustees..... 1,376,472(5) 6.3
515 South Figueroa Street
Los Angeles, CA 90071
ATCO Holdings Limited................................. 1,115,923 5.1
c/o ATCO Development, Inc.
11777 Katy Freeway
Houston, TX 77079
Philip M. Hawley...................................... 647,000(6) 2.9
Thomas M. DeLitto..................................... 109,327(7) *
Robert A. Burton...................................... 12,500(8) *
Herbert J. Friedman................................... 29,981(9) *
K. James McTaggart.................................... 14,333(10) *
Klaus Tabar........................................... 34,837(11) *
Kamal G. Abdelnour.................................... 47,520(12) *
Jeffrey H. Coats...................................... -- --
Peter H. Dailey....................................... 14,570(13) *
John A. Gavin......................................... 14,570(13) *
All directors and executive officers as a group (10
persons)............................................ 924,638 4.1
</TABLE>
- ---------------
* Less than one percent
(1) Outstanding warrants and options held by each of the principal
stockholders, directors and executive officers which are exercisable
currently or within 60 days of the date of this table are deemed to be
outstanding shares of Common Stock for their respective calculations.
(2) Includes warrants to purchase 2,400,000 shares of Common Stock.
(3) Worms & Cie, through JOL, Permal Capital Management, Inc. and certain other
affiliates, may be deemed to be the beneficial owner of 2,755,310 shares of
Common Stock and warrants to purchase 427,397 shares of Common Stock, which
amounts include 1,288,040 shares and 29,442 warrants held by two former
directors of the Company, and exclude 109,327 shares, options and warrants
held by Mr. DeLitto and shown separately below. The two former directors
and Mr. DeLitto are directors and officers of affiliates of Worms & Cie.
Worms & Cie disclaims ownership of the shares held by these individuals.
(4) Warrants to purchase 300,000 shares of Common Stock.
(5) As trustees for various Hawley Trusts, John F. Hawley and Barbara H. Hawley
are deemed to be beneficial owners of such shares.
4
<PAGE> 6
(6) Includes options to purchase 617,000 shares of Common Stock.
(7) Includes options to purchase 9,998 shares of Common Stock, 9,570 deferred
stock units and a warrant to purchase 14,721 shares of Common Stock.
(8) Represents options to purchase 12,500 shares of Common Stock.
(9) Includes options to purchase 23,760 shares of Common Stock.
(10) Includes options to purchase 13,333 shares of Common Stock.
(11) Includes options to purchase 29,700 shares of Common Stock.
(12) Includes option to purchase 5,000 shares of Common Stock, 9,570 deferred
stock units and a warrant to purchase 32,950 shares of Common Stock.
(13) Consists of options to purchase 5,000 shares of Common Stock and 9,570
deferred stock units.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the directors
and officers of the Company and persons who own more than ten percent of a
registered class of the Company's equity securities ("Reporting Persons") to
file with the Securities and Exchange Commission and the American Stock Exchange
initial reports of ownership and reports of changes in ownership of Common
Stock. In addition, under Section 16(a), trusts for which a Reporting Person is
a trustee and a beneficiary (or a member of his immediate family is a
beneficiary), may have a separate reporting obligation with regard to holdings
and transactions in Common Stock. Specific due dates for these reports have been
established, and the Company is required to disclose in this proxy statement any
failure to file by these dates during 1997 or in prior years if not previously
reported. To the Company's knowledge, all of these requirements were satisfied,
except that Messrs. Hawley, Coats, Dailey and Gavin, Reporting Persons, filed
one late Form 3 for transactions relating to their initial investment or
accession to the board of directors and Messrs. Friedman, Tabar and McTaggart,
Reporting Persons, filed one late Form 3 for their initial accession to
reporting status. All of these late filings have been corrected.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
During the fiscal year ended February 1, 1998 (fiscal year 1997), the Board
of Directors of the Company held seven meetings. All directors attended at least
75% of the aggregate number of meetings of the Board and all committees of the
Board on which they served.
All directors were reimbursed for travel and other expenses related to
their activities as directors during fiscal year 1997, and will continue to be
so reimbursed in fiscal year 1998 and beyond. The four non-employee directors
other than Jeffrey H. Coats were each paid a fee of $10,000 for their services
during fiscal year 1997. Deferred stock units valued at $10,000 were granted
under the Company's 1997 Stock Incentive Plan for services rendered as directors
to each non-employee director (other than Mr. Coats) in office on December 31,
1997 and will be granted on December 31 of each year thereafter during the term
of the 1997 Stock Incentive Plan.
The Board of Directors has designated four principal standing committees.
Set forth below are descriptions of the functions of these committees and the
names of their current members.
Executive Committee. The current members of the Executive Committee are
Messrs. Hawley (Chairman), DeLitto and Coats. The Executive Committee has all of
the powers and authority in the management of the business and affairs of the
Company, except those prohibited by law, to take action on behalf of the Board
of Directors as may be necessary between regular meetings of the Board when a
special meeting or a telephonic meeting of the full Board is not possible or
practicable. All actions taken by the Executive Committee are presented to the
full Board of Directors for ratification at its next regular or special meeting.
The Executive Committee held no meetings in fiscal year 1997.
5
<PAGE> 7
Audit Committee. The current members of the Audit Committee are Messrs.
Gavin (Chairman), Dailey and Abdelnour. This committee reviews and makes reports
and recommendations to the Board of Directors with respect to the selection of
the independent public accountants of the Company, and the arrangements for and
the scope of the audits to be performed by such independent public accountants
and reviews the annual consolidated financial statements of the Company. The
Audit Committee held two meetings in fiscal year 1997.
Compensation Committee. The members of the Compensation Committee are
Messrs. Abdelnour (Chairman), Gavin and Dailey. This committee reviews the
salaries and salary ranges of the officers and employees of the Company and its
subsidiaries whose compensation exceeds specified levels as well as the
compensation, retirement and fringe benefits plans (including option plans) of
the Company and its subsidiaries, and makes recommendations with respect to such
matters to the Board of Directors. The Compensation Committee also serves as the
administrative committee of the Company's 1997 Stock Incentive Plan. The
Compensation Committee held two meetings in fiscal year 1997.
Nominating Committee. The members of the Nominating Committee are Messrs.
Hawley (Chairman), DeLitto, Coats and Abdelnour. This committee identifies,
reviews the qualifications of and recommends candidates to the Board of
Directors for election as directors of the Company, and also acts on other
matters pertaining to membership on the Board of Directors. The Nominating
Committee advises the Board of Directors on terms of tenure and compensation for
directors and issues involving potential conflicts of interest. The Nominating
Committee also identifies, reviews the qualifications of, and recommends to the
Board of Directors individuals for senior management positions of the Company.
The Nominating Committee held no meetings in fiscal year 1997.
The Nominating Committee will consider in appropriate cases recommendations
by stockholders of the Company as to candidates for membership on the Board of
Directors. Any stockholder who desires to propose to the Nominating Committee a
candidate for such membership should send to the attention of the Secretary of
the Company a letter of recommendation containing the name and address of the
proposing stockholder and the proposed candidate. A written consent of the
proposed candidate to serve as director if elected and a detailed description of
his or her qualifications and background should also be provided.
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<PAGE> 8
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth all compensation paid by the Company during
fiscal 1997, 1996, and 1995 to (i) each of the individuals serving as the
Company's Chief Executive Officer during fiscal 1997 and (ii) the four other
most highly compensated executive officers of the Company during fiscal 1997
(collectively referred to as the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ---------------
COMPENSATION SECURITIES ALL OTHER
----------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#) ($)
--------------------------- ---- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Philip M. Hawley.................. 1997 233,842 --
Chairman of the Board and Chief 1996 101,959 1,234,000
Executive Officer
Robert A. Burton.................. 1997 155,160 50,000
Senior Vice President and Chief 1996 28,978 50,000 50,000(1)
Financial Officer
Herbert J. Friedman............... 1997 156,959 50,000 39,119(2)
Senior Vice President of 1996 152,301 50,000
Merchandising, Product 1995 136,770 1,200 1,000
Development, Marketing and
Stores
K. James McTaggart................ 1997 135,633 40,000
Senior Vice President of 1996 121,953 45,000
Manufacturing and Distribution
Klaus Tabar....................... 1997 155,159 17,030 50,000
Senior Vice President of 1996 141,645 34,030 50,000
Real Estate and Construction 1995 117,899 13,505 1,000
</TABLE>
- ---------------
(1) Represents reimbursement for out-of-pocket relocation costs.
(2) Represents payment for prior years accrued but unused vacation.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options and
deferred stock units granted during fiscal 1997 to the Named Executive Officers.
<TABLE>
<CAPTION>
REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES
NUMBER OF OPTIONS/SARS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE OR FOR OPTION TERM
OPTIONS/ SARS FISCAL BASE PRICE EXPIRATION --------------------
NAME GRANTED(#) YEAR(1) ($/SH) DATE 5%($) 10%($)
---- ------------- ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Philip M. Hawley........... -- -- -- -- -- --
Robert A. Burton........... 50,000 11.6% 1.56 08/14/07 127,140 202,020
Herbert J. Friedman........ 50,000 11.6 1.56 08/14/07 127,140 202,020
K. James McTaggart......... 40,000 9.3 1.56 08/14/07 101,712 161,616
Klaus Tabar................ 50,000 11.6 1.56 08/14/07 127,140 202,020
</TABLE>
- ---------------
(1) The Company granted options for a total of 13,664 deferred stock units to
directors and 417,000 shares of Common Stock to employees of the Company
during 1997. All of the options and deferred stock units were granted under
the 1997 Stock Incentive Plan.
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<PAGE> 9
AGGREGATED OPTION/SAR EXERCISES IN 1997
AND YEAR-END OPTION/SAR VALUES(1)
The following table sets forth information concerning the value of
unexercised options and deferred stock units held by the Named Executive
Officers as of February 1, 1998, the end of the Company's 1997 fiscal year. No
Named Executive Officers exercised any options during fiscal year 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS OPTIONS/SARS
NUMBER OF AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Philip M. Hawley........ -- -- 617,000 617,000 925,500 925,500
Robert A. Burton........ -- -- 12,500 87,500 11,000 80,000
Herbert J. Friedman..... -- -- 23,760 87,500 11,000 80,000
K. James McTaggart...... -- -- 13,333 71,667 13,600 66,400
Klaus Tabar............. -- -- 29,700 87,500 11,000 80,000
</TABLE>
- ---------------
(1) Based on the closing price of the Common Stock as quoted on the Nasdaq
SmallCap Market of $2.50 on January 30, 1998.
EMPLOYMENT AGREEMENTS
In August 1996, the Company entered into an Employment Agreement with
Philip M. Hawley pursuant to which the Company agreed to employ Mr. Hawley for a
term ending on August 25, 1999, and to pay Mr. Hawley a base salary at the rate
of $225,000 per year and provide benefits. The Company and Mr. Hawley have
agreed to extend this agreement to January 31, 2001. If Mr. Hawley's employment
is terminated by the Company without cause (as defined in the Employment
Agreement) he is entitled to receive his full base salary and benefits for the
remaining term of the Employment Agreement. If Mr. Hawley resigns from the
Company upon a change in control (as defined in the Employment Agreement) he is
entitled to a lump sum payment equal to the greater of (i) the remaining amounts
that would be payable to him under the Employment Agreement and (ii) $225,000.
Furthermore, the Company agreed to grant Mr. Hawley an option to purchase
1,234,000 shares of Common Stock at an exercise price of $1.00 per share with
vesting over three years. In the event of a change in control, the right to
exercise the options would accelerate. Mr. Hawley is also entitled to all other
benefits of employment available to executive officers of the Company generally,
including bonuses, retirement, vacation, deferred compensation, employee
discount, and various health related benefits.
The Company has entered into agreements with Messrs. Burton, Friedman,
McTaggart and Tabar, as well as several other officers and employees of the
Company, providing for the payment of severance benefits equal to such officers'
or employees' monthly salary plus benefits for up to 12 months if terminated
without cause.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee (the "Committee") of the Company met two times
during fiscal year 1997. At the meetings the Committee reviewed and made
recommendations to the Board of Directors on cash and other compensation for the
Company's executive officers.
In making its recommendations, the Committee took into account many factors
in determining aggregate compensation, including awards of stock options and a
proposed management bonus program. The factors considered by the Committee
include (1) the financial results of the Company for the preceding fiscal year,
(2) the performance of the Company's stock, (3) the experience level and
performance of the executive officers, (4) the compensation paid to executive
officers in prior years and (5) compensation of executive officers employed by
companies in industries similar to that of the Company. The committee also
considered and intended to set executive compensation policies in order to
preserve qualifying compensation deductions
8
<PAGE> 10
under 162(m) of the Internal Revenue Code which could limit certain deductions
for executive compensation. This provision did not apply to the Company in
fiscal year 1997. The Committee did not weigh one or more of these factors more
heavily than others, but did consider the relationship of an employee's
responsibilities to the factors.
The Committee awards stock options to employees based on salary levels,
special circumstances such as promotions and contractual commitments, and
performance, experience and level of responsibility of each executive. The
Company's executive officers have a significant equity ownership in the Company,
and the Committee is of the view that this has been and continues to be a key
factor in focusing the efforts of management in building stockholder value.
In 1997, the compensation to executive officers was comprised of (1) annual
salary, (2) a cash bonus based on performance of the executive, and (3) other
employee benefits, including stock options, which are described in the Proxy
Statement. See "Compensation of Executive Officers".
Philip M. Hawley, the Chief Executive Officer of the Company, received
compensation according to the terms of his employment agreement with the
Company. This employment agreement was negotiated at arm's length with General
Electric Capital Corporation during the refinancing of the Company.
The Committee on August 15, 1997 awarded stock option grants to various
members of the senior management staff of the Company. The Board of Directors
also approved the amendment of the Management Committee Bonus Plan for certain
senior executives of the Company. This Bonus Plan is based upon the growth of
EBITDA during fiscal year 1997.
The members of the Compensation Committee are Kamal Abdelnour, John A.
Gavin and Peter H. Dailey.
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<PAGE> 11
PERFORMANCE GRAPHS
KRAUSE'S FURNITURE, INC., NASDAQ (U.S. COMPANIES) AND
NYSE/AMEX/NASDAQ STOCKS (HOME FURNITURE AND FURNISHINGS STORES)
COMPARISON OF CUMULATIVE TOTAL RETURN FROM DECEMBER 31, 1992 TO JANUARY 30, 1998
<TABLE>
<CAPTION>
'KRAUSES NASDAQ STOCK
MEASUREMENT PERIOD FURNITURE, MARKET (U.S. NYSE/AMEX/NASDAQ
(FISCAL YEAR COVERED) INC.' COMPANIES) STOCKS
<S> <C> <C> <C>
12/31/92 100.0 100.0 100.0
12/31/93 170.0 114.8 134.2
1/27/95 165.0 113.4 93.9
1/26/96 70.0 156.7 75.1
1/31/97 53.3 209.1 94.7
1/30/98 66.7 247.2 150.5
</TABLE>
The above graph shows the cumulative total return assuming $100 invested on
December 31, 1992.
10
<PAGE> 12
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors are
Kamal G. Abdelnour, President and Chief Executive Officer of ATCO Development,
Inc.; John A. Gavin, Chief Executive Officer of Gamma Services International, a
Principal of Gavin, Dailey and Partners and Managing Director of Hicks, Muse,
Tate and Forst (Latin America); and Peter H. Dailey, a Principal of Enniskerry
Financial. Mr. Abdelnour is chairman of the Compensation Committee.
All decisions with respect to compensation were either made or ratified by
the current Committee. There were no interlocks.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997, 1996 and 1995 a number of transactions occurred between the
Company and its subsidiaries and certain directors and their affiliates. The
Company believes that each such arrangement was as fair as could have been
obtained from unaffiliated persons.
1996 Notes. From May 13, 1996 to June 19, 1996, various investors loaned an
aggregate of $2,950,000 to the Company. Among the investors were Permal Capital
Management, Inc., an indirect subsidiary of Worms & Cie ($50,000 principal
amount), ATCO Development, Inc. ($150,000), Mr. DeLitto, the Company's Vice
Chairman of the Board ($25,000), and Mr. Sharpe ($25,000) and Mr. Perrette
($250,000), each a former officer of the Company. In addition, on May 21, 1996
and July 2, 1996, JOL loaned to the Company $1,500,000 and $500,000,
respectively. All indebtedness pursuant to these loans (collectively, the "1996
Notes") was payable on demand and bore interest at the annual rate of 10% for
the first year only. All amounts outstanding under the 1996 Notes were retired
in connection with the 1996 Securities Purchase Agreement described below.
1996 Securities Purchase Agreement. On August 26, 1996, and September 4,
1996, the Company entered into a securities purchase agreement (the "Securities
Purchase Agreement") whereby the Company raised an aggregate of $18,735,000 in
debt and equity. Pursuant to the Securities Purchase Agreement:
O The Company sold 10,669,000 shares of Common Stock to certain investors,
at a price of $1.00 per share. Purchasers included GECC (5,000,000
shares), ATCO Holdings Ltd. (500,000 shares), certain affiliates of Worms
& Cie (500,000 shares), Mr. Hawley, the Company's Chairman of the Board
and Chief Executive Officer and various trusts established for the
benefit of relatives of Mr. Hawley (1,080,000 shares), and Mr. DeLitto,
the Company's Vice Chairman of the Board (25,000 shares).
O The Company issued 3,066,251 shares of Common Stock to the holders of the
1996 Notes in consideration for retirement of all amounts outstanding
under the 1996 Notes, including accrued interest. Shares were issued at a
rate of one share per $1.00 of debt retired.
O GECC made a loan to the Company in the original principal amount of
$5,000,000. This indebtedness was evidenced by a note (the "Original
Note") bearing interest at the rate of 10% per annum and payable in full
on or before August 31, 2001. Pursuant to the 1997 Supplemental
Securities Agreement (described below), this note was replaced with a
note bearing interest at 9.5% per annum and payable in full on August 31,
2002. In connection with the issuance of the Original Note, the Company
issued to GECC warrants to purchase a total of 1,400,000 shares of Common
Stock at an exercise price of $.001 per share, expiring August 31, 2006.
In the event that the Company fails to meet certain financial covenants,
including failure to repay this loan, the Securities Purchase Agreement
provides, in part, that GECC may take action to appoint additional
members of the Board of Directors such that GECC will control the
majority of the Board.
O The Company converted all outstanding shares of Series A Preferred Stock
into 1,176,950 shares of Common Stock. The holders of the Preferred Stock
who received shares of Common Stock included certain affiliates of Worms
& Cie and JOL.
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O The Company entered into a Registration Rights Agreement with all
investors that received shares of Common Stock pursuant to the Securities
Purchase Agreement.
O The Company entered into a Stockholders Agreement with investors.
Pursuant to the Stockholders Agreement, Mr. Hawley was appointed Chief
Executive Officer and named Chairman of the Board. Also pursuant to the
Stockholders Agreement, (i) Mr. Coats, a managing Director of GE Capital
Equity Capital Group, a wholly-owned subsidiary of GECC, was appointed to
the Board, and (ii) Mr. DeLitto, the President of Permal Capital
Management, Inc., was appointed to the Board.
The price of $1.00 per share for shares of Common Stock issued pursuant to
the Securities Purchase Agreement was negotiated at arm's length between the
Company and GECC, the lead investor, prior to August 19, 1996, the date of the
public announcement regarding the proposed GECC financing. The average of the
high and low sales prices on the Nasdaq SmallCap Market for the Company's Common
Stock during the two weeks prior to August 19, 1996, was $0.91 per share. The
average of the high and low sales prices on the Nasdaq SmallCap Market for the
Company's Common Stock on August 26, 1996, and on September 10, 1996, the
closing dates of the transactions, was $1.66 and $1.47, respectively.
1997 Supplemental Securities Purchase Agreement. On August 14, 1997, the
Company concluded a supplemental agreement to the Securities Purchase Agreement
(the "Supplemental Agreement"). Pursuant to the Supplemental Agreement:
O The Company sold subordinated notes to GECC and JOL in the principal
amounts of $2,500,000 and $500,000, respectively (together, the "1997
Notes"). The 1997 Notes bear interest at a rate of 9.5%, payable
quarterly. Principal is payable in six semi-annual installments,
commencing February, 2000. In addition, GECC and JOL were issued warrants
to purchase 600,000 shares of Common Stock and 140,000 shares of Common
Stock, respectively, at a purchase price of $1.25 per share. In the event
that the Company fails to meet certain financial covenants, including
failure to repay this loan, the Securities Purchase Agreement provides,
in part, that GECC may take action to appoint additional members of the
Board of Directors such that GECC will control the majority of the Board.
O The Company arranged for a standby credit facility under which the
Company could at its option, subject to attainment of certain financial
covenants, borrow up to an additional $3,500,000 (the "Standby Notes")
from GECC and JOL under the same terms and conditions of the 1997 Notes.
The Company borrowed funds pursuant to the Standby Notes on December 30,
1997 and issued to GECC and JOL additional warrants to purchase 400,000
and 160,000 shares of Common Stock, respectively, at $1.25 per share.
O The Company issued to GECC and JOL warrants to purchase in the aggregate
up to an additional 1,000,000 shares of Common Stock at a price of $0.01
per share (the "Performance Warrants"). The Performance Warrants first
become exercisable in April 2000 and will be canceled if the Company
meets certain economic performance targets for fiscal year 1999.
O The Company issued a new 9.5% Subordinated Note due August 31, 2002 (the
"Replacement Note") in the principal amount of $5,501,091 to replace the
Original Note (which bore interest at 10% per annum and was payable in
full on or before August 31, 2001) in the principal amount of $5 million
and certain additional notes in aggregate principal amount of $501,091
reflecting accrued interest. The Replacement Note is payable semiannually
on a straight-line basis over three years beginning February 2000.
O The Company amended the Registration Rights Agreement and the
Stockholders Agreement.
Private Label Credit Card Program with Monogram Credit Card Bank of Georgia
(an Affiliate of GECC). In April 1997, the Company entered into an agreement
with Monogram Credit Card Bank of Georgia ("Monogram"), an affiliate of GECC,
pursuant to which Monogram provides a customized credit program to the Company.
Under this program, approved customers of the Company are able to purchase
products on credit through a credit card issued by Monogram. Monogram purchases
each credit from the Company and bears the risk of loss on such credit
purchases. The program is for an initial term of five years
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and will automatically renew for consecutive five-year terms unless terminated
by either party at least six months prior to the end of any such five-year term.
Transactions with Permal Capital Management, Inc. (a wholly owned
subsidiary of Worms & Co., Inc., since October 1990). In 1996 and 1995, Permal
Capital Management, Inc. ("PCMI") provided various management services for the
Company and its subsidiaries, for which PCMI received $58,333 and $100,000,
respectively. PCMI's executive management services for the Company included
assistance with regard to executive management, financial consulting and
strategic planning during the year. 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 Board of Directors.
Succession Agreement. In December 1997, a Succession Agreement was entered
into by the Company and the following stockholders: Philip M. Hawley, its
Chairman, his sons John F. Hawley and Dr. Philip M. Hawley, Jr., GECC and Permal
Capital Management. The parties to the Succession Agreement agreed that if
Philip M. Hawley ceases to serve on the Board of Directors, the stockholder
parties would take all necessary action to ensure that John F. Hawley, or his
nominee if he is unavailable, is elected to serve as a director. Furthermore,
GECC and each of the members of the Hawley Group agreed to cooperate in
connection with the acquisition by either of Common Stock held by the Permal
Group. The agreement will continue as long as the Hawley Group owns an aggregate
of at least 1,000,000 shares of Common Stock.
PROPOSAL NO. 2
APPROVAL OF AN INCREASE OF 1,000,000 SHARES IN THE COMPANY'S
1997 STOCK INCENTIVE PLAN
PROPOSAL TO AMEND THE KRAUSE'S FURNITURE, INC. 1997 STOCK INCENTIVE PLAN
The Company's Board of Directors has unanimously approved an amendment to
The Krause's Furniture, Inc. 1997 Stock Incentive Plan (the "Incentive Plan") to
increase the number of shares of common stock reserved for issuance thereunder
from 1,000,000 to 2,000,000 and has recommended the amendment to the
stockholders.
As of the Record Date, of the 1,000,000 shares of common stock initially
reserved under the Incentive Plan, 253,000 shares of common stock were available
for future grants under the Incentive Plan. With aggregate annual grants of
options averaging 373,500 shares over the last two years, the Board believes it
is prudent to increase the number of shares available for future grants. In
addition, the Board believes that there may be circumstances (including, but not
limited to, special awards to existing employees and awards to senior level
executive officers as part of a package of benefits offered to induce them to
join the Company) in which it would be appropriate to award an individual
options to purchase shares and, therefore, is requesting the flexibility to
increase the number of shares available for future grants.
The Board believes that the grant of stock options to officers and key
employees of the Company and its subsidiaries is a vital factor in attracting
and retaining effective and capable employees who contribute to the growth and
success of the Company. Proceeds received by the Company upon exercise of the
options granted under the Incentive Plan are available for general corporate
purposes. It is not possible at this time to determine the number or identity of
all of the individuals who will be eligible for the grants of stock options
under the Incentive Plan on or prior to January 19, 2007.
Set forth below is a summary of certain of the provisions of the Incentive
Plan and the tax consequences to the Company and employees who receive stock
options under the Incentive Plan.
The Board adopted the Incentive Plan effective as of January 20, 1997, and
the Shareholders approved the Incentive Plan at the annual meeting on May 29,
1997. To date, the Compensation Committee has granted options covering an
aggregate of 747,000 shares of common stock under the Incentive Plan.
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In addition to the grants described above, on December 31, 1997, Messrs.
Abdelnour, DeLitto, Dailey, and Gavin, each of whom is a non-employee director
of the Company, received grants of deferred stock units. These grants are made
automatically under the Incentive Plan and are not subject to the approval of
the Compensation Committee. Each grant provides for the award of a number of
deferred stock units determined by dividing $10,000 by the fair market value of
a share of the Company's Common Stock on the date of the award. Actual issuance
of stock is deferred until after a participating director ceases to serve as a
director of the Company.
The Incentive Plan is intended to enable the Company to enhance its ability
to provide key employees, consultants and directors with meaningful awards and
incentives commensurate with their contributions and competitive with those
offered by other employers. It will also increase stockholder value by further
aligning the interests of key employees, consultants and directors with the
interests of the Company's stockholders by providing an opportunity to benefit
from stock price appreciation that generally accompanies improved financial
performance. The Board of Directors believes that the Company's long term
success is dependent upon the ability of the Company to attract and retain
superior individuals who, by virtue of their ability and qualifications, make
important contributions to the Company.
A total of 2,000,000 shares of Common Stock, including the shares added by
the proposed amendment (the "Shares"), which is equal to 9.1% of the Shares
outstanding as of the Record Date, have been reserved for issuance under the
Incentive Plan. The Incentive Plan will terminate on January 19, 2007, unless
earlier terminated by the Board.
PROPOSED AMENDMENT
The proposed amendment to the 1997 Plan would revise the terms of Section
3(a) to read as follows:
"(a) Subject to the provisions of Section 11, below, the maximum
aggregate number of Shares which may be issued pursuant to all Awards is
two million (2,000,000). The shares to be issued pursuant to Awards may be
authorized but unissued, or reacquired Common Stock."
Other than the increase in the number of shares of common stock reserved
for issuance pursuant to options, no additional amendments to the plan are
contemplated at this time.
The affirmative vote of a majority of the shares present in person or by
proxy at the Annual Meeting and entitled to vote is required for adoption of
Proposal No. 2. For purposes of the vote on Proposal 2, abstentions will have
the same effect as votes against the proposal and broker non-votes will not be
counted as votes cast and will have no effect on the result of the vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL
OF AN INCREASE OF 1,000,000 SHARES IN THE 1997 STOCK INCENTIVE PLAN
A general description of the principal terms of the Incentive Plan as
proposed is set forth below. This description is qualified in its entirety by
the terms of the Incentive Plan, a copy of which, as it is proposed to be
amended, is attached to this Proxy Statement as Exhibit A and is incorporated by
reference herein.
GENERAL DESCRIPTION
The Incentive Plan provides for the grant of (i) Shares, (ii) an option, an
SAR or similar right with an exercise or conversion privilege at a fixed or
variable price related to the Common Stock and/or the passage of time, the
occurrence of one or more events, or the satisfaction of performance criteria or
other conditions, or (iii) any other security with the value derived from the
value of the Common Stock of the Company to employees and consultants, and for
automatic grants of deferred stock units to participating outside Directors
(collectively, the "Awards"). The maximum number of Shares with respect to which
options and SARs may be granted to an employee of the Company during a fiscal
year of the Company is 200,000 Shares.
The Incentive Plan is administered, with respect to grants to directors,
officers, consultants, and other employees, by the plan administrator (the
"Administrator"), defined as the Board or one or more committees designated by
the Board. With respect to grants to officers and directors, the committee shall
be constituted in
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such a manner as to satisfy applicable laws, including Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended. Awards of deferred stock
units to participating outside Directors are automatic, but to the extent that
any administration is required, they will be administered by the Board.
The Board of Directors may at any time amend, suspend or terminate the
Incentive Plan. To the extent necessary to comply with applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Awards granted to residents therein,
the Company shall obtain stockholder approval of any amendment to the Incentive
Plan in such a manner and to such a degree as required.
Stock options granted under the Incentive Plan may be either incentive
stock options under the provisions of Section 422 of the Code, or non-qualified
stock options. Incentive stock options may be granted only to employees of the
Company or any parent or subsidiary corporation of the Company. Awards other
than incentive stock options may be granted to employees and consultants.
Under the Incentive Plan, incentive stock options may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised during the
lifetime of the grantee only by the grantee. However, the Incentive Plan permits
the designation of beneficiaries by holders of incentive stock options. Other
Awards shall be transferable to the extent provided in the Award agreement.
The Incentive Plan authorizes the Administrator to select the employers,
directors and consultants of the Company to whom Awards may be granted and to
determine the terms and conditions of any Award; however, the term of an
incentive stock option may not be for more than 10 years (or 5 years in the case
of incentive stock options granted to any grantee who owns stock representing
more than 10% of the combined voting power of the Company or any parent or
subsidiary corporation of the Company). The Incentive Plan authorizes the
Administrator to grant Awards at an exercise price determined by the
Administrator. In the case of incentive stock options, such price cannot be less
than 100% (or 110%, in the case of incentive stock options granted to any
grantee who owns stock representing more than 10% of the combined voting power
of the Company or any parent or subsidiary corporation of the Company) of the
fair market value of the Common Stock on the date the option is granted. In the
case of non-qualified stock options, such price cannot be less than 100% of the
fair market value of the Common Stock on the date the option is granted. Payment
of the purchase price upon exercise of any Award granted under the Incentive
Plan must be made in the form designated by the Administrator, which may
include: (i) cash; (ii) check; (iii) delivery of a promissory note with terms
acceptable to the Administrator; (iv) surrender of Shares owned by Grantee; (v)
by delivery of an irrevocable direction to a securities broker to sell shares
and deliver proceeds to the Company in payment for the Shares; or (vi) any
combination of the foregoing. The aggregate fair market value of the Common
Stock with respect to any incentive stock options that are exercisable for the
first time by an eligible employee in any calendar year may not exceed $100,000.
If a Grantee satisfies the exercise price of an option by having the Company
withhold Shares otherwise deliverable to the Grantee, the Administrator may
issue the Grantee an additional option, with terms identical to the Award
agreement under which the option was exercised, but an exercise price based upon
the fair market value of the Company's stock at the time of the grant of the
additional option.
The Awards may be granted subject to vesting schedules and restrictions on
transfer and repurchase or forfeiture rights in favor of the Company as
specified in the agreements to be issued under the Incentive Plan. Except as
provided in an Award agreement, the vesting schedule is accelerated and all
Awards become fully vested, exercisable, and released from any restrictions on
transfer and repurchase or forfeiture rights in the event of a Corporate
Transaction, a Change in Control or a Subsidiary Disposition, each as defined in
the Incentive Plan. Effective upon the consummation of a Corporate Transaction,
all outstanding Awards under the Plan shall terminate unless assumed by the
successor company or its parent or the acquiring company substitutes a
satisfactory cash incentive program. The administrator of the Incentive Plan has
the ability to accelerate award vesting in anticipation of a Change in Control
or the disposition of a subsidiary. The Incentive Plan also permits the
Administrator to include a provision whereby the grantee may elect at any
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time while an employee, director or consultant to exercise any part or all of
the Award prior to full vesting of the Award.
Under the Incentive Plan, the Administrator may establish one or more
programs under the Incentive Plan to permit selected grantees the opportunity to
elect to defer receipt of consideration payable under an Award. The
Administrator also may establish under the Incentive Plan separate programs for
the grant of particular forms of Awards to one or more classes of grantees.
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 of the Company, 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 an equivalent amount of the Company's
Common Stock, based upon the fair market value of the Company's 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
occurs in five annual installments, but a director may elect to receive a single
payment. In the event of a Change of Control of the Company, as defined in the
Incentive Plan, the director's deferred stock account will be paid immediately
in cash.
The Incentive Plan permits the grant of Awards prior to approval of the
Incentive Plan by the Stockholders. However, incentive stock options are not
exercisable until such approval is obtained and, if approval is not obtained
within twelve months of the date the Board adopted the Incentive Plan,
previously granted incentive stock options will terminate. The Incentive Plan
provides that no grant of deferred stock units to participating outside
directors will be effective if the Incentive Plan is not approved by the
Stockholders.
CERTAIN FEDERAL TAX CONSEQUENCES
The following summarizes only the federal income tax consequences of stock
options and shares of restricted stock granted under the Incentive Plan. State
and local tax consequences may differ.
The grant of a nonqualified stock option under the Incentive Plan will not
result in any federal income tax consequences to the Optionee or to the Company.
Upon exercise of a nonqualified stock option, the Optionee is subject to income
taxes at the rate applicable to ordinary compensation income on the difference
between the option price and the fair market value of the Shares on the date of
exercise. This income is subject to withholding for federal income and
employment tax purposes. The Company is entitled to an income tax deduction in
the amount of the income recognized by the Optionee. Any gain or loss on the
Optionee's subsequent disposition of the Shares of Common Stock will be a
capital gain or loss. The Company does not receive a tax deduction for any such
gain. The maximum marginal rate at which ordinary income is taxed to individuals
is currently 39.6% and the maximum rate at which long-term capital gains are
taxed is 28%.
The grant of an incentive stock option under the Incentive Plan will not
result in any federal income tax consequences to the Optionee or to the Company.
An Optionee recognizes no federal taxable income upon exercising an incentive
stock option ("ISO") (subject to the alternative minimum tax rules discussed
below), and the Company receives no deduction at the time of exercise. In the
event of a disposition of stock acquired upon exercise of an ISO, the tax
consequences depend upon how long the optionee has held the Shares of Common
Stock. If the optionee does not dispose of the Shares within two years after the
ISO was granted, nor within one year after the ISO was exercised and Shares were
purchased, the optionee will recognize a long-term capital gain (or loss) equal
to the difference between the sale price of the Shares and the exercise price.
The Company is not entitled to any deduction under these circumstances.
If the optionee fails to satisfy either of the foregoing holding periods,
he or she must recognize ordinary income in the year of the disposition
(referred to as a "disqualifying disposition"). The amount of such ordinary
income generally is the lesser of (i) the difference between the amount realized
on disposition and the exercise price, or (ii) the difference between the fair
market value of the stock on the exercise date and the exercise price. Any gain
in excess of the amount taxed as ordinary income will be treated as a long or
short-
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term capital gain, depending on whether the stock was held for more than one
year. The Company, in the year of the disqualifying disposition, is entitled to
a deduction equal to the amount of ordinary income recognized by the optionee.
The "spread" under an ISO -- i.e., the difference between the fair market
value of the Shares at exercise and the exercise price -- is classified as an
item of adjustment in the year of exercise for purposes of the alternative
minimum tax.
The grant of restricted stock will subject the recipient to ordinary
compensation income on the difference between the amount paid for such stock and
the fair market value of the Shares on the date that the restrictions lapse.
This income is subject to withholding for federal income and employment tax
purposes. The Company is entitled to an income tax deduction in the amount of
the income recognized by the recipient. Any gain or loss on the recipient's
subsequent disposition of the Shares will receive long or short-term capital
gain or loss treatment depending on whether the Shares are held for more than
one year and depending on how long the stock has been held since the
restrictions lapsed. The Company does not receive a tax deduction for any such
gain. Recipients of restricted stock may make an election under Internal Revenue
Code Section 83(b) to recognize as ordinary compensation income in the year that
such restricted stock is granted the amount equal to the spread between the
amount paid for such stock and the fair market value on date of the issuance of
the stock. If such an election is made, the recipient recognizes no further
amounts of compensation income upon the lapse of any restrictions and any gain
or loss on subsequent disposition will be long or short-term capital gain. The
Section 83(b) election must be made within thirty days from the time the
restricted stock is issued.
Grants of Deferred Stock Units to directors are treated as deferred
compensation taxable as ordinary income upon issuance of the Shares in
satisfaction of the account. The Company is entitled to an income tax deduction
in the amount of the income recognized by the director.
PROPOSAL NO. 3
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Arthur Andersen LLP has been provisionally designated by the
Board of Directors to examine the financial statements of the Company for the
year ending January 31, 1999. A resolution will be presented at the Annual
Meeting to retain said firm as independent public accountants to examine the
financial statements for the year ending January 31, 1999. The Board may appoint
a new firm of independent public accountants at any time if it believes that
such a change would be in the best interests of the Company and its
stockholders. If the stockholders, by the affirmative vote of a majority of the
shares represented at the Annual Meeting, do not vote to ratify the decision to
retain Arthur Andersen LLP, the selection of independent public accountants will
be reconsidered by the Board. Arthur Andersen LLP served as independent public
accountants of the Company for fiscal year 1997. It is anticipated that a
representative of Arthur Andersen LLP will be present at the Annual Meeting and
will be available to answer any appropriate questions from the stockholders and
will be given the opportunity to make a statement should the representative
desire to do so.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
PROPOSAL NO. 3
OTHER BUSINESS
The Board of Directors knows of no other business that will be presented
for consideration at the Annual Meeting. If any other matters are brought before
the meeting, it is the intention of the persons named in the accompanying proxy
to vote, or otherwise act, in accordance with their judgment on such matters.
ANNUAL REPORT
A copy of the Company's Annual Report for fiscal 1997 is enclosed with this
Proxy Statement.
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STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 1999 Annual
Meeting of Stockholders must be received at the principal executive office of
the Company not later than January 6, 1999, for inclusion in next year's Proxy
Statement and Proxy Card. All such proposals should be in compliance with
applicable Securities and Exchange Commission regulations.
BY ORDER OF THE BOARD OF DIRECTORS
JUDITH OLSON LASKER
Secretary
Dated: May 4, 1998.
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EXHIBIT A
KRAUSE'S FURNITURE, INC.
1997 STOCK INCENTIVE PLAN
1. PURPOSES OF THE PLAN. The purposes of this Stock Incentive Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Officers,
Directors and Consultants of the Company and its Subsidiaries and to promote the
success of the Company's business.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Account" means a bookkeeping account established for a Participant
under Section 6.
(b) "Administrator" means the Board or any of the Committees appointed to
administer the Plan.
(c) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 promulgated under the Exchange Act.
(d) "Applicable Laws" means the legal requirements relating to the
administration of stock incentive plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Awards granted to residents therein.
(e) "Award" means the grant of an Option, SAR, Dividend Equivalent Right,
Restricted Stock, Performance Unit, Performance Share, Deferred Stock Unit or
other right or benefit under the Plan.
(f) "Award Agreement" means the written agreement evidencing the grant of
an Award executed by the Company and the Grantee, including any amendments
thereto.
(g) "Beneficiary" means a Grantee's beneficiary, designated in writing and
in a form and manner satisfactory to the Administrator, or if a Grantee fails to
designate a beneficiary, or if the Grantee's designated Beneficiary predeceases
the Grantee, the Grantee's estate.
(h) "Board" means the Board of Directors of the Company.
(i) "Change in Control" means a change in ownership or control of the
Company effected through either of the following transactions:
(1) the direct or indirect acquisition by any person or related group
of persons (other than an acquisition from or by the Company or by a
Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer made directly to the Company's
stockholders which a majority of the Continuing Directors who are not
Affiliates or Associates of the offeror do not recommend such stockholders
accept, or
(2) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
ceases, by reason of one or more contested elections for Board membership,
to be comprised of individuals who are Continuing Directors.
(j) "Closing Price" shall mean, for any trading day, the closing price of a
Share on the market then used to determine Fair Market Value.
(k) "Code" means the Internal Revenue Code of 1986, as amended.
(l) "Committee" means any committee appointed by the Board to administer
the Plan.
(m) "Common Stock" means the common stock of the Company.
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(n) "Company" means Krause's Furniture, Inc., a Delaware corporation.
(o) "Consultant" means any person who is engaged by the Company or any
Parent or Subsidiary to render consulting or advisory services as an independent
contractor and is compensated for such services.
(p) "Continuing Directors" means members of the Board who either (i) have
been Board members continuously for a period of at least thirty-six (36) months
or (ii) have been Board members for less than thirty-six (36) months and were
elected or nominated for election as Board members by at least a majority of the
Board members described in clause (i) who were still in office at the time such
election or nomination was approved by the Board.
(q) "Continuous Status as an Employee, Officer, Director or Consultant"
means that the employment, officer, director or consulting relationship with the
Company, any Parent, or Subsidiary, is not interrupted or terminated. Continuous
Status as an Employee, Director or Consultant shall not be considered
interrupted in the case of (i) any leave of absence approved by the Company or
(ii) transfers between locations of the Company or between the Company, its
Parent, any Subsidiary, or any successor. A leave of absence approved by the
Company shall include sick leave, military leave, or any other personal leave
approved by an authorized representative of the Company. For purposes of
Incentive Stock Options, no such leave may exceed the time permitted in the
Company's personnel policies published from time to time, unless reemployment
upon expiration of such leave is guaranteed by statute or contract.
(r) "Corporate Transaction" means any of the following stockholder-approved
transactions to which the Company is a party:
(1) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the state in which the Company is incorporated;
(2) the sale, transfer or other disposition of all or substantially
all of the assets of the Company (including the capital stock of the
Company's subsidiary corporations) in connection with the complete
liquidation or dissolution of the Company; or
(3) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such
securities immediately prior to such merger.
(s) "Covered Employee" means an Employee who is a "covered employee" under
Section 162(m)(3) of the Code.
(t) "Deferred Stock Unit" means a hypothetical share of Common Stock as
described in Section 6.
(u) "Director" means a member of the Board.
(v) "Dividend Equivalent Right" means a right entitling the Grantee to
compensation measured by dividends paid with respect to Common Stock.
(w) "Effective Date" means the date when this Plan has been adopted by the
Board.
(x) "Employee" means any person, including an Officer or Director, who is
an employee of the Company or any Parent or Subsidiary of the Company for
purposes of Section 422 of the Code. The payment of a director's fee by the
Company shall not be sufficient to constitute "employment" by the Company.
(y) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(z) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(1) Where there exists a public market for the Common Stock, the Fair
Market Value shall be (A) the closing price for a Share for the last market
trading day prior to the time of the determination (or, if no closing price
was reported on that date, on the last trading date on which a closing
price was reported) on the stock exchange determined by the Administrator
to be the primary market for the Common Stock or the NASDAQ National
Market, whichever is applicable or (B) if the Common Stock
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is not traded on any such exchange or national market system, the average
of the closing prices of a Share on the NASDAQ Small Cap Market for the
three trading days prior to the time of the determination (or, if no such
prices were reported on one or more of such days, on the last three days on
which such prices were reported), in each case, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
(2) In the absence of an established market of the type described in
(1), above, for the Common Stock, the Fair Market Value thereof shall be
determined by the Administrator in good faith.
(aa) "Grantee" means an Employee, Director or Consultant who receives an
Award under the Plan.
(bb) "Incentive Stock Option" means an option intended to qualify as an
Incentive Stock Option under Section 422 of the Code.
(cc) "Non-Qualified Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.
(dd) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(ee) "Option" means a stock option granted pursuant to the Plan.
(ff) "Outside Director" means a Director who is not the beneficial owner of
ten percent (10%) or more of the Company's stock of any class or an employee of
the Company or of any Subsidiary.
(gg) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(hh) "Participating Outside Director" means an Outside Director who has not
indicated in writing to the Company prior to the date of an Award under Section
6 that he or she cannot or does not wish to participate in the deferred stock
program described in Section 6.
(ii) "Payment Commencement Date" means the first business day of the Plan
Year immediately following the Plan Year in which the Outside Director
terminates service as a member of the Board.
(jj) "Performance -- Based Compensation" means compensation qualifying as
"performance-based compensation" under Section 162(m) of the Code.
(kk) "Performance Shares" means Shares or an award denominated in Shares
which may be earned in whole or in part upon attainment of performance criteria
established by the Administrator.
(ll) "Performance Units" means an award which may be earned in whole or in
part upon attainment of performance criteria established by the Administrator
and which may be settled for cash, Shares or other securities or a combination
of cash, Shares or other securities as established by the Administrator.
(mm) "Plan" means this 1997 Stock Incentive Plan.
(nn) "Plan Year" means the calendar year.
(oo) "Restricted Stock" means Shares issued under the Plan to the Grantee
for such consideration, if any, and subject to such restrictions on transfer,
rights of first refusal, repurchase provisions, forfeiture provisions, and other
terms and conditions as established by the Administrator.
(pp) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor thereto.
(qq) "SAR" means a stock appreciation right entitling the Grantee to Shares
or cash compensation, as established by the Administrator, measured by
appreciation in the value of Common Stock.
(rr) "Share" means a share of the Common Stock.
(ss) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
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(tt) "Subsidiary Disposition" means the disposition by the Company of its
equity holdings in any subsidiary corporation effected by a merger or
consolidation involving that subsidiary corporation, the sale of all or
substantially all of the assets of that subsidiary corporation or the Company's
sale or distribution of substantially all of the outstanding capital stock of
such subsidiary corporation.
3. STOCK SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10, below, the maximum aggregate
number of Shares which may be issued pursuant to all Awards is two million
(2,000,000). The Shares to be issued pursuant to Awards may be authorized, but
unissued, or reacquired Common Stock.
(b) If an Award expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Award exchange program, or
if any unissued Shares are retained by the Company upon exercise of an Award in
order to satisfy the exercise price for such Award or any withholding taxes due
with respect to such Award, such unissued or retained Shares shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that actually have been issued under the Plan pursuant to an
Award shall not be returned to the Plan and shall not become available for
future distribution under the Plan, except that if unvested Shares are
forfeited, or repurchased by the Company at their original purchase price, such
Shares shall become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) Plan Administrator.
(1) Administration with Respect to Directors and Officers. With
respect to grants of Awards to Officers, Directors or Employees who are
also Officers or Directors of the Company, the Plan shall be administered
by (A) the Board or (B) a Committee designated by the Board to serve at the
pleasure of the Board, which Committee shall be constituted in such a
manner as to satisfy the Applicable Laws and to permit such grants and
related transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee
shall continue to serve in its designated capacity until otherwise directed
by the Board. The Committee shall select one of its members as chairman,
and shall hold meetings at such times and places as it may determine. A
majority of the Committee shall constitute a quorum and acts of the
Committee at which a quorum is present, or acts reduced to or approved in
writing by all members of the Committee, shall be the valid acts of the
Committee.
(2) Administration With Respect to Consultants and Other
Employees. With respect to grants of Awards to Employees or Consultants who
are neither Directors nor Officers of the Company, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board,
which Committee shall be constituted in such a manner as to satisfy the
Applicable Laws. Once appointed, such Committee shall continue to serve in
its designated capacity until otherwise directed by the Board. The Board
may authorize one or more Officers to grant such Awards and may limit such
authority by requiring that such Awards must be reported to and ratified by
the Board or a Committee within six (6) months of the grant date, and if so
ratified, shall be effective as of the grant date.
(3) Administration With Respect to Covered Employees. Notwithstanding
the foregoing, grants of Awards to any Covered Employee intended to qualify
as Performance-Based Compensation shall be made only by a Committee (or
subcommittee of a Committee) which is comprised solely of two or more
Directors eligible to serve on a committee making Awards qualifying as
Performance-Based Compensation. In the case of such Awards granted to
Covered Employees, references to the "Administrator" or to a "Committee"
shall be deemed to be references to such Committee or subcommittee.
(4) Administration Errors. In the event an Award is granted in a
manner inconsistent with the provisions of this subsection (a), such Award
shall be presumptively valid as of its grant date to the extent permitted
by the Applicable Laws.
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(5) Notwithstanding the foregoing and any designation of the
Administrator by the Board, Awards made under Section 6 shall be
administered exclusively by the Board, except as is specifically otherwise
provided in Section 6.
(b) Powers of the Administrator. Subject to Applicable Laws and the
provisions of the Plan (including any other powers given to the Administrator
hereunder), and except as otherwise provided by the Board, the Administrator
shall have the authority, in its discretion:
(1) to select the Employees, Officers, Directors and Consultants to
whom Awards may be granted from time to time hereunder;
(2) to determine whether and to what extent Awards are granted
hereunder;
(3) to determine the number of Shares or the amount of other
consideration to be covered by each Award granted hereunder;
(4) to approve forms of Award Agreement for use under the Plan;
(5) to determine the terms and conditions of any Award granted
hereunder;
(6) to amend the terms of any outstanding Award granted under the
Plan, including a reduction in the exercise price (or base amount on which
appreciation is measured) of any Award to reflect a reduction in the Fair
Market Value of the Common Stock since the grant date of the Award,
provided that any amendment that would adversely affect the Grantee's
rights under an outstanding Award shall not be made without the Grantee's
written consent; provided, however, that the Administrator may not amend
the terms of any outstanding option to reduce the purchase price of the
Shares covered by such option without the consent of the stockholders then
sufficient to approve the Plan in the first instance. The Administrator
may, with the Optionee's written consent, cancel any outstanding stock
option or accept any outstanding stock option in exchange for a new option;
provided, however, that the Administrator may not cancel any outstanding
option and replace such canceled option with any option or options having a
purchase price of the Shares covered by such option or options which is
lower than that of the canceled option without the consent of the
stockholders then sufficient to approve the Plan in the first instance.
(7) to construe and interpret the terms of the Plan and Awards granted
pursuant to the Plan;
(8) to establish additional terms, conditions, rules or procedures to
accommodate the rules or laws of applicable foreign jurisdictions and to
afford Grantees favorable treatment under such laws; provided, however,
that no Award shall be granted under any such additional terms, conditions,
rules or procedures with terms or conditions which are inconsistent with
the provisions of the Plan; and
(9) to take such other action, not inconsistent with the terms of the
Plan, as the Administrator deems appropriate.
(c) Effect of Administrator's Decision. All decisions, determinations and
interpretations of the Administrator shall be conclusive and binding on all
persons.
5. ELIGIBILITY. Awards, other than Incentive Stock Options, may be granted
to Employees, Officers, Directors and Consultants. Incentive Stock Options may
be granted only to Employees. An Employee, Officer, Director or Consultant who
has been granted an Award may, if otherwise eligible, be granted additional
Awards; provided, however, Outside Directors shall not be eligible for any award
under this plan other than those provided for in Section 6. Awards may be
granted to such Employees of the Company and its subsidiaries who are residing
in foreign jurisdictions as the Administrator may determine from time to time.
6. AUTOMATIC AWARDS OF DEFERRED STOCK UNITS TO OUTSIDE DIRECTORS.
(a) As of the Effective Date and as of the last day of each Plan Year, the
Company shall credit Deferred Stock Units to each participating Outside
Director's Deferred Stock Unit Account equal to the number of Deferred Stock
Units determined by dividing Ten Thousand Dollars ($10,000) by the Fair Market
Value of a Share on the date of the Award. In the case of a Participating
Outside Director whose service as an Outside
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Director terminates during the Plan Year, the applicable dollar amount shall be
determined by multiplying Ten Thousand Dollars ($10,000) by a fraction, the
numerator of which shall be the number of full calendar quarters of service as
an Outside Director completed by the Participating Outside Director during the
Plan Year and the denominator of which shall be four.
(b) A separate Account under the Plan shall be established for each
Participating Outside Director. Such Account shall be (i) credited with the
amounts credited in accordance with paragraph (a), (ii) credited (or charged, as
the case may be) with the investment results determined in accordance with
paragraph (c)and (iii) charged with the amounts paid by the Plan to or on behalf
of the Participating Outside Director in accordance with paragraph (e). Within
each Participating Outside Director's Account, separate subaccounts shall be
maintained to the extent the Administrator determines them to be necessary or
useful in the administration of the Plan.
(c) A Participating Outside Director's Deferred Stock Unit Account shall be
treated as if it were invested in Deferred Stock Units that are equivalent in
value to the fair market value of shares of Company Common Stock in accordance
with the following rules:
(1) Deemed Reinvestment Of Dividends. The number of Deferred Stock
Units credited to a Participating Outside Director's Deferred Stock Unit
Account shall be increased on each date on which a dividend is paid on
Company Common Stock. The number of additional Deferred Stock Units
credited to a Participating Outside Director's Deferred Stock Unit Account
as a result of such increase shall be determined by (i) multiplying the
total number of Deferred Stock Units (excluding fractional Deferred Stock
Units) credited to the Participating Outside Director's Deferred Stock Unit
Account immediately before such increase by the amount of the dividend paid
per share of Company Common Stock on the dividend payment date, and (ii)
dividing the product so determined by the Fair Market Value of a Share on
the dividend payment date.
(2) Conversion Out of Deferred Stock Units. The dollar value of the
Deferred Stock Units credited to a Participating Outside Director's
Deferred Stock Unit Account on any date shall be determined by multiplying
the number of Deferred Stock Units (including fractional Deferred Stock
Units) credited to the Participating Outside Director's Deferred Stock Unit
Account by the Fair Market Value of a Share on that date.
(3) Effect of Recapitalization. In the event of a transaction or event
described in this subparagraph (3), the number of Deferred Stock Units
credited to a Participating Outside Director's Deferred Stock Unit Account
shall be adjusted in such manner as the Board, in its sole discretion,
deems equitable. A transaction or event is described in this subparagraph
(3) if (x) it is a dividend (other than regular quarterly dividends) or
other distribution (whether in the form of cash, shares, other securities,
or other property), extraordinary cash dividend, recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, repurchase, or exchange of shares or other securities,
the issuance or exercisability of stock purchase rights, the issuance of
warrants or other rights to purchase shares or other securities, or other
similar corporate transaction or event and (y) the Board determines that
such transaction or event affects the shares of Company Common Stock, such
that an adjustment pursuant to this paragraph (3) is appropriate to prevent
dilution or enlargement of the benefits or potential benefits intended to
be made available under the Plan.
(4) Change in Deemed Investment Election. A Participating Outside
Director who elects to receive distribution of his or her Accounts in
annual installments will continue to have his or her Deferred Stock Unit
Account credited with Deferred Stock Units during the installment period.
(d) Each Account established under this Section 6 shall be maintained for
bookkeeping purposes only. Neither the Plan nor any of the Accounts established
under the Plan shall hold any actual funds or assets. The Deferred Stock Units
established hereunder shall be used solely to determine the amounts to be paid
hereunder, shall not be or represent an equity security of the Company, shall
not be convertible into or otherwise entitle a Participating Outside Director to
acquire an equity security of the Company and shall not carry any voting or
dividend rights.
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(e) Payments shall be made as follows:
(1) Amounts credited to a Participating Outside Director's Deferred
Stock Unit Account shall be paid in shares of Company Common Stock, except
that a cash payment will be made with any final installment for any
fraction of a Deferred Stock Unit remaining in the Participating Outside
Director's Account. Such fractional Deferred Stock Unit shall be valued at
the Closing Price on the date of settlement. The right of any person to
receive one or more payments under this Section 6 shall be an unsecured
claim against the general assets of the Company.
(2) Payments to a Participating Outside Director with respect to the
Participating Outside Director's Account shall begin as of the
Participating Outside Director's Payment Commencement Date; provided that
if a Participating Outside Director dies before the Participating Outside
Director's Payment Commencement Date, payment of the entire value of the
Participating Outside Director's Account shall be made to the Participating
Outside Director's Beneficiary in accordance with the provisions of
subparagraphs (3) or (4), whichever is applicable, after the Administrator
receives all documents and other information that it requests in connection
with the payment.
(3) Five Annual Installments. A Participating Outside Director shall
receive his or her Account in five annual installments unless the
Participating Outside Director elects to receive his or her benefits under
the Plan in the form of a lump-sum payment in accordance with subparagraph
(4), below. Annual installments shall be payable to the Participating
Outside Director beginning as of the Payment Commencement Date and
continuing as of each Payment Anniversary Date thereafter until all
installments have been paid. The first annual installment shall equal
one-fifth ( 1/5) of the value of the Participating Outside Director's
Account(s), determined as of the Payment Commencement Date. Each successive
annual installment shall equal the value of the Participating Outside
Director's Account(s), determined as of the Payment Anniversary Date,
multiplied by a fraction, the numerator of which is one, and the
denominator of which is the excess of five over the number of installment
payments previously made (i.e., 1/4, 1/3, etc.). If the Participating
Outside Director dies before the Participating Outside Director's Payment
Commencement Date, or after the Participating Outside Director's Payment
Commencement Date but before all five installments have been paid, the
remaining installments shall be paid to the Participating Outside
Director's Beneficiary in accordance with the schedule in this subparagraph
(3).
(4) Lump Sum. A Participating Outside Director may elect to receive
his or her Account under the Plan in the form of a lump-sum payment in lieu
of the five installment payments determined under subparagraph (3), above.
The lump sum shall be payable to the Participating Outside Director in
shares of Company Common Stock on the Payment Commencement Date. An
election under this subparagraph (4) shall be made in a form and manner
satisfactory to the Board and shall be effective as to the Participating
Outside Director only if made prior to termination of service with the
Board of Directors. If the Participating Outside Director dies before his
or her Payment Commencement Date having elected to receive benefits in the
form of a lump sum, a lump sum payment shall be made to the Participating
Outside Director's Beneficiary on the Payment Commencement Date.
(f) Notwithstanding any other provision in this Section 6 or in any other
Section of the Plan to the contrary, the value of a Participating Outside
Director's Account shall be paid to the Participating Outside Director in a
lump-sum cash payment on the occurrence of a Change in Control or as soon
thereafter as practicable, but in no event later than five days after a Change
in Control. For purposes of payments under this paragraph (f), the value of a
Deferred Stock Unit shall be computed as the greater of (1) the Closing Price of
a Share on or nearest the date on which the Change of Control is deemed to
occur, or (2) the highest per Share price for Shares actually paid in connection
with the Change of Control.
(g) The Board may amend, suspend, or terminate the provisions of this
Section 6 at any time; provided that no amendment, suspension, or termination of
this Section 6 shall, without a Participating Outside Director's consent, reduce
the Participating Outside Director's benefits accrued under this Section 6
before the date of such amendment, suspension, or termination. If this Section 6
is terminated in accordance with this paragraph (g), the terms of the Plan as in
effect immediately before termination shall determine the right
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to payment in respect of any amounts that remain credited to a Participating
Outside Director's Account upon termination.
(h) The Board shall furnish an annual statement to each Participating
Outside Director or, if the Participating Outside Director is deceased, the
Participating Outside Director's Beneficiary, reporting the value of the
Participating Outside Director's Account as of the end of the most recent Plan
Year.
(i) The Board may delegate to officers of the Company any and all authority
with which it is vested under this Section 6, and the Board may allocate its
responsibilities under this Section 6 among its members.
(j) No payment due under this Section 6 shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or
charge in any other way. Any attempt to anticipate, alienate, sell, transfer,
assign, pledge, encumber, or charge such payment in any other way shall be void.
No such payment or interest therein shall be liable for or subject to the debts,
contracts, liabilities, or torts of any Participating Outside Director or
Beneficiary. If any Participating Outside Director or Beneficiary becomes
bankrupt or attempts to anticipate, alienate, sell, transfer, assign, pledge,
encumber, or charge in any other way any payment under the Plan, the Board may
direct that such payment be suspended and that all future payments to which such
Participating Outside Director or Beneficiary otherwise would be entitled be
held and applied for the benefit of such person, the person's children or other
dependents, or any of them, in such manner and in such proportions as the Board
may deem proper.
(k) Nothing in this Section 6 shall confer upon any person the right to
continue to serve as a member of the Board or to participate in the Plan,
including this Section 6, other than in accordance with its terms.
(l) The Board may make any appropriate arrangements to deduct from all
credits and payments under this Section 6 any taxes that the Board reasonably
determines to be required by law to be withheld from such credits and payments.
(m) If the Board determines, upon evidence satisfactory to the Board, that
any Participating Outside Director or Beneficiary to whom a benefit is payable
under this Section 6 is unable to care for his or her affairs because of illness
or accident or otherwise, any payment due under this Section 6 (unless prior
claim therefor shall have been made by a duly authorized guardian or other legal
representative) may be paid, upon appropriate indemnification of the Board and
the Company, to the spouse of the Participating Outside Director or Beneficiary
or other person deemed by the Board to have incurred expenses for the benefit of
and on behalf of such Participating Outside Director or Beneficiary. Any such
payment shall be a complete discharge of any liability under this Section 6 with
respect to the amount so paid.
(n) Each Participating Outside Director and Beneficiary entitled to receive
a payment under this Section 6 shall keep the Board advised of his or her
current address. If the Board is unable for a period of 36 months to locate a
Participating Outside Director or Beneficiary to whom a payment is due under the
Plan, commencing with the first day of the month as of which such payment first
comes due, the total amount payable to such Participating Outside Director or
Beneficiary shall be forfeited. Should such a Participating Outside Director or
Beneficiary subsequently contact the Board requesting payment, the Board shall,
upon receipt of all documents and other information that it might request in
connection with the payment, restore and pay the forfeited payment in a lump
sum, the value of which shall not be adjusted to reflect any interest or other
type of investment earnings or gains for the period of forfeiture.
(o) NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS SECTION 6, THE PROVISIONS
OF THIS SECTION 6 SHALL NOT BE EFFECTIVE IF A MAJORITY OF THE SHAREHOLDERS
PRESENT IN PERSON OR BY PROXY AT A DULY CONVENED MEETING OF SHAREHOLDERS OF THE
COMPANY DO NOT APPROVE THE PLAN. IF SUCH APPROVAL IS NOT OBTAINED WITHIN TWELVE
MONTHS FOLLOWING THE EFFECTIVE DATE PARTICIPATING OUTSIDE DIRECTORS SHALL HAVE
NO RIGHTS HEREUNDER AND ALL GRANTS SHALL BE OF NO FORCE OR EFFECT WHATSOEVER.
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7. TERMS AND CONDITIONS OF AWARDS.
(a) Type of Awards. The Administrator is authorized under the Plan to award
any type of arrangement to an Employee, Officer, Director (other than an Outside
Director) or Consultant that is not inconsistent with the provisions of the Plan
and that by its terms involves or might involve the issuance of (i) Shares, (ii)
an Option, an SAR or similar right with an exercise or conversion privilege at a
fixed or variable price related to the Common Stock and/or the passage of time,
the occurrence of one or more events, or the satisfaction of performance
criteria or other conditions, or (iii) any other security with the value derived
from the value of the Common Stock. Such awards include, without limitation,
Options, SARs, sales or bonuses of Restricted Stock, Dividend Equivalent Rights,
Performance Units or Performance Shares, and an Award may consist of one such
security or benefit, or two or more of them in any combination or alternative.
(b) Designation of Award. Each Award shall be designated in the Award
Agreement. In the case of an Option, the Option shall be designated as either an
Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of Shares
subject to Options designated as Incentive Stock Options which become
exercisable for the first time by a Grantee during any calendar year (under all
plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess
Options, to the extent of the Shares covered thereby in excess of the foregoing
limitation, shall be treated as Non-Qualified Stock Options. For this purpose,
Incentive Stock Options shall be taken into account in the order in which they
were granted, and the Fair Market Value of the Shares shall be determined as of
the date the Option with respect to such Shares is granted.
(c) Conditions of Award. Subject to the terms of the Plan, the
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, increase in share price, earnings per share, total stockholder
return, return on equity, return on assets, return on investment, net operating
income, cash flow, revenue, economic value added, personal management
objectives, or other measure of performance selected by the Administrator.
Partial achievement of the specified criteria may result in a payment or vesting
corresponding to the degree of achievement as specified in the Award Agreement.
(d) Deferral of Award Payment. The Administrator may establish one or more
programs under the Plan to permit selected Grantees the opportunity to elect to
defer receipt of consideration upon exercise of an Award, satisfaction of
performance criteria, or other event that absent the election would entitle the
Grantee to payment or receipt of Shares or other consideration under an Award.
The Administrator may establish the election procedures, the timing of such
elections, the mechanisms for payments of, and accrual of interest or other
earnings, if any, on amounts or Shares so deferred, and such other terms,
conditions, rules and procedures that the Administrator deems advisable for the
administration of any such deferral program.
(e) Award Exchange Programs. The Administrator may establish one or more
programs under the Plan to permit selected Grantees to exchange an Award under
the Plan for one or more other types of Awards under the Plan on such terms and
conditions as established by the Administrator from time to time.
(f) Individual Option and SAR Limit. The maximum number of Shares with
respect to which Options and SARs may be granted to any Employee in any fiscal
year of the Company shall be two hundred thousand (200,000) Shares. The
foregoing limitation shall be adjusted proportionately in connection with any
change in the Company's capitalization pursuant to Section 11, below. To the
extent required by Section 162(m) of the Code or the regulations thereunder, in
applying the foregoing limitation with respect to an Employee, if any Option or
SAR is canceled, the canceled Option or SAR shall continue to count against the
maximum number of Shares with respect to which Options and SARs may be granted
to the Employee. For this purpose, the repricing of an Option (or in the case of
an SAR, the reduction of the base amount on which the stock appreciation is
calculated to reflect a reduction in the Fair Market Value of the Common Stock)
shall be treated as the cancellation of the existing Option or SAR and the grant
of a new Option or SAR.
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(g) Early Exercise. The Award may, but need not, include a provision
whereby the Grantee may elect at any time while an Employee, Officer, Director
or Consultant to exercise any part or all of the Award prior to full vesting of
the Award. Any unvested Shares received pursuant to such exercise may be subject
to a repurchase right in favor of the Company or to any other restriction the
Administrator determines to be appropriate.
(h) Term of Award. The term of each Award shall be the term stated in the
Award Agreement, provided, however, that the term of an Incentive Stock Option
shall be no more than ten (10) years from the date of grant thereof. However, in
the case of an Incentive Stock Option granted to a Grantee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Incentive Stock Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the Award Agreement.
(i) Transferability of Awards. Incentive Stock Options may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Grantee, only by the Grantee. Other Awards shall be
transferable to the extent provided in the Award Agreement.
(j) Time of Granting Awards. The date of grant of an Award shall for all
purposes be the date on which the Administrator makes the determination to grant
such Award, or such other date as is determined by the Administrator. Notice of
the grant determination shall be given to each Employee, Officer, Director or
Consultant to whom an Award is so granted within a reasonable time after the
date of such grant.
8. AWARD EXERCISE OR PURCHASE PRICE, CONSIDERATION, TAXES AND RELOAD
OPTIONS.
(a) Exercise or Purchase Price. The exercise or purchase price, if any, for
an Award shall be as follows:
(1) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be not less
than one hundred ten percent (110%) of the Fair Market Value per Share
on the date of grant.
(B) granted to any Employee other than an Employee described in the
preceding paragraph, the per Share exercise price shall be not less than
one hundred percent (100%) of the Fair Market Value per Share on the
date of grant.
(2) In the case of a Non-Qualified Stock Option, the per Share
exercise price shall be not less than one hundred percent (100%) of the
Fair Market Value per Share on the date of grant unless otherwise
determined by the Administrator.
(3) In the case of Awards intended to qualify as Performance-Based
Compensation, the exercise or purchase price, if any, shall be not less
than one hundred percent (100%) of the Fair Market Value per Share on the
date of grant.
(4) In the case of other Awards, such price as is determined by the
Administrator.
(b) Consideration. Subject to Applicable Laws, the consideration to be paid
for the Shares to be issued upon exercise or purchase of an Award including the
method of payment, shall be determined by the Administrator. In addition to any
other types of consideration the Administrator may determine, the Administrator
is authorized to accept as consideration for Shares issued under the Plan the
following:
(1) cash;
(2) check;
(3) delivery of Grantee's promissory note with such recourse,
interest, security, and redemption provisions as the Administrator
determines is appropriate;
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(4) surrender of Shares (including withholding of Shares otherwise
deliverable upon exercise of the Award) which have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares
as to which said Award shall be exercised (but only to the extent that such
exercise of the Award would not result in an accounting compensation charge
with respect to the Shares used to pay the exercise price unless otherwise
determined by the Administrator);
(5) delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Award and delivery to the
Company of the sale or loan proceeds required to pay the exercise price; or
(6) any combination of the foregoing methods of payment.
(c) Taxes. No Shares shall be delivered under the Plan to any Grantee or
other person until such Grantee or other person has made arrangements acceptable
to the Administrator for the satisfaction of any foreign, federal, state, or
local income and employment tax withholding obligations. Upon exercise of an
Award, the Company shall withhold or collect from Grantee an amount sufficient
to satisfy such tax obligations. Upon an Optionee's exercise of a stock option,
the Company may satisfy its withholding by withholding from such Optionee or
requiring the Optionee to surrender Shares sufficient to satisfy federal, state
and local income and employment tax withholding obligations.
(d) Reload Options. In the event the exercise price or tax withholding of
an Option is satisfied by the Company or the Grantee's employer withholding
Shares otherwise deliverable to the Grantee, the Administrator may issue the
Grantee an additional Option, with terms identical to the Award Agreement under
which the Option was exercised, but at an exercise price as determined by the
Administrator in accordance with the Plan.
9. EXERCISE OF AWARD.
(a) Procedure for Exercise; Rights as a Stockholder.
(1) Any Award granted hereunder shall be exercisable at such times and
under such conditions as determined by the Administrator under the terms of
the Plan and specified in the Award Agreement.
(2) An Award shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of
the Award by the person entitled to exercise the Award and full payment for
the Shares with respect to which the Award is exercised has been received
by the Company. Until the issuance (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote
or receive dividends or any other rights as a stockholder shall exist with
respect to Shares subject to an Award, notwithstanding the exercise of an
Option or other Award. The Company shall issue (or cause to be issued) such
stock certificate promptly upon exercise of the Award. No adjustment will
be made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in the Award
Agreement or Section 11, below.
(b) Exercise of Award Following Termination of Employment, Officer,
Director or Consulting Relationship.
(1) An Award may not be exercised after the termination date of such
Award set forth in the Award Agreement and may be exercised following the
termination of a Grantee's Continuous Status as an Employee, Officer,
Director or Consultant only to the extent provided in the Award Agreement.
(2) Where the Award Agreement permits a Grantee to exercise an Award
following the termination of the Grantee's Continuous Status as an
Employee, Officer, Director or Consultant for a specified period, the Award
shall terminate to the extent not exercised on the last day of the
specified period or the last day of the original term of the Award,
whichever occurs first.
(c) Buyout Provisions. The Administrator may at any time offer to buy out
for a payment in cash or Shares, an Award previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Grantee at the time that such offer is made.
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<PAGE> 31
10. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Shares shall not be issued pursuant to the exercise of an Award unless
the exercise of such Award and the issuance and delivery of such Shares pursuant
thereto shall comply with all Applicable Laws, and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
(b) As a condition to the exercise of an Award, the Company may require the
person exercising such Award to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any Applicable
Laws.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
Subject to any required action by the stockholders of the Company, the
number of Shares covered by each outstanding Award, and the number of Shares
which have been authorized for issuance under the Plan but as to which no Awards
have yet been granted or which have been returned to the Plan, as well as the
price per share of Common Stock covered by each such outstanding Award, 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 subject to an Award.
12. CORPORATE TRANSACTIONS/CHANGES IN CONTROL/SUBSIDIARY DISPOSITIONS.
(a) In the event of any Corporate Transaction, each Award which is at the
time outstanding under the Plan automatically shall become fully vested and
exercisable and be released from any restrictions on transfer and repurchase or
forfeiture rights, immediately prior to the specified effective date of such
Corporate Transaction, for all of the Shares at the time represented by such
Award. However, an outstanding Award under the Plan shall not so fully vest and
be exercisable and released from such limitations if and to the extent: (i) such
Award is, in connection with the Corporate Transaction, either to be assumed by
the successor corporation or Parent thereof or to be replaced with a comparable
Award with respect to shares of the capital stock of the successor corporation
or Parent thereof, (ii) such Award is to be replaced with a cash incentive
program of the successor corporation which preserves the compensation element of
such Award existing at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such Award or (iii) the vesting, exercisability and release from such
limitations of such Award is subject to other limitations imposed by the
Administrator at the time of the grant of the Award. The determination of Award
comparability under clause (i) above shall be made by the Administrator, and its
determination shall be final, binding and conclusive. The Administrator also
shall have the authority to grant Awards under the Plan that are to
automatically vest and be fully exercisable and released from such limitations
in whole or in part immediately prior to the Corporate Transaction or upon the
subsequent termination of the Continuous Status as an Employee or Consultant of
the Grantee, whether or not the Award is otherwise to be assumed or replaced in
connection with the consummation of such Corporate Transaction.
(b) Effective upon the consummation of the Corporate Transaction, all
outstanding Awards under the Plan shall terminate and cease to remain
outstanding, except to the extent assumed by the successor company or its
Parent. Notwithstanding the foregoing, the Administrator, in its discretion, may
prevent the acceleration of vesting and release from any restrictions on
transfer and repurchase or forfeiture rights of any outstanding Award with
respect to any Corporate Transaction.
(c) The Administrator shall have the authority, exercisable either in
advance of any actual or anticipated Change in Control (other than a Change in
Control which is also a Corporate Transaction) or at the time of an actual
Change in Control and either at the time of the grant of an Award or at any time
while an Award remains outstanding, to provide for the automatic full vesting
and exercisability of one or more outstanding unvested Awards under the Plan and
the termination of restrictions on transfer and repurchase or forfeiture rights
on such Awards, in connection with a Change in Control. The Administrator also
shall have the
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<PAGE> 32
authority to condition any such Award vesting and exercisability or release from
such limitations upon the subsequent termination of the Continuous Status as an
Employee or Consultant of the Grantee within a specified period following the
effective date of the Change in Control. The Administrator may provide that any
Awards so vested or released from such limitations in connection with a Change
in Control, shall remain fully exercisable until the expiration or sooner
termination of the Award.
(d) The Administrator shall have the authority, exercisable either in
advance of any actual or anticipated Subsidiary Disposition or at the time of an
actual Subsidiary Disposition and either at the time of the grant of an Award or
at any time while an Award remains outstanding, to provide for the automatic
full vesting and exercisability of one or more outstanding unvested Awards under
the Plan and the termination of restrictions on transfer and repurchase or
forfeiture rights on such Awards, in connection with a Subsidiary Disposition,
but only with respect to those Grantees who are at the time engaged primarily in
Continuous Service as an Employee or Consultant with the subsidiary corporation
involved in such Subsidiary Disposition. The Administrator also shall have the
authority to condition any such Award vesting and exercisability or release from
such limitations upon the subsequent termination of the affected Grantee's
Continuous Service as an Employee or Consultant with that subsidiary corporation
within a specified period following the effective date of the Subsidiary
Disposition. The Administrator may provide that any Awards so vested or released
from such limitations in connection with a Subsidiary Disposition, shall remain
fully exercisable until the expiration or sooner termination of the Award.
13. TERM OF PLAN.
Subject to approval of the Plan by the stockholders of the Company within
twelve months of the date of its adoption by the Board, the Plan shall become
effective immediately upon its adoption by the Board. The Plan shall continue in
effect for a term of ten (10) years unless sooner terminated.
14. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
(a) The Board may at any time amend, suspend or terminate the Plan. To the
extent necessary to comply with Applicable Laws, the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a degree
as required.
(b) No Award may be granted during any suspension of the Plan or after
termination of the Plan.
(c) Any amendment, suspension or termination of the Plan shall not affect
Awards already granted, and such Awards shall remain in full force and effect as
if the Plan had not been amended, suspended or terminated, unless mutually
agreed otherwise between the Grantee and the Administrator, which agreement must
be in writing and signed by the Grantee and the Company.
15. RESERVATION OF SHARES.
(a) The Company, during the term of the Plan, will at all times reserve and
keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
(b) The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
16. NO EFFECT ON TERMS OF EMPLOYMENT.
The Plan shall not confer upon any Grantee any right with respect to
continuation of employment or consulting relationship with the Company, nor
shall it interfere in any way with his or her right or the Company's right to
terminate his or her employment or consulting relationship at any time, with or
without cause.
17. STOCKHOLDER APPROVAL.
The grant of Incentive Stock Options under the Plan shall be subject to
approval of the Plan by the stockholders of the Company within twelve (12)
months before or after the date the Plan is adopted by the
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<PAGE> 33
Board. Such stockholder approval shall be obtained in the degree and manner
required under Applicable Laws. The Administrator may grant Incentive Stock
Options under the Plan prior to approval by the stockholders, but until such
approval is obtained, no such Incentive Stock Option shall be exercisable. In
the event that stockholder approval is not obtained within the twelve (12) month
period provided above, all Incentive Stock Options previously granted under the
Plan shall terminate.
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<PAGE> 34
DETACH HERE
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS OF KRAUSE'S FURNITURE, INC.
May 28, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND
MAY BE REVOKED PRIOR TO ITS EXERCISE
The undersigned hereby constitutes and appoints Philip M. Hawley and
Thomas M. DeLitto and each of them, proxies for the undersigned, with full power
of substitution, to vote in the manner directed below all shares of Common Stock
of Krause's Furniture, Inc. (the "Company") which the undersigned is entitled to
vote at the Annual Meeting of the Stockholders of the Company to be held on May
28, 1998 or any adjournment or postponement thereof, on all matters that may
come before the Annual Meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED. IN
ABSENCE OF ANY DIRECTION, THE SHARES WILL BE VOTED FOR EACH NOMINEE NAMED IN
PROPOSAL 1 ON THE REVERSE SIDE, FOR PROPOSALS 2 AND 3 AND IN ACCORDANCE WITH
THEIR DISCRETION ON SUCH OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE
MEETING. THE SHARES REPRESENTED BY THIS PROXY CANNOT BE VOTED UNLESS THIS PROXY
CARD IS SIGNED AND RETURNED.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
[SEE REVERSE SIDE]
31
<PAGE> 35
DETACH HERE
[X] Please mark votes as in this example.
1. To elect a Board of six directors to serve for the ensuing year,
consisting of the following nominees:
Nominees: Kamal G. Abdelnour, Jeffrey H. Coats, Peter H. Dailey, Thomas
M. DeLitto, John A. Gavin and Philip M. Hawley.
FOR WITHHELD MARK HERE [ ]
[ ] [ ] FOR ADDRESS
CHANGE AND
[ ]_________________________________ NOTE BELOW
For all nominees except as noted above
2. To consider and act upon a proposal to approve an increase of 1,000,000
shares in the Company's 1997 Stock Incentive Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To consider and ratify the appointment of Arthur Andersen LLP as
independent public accountants for the fiscal year ending January 31,
1999.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Stockholders to be held May 28, 1998 and the Proxy Statement attached thereto.
(Please date this Proxy and sign exactly as your name appears hereon. When
signing as an attorney, executor, administrator, trustee or guardian, please
give your full title. If there is more than one trustee, all should sign. All
joint owners should sign.)
Signature: _____________ Date:______ Signature: _________________ Date:________
32
