<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
[X] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
</TABLE>
KRAUSE'S FURNITURE, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] Fee not required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
KRAUSE'S FURNITURE, INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 27, 1999
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 27, 1999, 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 ratify the appointment of Arthur Andersen LLP as
independent public accountants for the fiscal year ending January 30, 2000.
(3) 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 April 15, 1999 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
[SIG]
JUDITH OLSON LASKER
Secretary
Dated: April 23, 1999.
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> 3
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 27, 1999, 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 April 15, 1999 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 April 23, 1999. 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.
1
<PAGE> 4
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.
Nominees for Election as Directors
KAMAL G. ABDELNOUR, age 62, 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 41, has been a Director since August 1996. He has
been a Managing Director of GE Equity, 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 Hastings Group, Inc., which filed for bankruptcy in October
1995. The Hastings Group, Inc. filed its plan of liquidation on December 23,
1997, which went effective on January 1998. Mr. Coats has been a director of
ValueVision International, Inc. since April 1999, and a director of
autobytel.com since August 1996 (the corporation went public in March 1999).
HON. PETER H. DAILEY, age 68, has been a director since September 1996. He
is Chairman of Fedco, Inc., a retailing organization, since September 1998. 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 Enniskerry Financial, Inc., a private
investment company founded in 1968. Mr. Dailey is a member of the Board of
Directors of Chicago Title Corporation, Sizzler, 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 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. Sizzler emerged
out of bankruptcy after ten months and has been profitable since that time, all
creditors have been paid 100 cents on a dollar and the stock has continued to
grow.
THOMAS M. DELITTO, age 46, has been Vice Chairman 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 of Permal Capital Management, Inc., a
wholly owned subsidiary of Worms & Co., Inc., since September 1991 and President
since March 1991; 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, and Chief Administrative officer since June 1998.
HON. JOHN A. GAVIN, age 68, has been a director since September 1996. He is
the founder and Chairman of Gamma Holdings and was a principal of Gavin, Dailey
and Partners, both international capital and consulting firms, since 1968 and
from 1990 to 1998, respectively. He has also been affiliated with Hicks, Muse,
Tate and Furst (Latin America) as Partner and Managing Director since 1995. In
1998, Mr. Gavin joined Pacific Capital Group and Global Crossing Incorporated as
Director of Southern Crossing, the Latin American component of Global Crossing.
Mr. Gavin is a member of the Board of Directors of Atlantic
2
<PAGE> 5
Richfield Company, International Wire Group and Apex Mortgage Capital and is a
trustee of the Hotchkis & Wiley Funds (a Merrill Lynch company).
PHILIP M. HAWLEY, age 73, has been Chairman 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.
Executive Officers Who are not Directors
ROBERT A. BURTON, age 58, was named Executive Vice President and Chief
Financial Officer on February 1, 1999; he had 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.
HERBERT J. FRIEDMAN, age 48, was named Executive Vice President on February
1, 1999; he had 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 37, was named Executive Vice President on February
1, 1999; he had 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.
KLAUS TABAR, age 45, 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.
3
<PAGE> 6
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 March 31, 1999 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........................................... 3,153,265(3) 14.1
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...................................... 977,500(6) 4.3
Thomas M. DeLitto..................................... 100,523(7) *
Robert A. Burton...................................... 62,500(8) *
Herbert J. Friedman................................... 63,760(9) *
K. James McTaggart.................................... 51,000(10) *
Klaus Tabar........................................... 74,837(11) *
Kamal G. Abdelnour.................................... 53,437(12) *
Jeffrey H. Coats...................................... -- --
Peter H. Dailey....................................... 20,487(13) *
John A. Gavin......................................... 20,487(13) *
All directors and executive officers
as a group (10 persons)............................... 1,424,531 6.1
</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 397,955 shares of Common Stock, which
amounts include 1,288,040 shares held by two former directors of the
Company, and exclude 100,523 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> 7
(6) Includes options to purchase 925,500 shares of Common Stock.
(7) Includes options to purchase 9,998 shares of Common Stock and 15,487
deferred stock units.
(8) Includes options to purchase 52,500 shares of Common Stock.
(9) Includes options to purchase 63,760 shares of Common Stock.
(10) Includes options to purchase 50,000 shares of Common Stock.
(11) Includes options to purchase 69,700 shares of Common Stock.
(12) Includes options to purchase 5,000 shares of Common Stock and 15,487
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 15,487
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 1998 or in prior years if not previously
reported. To the Company's knowledge, all of these requirements were satisfied,
except that Mr. Friedman, Reporting Person, filed one late Form 4 for one stock
transaction. This late filing has been corrected.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
During the fiscal year ended January 31, 1999 (fiscal year 1998), the Board
of Directors of the Company held six meetings. All directors attended at least
80% 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 1998, and will continue to be
so reimbursed in fiscal year 1999 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 1998. 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,
1998 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 1998.
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 1998.
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<PAGE> 8
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 1998.
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 1998.
The Nominating Committee will consider 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.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth all compensation paid by the Company during
fiscal 1998, 1997, and 1996 to (i) the Company's Chief Executive Officer during
fiscal 1998 and (ii) the four other most highly compensated executive officers
of the Company during fiscal 1998 (collectively referred to as the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION SECURITIES ALL OTHER
---------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#) ($)
--------------------------- ---- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Philip M. Hawley........................ 1998 233,649 --
Chairman and Chief 1997 233,842 --
Executive Officer 1996 101,959 1,234,000
Robert A. Burton........................ 1998 155,415 15,000
Executive Vice President and 1997 155,160 50,000
Chief Financial Officer 1996 28,978 50,000 50,000(1)
Herbert J. Friedman..................... 1998 157,215 15,000
Executive Vice President of 1997 156,959 50,000 39,119(2)
Merchandising, Product 1996 152,301 50,000
Development, Marketing and Stores
K. James McTaggart...................... 1998 135,405 15,000
Executive Vice President of 1997 135,633 40,000
Manufacturing and Distribution 1996 121,953 45,000
Klaus Tabar............................. 1998 155,415 -- 15,000 36,060(2)
Senior Vice President of 1997 155,159 17,030 50,000
Real Estate and Construction 1996 141,645 34,030 50,000
</TABLE>
- ---------------
(1) Represents reimbursement for out-of-pocket relocation costs.
(2) Represents payment for prior years' accrued but unused vacation.
6
<PAGE> 9
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options and
deferred stock units granted during fiscal 1998 to the Named Executive Officers.
<TABLE>
<CAPTION>
REALIZABLE
VALUE AT ASSUMED
% OF TOTAL 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................ 15,000 8.0% 3.25 06/14/08 79,463 126,263
Herbert J. Friedman............. 15,000 8.0% 3.25 06/14/08 79,463 126,263
K. James McTaggart.............. 15,000 8.0% 3.25 06/14/08 79,463 126,263
Klaus Tabar..................... 15,000 8.0% 3.25 06/14/08 79,463 126,263
</TABLE>
- ---------------
(1) The Company granted options for a total of 23,668 deferred stock units to
directors and 165,000 shares of Common Stock to employees of the Company
during 1998. All of the options and deferred stock units were granted under
the 1997 Stock Incentive Plan.
AGGREGATED OPTION/SAR EXERCISES IN 1998
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 January 31, 1999, the end of the Company's 1998 fiscal year. No
Named Executive Officers exercised any options during fiscal year 1998.
<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............ -- -- 925,500 308,500 462,750 154,250
Robert A. Burton............ -- -- 52,500 62,500 -- --
Herbert J. Friedman......... -- -- 63,760 62,500 -- --
K. James McTaggart.......... -- -- 50,000 50,000 2,200 --
Klaus Tabar................. -- -- 69,700 62,500 -- --
</TABLE>
- ---------------
(1) Based on the closing price of the Common Stock as quoted on the American
Stock Exchange of $1.50 on January 31, 1999.
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,
7
<PAGE> 10
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 Krause's Furniture, Inc.
(the "Company") has met two times during fiscal year 1998. 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 under 162(m) of the Internal Revenue
Code which could limit certain deductions for executive compensation.
The Committee awarded 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 1998, 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.
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 April 2, 1998 and on May 28, 1998, 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 1998.
The members of the Compensation Committee are Kamal Abdelnour, John A.
Gavin and Peter H. Dailey.
8
<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 JANUARY 28, 1994 TO JANUARY 29, 1999
<TABLE>
<CAPTION>
KRAUSES FURNITURE, NASDAQ STOCK MARKET NYSE/AMEX/NASDAQ
INC. (U.S. COMPANIES) STOCKS
------------------ ------------------- ----------------
<S> <C> <C> <C>
01/28/94 100.0 100.0 100.0
01/27/95 82.5 96.4 70.2
01/26/96 35.0 133.2 56.2
01/31/97 26.7 177.7 70.8
01/30/98 33.3 209.9 112.6
01/29/99 20.0 328.5 110.6
</TABLE>
The above graph shows the cumulative total return assuming $100 invested on
January 28, 1994.
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, founder and Chairman of Gamma Holdings and Partner and
Managing Director of Hicks, Muse, Tate and Forst (Latin America); and Peter H.
Dailey, Chairman of Fedco, Inc. and 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 1998, 1997 and 1996 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 ($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
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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:
- 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 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 (25,000 shares).
- 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.
- 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, as amended, (described below), this note was
replaced with a note bearing interest at 9.5% per annum and payable in
full on July 30, 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.
- 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.
- The Company entered into a Registration Rights Agreement with all
investors that received shares of Common Stock pursuant to the Securities
Purchase Agreement.
- The Company entered into a Stockholders Agreement with investors.
Pursuant to the Stockholders Agreement, Mr. Hawley was appointed Chief
Executive Officer and named Chairman. Also pursuant to the Stockholders
Agreement, (i) Mr. Coats, a Managing Director of GE Equity, 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 which was
amended as of March 31, 1999:
- 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 ten quarterly installments, commencing
April, 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
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<PAGE> 13
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.
- 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.
- 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.
- 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 in ten
quarterly installments beginning April 2000.
- 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 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, Permal Capital
Management, Inc. ("PCMI") provided various management services for the Company
and its subsidiaries, for which PCMI received $58,333. 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.
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
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
fiscal year ending January 30, 2000. A resolution will be presented at the
Annual Meeting to retain said firm as independent public accountants to examine
the
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<PAGE> 14
financial statements for the year ending January 30, 2000. 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 1998. 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. 2
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 1998 is enclosed with this
Proxy Statement.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the 2000 Annual
Meeting of Stockholders must be received at the principal executive office of
the Company not later than March 12, 2000, 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. Nominations for
director intended to be presented at the 2000 Annual Meeting of Stockholders
must be received at the principal executive office of the Company not later than
March 27, 2000, for inclusion in next year's Proxy Statement and Proxy Card.
BY ORDER OF THE BOARD OF DIRECTORS
[SIG]
JUDITH OLSON LASKER
Secretary
Dated: April 23, 1999.
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1114-PS-99
<PAGE> 16
- --------------------------------------------------------------------------------
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS OF
KRAUSE'S FURNITURE, INC.
May 27, 1999
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 27, 1999 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 PROPOSAL 2 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.
SEE REVERSE SEE REVERSE
SIDE SIDE
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE> 17
PLEASE MARK
[X] 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. Abdeinour, Jeffrey H. Coats, Peter H. Dalley,
Thomas M. DeLitto, John A. Gavin and Philip M. Hawley
FOR WITHHELD
[ ] [ ]
[ ] ______________________________________
For all nominees except as noted above
2. To consider and ratify the appointment of Arthur Andersen LLP as
independent public accountants for the fiscal year ending January
30, 2000.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
The undersigned acknowledges receipt of the Notice of Annual Meeting
of Stockholders to be held May 27, 1999 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: ______
