<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 31, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ____________
Commission file number 0-17868
KRAUSE'S FURNITURE, INC.
(Exact name of Registrant as specified in its charter.)
DELAWARE 77-0310773
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 NORTH BERRY STREET, BREA, CALIFORNIA 92821-3903
(Address of principal executive offices) (Zip Code)
(714) 990-3100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.001 PAR VALUE AMERICAN STOCK EXCHANGE
(Title of Class) (Name of each exchange where registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
As of April 6, 1999 the aggregate market value of Registrant's $.001 par
value common stock held by non-affiliates was approximately $17,429,000 based on
the closing price for the stock. As of April 6, 1999 there were 19,020,539
shares of $.001 par value common stock outstanding.
Documents Incorporated by Reference: Proxy Statement for 1998 Annual
Meeting of Stockholders with respect to information required in Part III.
1
<PAGE> 2
This Report on Form 10-K contains certain forward-looking statements
that are based on current expectations. In light of the important factors that
can materially affect results, including those set forth in this Form 10-K, the
inclusion of forward-looking information herein should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company may encounter competitive,
financial and business challenges making it more difficult than expected to
continue to develop, market, manufacture and ship products on a timely basis;
competitive conditions may change adversely; demand for the Company's products
may weaken; the market may not accept the Company's merchandising strategies and
products; the Company may be unable to retain existing key management personnel;
the Company's forecasts may not accurately anticipate customer demand; and there
may be other material adverse changes in the Company's operations or business.
Certain important factors affecting the forward-looking statements made herein
include, but are not limited to (i) timely identifying, designing, and
delivering new products as well as enhancing existing products, (ii)
implementing current strategic plans, (iii) accurately forecasting capital
expenditures, and (iv) obtaining new sources of external financing. Assumptions
relating to budgeting, marketing, advertising, product development and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experiences and business
developments, the impact of which may cause the Company to alter its marketing,
advertising, capital expenditure or other budgets, which may in turn affect the
Company's financial position and results of operations.
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
THE COMPANY. The Company is a leading vertically integrated manufacturer
and retailer of made-to-order upholstered furniture and accessories. The Company
operates 90 furniture showrooms under the Krause's (76 showrooms) and Castro
Convertibles (14 showrooms) brand names in 12 states, with 55 of those showrooms
in California and in the New York City metropolitan area, including New York,
New Jersey and Connecticut. Customers can choose from more than 60 styles and 40
sizes of sofas, incliners, recliners, sectionals, sofabeds and chairs, which
they can customize with 800 fabrics and 50 leathers. The Company believes that
it has developed a reputation for delivering high quality, custom-crafted
furniture at prices comparable to those of mass-produced sold-as-shown
furniture. In recent periods, the Company has undergone significant changes,
raising substantial new capital, hiring a new management team with extensive
expertise in retailing, and changing the Company's business strategy from a
factory-direct orientation to a retail-oriented, fashion conscious approach.
In the spring of 1996, GECC and Philip M. Hawley, the former Chairman
and Chief Executive Officer of The Broadway Stores, Inc. (formerly Carter Hawley
Hale Stores, Inc.), undertook an evaluation of the Company and determined that
it had strong brand name recognition, good retail locations in strong markets,
demonstrated manufacturing capability and a unique niche. They perceived that
the Company presented an opportunity for growth by remodeling existing
showrooms, opening new showrooms in existing markets and penetrating new
markets. Beginning in August 1996, GECC and certain other investors led by Mr.
Hawley invested approximately $22 million in equity and debt in the Company. The
Company hired new executives with retail experience and Mr. Hawley became its
Chairman and Chief Executive Officer.
RECENT DEVELOPMENTS. In April 1998 the Company raised approximately $7.3
million of equity as a result of a public offering of approximately 3.0 million
additional shares. At the same time as the public offering, the Company listed
its shares on the American Stock Exchange and terminated trading in the Nasdaq
SmallCap Market.
Under the leadership of Mr. Hawley, the Company has undergone a major
expansion and remodeling program, and has developed a marketing and
merchandising strategy designed to increase its appeal to its existing broad
customer base by promoting the Company's wide selection of products, styles and
fabrics, as well as quality and value. Under this program, the Company has
remodeled 38 existing showrooms, 22 of which were remodeled during fiscal 1998,
established design centers in prominent locations within showrooms to highlight
fabric selection, created decorated room settings, added new lighting and
carpeting, and integrated the Castro Convertibles brand name and products into
its remodeled Krause's showrooms. The Company plans to continue to remodel and
upgrade existing showrooms during fiscal 1999. The Company has also taken
significant steps to improve margins by increasing prices to competitive levels,
reducing promotional discounting and improving manufacturing efficiencies, and
to reduce expenses by implementing budgeting controls, consolidating selling,
general and administrative expenses and cutting costs, including revising its
sales commission structure. These new strategies, combined with improved
economies in regions where the Company operates, have begun to show positive
financial results. For the fiscal year ended January 31, 1999, same-store sales
(for showrooms opened a year or more) increased 9.8% compared to the prior
fiscal year. In addition, gross profit increased from 51.3% to 53.2% of net
sales in fiscal 1998 compared to fiscal 1997. Since the management change, the
Company has also opened thirteen new showrooms, eight of which were opened
during fiscal 1998, featuring its new store design and has plans to open
approximately 16 to 21 additional showrooms during the balance of fiscal 1999.
2
<PAGE> 3
INDUSTRY OPPORTUNITY AND COMPETITIVE STRENGTHS. The Company believes a
number of macroeconomic factors influence furniture sales, including existing
home sales, housing starts, consumer confidence, availability of credit,
interest rates and demographic trends. Management believes favorable fundamental
trends in home building and demography will continue to drive long-term growth
in the furniture industry.
The furniture market is large and diversified. Because the market for
custom crafted furniture is highly fragmented, the Company believes that
manufacturers with strong brand name recognition, broad distribution and good
value to price ratio are positioned to increase market share.
o Reputation for Value and Selection; Brand Names. The Company believes that
it has attained a reputation for high quality, custom-crafted furniture at
prices comparable to those of mass-produced, sold-as-shown furniture. For
over 26 and 68 years, respectively, Krause's and Castro Convertibles have
developed a reputation for selection, quality, price and service. The
Company believes that its reputation and strong brand recognition influence
customer purchasing decisions and will help the Company expand its
distribution in existing markets and penetrate new markets.
o New, Experienced Management Team. Since the 1996 investment, the Company has
hired a strong management team with extensive retailing experience, led by
Philip M. Hawley, the former Chairman and Chief Executive Officer of The
Broadway Stores, Inc. New management has adopted business and marketing
strategies designed to leverage the Company's existing brand name
recognition and distribution system and appeal to its existing broad
customer base. The management team has a substantial equity stake in the
Company.
o Vertically Integrated Manufacturer and Distributor of Custom Furniture. The
Company is a leading combined manufacturer and retailer of made-to-order
upholstered furniture. This vertical integration enables the Company to
manufacture high-quality, competitively priced custom upholstered furniture
and deliver it to the customer usually within two to four weeks from the
date ordered. Vertical integration also enables the Company to capture
profits at both the manufacturing and retail level, with minimal inventory
risk. Further, the Company can use the available capacity of its
manufacturing facility to accommodate planned sales growth.
o Well Located Retail Distribution Network. As of January 31, 1999, the
Company operated 88 showrooms, primarily in California and the New York City
metropolitan area, and in selected other markets in the Southwest, Northwest
and Midwest. The Company believes that its showrooms are in many markets
that have favorable demographics and upward economic trends, and that a
substantial majority of its showrooms are located in high traffic areas. In
addition, many showrooms are near other furniture retailers, where the
Company believes it can benefit from increased traffic of furniture
customers and from comparison shopping, typically by shoppers who compare
Company products to those of sold-as-shown retailers or premium-priced
custom manufacturers.
o Focus on Gross Margins and Cost Controls. In recent periods, the Company has
taken a number of steps to improve its gross margin and reduce expenses by
reducing discounts and other special pricing programs, improving its
manufacturing processes, introducing budgeting controls, revising its sales
commission structure, consolidating selling, general and administrative
expenses and cutting costs. As a result, the Company has developed an
organization focused on gross margin improvements, expense control and
operating efficiency.
BUSINESS STRATEGY. The Company intends to leverage its competitive
strengths in order to increase its sales volumes, improve its overall financial
performance and enhance its market position. The Company is attempting to
achieve these objectives by pursuing the following strategies:
o Remodel Existing Showrooms. The Company is well into a major remodeling
program to update its showrooms, imbue a sense of fashion and excitement and
move away from the Company's traditional factory-direct orientation. The
Company has developed new store layout, design and visual presentation
themes to center attention on fabric selection and customization options,
present merchandise by life style as complete room environments and enhance
lighting and color in order to add drama and create excitement throughout
its showrooms. The Company has remodeled 38 showrooms, 22 of which were
remodeled during fiscal 1998, and expects to complete the remodeling program
over the next eighteen months.
o Add New Showrooms in Existing Markets. The Company plans to expand its
presence in markets where it has an existing base of showrooms so that it
can leverage its brand name recognition and marketing efforts as well as its
existing distribution network and management. The Company estimates that it
has not less than 40 opportunities to open showrooms in existing markets. To
3
<PAGE> 4
date, the Company has opened thirteen new showrooms, eight of which were
opened during fiscal 1998, and expects to open approximately 16 to 21
additional showrooms during the balance of fiscal 1999.
o Relocate Under-Performing Showrooms. The Company estimates that it has
approximately two dozen showrooms that are in good market areas but in poor
locations within these market areas. As the leases on these showrooms
expire, the Company plans to seek more suitable locations and incorporate
into the new showrooms the same new layout, design and visual presentation
themes that it has developed in the remodeling program.
o Revamp Marketing and Sales Promotion. The Company has revamped its marketing
and sales promotion with the goal of better defining its market niche and
differentiating it from its competitors. A major focus of this effort is a
shift away from a factory-direct orientation to that of customization and
craftsmanship with emphasis on value rather than price. To this end, the
Company changed the name it does business under from Krause's Sofa Factory
to Krause's Custom Crafted Furniture and developed a new, modern logo.
Another focus of this effort has been to create an advertising format and
message and to use larger ads in an effort to better attract customers.
o Develop New Products; Increase Sales of Complementary Products. The Company
has put in place a new product development program, which is freshening
showroom inventories and introducing a number of new styles designed to
increase its appeal to customers. In addition, although the Company intends
to continue to focus on the manufacture and sale of upholstered products, as
a part of its new merchandising approach it has increased the promotion and
sale of other products, including accessories supplied by third parties such
as tables, lamps, area rugs and wall decor, custom-made chairs and
recliners. The Company believes these additional merchandise classifications
have broadened the Company's offerings and contributed to increased sales
per square foot.
o Leverage the Castro Franchise. In 1993, the Company acquired certain assets
principally related to the retail operations of Castro Convertible
Corporation, including the "Castro Convertibles" tradename and trademark and
retail store locations. Castro Convertibles, which started business in 1931,
has been known throughout the East Coast for its quality sofabed products
and was an early pioneer in developing the tri-fold sofabed mechanism. The
Company has leveraged this strong brand awareness by adding a Castro
Convertibles gallery in all of its Krause's remodeled and new showrooms.
o Increase Showroom Productivity. For the year ended January 31, 1999, the
Company's sales per square foot of selling space averaged $127. To further
increase showroom productivity, the Company is in the process of gradually
reducing the average size of its showrooms from approximately 12,100 square
feet of selling space to approximately 10,000 square feet, which it believes
is the optimal size to show and sell the Company's products. In addition,
the Company intends to increase same-store sales by continuing to (i) roll
out its remodeling and expansion program, which has produced higher
same-store sales at the initial group of remodeled showrooms, (ii) add new
products, including accessory products manufactured by third parties, and
(iii) increase the effective sales prices of its products through reduced
promotional discounting.
SHOWROOMS AND MERCHANDISING. Showrooms. The Company sells its products
exclusively through leased retail showrooms in 12 states. Retail showrooms in
California, Colorado, Arizona, Nevada, Texas, New Mexico, Washington and
Illinois operate under the name KRAUSE'S CUSTOM CRAFTED FURNITURE, KRAUSE'S SOFA
FACTORY(R) or KRAUSE'S SOFAS(R). The Company intends to convert all of these
showrooms to operate under the name KRAUSE'S CUSTOM CRAFTED FURNITURE. Retail
showrooms in New York, New Jersey, Connecticut and Florida are operated under
the name CASTRO CONVERTIBLES(R). Showroom locations are selected on the basis of
strictly defined criteria, including expected population growth, desirable
target consumer demographics and psychographics, high visibility with easy
access from major thoroughfares, adequate parking facilities and proximity to
other furniture retailers.
Selling space in retail showrooms varies in size from 1,400 square feet
to 23,400 square feet, with an average size of 11,700 square feet. The typical
showroom displays approximately 50 to 60 styles in coordinated furniture
groupings to illustrate the diversity and availability of contemporary and
traditional upholstered furniture.
When a customer makes a selection, a sales associate collects a down
payment and immediately enters the order in the Company's computer system
through a terminal at the showroom. The order, reflecting the customer's exact
specifications of style, color, size, configuration and fabric, is then sent to
the Company's facility in Brea, California for manufacturing.
REMODELING AND EXPANSION. The Company is well into a major expansion and
remodeling program. Key components of this program include establishing design
centers in prominent locations within showrooms to highlight fabric selection,
creating decorated room settings, adding new lighting and carpeting, developing
consistent and highly visible signage, and integrating the
4
<PAGE> 5
Castro Convertibles brand name and products into its Krause's Custom Crafted
Furniture showrooms. As part of this program, the Company has remodeled 38
showrooms, 22 of which were remodeled during fiscal 1998, and has plans to
remodel additional showrooms during fiscal 1999. The remodeled showrooms are
designed to present a more appealing environment to the consumer, emphasizing
the Company's wide array of styles and fabric selections, and highlight the
consumer's ability to customize furniture selections to suit individual taste.
Remodeled showrooms feature prominently displayed design centers to highlight
fabric selection, decorated room settings, and new lighting and carpeting. The
Company anticipates that it will recover the cost of each remodeled store in
approximately one year through increased sales after the remodeling.
The Company is also seeking to expand its presence in existing markets
to increase sales and market share. This will enable the Company to leverage its
brand name recognition and take advantage of the advertising umbrella and
infrastructure that currently exists. It will also focus on areas with strong
demographics and economic performance. The Company has opened thirteen new
showrooms, eight of which were opened during fiscal 1998, since it began its
expansion program and intends to open approximately 16 to 21 additional
showrooms during the balance of fiscal 1999. In addition, as leases expire on
showrooms that are not located in prime retail areas, but are in favorable
markets, the Company will attempt to move those showrooms to more suitable
locations.
MERCHANDISING AND ADVERTISING. The Company has implemented new
merchandising programs designed to further leverage and enhance the strength of
the Krause's and Castro Convertibles brand names. In addition to implementing
its expansion and remodeling program designed to enhance the Company's appeal to
its existing broad customer base, the Company has further enhanced and leveraged
the strength of the Krause's and Castro Convertibles brand names through new
advertising and merchandising programs that emphasize the selection, features
and value of its products. The Company is seeking to use its strong brand
awareness to initially increase its share of existing markets and ultimately to
penetrate new markets. As an integral part of its new and remodeled Krause's
Custom Crafted Furniture showrooms, the Company has added a section dedicated to
its Castro Convertibles products to further leverage this product line and brand
name.
The Company primarily advertises through print media, both in newspapers
and by direct mail. It also employs targeted radio advertising in selected
markets. The Company has freshened the appearance of its advertising to give
more consistent placement of the Krause's and Castro Convertibles brand names,
to play down the Company's previous factory-direct image, and to appeal to a
more fashion-conscious buyer. While the Company plans to continue to display
prices in its advertising, it has reduced the prominence of promotional pricing
in favor of highlighting the selection, style and value of its products.
PRODUCTS. The Company focuses on manufacturing and retailing
high-quality, affordably priced made-to-order upholstered furniture. Its product
line consists primarily of upholstered (covered in woven fabric or leather)
sofas, sofabeds, chairs and sectionals. Customers of the Company may choose from
a selection of approximately 60 different styles, 40 sizes, 800 fabrics and 50
leather choices. Except for a few styles of occasional and reclining chairs
which the Company purchases from outside vendors, the Company manufactures
virtually all of the upholstered furniture offered in its showrooms.
In addition to its exclusive upholstered furniture line, the Company
retails an assortment of tables, area rugs, lamps and wall decor, custom-made
chairs and recliners. These furniture products and accessories, which are
supplied to the Company by outside vendors, complement the Company's upholstered
furniture products and help to create the room setting displays. Because the
Company typically views sales of these furniture products and accessories as
incremental to, rather than in lieu of, sales of the Company's own upholstered
furniture products, the Company has increased the promotion and sale of these
complimentary furniture products and accessories. Merchandise purchased from
other suppliers currently accounts for approximately 10.7% of net sales.
In order to be responsive to changing customer demands, the Company will
develop new products more aggressively. Since the 1996 financings, the Company
has introduced 24 new sofa styles and five new chair styles. In addition, the
Company is committed to periodically update its inventory of 800 fabrics by
replacing slow-moving, out-of-style fabrics with more contemporary designs.
Because of its made-to-order strategy, the Company does not require a
substantial inventory of finished goods, whether they are manufactured by it or
purchased from outside sources.
MANUFACTURING. The Company's manufacturing facilities in Brea, California
produce upholstered furniture for both Krause's and Castro Convertibles
showrooms. Manufacturing generally begins with the purchase of kits containing
wooden frame components. These components are chiefly hardwood, but also include
softwood and some engineered lumber. Outside mills make the components, first
kiln-drying the lumber for extra strength and straightness, then cutting the
component pieces to Company specifications for each different style, working to
precise standards. Company artisans, using pneumatic and power tools, assemble
5
<PAGE> 6
the wooden parts into frames for different furniture models. All corners are
blocked and glued for added strength and proper distribution of weight and
stress.
The Company primarily uses a one-piece frame method in which workers
build the entire frame before any upholstering occurs. This method makes the
frame stronger and leads to a more finely tailored appearance. Workers complete
the frames by installing metal springs, which contribute to the continued
comfort, durability and appearance of the upholstered furniture. Some Castro
Convertibles models have a frame that can be disassembled for delivery through
the narrow doorways and hallways of New York area apartments.
The first step in the upholstering process is cutting and sewing the
fabric chosen by the customer. The sewn fabric is sent to the assembly line
where workers construct the frame and upholster the seats, backs and arms. The
Company employs quilters as well as special seamstresses to sew zippers, bolster
covers, ruffles, skirts and pleats.
Upholstering takes place along an assembly line. Several individuals
work on each frame, each specializing in an area of responsibility -- springs,
outside body, seat, arm, inside body and so on. While the frame is upholstered,
seat cushions are filled with the customer's selection of either down, standard
foam or a Foreverflex(R) insert (the Company's proprietary seating material).
The Foreverflex(R) cushion insert is a high-density foam cushion which is
injection molded with springs suspended within the foam. An outside supplier
makes the Foreverflex(R) cushion insert to strict Company specifications and
provides a lifetime guarantee. Every piece of finished upholstered furniture
undergoes a quality control inspection during production and again prior to
shipment from the factory to the local distribution center.
The Company generally has adequate inventories of raw materials and
other supplies on hand to fill customer orders, and expects its suppliers to
satisfy its requirements shortly before materials are used in production.
The Company builds approximately 650 pieces of upholstered furniture per
day in two shifts. This output represents approximately 54% of double shift
manufacturing capacity. The level of production primarily reflects customer
orders, because the Company does not manufacture units for inventory.
When an order has completed the manufacturing or outside purchasing
process, it is shipped to a regional warehouse for the final preparation and
delivery to the customer. The Company uses outside delivery services, as well as
its own personnel in certain areas, for deliveries.
BACKLOG. The Company turns its manufacturing backlog approximately every
23 to 28 days. Backlog as of January 31, 1999 was approximately $11.3 million
compared to $10.7 million at February 1, 1998.
SUPPLIERS AND MATERIALS. Many suppliers currently provide the Company
with the materials used in manufacturing its upholstered furniture products. The
Company's ten largest suppliers provided it with 52.9% of its purchased raw
materials during the fiscal year ended January 31, 1999, including one such
supplier that provided approximately 10.2% The Company is dependent on the
continued supply of components and raw materials, including frame components,
fabrics, leather, foam and sofabed and motion mechanisms. Management constantly
seeks new suppliers and better prices through competitive bidding and the
qualification of alternative sources of supply. If the Company could not develop
alternative sources of supply when needed or failed to obtain sufficient
single-source products, components and raw materials, the resulting loss in
production capability would adversely affect the Company's sales and operating
results.
TRADEMARKS AND PATENTS. The Company holds trademarks and patents
registered in the United States for some of its products and processes. The
Company has a registered trademark in the United States for the Krause's Sofa
Factory(R) and Castro Convertibles(R) names and logos and the name
Foreverflex(R). The Company has applied for a trademark for the name Krause's
Custom Crafted Furniture. Trademarks, which the Company considers important to
its business, have expiration dates ranging from May 13, 2002 to November 30,
2004, but each is renewable in perpetuity. The Company also has other
trademarks, both registered and unregistered, that the Company believes are not
material to its business or to any ongoing product lines.
GOVERNMENT REGULATIONS. The Company's facilities are subject to numerous
federal, state and local laws and regulations designed to protect the
environment from waste emissions and from hazardous substances. The Company is
also subject to the federal Occupational Safety and Health Act and other laws
and regulations affecting the safety and health of employees in the production
areas of its facilities. Management believes that it is in compliance in all
material respects with all applicable environmental and occupational safety
regulations.
6
<PAGE> 7
EMPLOYEES. The majority of the Company's employees are not unionized and
many have worked for the Company for more than 10 years. A union contract covers
approximately 50 retail employees in the greater New York area. At January 31,
1999, the total work force numbers approximately 1,112, with approximately 433
working in manufacturing, 589 in retail and warehousing operations, and 90 in
administration.
COMPETITION. The home furnishings industry is highly competitive and
fragmented, and includes competition from traditional furniture retailers,
department stores and discount and warehouse outlets. Certain companies which
compete directly with the Company have greater financial and other resources
than the Company. The Company competes on a national level with Ethan Allen
Inc., Levitz Furniture, Leather Center, Inc., Expressions and traditional
department stores, among others. The Company also competes on a regional basis.
In New York, New Jersey and Chicago, the Company's primary competitor is
Jennifer Convertibles, Inc., and in the Western United States the Company's
primary regional competitors include Homestead House, Inc., The Leather Factory
and Norwalk Furniture Corporation (the latter of which also competes in the
Midwest market). In Houston, Texas, the Company's primary regional competitor is
Star Furniture Company. Expressions, Norwalk Furniture Corporation and Ethan
Allen Inc., like the Company, manufacture their own upholstered products and
offer "made-to-order" customization similar to that provided by the Company.
Levitz Furniture primarily addresses the low to middle end "as shown" market,
whereas traditional department stores typically focus on the middle to upper end
"as shown" market.
INSURANCE. The Company purchases occurrence-based product liability
insurance in the aggregate amount of $17 million. Management believes that based
upon its historical liability experience, the amount of insurance it carries is
adequate.
RISK FACTORS RELATING TO THE BUSINESS
LACK OF PROFITABLE OPERATIONS; ACCUMULATED DEFICITS. The Company has
reported losses from operations in each of the past five years and had an
accumulated deficit of $47.0 million at January 31, 1999. If losses from
operations continue, they could adversely affect the market price for the common
stock and the Company's ability to maintain existing financing and obtain new
financing. There can be no assurance that the Company will achieve profitability
in the future.
CAPITAL REQUIREMENTS; RESTRICTIONS ON COMPANY'S ABILITY TO OBTAIN
ADDITIONAL CAPITAL. The Company believes that borrowings under its Revolving
Credit Facility and internally generated funds will be sufficient to fund its
requirements for working capital and capital expenditures through the end of
fiscal year 1999. However, the Company may need to raise additional funds to
finance its remodeling and expansion program through either debt or equity
financing, and there can be no assurance that the Company's financial
performance will generate sufficient funds. The Company currently contemplates
that other sources of capital would be available, although this situation could
change.
The Company's existing secured revolving credit facility provides for
borrowings of up to $15.0 million, is subject to maturity in March 2002, imposes
borrowing base limitations, and restricts it from incurring future additional
indebtedness from third parties in an amount in excess of $5.0 million.
Consequently, if the Company needs any significant additional infusion of
capital, it may have to issue additional equity. Such additional capital, if
raised, is likely to dilute the interest of the Company's stockholders. The
revolving credit agreement further requires the Company to maintain financial
covenants regarding adjusted net worth and earnings before interest, taxes,
depreciation and amortization. Substantially all of the Company's assets are
pledged as collateral for repayment of existing indebtedness. The Company's
collateral pledge may make it more difficult for the Company to obtain
additional financing on advantageous terms, if at all.
Additionally, the restrictions described above could significantly impair
the Company's ability to raise additional capital by issuing either additional
equity or debt.
LEVERAGE AND ABILITY TO SERVICE FIXED CHARGES. At January 31, 1999, the
Company had $18.0 million of long-term debt and had a negative tangible net
worth (stockholders' equity less intangible assets) of $2.0 million. For the
fiscal year ended January 31, 1999, earnings before interest, taxes,
depreciation and amortization were $.9 million. A high percentage of the
Company's operating expenses are relatively fixed, including approximately $1.4
million per month in lease payments.
The Company's high level of debt and debt service requirements will have
several important effects on its future operations, including the following: (i)
the Company will need to devote significant cash to service debt, reducing funds
available for operations and future business opportunities and increasing the
Company's vulnerability to adverse economic and industry conditions and
competition; (ii) the Company's leveraged position will increase its
vulnerability to competitive pressures; (iii) the financial covenants and other
restrictions contained in certain agreements relating to the Company's
indebtedness will require the Company to meet
7
<PAGE> 8
certain financial performance tests which increase over time and will restrict
its ability to borrow additional funds, to dispose of assets, to issue preferred
stock or to pay cash dividends on or repurchase common stock; and (iv) funds
available for working capital, capital expenditures, acquisitions and general
corporate purposes will be limited.
Any default under the documents governing indebtedness of the Company
could have a significant adverse effect on the market value of the common stock.
NO ASSURANCE OF SUCCESSFUL IMPLEMENTATION OF BUSINESS STRATEGIES. The
Company's near-term business strategies include (i) revamping marketing and
sales promotion with the goal of better defining the Company's market niche and
differentiating the Company from its competitors; (ii) developing new products,
which will accomplish a freshening of inventories and see the introduction of a
number of new styles, designed to increase customer appeal; (iii) remodeling
showrooms and adding new showrooms in existing market areas; and (iv) enhancing
and leveraging the strength of its brand names. The Company's inability to
achieve any of these goals could have a material adverse effect on the Company's
business, financial condition, and results of operations. See"Business --
Business Strategy."
Certain internal and external factors directly affect the Company's
business, including the following: the availability of suitable showroom
locations in existing markets; the capacity of management to complete remodeling
at the planned pace; the availability of financing for expansion and remodeling;
and general economic conditions, including employment levels, business
conditions, interest rates and tax rates in the Company's market areas. While
the Company believes that current economic conditions favor growth in the
markets it serves, various factors, including those listed above, could reduce
sales or increase operating expenses. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." There can be no assurance
that various factors will not adversely effect the Company's business in the
future or will not prevent the Company from successfully implementing its
business strategies.
DEPENDENCE UPON CHIEF EXECUTIVE OFFICER AND KEY PERSONNEL. The Company's
future performance will depend to a large extent upon the efforts of Philip M.
Hawley and other members of its executive management team. The loss of the
services of Mr. Hawley or other key members of the team could have an adverse
effect on the Company. In August 1996, the Company entered into an Employment
Agreement with Mr. Hawley, pursuant to which the Company agreed to employ Mr.
Hawley for a term ending on August 25, 1999. The Company has agreed to extend
this agreement to January 31, 2001.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. Because the Company sells
most of its products on a made-to-order basis with a two-to-four week delivery
cycle, it typically operates with about 30 days of backlog. As a result,
quarterly sales and operating results generally depend on the volume and timing
of orders and the Company's ability to fulfill orders within a quarter, which
are difficult to forecast. For example, because one of the Company's fabric
suppliers could not supply all of the Company's needs on a timely basis,
customer orders representing approximately $1,200,000 in sales were not
completed as expected in the fourth quarter of fiscal 1997. The Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant shortfall of demand for the
Company's products in relation to the Company's expectations would have an
immediate adverse impact on the Company's business, operating results and
financial condition. In addition, the Company plans to increase certain cash
expenditures in connection with the remodeling of existing showrooms and the
opening of new showrooms. To the extent that such expenditures precede or are
not subsequently followed by increased revenues, the Company's business,
operating results and financial condition will be materially adversely affected.
In addition, the Company's operating results are affected by a variety of
factors, including consumer tastes, housing activity, interest rates, credit
availability and general economic conditions in its selected market. It is
likely that in some future quarter the Company's operating results will be below
the expectations of public market analysts and investors. In that event, the
price of the common stock would likely be materially adversely affected.
DEPENDENCE ON SUPPLIERS. The Company obtains its raw materials and some
manufactured products from various outside sources and generally has had no
difficulty obtaining them. However, the Company is dependent on the continued
supply from relatively few suppliers of certain products, components and raw
materials, including fabrics, leather, foam, and sleeper and motion mechanisms.
Specifically, the Company's 10 largest suppliers accounted for approximately
52.9% of its aggregate purchases in the fiscal year ended January 31, 1999.
During the fiscal year ended January 31, 1999, approximately 11.3% of these
purchaes represented leather, with one supplier constituting approximately 28.0%
of the leather purchases made by the Company during this period, and
approximately 10.2% of these purchases consisted of pre-cut wood components
purchased from a supplier, constituting nearly all of the pre-cut wood component
purchases made by the Company. The Company has no supply contract with either of
these large suppliers, but instead makes each purchase under a separate purchase
order. Both leather and pre-cut wood components are commodities the Company
believes it can readily obtain from alternative sources, and from time to time
the Company has purchased such commodities from alternative sources. If the
Company could not develop alternative sources of supply of leather, pre-cut wood
components or certain other raw materials and products when needed, or could not
obtain sufficient single-source products,
8
<PAGE> 9
components and raw materials when needed, the resulting loss of production
capability, would adversely affect the Company's results of operations.
In addition, commodity raw materials are subject to fluctuations in
price. Because raw materials make up a substantial part of the cost of goods
sold by the Company, price fluctuations could have a material adverse effect on
the Company's results of operations. Although the Company has historically
absorbed gradual increases in raw material prices, there can be no assurance
that the Company will continue to be able to do so in the future. In addition,
sharp increases in material prices are more difficult to pass through to the
customer in a short period of time and may negatively impact the short-term
financial performance of the Company. See "Business -- Manufacturing."
COMPETITION. The home furnishings industry is highly competitive and
fragmented, and includes competition from traditional furniture retailers,
department stores and discount and warehouse outlets. Certain companies which
compete directly with the Company have greater financial and other resources
than the Company. The Company competes on a national level with Ethan Allen
Inc., Levitz Furniture, Leather Center, Inc., Expressions and traditional
department stores, among others. The Company also competes on a regional basis.
In New York, New Jersey and Chicago, the Company's primary competitor is
Jennifer Convertibles, Inc., and in the Western United States the Company's
primary regional competitors include Homestead House, Inc., The Leather Factory
and Norwalk Furniture Corporation (the latter of which also competes in the
Midwest market). In Houston, Texas, the Company's primary regional competitor is
Star Furniture Company. Expressions, Norwalk Furniture Corporation and Ethan
Allen Inc., like the Company, manufacture their own upholstered products and
offer custom-crafted furniture similar to that provided by the Company. Levitz
Furniture primarily addresses the low to middle end "as shown" market, whereas
traditional department stores typically focus on the middle to upper end "as
shown" market.
CYCLICAL NATURE OF THE FURNITURE INDUSTRY. The home furnishings industry
historically has been cyclical, fluctuating significantly with general economic
cycles. After economic downturns, the home furnishings industry tends to recover
more slowly than the general economy. The Company believes that the industry is
significantly influenced by economic conditions generally and particularly by
consumer behavior and confidence, the level of personal discretionary spending,
housing activity, interest rates and credit availability. A prolonged economic
downturn would have a material adverse effect on the Company.
DEPENDENCE ON REGIONAL ECONOMIES. The Company's markets are concentrated
in California and the New York City metropolitan area, where 50.7% and 12.6%,
respectively, of the Company's sales in the fiscal year ended January 31, 1999
originated. Consequently, an economic downturn in either of those states would
likely have a disproportionately negative impact on the financial condition of
the Company. Management believes the economic indicator most relevant to its
operations is consumer confidence. In January 1999, the consumer confidence
index, as reported by the Conference Board, for the Middle Atlantic Region,
which includes New York, was 113.2, the index for the Pacific Region, which
includes California, was 127.8, and the average index for the United States as a
whole, was 128.9.
RELIANCE ON MANUFACTURING FACILITY AND COMPUTER SYSTEM; VULNERABILITY TO
EARTHQUAKES. The Company's sole manufacturing plant, as well as the central
processing facility for the computer system that contains the Company's business
records and links the showrooms to Company headquarters is located in Southern
California, an area prone to earthquakes. An earthquake or other natural
disaster or work stoppage or other event affecting the normal operations of the
business could seriously impair the Company's capacity to continue its
manufacturing and retail operations. While the Company intends to implement a
disaster recovery system to lessen the impact of such a disaster or other work
stoppage, there can be no assurance that the Company will successfully put such
a system into operation.
In addition, the Company is pursuing replacing its computer system with a
new enterprise resource planning system to improve order configuration,
manufacturing scheduling and distribution processes. In the event that the
Company undertakes to replace its current computer system, failure to promptly
implement and integrate its system could have a material adverse affect on the
Company.
CONTROL BY PRINCIPAL STOCKHOLDERS. The current management, directors and
other principal stockholders of the Company own in the aggregate approximately
55.1% of the issued and outstanding capital stock of the Company on a
fully-diluted basis. Furthermore, the Company has entered into a Stockholders
Agreement with certain of its stockholders which provides, in part, that the
stockholders who are parties to the Stockholders Agreement will vote their
shares in any election of directors in a manner that assures the election of
directors designated by each of them. The Stockholders Agreement also prohibits
the Company from taking certain actions, such as mergers, liquidations or
dissolutions, without the approval of the member of the Board of Directors
designated by GECC. It is unlikely that any principal stockholder or group of
public stockholders acting in concert would be in the position to
9
<PAGE> 10
influence corporate policy, particularly where any such policy could have a
detrimental effect on GECC or others of the public stockholders. These factors
may have the effect of delaying, deferring or preventing a change in control of
the Company.
POSSIBLE LIMIT ON USE OF OPERATING LOSS CARRYFORWARDS RESULTING FROM
CHANGE IN CONTROL. As of January 31, 1999, the Company had approximately $40
million of federal net operating loss carryforwards including approximately $10
million which is currently limited by Section 382 of the Internal Revenue Code
of 1986, as amended. Also, Section 382 would further limit the Company's use of
its operating loss carryforwards if the cumulative ownership change during any
three-year period exceeds 50%. As a result of transactions occurring through
January 31, 1999, the Company experienced a cumulative ownership change of
approximately 42% as defined in Section 382. These factors may have the effect
of delaying, deferring or preventing a change in control of the Company.
MARKET FOR THE COMPANY'S COMMON STOCK; POTENTIAL VOLATILITY OF STOCK
PRICE. The Company's common stock began trading on the American Stock Exchange
on March 31, 1998. Prior to that date the Company's common stock traded on the
Nasdaq SmallCap Market. There can be no assurances as to the extent or nature of
the market for the Company's common stock (which is currently thinly traded) or
as to the price at which the Company's common stock will trade. The market price
of the Company's Common stock may be significantly affected by various factors
such as quarterly variations in the Company's operating results, changes in
revenue growth rates for the Company as a whole or for specific geographic areas
or products, earnings estimates or changes in estimates by market analysts,
speculation in the press or analyst community and general market conditions or
market conditions specific to particular industries. Further, there have been
periods of extreme volatility in the stock market that, in many cases, were
unrelated to the operating performance of, or announcements concerning, the
issuers of the affected securities. General market declines or volatility in the
future could adversely affect the price of the common stock. There can be no
assurance that the common stock will maintain its current market price.
Short-term trading strategies of certain investors can have a significant effect
on the price of specific securities. Due to sporadic trading, the Company does
not believe that an established trading market exists for its common stock.
MAINTAINING LISTING ON AMERICAN STOCK EXCHANGE. The Company began trading
on the American Stock Exchange on March 31, 1998. The American Stock Exchange
may at its discretion suspend or delist the securities of a company without
notice if, in the opinion of the exchange, certain circumstances apply,
including any one of the following: the financial condition and/or operating
results of the company appear to be unsatisfactory; it appears that the extent
of public distribution or the aggregate market value of the security has become
so reduced as to make further dealings on the exchange inadvisable; the Company
has sold or otherwise disposed of its principal operating assets, or has ceased
to be an operating company; the company has failed to comply with the listing
requirements of the exchange; or any other event has occurred or condition
exists that makes further trading on the exchange unwarranted. Because many of
these circumstances lie beyond the control of the Company, and because the
American Stock Exchange may determine at its discretion whether cause for
suspension or delisting exists, there is a risk that the Company may no longer
be able to list its shares for trading on the American Stock Exchange or any
other stock exchange or market system. In that event, the price of the common
stock would be materially, adversely affected and the ability of investors to
sell their shares of the common stock could be seriously impaired.
ANTITAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS AND DELAWARE LAW.
Certain provisions of the Company's Certificate of Incorporation and of Delaware
law could discourage potential acquisition proposals and could delay or prevent
a change in control of the Company. Such provisions could diminish the
opportunities for stockholders to participate in tender offers, including tender
offers at a price above the then current market value of the Company's Common
Stock. See "Description of Capital Stock -- Section 203 of the Delaware General
Corporation Law." Such provisions may also inhibit fluctuations in the market
price of Company Common Stock that could result from takeover attempts. In
addition, while the Company currently has no plans to issue any preferred stock,
the Company's Certificate of Incorporation, as amended, authorizes the Board of
Directors to issue up to 666,667 shares of Preferred Stock without further
stockholder approval. Issuance of preferred stock could have the effect of
delaying, deterring or preventing a change in control of the Company. The
issuance of additional series of preferred stock could also adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Board of Directors also has the authority to fix and
determine the relative rights and preferences of preferred shares, as well as
the authority to issue such shares, without further stockholder approval. As a
result, the Board of Directors could authorize the issuance of a series of
Preferred Stock which would grant to holders preferred rights to the assets of
the Company upon liquidation, the right to receive dividends before dividends
would be declared to holders of Common Stock, and the right to the redemption of
such shares, together with a premium, prior to the redemption of the Common
Stock, or such other preferred provisions as the Board of Directors may in its
sole discretion deem appropriate. Holders of Common Stock have no redemption
rights or other preferences.
GOVERNMENTAL REGULATION. The Company's operations must meet federal,
state and local regulatory standards in the areas of safety, health and
environmental pollution and waste control. If the Company fails to comply with
these regulations, the Company
10
<PAGE> 11
could be subject to liability ranging from monetary fines and charges to
injunctive actions, any of which would adversely affect the Company. Future
changes in these regulations could also have a material adverse effect on the
Company.
ABSENCE OF DIVIDENDS. The Company has not paid cash dividends on its
Common Stock and does not anticipate that it will do so in the foreseeable
future. Furthermore, dividends are subject to limitations and restrictions under
the terms of the Company's indebtedness to various institutional lenders,
including a prohibition on the payment of dividends without the prior written
consent of the lenders.
ITEM 2. PROPERTIES
The Company maintains its administrative offices and manufacturing plant
in a leased 250,000 sq. ft. facility at 200 North Berry Street, Brea,
California. The lease has a remaining term of 10 years with four five-year
options and grants the Company certain options to purchase the facility. The
Company also leases approximately 275,000 sq. ft. for warehouse and distribution
facilities. The Company leases all its retail showrooms with rents either fixed
or with fixed minimums coupled with contingent rents based on the Consumer Price
Index or a percentage of sales. The Company's 90 showrooms occupy approximately
1,000,000 sq. ft. of selling space.
ITEM 3. LEGAL PROCEEDINGS
On May 27, 1994, the Company was served with a complaint in the case
captioned Miriam Brown v. Mr. Coffee, inc. et al. (Civil Action No. 13531), in
the Delaware Court of Chancery, New Castle County. The complaint names the
Company, Mr. Coffee and certain individuals including Jean R. Perrette and
Kenneth W. Keegan, both former directors and officers of the Company, as
defendants in a purported class action lawsuit. The complaint alleges that the
individuals named as co-defendants breached their fiduciary duties as directors
of Mr. Coffee by, among other things, their alleged efforts to entrench
themselves in office and prevent Mr. Coffee's public shareholders from
maximizing the value of their holdings, engaging in plans and schemes unlawfully
to thwart offers and proposals from third parties, and approving or causing the
Company and others to agree to vote in favor of a merger with Health o meter
Products, Inc. The Company is alleged to have participated in and advanced the
alleged breaches. The plaintiff originally sought to enjoin the merger; however,
plaintiff withdrew such action and the merger was completed in August 1994. The
Company and the Mr. Coffee directors filed motions to dismiss the complaint on
August 11, 1994. On October 9, 1996, the plaintiff filed a second amended
complaint. All defendants subsequently joined in filing a motion to dismiss the
complaint. The Court has taken the motion under advisement. The plaintiff seeks
compensatory damages and costs and disbursements in connection with the action,
including attorneys' and experts' fees, and such other further relief as the
court deems just and proper.
For a number of reasons, including the extensive solicitation and
negotiation process which preceded the acceptance by Mr. Coffee's Board of
Directors of the Health o meter offer, the Company believes that the plaintiff's
allegations are without merit. Management believes that any liability in the
event of final adverse determination of any of this matter would not be material
to the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
On March 31, 1998, the Company's common stock began trading on the
American Stock Exchange under the ticker symbol KFI. Prior to that date the
Company's common stock traded on the Nasdaq SmallCap Market under the ticker
symbol SOFA. The following table sets forth the high and low per share prices
for the Company's Common Stock for each quarter during the 1998 and 1997 fiscal
years.
11
<PAGE> 12
<TABLE>
<CAPTION>
1998 1997
------------- ------------
Quarter High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First ................ $4.44 $2.43 $2.06 $1.25
Second ............... 4.12 1.50 1.81 1.48
Third ................ 1.75 0.69 4.19 1.50
Fourth ............... 1.94 0.94 3.25 2.13
</TABLE>
As of April 5, 1999, there were approximately 337 holders of record of
the Company's common stock. The Company has paid no dividends to date and does
not expect to do so in the foreseeable future.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The following data as of and for the years ended January 31, 1999 and February
1, 1998 has been derived from consolidated financial statements appearing
elsewhere herein that have been audited by Arthur Andersen LLP, independent
public accountants. The following data for the year ended February 2, 1997 has
been derived from consolidated financial statements appearing elsewhere herein
that have been audited by Ernst & Young LLP, independent auditors. The following
data as of February 2, 1997, January 28, 1996 and January 29, 1995 and for the
years ended January 28, 1996 and December 31, 1994 and for the month ended
January 29, 1995 has been derived from audited consolidated financial statements
not included herein. The following data for the month ended January 30, 1994 is
unaudited. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in this
Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Fiscal Year Ended Month Ended
-------------------------------------------------------------- ------------------------
January 31, February 1, February 2, January 28, December 31, January 29, January 30,
1999(4) 1998(4) 1997(4) 1996(4) 1994 1995(4)(5) 1994 (5)
---------- --------- --------- --------- --------- ---------- ----------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales $ 130,447 $ 115,201 $ 112,737 $ 122,319 $ 116,471 $ 7,179 $ 7,326
Gross profit 69,460 59,048 56,247 62,467 62,949 3,532 3,807
Loss from operations (2,112) (5,594) (12,447) (9,388) (2,398) (3,231) (2,041)
Gain from sale of Mr. Coffee
stock(2) -- -- -- -- 12,115 -- --
Income (loss) before
extraordinary items (5,134) (7,480) (13,389) (8,715) 5,831 (3,221) (2,185)
Extraordinary items(3) -- -- -- -- (436) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ (5,134) $ (7,480) $ (13,389) $ (8,715) $ 5,395 $ (3,221) $ (2,185)
========= ========= ========= ========= ========= ========= =========
Income (loss) per share(1):
Income (loss) before
extraordinary items $ (0.24) $ (0.39) $ (1.28) $ (2.21) $ 1.08 $ (0.87) $ (0.63)
Extraordinary items -- -- -- -- (0.08) -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ (0.24) $ (0.39) $ (1.28) $ (2.21) $ 1.00 $ (0.87) $ (0.63)
========= ========= ========= ========= ========= ========= =========
Number of shares used in
computing income (loss)
per share(1) 21,490 19,021 10,445 3,950 5,394 3,685 3,490
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
January 31, February 1, February 2, January 28, January 29,
1999(4) 1998(4) 1997(4) 1996(4) 1995
---------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 52,506 $ 45,312 $ 43,087 $ 46,866 $ 53,750
Inventories 20,413 16,013 14,013 14,627 18,016
Working capital (deficiency) 2,858 (922) (2,182) (6,878) (3,751)
Intangible assets 14,261 15,557 16,890 18,236 19,910
Short-term debt 542 22 41 19 17
Long-term debt 17,990 13,731 6,306 5,584 2,181
Stockholders' equity 12,229 9,892 15,543 13,985 22,700
</TABLE>
(1) Per share amounts are calculated in accordance with SFAS No. 128 and
represent diluted per share amounts. See Note 1 to the Consolidated
Financial Statements.
(2) In August 1994 the Company sold its ownership of 1,500,548 shares of Mr.
Coffee common stock for cash of $23.3 million. Proceeds from this sale were
used to retire debt of $18.3 million and pay income taxes of $2.1 million
with the remainder used for working capital.
(3) Represents loss from early debt retirement.
(4) In April 1995 the Company changed from a calendar year-end to a fiscal year
ending on the last Sunday in January, as determined by the 52/53 week
retail fiscal year. In connection with the change in fiscal periods, the
Company reported a net loss of $3,221,000 for the month ended January 29,
1995. The fiscal year ended February 2, 1997 is a 53-week period while the
fiscal years ended January 31, 1999, February 1, 1998 and January 28, 1996
are 52-week periods.
(5) Average weekly sales (shipments) in January are lower than other months due
to seasonally low order rates in the last three weeks of December.
Therefore, the operating loss reported in January is higher than other
months in the fiscal years presented.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere herein.
The Company has reported losses from operations in each of the past five
years due to inefficiencies within its operations. As a result of such losses,
the Company had an accumulated deficit of $46,964,000 at January 31, 1999.
The Company's management, which underwent a substantial restructuring
after the 1996 financings discussed under "Liquidity and Capital Resources," has
developed a strategic plan for the business which provides, among other things,
for remodeling showrooms to provide a more appealing setting for customers,
adding new showrooms, increasing product prices to competitive levels, reducing
promotional discounting, reconfiguring selling commissions, remerchandising,
refocusing advertising, improving the manufacturing processes and reducing
expenses through budgetary controls. These plans have been implemented since the
latter part of fiscal 1996, are believed to have contributed significantly to
reducing losses and are expected to ultimately return the Company to
profitability; however, there can be no assurance that the Company will achieve
profitability.
Management believes that the Company has sufficient sources of financing
to continue operations throughout fiscal 1999. However, the Company's long-term
success is dependent upon management's ability to successfully execute its
strategic plan and, ultimately, to achieve sustained profitable operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash needs are for funding capital expenditures
to open new showrooms and remodel existing showrooms; manufacturing samples of
upholstered furniture for display in its new and existing showrooms as well as
to purchase merchandise from other manufacturers that complement the upholstered
furniture manufactured and displayed by the Company; and for funding capital
expenditures related to the improvement and maintenance of its management
information systems. The cash required for funding production and fulfillment of
customer orders is typically provided by the Company's customers from a deposit
made at the time an order is placed. Beginning in fiscal 2000, the Company will
also require cash to make the scheduled principal payments on its subordinated
notes.
In recent periods, the Company has incurred additional debt and raised
equity capital to cover operating deficits and to finance the remodeling and
expansion of its showrooms. In fiscal 1999, management plans to remodel and
upgrade existing showrooms, as well as add 20 to 25 additional showrooms, at an
aggregate cost of approximately $6.7 million. Management expects to fund such
capital expenditures by internally generated cash and by borrowings under the
Company's revolving credit facility. As of March 15, 1999, the Company has
executed leases for 10 new stores, three of which will replace existing stores
upon expiration of leases. The Company is not contractually committed to make
the remainder of these capital expenditures and could slow its expansion and
remodeling program if the Company experiences any liquidity shortages.
In May 1996, the Company raised approximately $3 million through the
issuance of convertible notes to certain related party investors. In August and
September 1996, GECC and certain other investors led by Mr. Philip M. Hawley,
the Company's current Chairman and Chief Executive Officer, invested $15.7
million in the Company. In connection with this financing, the Company (i)
issued approximately $13.7 million of common stock, of which $5 million was
purchased by GECC and approximately $3 million was issued to the holders of
convertible notes in cancellation thereof; and (ii) issued to GECC a 10%
promissory note in the principal amount of $5 million, together with a warrant
to purchase 1.4 million shares at $.001 per share. Also in connection with this
financing, the holders of shares of the Company's pre-existing preferred stock
agreed to convert their shares into approximately 1.2 million shares of common
stock.
On August 14, 1997, the Company completed transactions with two
investors in which it issued $3 million of subordinated notes with (i) warrants
to purchase an aggregate of 740,000 shares of common stock at $1.25 per share
and (ii) warrants to purchase an aggregate amount of up to 1,000,000 shares of
common stock at $0.01 per share which warrants may be completely or partially
cancelled depending on the economic performance of the Company in fiscal 1999.
Also, the Company arranged a standby credit facility of $3.5 million which the
Company drew down on December 30, 1997. At the time the standby credit facility
was drawn down, the Company issued to the investors warrants to purchase 560,000
additional shares of common stock at $1.25 per share.
In April 1998, the Company issued approximately 2,963,000 additional
shares of common stock in a public secondary offering. Net proceeds to the
Company were approximately $7.3 million.
14
<PAGE> 15
In March 1999, the Company's existing revolving line of credit with
Congress Financial Corporation (Western) was amended (the "Revolving Credit
Facility") to increase the maximum commitment available from $10 million to $15
million, subject to borrowing base limitations, and to extend the maturity date
to March 31, 2002. The Revolving Credit Facility accrues interest at a rate of
prime plus a margin ranging from .5% to 1% based upon the Company's EBITDA
performance and is secured by substantially all of the Company's assets. As of
January 31, 1999, the Company had unused borrowing capacity of approximately $3
million under the original terms of its Revolving Credit Facility.
Under the terms of the agreements related to the Company's subordinated
notes, as well as under the terms of the Revolving Credit Facility, the Company
is required to maintain certain financial covenants and is prohibited from
incurring additional indebtedness from third parties in an amount in excess of
$5.0 million.
The Company believes that borrowings under its Revolving Credit Facility
and internally generated funds will be sufficient to fund its requirements for
working capital and capital expenditures through the end of fiscal year 1999.
However, the Company may need to raise additional funds to finance its
remodeling and expansion program through either debt or equity financing, and
there can be no assurance that the Company's financial performance will generate
sufficient funds. The Company currently contemplates that other sources of
capital would be available, although this situation could change.
The aggregate annual maturities of long-term debt during each of the
five fiscal years subsequent to January 31, 1999 are approximately as follows:
$542,000 in 1999, $3,268,000 in 2000, $4,330,000 in 2001, $12,005,000 in 2002,
and $13,000 in 2003. Management anticipates such payments will be made out of
operating cash flow, draws under the Revolving Credit Facility or through
refinancing.
As of January 31, 1999, the Company had cash and cash equivalents of
$80,000. Cash flow activity for the fiscal years ended January 31, 1999,
February 1, 1998 and February 2, 1997 is presented in the Consolidated
Statements of Cash Flows.
1998 Cash Flow During fiscal 1998, cash and cash equivalents decreased
by $836,000. Operating activities used net cash of $5,575,000, principally from
a cash loss from operations of $849,000 and increases in inventory and prepaid
expenses and other assets of $4,400,000 and $359,000, respectively. The increase
in inventory is principally due to the Company's expansion and remodeling
program. Investing activities during the period included capital expenditures of
$5,727,000, nearly all of which was used to remodel 22 retail showrooms and open
eight new showrooms. Financing activities during the period consisted
principally of net proceeds of $7,267,000 from the sale of 2,963,889 shares of
common stock and net borrowings of $3,180,000 under the Company's revolving
credit facility. Management plans to continue its program of remodeling and
upgrading showrooms as well as adding new showrooms; the Company expects to
incur costs of approximately $6.7 million related to this program in fiscal
1999.
1997 Cash Flow During fiscal 1997, cash and cash equivalents decreased
by $311,000. Operating activities used net cash of $4,998,000, principally from
a cash loss from operations of $3,806,000 and an increase in inventory of
$2,000,000 which was partially offset by an increase in accounts payable and
other liabilities of $753,000. The increase in inventory is principally due to
the Company's decision to expand its accessories business. Investing activities
during the period included capital expenditures of $3,521,000, nearly all of
which was used to remodel 16 retail showrooms and open one new showroom.
Financing activities during the period consisted principally of $6,500,000
borrowed from GECC and JOL and net borrowings of $1,813,000 under the Company's
revolving credit facility.
1996 Cash Flow. During fiscal 1996, cash and cash equivalents decreased
by $109,000. Operating activities used net cash of $14,315,000, principally from
a cash loss from operations of $10,210,000 and decreases in accounts payable and
other liabilities of $6,081,000, offset principally by a decrease in inventories
of $614,000 and collections of income tax refund receivables of $1,467,000.
Investing activities during the year included capital expenditures of $806,000,
principally for additions to leasehold improvements at certain retail showrooms.
Financing activities during fiscal 1996 were comprised principally of proceeds
from issuances of common stock of $10,669,000 less expenses of $448,000,
proceeds of $2,950,000 from issuances of convertible and demand notes
(subsequently converted into common stock, together with interest of $116,000)
and the issuance of a subordinated note of $5,000,000, offset by net payments of
$3,516,000 under the Company's revolving credit facility.
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items
from the Company's Consolidated Statement of Operations as a percentage of net
sales.
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
January 31, February 1, February 2,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 46.8 48.7 50.1
----------- ----------- -----------
Gross profit 53.2 51.3 49.9
----------- ----------- -----------
Operating expenses:
Selling 46.9 47.3 51.1
General and administrative 7.2 7.9 9.0
Amortization of goodwill 0.8 0.9 0.9
----------- ----------- -----------
54.9 56.1 61.0
----------- ----------- -----------
Loss from operations (1.7) (4.8) (11.1)
Interest expense (2.0) (1.5) (1.1)
Other income (expense) (0.3) (0.1) 0.3
----------- ----------- -----------
Net loss (4.0)% (6.4)% (11.9)%
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended(3)
----------------------------------------
January 31, February 1, February 2,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
STORE (SHOWROOM) DATA
Stores open at beginning of period 81 82 83
Stores opened during period 8 1 1
Stores closed during period 1 2 2
----------- ----------- -----------
Stores open at end of period 88 81 82
Average sales per showroom(1) (in 000's) $ 1,548 $ 1,422 $ 1,361
Comparable store sales increase (decrease)(2) 9.8% 2.7% (6.0%)
</TABLE>
(1) Based upon the weighted average number of stores open during the period
indicated.
(2) Comparable store sales are calculated by excluding the net sales of any
store for any month of the period if the store was not open during the same
month of the prior period. Also, a store opened at any time during the
month is deemed to have been open for the entire month.
(3) Fiscal 1998 and 1997 were 52 week years while fiscal 1996 was a 53 week
year.
52 WEEKS ENDED JANUARY 31, 1999 (FISCAL 1998) AS COMPARED TO 52 WEEKS
ENDED FEBRUARY 1, 1998 (FISCAL 1997)
Net Sales. Net sales for fiscal 1998 were $130,447,000 compared with
$115,201,000 for fiscal 1997. Sales increased $15,246,000 or 13.2% with same
store sales increasing 9.8%. The increase in sales was due to management's
strategy of continuing remodeling existing showrooms to provide a more appealing
setting for customers (22 showrooms were remodeled in fiscal 1998, compared to
16 in fiscal 1997); opening new showrooms in existing markets (eight new
showrooms were opened in fiscal 1998, compared to one in fiscal 1997); to
management's strategies of developing new products, increasing the promotion and
sale of accessories, and revamping the marketing and sales promotion program;
and to improved economies in regions where the Company operates.
Gross Profit. Gross profit was 53.2% of net sales in fiscal 1998
compared with 51.3% of net sales in fiscal 1997. The increase in gross profit as
a percentage of net sales resulted primarily from continuing improvements in the
manufacturing operations, less promotional discounting at the retail level and
negotiated reductions in raw material prices.
Selling Expenses. Selling expenses were $61,122,000 or 46.9% of net
sales in fiscal 1998 and were $54,481,000 or 47.3% of net sales in fiscal 1997.
The increase of $6,641,000 in selling expenses was primarily due to a
combination of higher sales volume and the opening of eight new showrooms in
fiscal 1998.
16
<PAGE> 17
General and Administrative Expenses. General and administrative
expenses for fiscal 1998 were $9,430,000 or 7.2% of net sales compared to
$9,141,000 or 7.9% of net sales, for fiscal 1997. The increase of $289,000 was
primarily the result of higher management payroll costs. The decrease as a
percentage of net sales was the result of leveraging higher sales volume.
Interest Expense. Interest expense, including amortization of deferred
financing costs, for fiscal 1998 increased by $861,000 over fiscal 1997 due
primarily to higher average debt outstanding, partially offset by lower interest
rates on the Company's outstanding debt.
Income Taxes. The Company paid no income taxes and no income tax benefit
was recorded for either of fiscal 1998 or 1997 due to uncertainties regarding
the realization of deferred tax assets available.
As of January 31, 1999, the Company had federal net operating loss
carryforwards of approximately $40 million which begin to expire in 2003, if not
utilized. As a result of various equity transactions, one of the Company's
subsidiaries experienced a change of ownership in 1993, as defined in the
Internal Revenue Code. As a result of this ownership change and other provisions
of the Internal Revenue Code, utilization of approximately $10 million of these
net operating loss carryforwards is limited to the future income of one of the
Company's subsidiaries and is further limited to approximately $1 million per
year on a cumulative basis. As of January 31, 1999, approximately $5 million of
the limited losses were available. In addition, the Company had state net
operating loss carryforwards of approximately $30 million which begin to expire
in fiscal 1999, if not utilized.
Net Loss. As a result of the above factors, the net loss was $5,134,000
for fiscal 1998, compared to a net loss of $7,480,000 for fiscal 1997. Net loss
per share in the 1998 period was $0.24 based on 21,490,000 shares outstanding.
In fiscal 1997 the net loss per share was $0.39 based on 19,021,000 weighted
average shares outstanding.
52 WEEKS ENDED FEBRUARY 1, 1998 (FISCAL 1997) AS COMPARED TO 53 WEEKS
ENDED FEBRUARY 2, 1997 (FISCAL 1996)
Net Sales. Net sales for fiscal 1997, a 52-week fiscal period, were
$115,201,000 compared with $112,737,000 for fiscal 1996, a 53 week period. Sales
for the 53rd week of fiscal 1996 totaled $3,417,000; on a comparable 52-week
basis, sales increased $5,881,000 or 5.4% with same store sales increasing 5.9%.
The increase in sales was due principally to management's strategy of remodeling
existing showrooms to provide a more appealing setting for customers (16
showrooms were remodeled in fiscal 1997); to management's strategies of
developing new products, increasing the promotion and sale of accessories, and
revamping the marketing and sales promotion program; and to improved economies
in selected regions where the Company operates.
Gross Profit. Gross profit was 51.3% of net sales in fiscal 1997
compared with 49.9% of net sales in fiscal 1996. The increase in gross profit
resulted primarily from the Company's decision in the third quarter of fiscal
1996 to raise prices to competitive levels and reduce promotional discounting.
Selling Expenses. Selling expenses were $54,481,000 or 47.3% of net
sales in fiscal 1997 and were $57,573,000 or 51.1% of net sales in fiscal 1996.
The decrease of $3,092,000 in selling expenses was primarily due to a decrease
of $1,737,000 in variable selling payroll, resulting from a new commission
structure, and decreases of $1,044,000 and $554,000 in store non-payroll
expenses and delivery expenses, respectively, resulting primarily from tighter
cost controls, offset in part by increased advertising costs of $574,000.
General and Administrative Expenses. General and administrative expenses
for fiscal 1997 were $9,141,000 or 7.9% of net sales compared to $10,101,000 or
9.0% of net sales, for fiscal 1996, a decrease of $960,000. This decrease was
primarily the result of lower costs generally and specifically lower
professional fees, contract labor costs and computer rental and maintenance
costs which were offset in part by higher management payroll costs.
Interest Expense. Interest expense for fiscal 1997 increased by $493,000
over fiscal 1996 due to higher average debt outstanding.
Income Taxes. The Company paid no income taxes and no income tax benefit
was recorded for either of fiscal 1997 or 1996 due to uncertainties regarding
the realization of deferred tax assets available.
Net Loss. As a result of the above factors, the net loss was $7,480,000
for fiscal 1997 as compared to a net loss of $13,389,000 for fiscal 1996. Net
loss per share in the 1997 period was $0.39 based on 19,021,000 shares
outstanding. In fiscal 1996, the net loss per share was $1.28 based on
10,445,000 weighted average shares outstanding.
17
<PAGE> 18
YEAR 2000 READINESS DISCLOSURE
In the past, computer engineers designed most computer programs and
embedded computer chips to use only two digits to specify a particular year. For
example, the digits "99" were used to specify the Year "1999." However,
computers that use only two digits cannot properly recognize the Year 2000 or
any following years. For example, after the Year 2000, the digits "01" could
mean either the Year "2001" or the Year "1901." This problem can cause computers
and other electronic devices to give erroneous results or to shut down.
Therefore, as dates employing the Year 2000 and following years come into use,
computer programs will need to use four digits to distinguish between the
different years of the 20th and the 21st century. Because of this Year 2000
problem, the Company and many other enterprises are vulnerable to unforeseen or
unanticipated problems with their computer systems and equipment containing
embedded computer chips, as well as from problems in the computer systems of
other parties on which their businesses rely.
The Company has a Year 2000 program in place to minimize any possible
effect on its business resulting from the Year 2000 problem. The Company has
evaluated its information technology ("IT") systems and believes it has
identified those that were not Year 2000 compliant. The Company upgraded its
payroll system to be Year 2000 compliant in the third quarter of fiscal 1998 and
its other mission critical business systems (manufacturing, procurement, order
processing and accounting) in the fourth quarter of fiscal 1998. The Company has
completed testing, implementation, and has conducted an end-to-end Year 2000
simulation test to validate compliance for its key business processes. The
Company has also assessed its desktops, communications systems and other
IT-related equipment. Remaining upgrades will be completed within the first
quarter of 1999.
The Company expects to bring its' IT systems into compliance without
incurring material costs. To date it has completed the remediation of business
systems by redirecting its existing internal programming resources, with costs
expensed as incurred. The Company expects total costs to be less than $10,000.
With regard to non-IT systems, the Company is continuing to assess its
facilities equipment, including but not limited to bank card terminals, alarm
systems and fax machines. These are being reviewed for Year 2000 compliance.
Disruption of these services would have a negligible impact on Company
operations and remediation costs are expected to be less than $5,000. The
Company plans to achieve readiness in this area by the second quarter of 1999.
Depending on whether suppliers and other entities with which the Company
does business are able to successfully address the Year 2000 issue, the
Company's results of operations could be materially adversely affected in any
given future reporting period during which such a Year 2000 event occurs. As a
result, the Company is communicating with such entities to determine their state
of readiness. The Company is also developing contingency plans to allow primary
operations of the Company to continue if the Company's significant systems or
such entities are disrupted by the Year 2000 problem. The Company expects that
its contingency plans will be developed by the end of the second quarter of
1999, and that it will be prepared in the event of systems failures to continue
to do business, although such operations may be at a higher cost.
At worst, if the Company's IT systems failed, the Company could use
manual systems to process furniture orders and manage its manufacturing
processes, but with a significant sacrifice in speed and efficiency. If the IT
systems of the Company's suppliers failed, the Company could experience
significant delays in delivery of materials that would, in turn, delay
production and customer deliveries.
These estimates and conclusions contain forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially. New developments may occur that could affect the Company's
estimates, such as the amount of planning and modification needed to achieve
full resolution of the Year 2000 problem; the availability and cost of
resources; the Company's ability to discover and correct all Year 2000 sensitive
computer code and equipment; and the ability of suppliers and other entities to
bring their systems into compliance.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the Financial Accounting Standards Board Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" in fiscal 1998. This statement requires that all items that meet the
definition of components of comprehensive income be reported in a financial
statement for the period in which they are recognized. Components of
comprehensive income include revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income
but excluded from net income. There are no differences between the Company's net
loss, as reported, and comprehensive loss as defined, for the periods presented
as of January 31, 1999.
18
<PAGE> 19
The Company has also adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" in fiscal 1998. The Company believes
it operates in only one business segment.
During the first quarter of fiscal 1998, the American Institute of
Certified Public Accountants issued Statement of Position (SOP) No. 98-5
"Pre-Opening Costs." This Statement provides guidance on the financial reporting
of start-up costs and organization costs. The Company adopted this SOP in fiscal
1998 and it did not materially impact the Company's Consolidated Financial
Statements.
Emerging Issues Task Force (EITF) No. 98-9 "Accounting for Contingent
Rent in Interim Financial Periods" requires lessee's to recognize contingent
rental expense in interim periods if the achievement of future targets that
trigger such contingency is considered to be probable. The Company's method of
accounting for contingent rent is consistent with the requirements of EITF No.
98-9.
MARKET RISK EXPOSURE
The Company is exposed to market risks related to fluctuations in
interest rates on its variable rate debt which consists of revolving credit
notes issued to a financial institution. The Company does not use interest rate
swaps, futures contracts or options on futures, or other types of derivative
financial instruments.
Historically, the Company has used debt financing for funding its
capital investments in new and remodeled showrooms and for funding cash used in
operations. The Company's debt consists primarily of fixed rate subordinated
debt with attached warrants, variable rate revolving credit notes and other
fixed rate notes payable.
For fixed rate debt, changes in interest rates generally affect the fair
market value, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence fair market value,
but do affect future earnings and cash flows. The Company has managed its
exposure to changes in interest rates by issuing part of its debt with fixed
interest rates and part with variable interest rates. Holding the variable rate
debt balance constant, each one percentage point increase in interest rates
occurring on the first day of the year would result in an increase in interest
expense for the coming year of approximately $70,000.
The table below details the principal amount and the average nominal
interest rates for the debt in each category based on the final maturity dates
and applicable amortization schedules for the fixed rate debt. The fair market
value estimates for debt securities are based on discounting future cash flows
using current rates the Company believes would be available to it if it were to
enter the market for debt of the same type and remaining maturity. The
subordinated debt was issued with common stock warrants. The fair value of the
subordinated debt has been determined inclusive of the warrants and using an
interest rate that the Company believes would be available to it for a similar
debt instrument issued with warrants having similar terms.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total Fair Value
------ ------ ------ ------ ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Subordinated Notes -- $3,000 $4,000 $5,001 -- -- $12,001 $12,001
Average interest rate -- 9.50% 9.50% 9.50% -- -- -- --
Variable Rate Notes -- -- -- $6,992 -- -- $6,992 $ 6,992
Average interest rate -- -- -- 8.75% -- -- -- --
Fixed Rate Other Notes Payable $ 542 $ 268 $ 330 $ 12 $ 13 $ 79 $1,244 $ 1,244
Average interest rate 9.90% 9.90% 10.0% 9.0% 9.0% 9.0% -- --
</TABLE>
The Company does not believe that the future market rate risks related
to the above securities will have a material impact on the Company or the
results of its future operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
19
<PAGE> 20
DISCLOSURE
As previously disclosed, the Board of Directors of the Company, upon the
recommendation of the Audit Committee of the Board on September 19, 1997,
terminated the Company's relationship with Ernst & Young LLP and engaged Arthur
Andersen LLP as its new independent accountants to audit the Company's
consolidated financial statements. The reports of Ernst & Young LLP on the
Company's consolidated financial statements for the year ended February 2, 1997
did not contain an adverse opinion or a disclaimer of opinion nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
During this period and thereafter there were no disagreements between the
Company and Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would
have caused it to make reference to the subject matter of the disagreements in
connection with its report. The Company authorized Ernst & Young LLP to respond
fully to inquiries from Arthur Andersen LLP concerning all matters relating to
prior audits conducted by Ernst & Young LLP.
The Company interviewed Arthur Andersen LLP before making its decision.
During this interview Company representatives sought information concerning the
potential auditor's familiarity with accounting matters affecting the furniture
manufacturing and furniture retail industries and the Company. No specific
advice was sought. The Company did not perceive that there were any differences
with regard to substantive accounting issues between Arthur Andersen LLP and the
Company's prior auditors.
The Company has supplied a copy of this disclosure to both Ernst & Young
LLP and Arthur Andersen LLP and neither has indicated to the Company that it
objects or disagrees with this disclosure.
PART III
The information required by Items 10 through 13 of this Part is
incorporated by reference to the Company's Proxy Statement, under the captions
"Election of Directors", "Security Ownership of Certain Beneficial Owners and
Management", "Compensation of Executive Officers" and "Certain Relationships and
Related Transactions", which Proxy Statement will be mailed to stockholders in
connection with the Company's annual meeting of stockholders which is scheduled
to be held in May, 1999.
20
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants 25
Report of Ernst & Young LLP, Independent Auditors 26
Consolidated Balance Sheet at January 31, 1999 and February 1, 1998 27
Consolidated Statement of Operations for the years ended January 31, 1999,
February 1, 1998 and February 2, 1997 28
Consolidated Statement of Stockholders' Equity for the years ended
January 31, 1999 February 1, 1998, and February 2, 1997 29
Consolidated Statement of Cash Flows for the years ended
January 31, 1999, February 1, 1998 and February 2, 1997 30
Notes to Consolidated Financial Statements 31
Schedule II- Valuation and Qualifying Accounts 43
Schedules I, III, IV, and V have been omitted since they are not applicable.
</TABLE>
21
<PAGE> 22
(a)(3) EXHIBITS
3.1 Certificate of Incorporation.(1)
3.1(a) Certificate of Amendment of Certificate of Incorporation dated
November 28, 1994. (5)
3.1(b) Certificate of Amendment of Certificate of Incorporation dated
August 1, 1995.(6)
3.1(c) Certificate of Amendment of Certificate of Incorporation dated June
7,1996.(7)
3.1(d) Certificate of Amendment of Certificate of Incorporation dated
August 1, 1996.(7)
3.2 By Laws.
4.1 Loan and Security Agreement dated January 20, 1995 by and between
Congress Financial Corporation (Western) and Krause's Sofa Factory
and Castro Convertible Corporation. (3)
4.1(a) First Amendment to Loan and Security Agreement dated as of May 10,
1996 by and between Congress Financial Corporation (Western) and
Krause's Sofa Factory and Castro Convertible Corporation.(6)
4.1(b) Second Amendment to Loan and Security Agreement dated as of August
26, 1996 by and between Congress Financial Corporation (Western) and
Krause's Sofa Factory and Castro Convertible Corporation.(14)
4.1(c) Third Amendment to Loan and Security Agreement dated as of November
25, 1996 by and between Congress Financial Corporation (Western) and
Krause's Sofa Factory and Castro Convertible Corporation.(14)
4.1(d) Amended and Restated Subordination Agreement dated as of August 26,
1996 by and between Congress Financial Corporation (Western) and
Krause's Furniture, Inc.(14)
4.1(e) Fourth Amendment to Loan and Security Agreement dated as of August
14, 1997 by and between Congress Financial Corporation (Western) and
Krause's Sofa Factory and Castro Convertible Corporation.(12)
4.1(f) Fifth Amendment to Loan and Security Agreement dated as of December
11, 1997 by and between Congress Financial Corporation (Western) and
Krause's Sofa Factory and Castro Convertible Corporation. (15)
4.1(g) Sixth Amendment to Loan and Security Agreement dated as of March 15,
1999 by and between Congress Financial Corporation (Western) and
Krause's Custom Crafted Furniture Corp. and Castro Convertible
Corporation.
4.1(h) Letter agreement between Krause's Furniture, Inc. and Congress
Financial Corporation (Western).(12)
4.2 Guarantee dated January 20, 1995 by Krause's Furniture, Inc. to
Congress Financial Corporation (Western). (3)
4.5 Certificate of Designations of Preferred Stock. (4)
10.1 1994 Directors Stock Option Plan.
10.2 1990 Employees Stock Option Plan.
10.3 Form of Securities Purchase Agreement between the Company, GECC and
certain other stockholders of the Company dated as if August 26,
1996.(8)
10.4 Form of $5,000,000 10% Subordinated Pay-In-Kind Note due August 31,
2001.(8)
10.5 Form of Warrant to Purchase 1,400,000 Shares of Common Stock.(8)
10.6 Form of Securities Purchase Agreement between the Company and
Certain Stockholders dated as of August 26, 1996.(8)
10.7 Form of Stockholders Agreement among the Company, GECC and certain
other stockholders of the Company dated as of August 26, 1996.(8)
10.8 Form of Registration Rights Agreement among the Company and GECC and
certain other stockholders of the Company dated as of August 26,
1996.(8)
10.9 Employment agreement with Philip M. Hawley.(8)
10.10 1997 Stock Incentive Plan. (9)
10.11 Supplemental Securities Purchase Agreement among Krause's Furniture,
Inc., General Electric Corporation and Japan Omnibus Ltd., dated as
of August 14, 1997. (12)
10.12 Letter agreement dated August 14, 1997 regarding Permal Group
shares.(12)
10.13 Letter agreement dated August 14, 1997 regarding warrant dilution
provisions.(12)
10.14 Amendment to the Supplemental Securities Purchase Agreement among
Krause's Furniture, Inc., General Electric Corporation and Japan
Omnibus Ltd., dated as of March 31, 1999.
11 Statement regarding computation of per share earnings.
22
<PAGE> 23
21 Subsidiaries.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
23.2 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
(1) Incorporated herein by reference to Exhibits to Registrant's Form S-4
dated June 19, 1992 (File No. 33-48725).
(2) Incorporated herein by reference to Exhibit 10.2 to Registrant's Form 10-K
for the year ended December 31, 1990 (File No. 0-17868).
(3) Incorporated herein by reference to Exhibit to Registrant's Form 8-K dated
as of January 20, 1995 (File No. 0-17868).
(4) Incorporated herein by reference to Exhibit 4.3 to Registrant's Form 8-K
dated as of October 7, 1993 (File No. 0-17868).
(5) Incorporated herein by reference to Exhibit 10.1 to Registrant's Form 10-K
dated as of December 31, 1994 (File No. 0-17868).
(6) Incorporated herein by reference to Exhibits to Registrant's Form 10-K
dated as of January 28, 1996 (File No. 0-17868).
(7) Incorporated herein by reference to Exhibits to Registrant's Form 10-Q
dated as of July 28, 1996 (File No. 0-17868).
(8) Incorporated herein by reference to Exhibits to Registrant's Form 8-K
dated as of August 26, 1996 (File No. 0-17868).
(9) Incorporated herein by reference to Exhibits to Registrant's Form S-1
dated March 12, 1997 (File No. 333-19485).
(10) Incorporated herein by reference to Exhibits to Registrant's Form 10-K
dated May 2, 1997 (File No. 0-17868).
(11) Incorporated herein by reference to Exhibits to Registrant's Proxy
Statement on Schedule 14A dated May 7, 1997 (File No. 0-17868).
(12) Incorporated herein by reference to Exhibits to Registrant's Form 8-K
dated as of August 14, 1997 (File No. 0-17868).
(13) Incorporated herein by reference to Exhibits to Registrant's Form 10-Q
dated as of December 17, 1997 (File No. 0-17868).
(14) Incorporated herein by reference to Exhibits to Registrant's Form 10-K
dated May 2, 1997 (File No. 0-17868).
(15) Incorporated herein by reference to Exhibits to Registrant's Form 10-K
dated April 30, 1998 (File No. 0-17868).
(b) REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the last quarter
of the period covered by this report.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KRAUSE'S FURNITURE, INC.
Date: April 23, 1999 By: /s/ PHILIP M. HAWLEY
--------------------------------------------------
Philip M. Hawley
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
Date: April 23 1999 /s/ PHILIP M. HAWLEY
-------------------------------------------------------------
Philip M. Hawley
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: April 23, 1999 /s/ THOMAS M. DELITTO
-------------------------------------------------------------
Thomas M. DeLitto
Director and Vice Chairman of the Board
Date: April 23, 1999 /s/ ROBERT A. BURTON
-------------------------------------------------------------
Robert A. Burton
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date: April 23, 1999 /s/ KAMAL G. ABDELNOUR
-------------------------------------------------------------
Kamal G. Abdelnour
Director
Date: April 23, 1999 /s/ JEFFREY H. COATS
-------------------------------------------------------------
Jeffrey H. Coats
Director
Date: April 23, 1999 /s/ PETER H. DAILEY
-------------------------------------------------------------
Peter H. Dailey
Director
Date: April 23, 1999 /s/ JOHN A. GAVIN
-------------------------------------------------------------
John A. Gavin
Director
</TABLE>
24
<PAGE> 25
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Krause's Furniture, Inc.
We have audited the accompanying consolidated balance sheets of Krause's
Furniture, Inc. and subsidiaries as of January 31, 1999 and February 1, 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Krause's
Furniture, Inc. and subsidiaries as of January 31, 1999 and February 1, 1998 and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
March 31, 1999
25
<PAGE> 26
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Krause's Furniture, Inc.
We have audited the consolidated balance sheet of Krause's Furniture, Inc.
as of February 2, 1997 (not separately presented herein), and the related
consolidated statements of operations, stockholders' equity and cash flows. for
the fiscal year ended. Our audits also included the financial statement schedule
listed in the Index at Item 14(a) as it relates to the fiscal year ended
February 2, 1997. These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The Company has reported losses from operations in each of the past five
years. Management's plan for meeting obligations as they become due is
summarized in Note 2 to the consolidated financial statements.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects and the consolidated results of its
operations of Krause's Furniture, Inc. at February 2, 1997, and the consolidated
results of its operations, and its cash flows for the fiscal year then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, as it relates to the fiscal year ended
February 2, 1997, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
March 28, 1997,
except for Note 2, as to which the date is
December 17, 1997
26
<PAGE> 27
KRAUSE'S FURNITURE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
January 31, February 1,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 80 $ 916
Accounts receivable, net of allowance of $180 ($164 at February 1, 1998)
for doubtful accounts 1,193 1,148
Inventories 20,413 16,013
Prepaid expenses 1,465 515
-------- --------
Total current assets 23,151 18,592
Property, equipment, and leasehold improvements, net 13,066 8,577
Goodwill, net 13,346 14,366
Leasehold interests, net 915 1,191
Other assets 2,028 2,586
-------- --------
$ 52,506 $ 45,312
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,750 $ 8,111
Accrued payroll and related expenses 2,502 1,993
Other accrued liabilities 3,849 3,967
Customer deposits 5,650 5,421
Notes payable 542 22
-------- --------
Total current liabilities 20,293 19,514
-------- --------
Long-term liabilities:
Notes payable 17,990 13,731
Other 1,994 2,175
-------- --------
Total long-term liabilities 19,984 15,906
-------- --------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value; 666,667 shares authorized;
no shares outstanding -- --
Common stock, $.001 par value; 35,000,000 shares authorized;
21,984,428 shares outstanding (19,020,539 at February 1, 1998) 22 19
Capital in excess of par value 59,171 51,703
Accumulated deficit (46,964) (41,830)
-------- --------
Total stockholders' equity 12,229 9,892
-------- --------
$ 52,506 $ 45,312
======== ========
</TABLE>
See accompanying notes.
27
<PAGE> 28
KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------
January 31, February 1, February 2,
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
Net sales $ 130,447 $115, 201 $ 112,737
Cost of sales 60,987 56,153 56,490
--------- --------- ---------
Gross profit 69,460 59,048 56,247
--------- --------- ---------
Operating expenses:
Selling 61,122 54,481 57,573
General and administrative 9,430 9,141 10,101
Amortization of goodwill 1,020 1,020 1,020
--------- --------- ---------
71,572 64,642 68,694
--------- --------- ---------
Loss from operations (2,112) (5,594) (12,447)
Interest expense (2,584) (1,723) (1,230)
Other income (expense) (438) (163) 288
--------- --------- ---------
Net loss $ (5,134) $ (7,480) $ (13,389)
========= ========= =========
Basic and diluted loss per share $ (0.24) $ (0.39) $ (1.28)
========= ========= =========
Number of shares used in computing loss per share 21,490 19,021 10,445
========= ========= =========
</TABLE>
See accompanying notes.
28
<PAGE> 29
KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Convertible Capital in
Preferred Stock Common Stock Excess of Total
-------------------- -------------------- Par Accumulated Stockholders'
Shares Amount Shares Amount Value Deficit Equity
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 28, 1996 118 $ 7,523 4,121 $ 4 $ 27,419 $(20,961) $ 13,985
Conversion of Series A preferred
stock (118) (7,523) 1,177 1 7,522 -- --
Exchange of notes payable and
related interest for common stock -- -- 3,066 3 3,063 -- 3,066
Issuance of common stock for cash,
net of expenses of $448 -- -- 10,669 11 10,210 -- 10,221
Issuance of common stock
purchase warrant -- -- -- -- 1,400 -- 1,400
Compensation expense on
stock option grant -- -- -- -- 293 -- 293
Repurchase of common stock -- -- (12) -- (33) -- (33)
Net loss -- -- -- -- -- (13,389) (13,389)
-------- -------- -------- -------- -------- -------- --------
Balance at February 2, 1997 -- -- 19,021 19 49,874 (34,350) 15,543
Issuance of common stock
purchase warrants -- -- -- -- 1,625 -- 1,625
Compensation expense on
stock option grant -- -- -- -- 204 -- 204
Net loss -- -- -- -- -- (7,480) (7,480)
-------- -------- -------- -------- -------- -------- --------
Balance at February 1, 1998 -- -- 19,021 19 9,892 51,703 (41,830)
Issuance of common stock for cash,
net of expenses of $1,625 -- -- 2,963 3 7,264 -- 7,267
Compensation expense on
stock option grant -- -- -- -- 204 -- 204
Net loss -- -- -- -- -- (5,134) (5,134)
-------- -------- -------- -------- -------- -------- --------
Balance at January 31, 1999 -- $ -- 21,984 $ 22 $ 59,171 $(46,964) $ 12,229
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
29
<PAGE> 30
KRAUSE'S FURNITURE, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------
January 31, February 1, February 2,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,134) $ (7,480) $ (13,389)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 3,019 2,431 2,561
Other non-cash charges 1,266 1,243 618
Change in assets and liabilities:
Accounts receivable (45) (28) (334)
Inventories (4,400) (2,000) 614
Prepaid expenses and other assets (359) 283 229
Income tax refund receivable -- -- 1,467
Accounts payable and accrued liabilities (151) 753 (4,688)
Customer deposits 229 (200) (1,393)
--------- --------- ---------
Net cash used by operating activities (5,575) (4,998) (14,315)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (5,727) (3,521) (806)
--------- --------- ---------
Net cash used by investing activities (5,727) (3,521) (806)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 157,316 145,458 143,002
Principal payments on long-term debt (154,117) (137,250) (138,178)
Proceeds from issuance of common stock 7,267 -- 10,221
Other -- -- (33)
--------- --------- ---------
Net cash provided by financing activities 10,466 8,208 15,012
--------- --------- ---------
Net decrease in cash (836) (311) (109)
Cash and cash equivalents at beginning of year 916 1,227 1,336
--------- --------- ---------
Cash and cash equivalents at end of year $ 80 $ 916 $ 1,227
========= ========= =========
Supplemental disclosures of cash flow information -
Cash paid during the year for:
Interest $ 1,752 $ 754 $ 466
Income taxes -- -- 9
Noncash investing and financing activities:
Capital lease obligations incurred 850 -- --
Preferred stock converted into common stock -- -- 7,523
Exchange of notes payable and related accrued
interest for common stock -- -- 3,066
Issuance of common stock purchase warrants -- 1,625 1,400
</TABLE>
See accompanying notes.
30
<PAGE> 31
KRAUSE'S FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of Krause's
Furniture, Inc., (the "Company") and its wholly owned subsidiaries, including
the Company's principal subsidiary, Krause's Custom Crafted Furniture Corp.,
formerly known as Krause's Sofa Factory ("Krause's"). In April 1995, the Company
changed its fiscal year from a calendar year-end to a fiscal year ending on the
last Sunday of January as determined by the 52/53 week retail fiscal year. The
fiscal years ended January 31, 1999 (fiscal 1998) and February 1, 1998 (fiscal
1997) are 52-week periods while the fiscal year ended February 2, 1997 (fiscal
1996) is a 53-week period. All significant intercompany transactions and
balances have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Business
Krause's manufactures made-to-order sofas, sofabeds, loveseats and
chairs, and sells these products (as well as externally-sourced products)
through its own chain of retail showrooms. As of January 31, 1999 there were 88
Company-owned showrooms, all of which are leased, located in 12 states. The
Company's manufacturing facility and 42 showrooms are located in California.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, cash in money market
accounts and certificates of deposit with original maturities of less than three
months, carried at cost, which approximates fair value.
Fair values of financial instruments
Fair values of cash and cash equivalents approximate cost due to the
short period of time to maturity. The fair values of the secured revolving
credit note, the subordinated notes, and other notes are based on borrowing
rates currently available to the Company for loans with similar terms or
maturity and approximate the carrying amounts reflected in the accompanying
consolidated financial statements.
<PAGE> 32
Inventories
Inventories are carried at the lower of cost or market using the
first-in, first-out method and are comprised of the following:
<TABLE>
<CAPTION>
January 31, February 1,
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Finished goods $15,992 $12,368
Work in progress 47 66
Raw materials 4,374 3,579
------- -------
$20,413 $16,013
======= =======
</TABLE>
Closed store expenses
Future expenses, such as rent and real estate taxes, net of estimated
sublease recovery, relating to closed showrooms are charged to operations upon a
formal decision to close the showroom.
Property, equipment and leasehold improvements
Property, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which range
from three to five years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the estimated useful life or the term of
the lease. Depreciation and amortization expense was $1,633,000 in fiscal 1998,
$1,099,000 in fiscal 1997, and $1,073,000 in fiscal 1996. Property, equipment
and leasehold improvements are summarized as follows:
<TABLE>
<CAPTION>
January 31, February 1,
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Leasehold improvements $ 14,038 $ 10,708
Construction in progress 2,490 1,922
Machinery and equipment 4,374 3,579
Office and store furniture 873 886
-------- --------
19,320 16,530
Less accumulated depreciation
and amortization (6,254) (7,953)
-------- --------
$ 13,066 $ 8,577
======== ========
</TABLE>
Goodwill
Goodwill, which represents the excess of purchase price over the fair
value of net assets acquired, is being amortized on a straight-line basis over
20 years. Accumulated amortization amounted to $6,980,000 as of January 31, 1999
and $5,960,000 as of February 1, 1998.
Long-lived assets and certain identifiable intangibles held and used by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Based upon its analysis, management believes that no impairment of
the carrying value of its long-lived assets inclusive of goodwill exists at
January 31, 1999. The Company's analysis at January 31, 1999 is based on an
estimate of future undiscounted cash flows using forecasts contained in the
Company's operating plan.
<PAGE> 33
Should the results of the operating plan not be achieved, future analyses may
indicate insufficient future undiscounted net cash flows to recover the carrying
value of the Company's long-lived assets, in which case the carrying value of
such assets should be written down to fair value. The Company's historical
results of operations and its cash flows in fiscal years 1998, 1997, and 1996
indicate that it is at least reasonably possible that such circumstances could
arise in fiscal 1999.
Leasehold interests
Leasehold interests represent the present value of the excess of fair
market value lease rates on certain retail facility leases as compared to the
stated lease rates contained in the leases as determined at the date the leases
were acquired. Amortization of leasehold interests is on a straight-line basis
over the remaining lease terms. Accumulated amortization amounted to $2,407,000
as of January 31, 1999 and $2,132,000 as of February 1, 1998.
Revenue recognition
Sales are recorded when goods are delivered to the customer. The Company
provides for estimated customer returns and allowances by reducing sales or by a
charge to operations, as appropriate, in the period of the sale.
Advertising expenses
Advertising costs, which are principally newspaper ads, mail inserts and
radio spots, are charged to expense as incurred. Advertising expenses in the
fiscal years ended January 31, 1999, February 1, 1998, and February 2, 1997 were
$12,272,000, $11,758,000 and $11,184,000, respectively.
Warranty costs
Estimated amounts for future warranty obligations for furniture sold are
charged to operations in the period the products are sold.
Income taxes
The Company provides for income taxes under the liability method.
Accordingly, deferred income tax assets and liabilities are computed for
differences between financial reporting and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income; valuation allowances are established when
necessary to reduce deferred tax assets to amounts which are more likely than
not to be realized.
Recent Accounting Pronouncements
The Company adopted the Financial Accounting Standards Board
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" in fiscal 1998. This statement requires that all items
that meet the definition of components of comprehensive income be reported in a
financial statement for the period in which they are recognized. Components of
comprehensive income include revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income
but are excluded from net income. There are no differences between the Company's
net loss, as reported, and comprehensive loss as defined, for the periods
presented as of January 31, 1999.
<PAGE> 34
The Company has also adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" in fiscal 1998. The Company believes
it operates in only one business segment.
During the first quarter of fiscal 1998, the American Institute of
Certified Public Accountants issued Statement of Position (SOP) No. 98-5
"Pre-Opening Costs." This Statement provides guidance on the financial reporting
of start-up costs and organization costs. The Company adopted this SOP in fiscal
1998 and it did not materially impact the Company's Consolidated Financial
Statements.
Emerging Issues Task Force (EITF) No. 98-9 "Accounting for Contingent
Rent in Interim Financial Periods" requires lessees to recognize contingent
rental expense in interim periods if the achievement of future targets that
trigger such contingency is considered to be probable. The Company's method of
accounting for contingent rent is consistent with the requirements of EITF No.
98-9.
Loss per share
Loss per share for fiscal 1998, 1997 and 1996 was computed based on the
weighted average number of common shares outstanding during each period since
common stock equivalents were antidilutive. If the conversion of preferred stock
during the year ended February 2, 1997 had occurred at the beginning of the
year, the net loss per share would have been $1.20.
The Company calculates loss per share in accordance with SFAS No. 128,
"Earnings Per Share". This statement requires the presentation of both basic and
diluted net income (loss) per share. Basic net income (loss) per share is
computed by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding. Diluted net income (loss)
per share includes the effect of the potential shares outstanding, including
dilutive stock options and warrants using the treasury stock method. Because the
impact of options and warrants are antidilutive, there is no difference between
the loss per share amounts computed for basic and diluted purposes.
Credit risk
Finance options are offered to customers through non-affiliated third
parties, at no material risk to the Company. Non-financed retail consumer
receivables are collected during the normal course of operations. There is no
significant concentration of credit risk and credit losses have been minimal.
2. OPERATIONS
The Company has reported losses from operations in each of the past five
years due to inefficiencies within its operations. As a result of such losses,
the Company had an accumulated deficit of $46,964,000 at January 31, 1999.
The Company's management, which underwent substantial restructuring in
the second half of fiscal 1996, has developed a strategic plan for the business
which provides, among other things, for remodeling showrooms to provide a more
appealing setting for customers, opening new showrooms, increasing product
prices to competitive levels, reducing promotional discounting, reconfiguring
selling commissions, remerchandising, refocusing advertising, improving the
manufacturing process and reducing expenses through budgetary controls. In the
opinion of management, all of these plans have been implemented and are believed
to have contributed significantly to reducing losses and are expected to
ultimately return the Company to profitability; however, there can be no
assurance that the Company will achieve profitability. During this period, the
Company has also raised additional equity capital and negotiated new credit
facilities as discussed more fully in Notes 5 and 3, respectively. Management
believes that the Company has sufficient sources of financing to continue
operations and fund its plan to remodel showrooms and open new showrooms
throughout fiscal 1999; however, if this is not the case, the
<PAGE> 35
Company will need to obtain additional capital and there can be no assurance
that any additional equity or debt financing will be available or available on
terms acceptable to the Company. The Company's long-term success is dependent
upon management's ability to successfully execute its strategic plan and,
ultimately, to achieve sustained profitable operations.
3. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
January 31, February 1,
1999 1998
---------- -----------
(in thousands)
<S> <C> <C>
Secured revolving credit notes $ 6,992 $ 3,812
Subordinated notes payable to shareholders 12,001 12,001
Unamortized debt discount, net of accumulated amortization of
$1,320,000 at January 31, 1999 and $590,000 at February 1, 1998 (1,705) (2,435)
Other notes 1,244 375
-------- --------
18,532 13,753
Less current portion 542 22
-------- --------
$ 17,990 $ 13,731
======== ========
</TABLE>
The secured revolving credit notes were issued under a revolving credit
agreement, which was most recently amended March 15, 1999, (the "Revolving
Credit Facility") between Krause's and a financial institution that expires in
March 2002. The Revolving Credit Facility provides for revolving loans of up to
$15 million based on the value of inventories. Available borrowing capacity
under the original terms of the Revolving Credit Facility, at January 31, 1999,
was $2,986,000. Substantially all of Krause's assets are pledged as collateral
for the loans which are guaranteed by the Company. Interest on the loans is
payable monthly at a margin ranging from .5% to 1.0% in excess of the prime rate
(7.75% at January 31, 1999) which margin varies depending on the Company's
performance.
On August 14, 1997, the Company concluded a Supplemental Securities
Purchase Agreement, which was amended as of March 31, 1999 (the "Agreement")
among the Company, General Electric Capital Corporation ("GECC") and Japan
Omnibus Ltd. ("JOL"), a company formerly known as Edson Investments, Inc. Under
the Agreement, the Company sold 9.5%, subordinated notes in an aggregate
principal amount of $3,000,000 to GECC and JOL (the "Supplemental Notes"), which
notes have a final maturity of July 30, 2002, and concurrently issued to GECC
and JOL warrants to purchase an aggregate of 740,000 shares of common stock of
the Company at a purchase price of $1.25 per share. The fair value of the
warrants of $925,000 was reflected in the consolidated financial statements as a
discount on the subordinated notes and an increase in capital in excess of par
value. This discount is being amortized to interest expense using the effective
interest method over the term of the Supplemental Notes. The Company also issued
to GECC and JOL a warrant to purchase an aggregate amount of up to 1,000,000
shares of the Company's common stock at a price of $0.01 per share which warrant
may be completely or partially cancelled depending on the economic performance
of the Company in fiscal 1999. The Company periodically assesses the likelihood
of vesting of the warrants, and, when and if probable, will further discount the
debt to assign value to the warrants.
Also, under the Agreement, on December 30, 1997, the Company drew on a
standby credit facility with GECC and JOL by selling additional 9.5%
subordinated notes in an aggregate principal amount of $3,500,000 (the "Standby
Notes") which notes have a final maturity of July 30, 2002. As part of the
Agreement, the Company issued to GECC and JOL warrants to purchase an aggregate
of 560,000 shares of common stock of the Company at a purchase price of $1.25
per share. The fair value of the warrants of $700,000 was reflected in the
consolidated financial statements as a discount on the subordinated notes and an
increase in capital in excess of par value. This
<PAGE> 36
discount is being amortized to interest expense using the effective interest
method over the term of the Standby Notes.
In conjunction with the August 14, 1997 financing described above, the
Company issued to GECC a new 9.5% subordinated note which note has a final
maturity of July 30, 2002 (the "Replacement Note") in the principal amount of
$5,501,091, to replace the Company's 10% Subordinated Pay-In-Kind Note (the
"Original Note") due August 31, 2001, in principal amount of $5,000,000, and
certain additional notes in aggregate principal amount of $501,091 reflecting
accrued interest. The Original Note was issued with a warrant to purchase
1,400,000 shares of common stock at $.001 per share at any time through August
31, 2006. The fair value of the warrant of $1,400,000 was reflected in the
consolidated financial statements as a discount on the subordinated note and an
increase in capital in excess of par value. This discount is being amortized to
interest expense using the effective interest method over the term of the
Replacement Note.
Each of the Replacement Note, Supplemental Notes and Standby Notes are
payable in ten quarterly installments beginning April 2000.
Pursuant to the terms of the Agreement and the Revolving Credit
Facility, the Company and Krause's are required to maintain certain financial
ratios and minimum levels of tangible net worth and working capital as well as
to achieve certain levels of earnings before interest, taxes, depreciation and
amortization. In addition, the Company and Krause's are restricted from entering
into certain transactions or making certain payments and dividend distributions
without the prior consent of the lenders. As of January 31, 1999, the Company
and Krause's were in compliance with the terms and conditions of these
agreements.
The aggregate annual maturities of long-term debt during each of the
five fiscal years subsequent to January 31, 1999 are approximately as follows:
$542,000 in 1999, $3,268,000 in 2000, $4,330,000 in 2001, $12,005,000 in 2002,
and $13,000 in 2003.
4. INCOME TAXES
Income tax benefits differ from the amounts computed by applying the
federal statutory rate of 34% to the loss before income taxes, as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
--------------------------------------
January 31, February 1, February 2,
1999 1998 1997
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Tax at federal statutory rate $(1,745) $(2,543) $(4,552)
Goodwill amortization 347 347 347
State income tax, net of federal benefit (280) (390) (742)
Other 245 (75) (386)
Adjustment of valuation allowance 1,433 2,661 5,333
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
<PAGE> 37
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------
January 31, February 1,
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
Deferred tax liabilities $ -- $ --
Deferred tax assets:
Net operating loss carryforwards 15,043 14,200
Reserves and accruals not currently deductible for tax purposes 2,694 2,104
-------- --------
Total deferred tax assets 17,737 16,304
Valuation allowance for deferred tax assets (17,737) (16,304)
-------- --------
Net deferred tax assets -- --
-------- --------
Net deferred taxes $ -- $ --
======== ========
</TABLE>
The change in the valuation allowance was a net increase of $1,433,000
for the fiscal year ended January 31, 1999, and a net increase of $2,661,000 for
the fiscal year ended February 1, 1998. The valuation allowance was increased
since the realization of net deferred tax assets is uncertain.
As of January 31, 1999 the Company has federal net operating loss
carryforwards of approximately $40 million which begin to expire in 2003, if not
utilized. As a result of various equity transactions, one of the Company's
subsidiaries has experienced a change of ownership in 1993, as defined in the
Internal Revenue Code. As a result of this ownership change and other provisions
of the Internal Revenue Code, utilization of approximately $10 million of these
net operating loss carryforwards is limited to the future income of one of the
Company's subsidiaries and is further limited to approximately $1 million per
year on a cumulative basis. As of January 31, 1999, approximately $5 million of
the limited loss carryforwards was available. In addition, the Company had state
net operating loss carryforwards of approximately $30 million, which begin to
expire in the year beginning February 1, 1999, if not utilized.
5. STOCKHOLDERS' EQUITY
On August 26, 1996 and September 10, 1996, the Company completed
transactions with investors in which the Company received net cash proceeds of
$10,221,000 from issuances of 10,669,000 shares of common stock. In addition,
$950,000 of convertible notes and $2,000,000 of demand notes (issued between May
13, 1996 and July 2, 1996 to related parties) together with accrued interest of
$116,251 were exchanged for 3,066,251 shares of common stock, and shares of
Series A preferred stock were converted into 1,176,950 shares of common stock.
In April 1998, the Company completed a public offering of 2,963,889
shares of its common stock at a price of $3.00 per share. Proceeds of the
offering totaled $7,267,000 after deducting underwriters' fees and offering
expenses. The purpose of the offering was to fund the remodeling of the
Company's existing showrooms, to fund the opening of new showrooms and for
general corporate purposes.
At January 31, 1999, the Company had warrants outstanding to purchase an
aggregate of 2,949,765 shares of its common stock. Of these warrants, 1,400,000
warrants were issued to GECC in fiscal 1996 at a exercise price of $.001 per
share and 1,300,000 were issued to GECC and JOL in fiscal 1997 at an exercise
price of $1.25 (see further discussion in Note 3). The remaining 249,765
warrants have exercise prices ranging from $1.32 to $2.91 per share and
expiration dates ranging from May 1999 to June 2005. The warrants generally
provide for certain anti-dilution adjustments. In addition, in connection with
the August 1997 financing, the Company issued warrants to GECC and JOL to
purchase up to 1,000,000 shares of common stock upon the occurrence of certain
events; such warrants expire August 31, 2006 (see Note 3). The Company also has
61,948 shares of common stock issuable
<PAGE> 38
upon payment of deferred stock units and options outstanding to purchase an
additional 2,208,458 shares of common stock.
As of January 31, 1999, 6,305,171 shares of the Company's common stock
are reserved for issuance upon exercise of warrants and stock options (see Note
6) and upon the payment of deferred stock units.
6. STOCK OPTION PLANS
The Company has elected to follow APB 25, "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its employee stock
options because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation"
requires use of option valuation models that were not developed for use in
valuing employee stock options.
The 1997 Stock Incentive Plan provides for the issuance of awards
covering up to 2,000,000 shares of Common Stock to employees, officers,
directors, and consultants. Awards under this plan can consist of options, stock
appreciation rights, dividend equivalent rights, restricted stock, performance
shares, deferred stock units or other stock based awards.
Directors who are not employees of the Company, other than one
non-employee director who has indicated that he cannot accept an award because
of his current employment by a stockholder, receive automatic grants of deferred
stock units covering shares having a fair market value of $10,000 for each year
of service as a director. These awards provide deferred compensation to
directors equivalent to an investment in shares on the date the award is
effective. Payout of the award is made in stock following a director's
retirement from the Board of Directors or death. Normally the payment is made in
five annual installments, but a director may elect to receive a single payment.
In August 1996, the Company awarded the Chief Executive Officer of the
Company an option to purchase 1,234,000 shares of common stock at an exercise
price of $1.00 per share with vesting over three years. Compensation expense was
recorded in the amount of $204,000, $204,000 and $293,000 in fiscal 1998, 1997
and 1996, respectively, based upon the vesting provisions and the market value
of the stock on the date of grant.
Options to purchase the Company's common stock are outstanding under the
Company's 1990 Employees Stock Option Plan, 1994 Directors Stock Option Plan,
and various plans established by Krause's prior to the time it was acquired by
the Company. All of these plans have been cancelled and no further grants may be
made under them.
Pro forma information regarding net loss and loss per share is required
by SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for fiscal
1998, 1997 and 1996; risk-free interest rates of 5.67%, 6.28% and 6.85%,
dividend yields of 0% for all periods, volatility factors of the expected market
price of the Company's common stock of 80%, 82% and 68%; and a weighted-average
life of the options of 7.0, 7.0 and 6.5 years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
<PAGE> 39
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The pro forma
disclosures are not likely to be representative of the effects on reported net
income (loss) for future years since only options granted since fiscal 1995 are
considered. The Company's pro forma information follows (in thousands, except
for per share information):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Pro forma net loss $ 5,564 $ 7,700 $ 13,188
Pro forma net loss per share $ 0.26 $ 0.40 $ 1.26
</TABLE>
As of January 31, 1999, under all option plans, a total of 3,293,458
shares of common stock are reserved for future issuance, options to purchase
2,208,458 shares of common stock were outstanding, options to purchase 1,390,708
were exercisable, at a weighted average exercise price of $1.44, and options for
1,085,000 shares were available for future grants.
The following table reflects option activity and related exercise
prices, actual and weighted average, under all stock option plans from January
28, 1996 to January 31, 1999.
<TABLE>
<CAPTION>
Weighted
Number of Actual Average
Options Exercise Price Exercise Price
--------- ------------- --------------
<S> <C> <C> <C>
Outstanding January 28, 1996 360,373 $2.16 - $8.34 $4.48
Granted 1,617,000 $ .78 - $1.62 $1.12
Forfeited (254,916) $ .78 - $8.34 $4.32
---------
Outstanding February 2, 1997 1,722,457 $ .78 - $7.13 $1.35
Granted 417,000 $1.56 $1.56
Forfeited (95,499) $2.16 - $7.13 $3.54
---------
Outstanding February 1, 1998 2,043,958 $ .78 - $6.38 $1.29
Granted 165,000 $3.25 $3.25
Forfeited (500) $3.18 $3.18
Outstanding January 31, 1999 2,208,458 $ .78 - $6.38 $1.44
=========
</TABLE>
The weighted average grant-date fair value of options granted during
1998 and 1997, for options where the exercise price on the date of grant was
equal to the stock price on that date, was $2.62 and $1.22, respectively.
The following table reflects the weighted average exercise price of
options outstanding, weighted average remaining contractual life of options
outstanding, number of shares exercisable and the weighted average exercise
price of exercisable options as of January 31, 1999.
<TABLE>
<CAPTION>
Weighted
Weighted Average Exercise
Number of Actual Weighted Average Number of Price of
Options Exercise Average Remaining Options Exercisable
Outstanding Price Range Exercise Price Contractual Life Exercisable Options
------------- ------------- -------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
2,009,000 $ .78 - $1.62 $1.22 7.9 years 1,221,250 $1.14
199,458 $3.09 - $6.38 $3.60 8.3 years 169,458 $3.66
--------- ---------
2,208,458 $ .78 - $6.38 $1.44 8.0 years 1,390,708 $1.44
========= =========
</TABLE>
7. RETIREMENT PLAN
The Company has a 401(k) retirement plan (effective January 1, 1994) to
which eligible employees may contribute up to 18% of their annual earnings. At
its discretion the Company matches employees' contributions. The Company's
contributions were not significant in fiscal 1998, 1997 and 1996.
<PAGE> 40
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company and its subsidiaries lease production, office and retail
facilities and equipment under operating leases. Lease terms range from three to
25 years and most leases contain renewal options and certain leases contain
purchase options. The Company's administrative offices and manufacturing
facilities lease has a remaining term of 10 years with four five-year renewal
options. Retail showrooms are all leased with rents either fixed or with fixed
minimums coupled with contingent rents based on the Consumer Price Index or a
percentage of sales.
Commitments as of January 31, 1999 under operating leases require
approximate future minimum annual rental payments as follows:
<TABLE>
<CAPTION>
Total
Fiscal Year (in thousands)
--------------
<S> <C>
1999 $17,087
2000 15,204
2001 12,224
2002 10,741
2003 7,579
Thereafter 18,048
--------------
$80,883
==============
</TABLE>
Total rent expense under all operating leases was approximately
$17,278,000, $15,456,000, and $15,389,000 for the fiscal years ended January 31,
1999, February 1, 1998 and February 2, 1997, respectively.
Litigation
The Company and its subsidiaries are also parties to various legal
actions and proceedings incident to normal business activity. Management
believes that any liability in the event of final adverse determination of any
of these matters would not be material to the Company's consolidated financial
position, liquidity or results of operations.
Year 2000 Readiness Disclosure
In the past, computer engineers designed most computer programs and
embedded computer chips to use only two digits to specify a particular year. For
example, the digits "99" were used to specify the Year "1999." However,
computers that use only two digits cannot properly recognize the Year 2000 or
any following years. For example, after the Year 2000, the digits "01" could
mean either the Year "2001" or the Year "1901." This problem can cause computers
and other electronic devices to give erroneous results or to shut down.
Therefore, as dates employing the Year 2000 and following years come into use,
computer programs will need to use four digits to distinguish between the
different years of the 20th and the 21st century. Because of this Year 2000
problem, the Company and many other enterprises are vulnerable to unforeseen or
unanticipated problems with their computer systems and equipment containing
embedded computer chips, as well as from problems in the computer systems of
other parties on which their businesses rely.
The Company has a Year 2000 program in place to minimize any possible
effect on its business resulting from the Year 2000 problem. The Company has
evaluated its information technology ("IT") systems and believes it has
identified those that were not Year 2000 compliant. The Company upgraded its
payroll system to be Year 2000 compliant in the third quarter of fiscal 1998 and
its other mission critical business systems (manufacturing, procurement, order
processing and accounting) in the fourth quarter of fiscal 1998. The Company has
completed testing, implementation, and has conducted an end-to-end Year 2000
simulation test to validate compliance for its
<PAGE> 41
key business processes. The Company has also assessed its desktops,
communications systems and other IT-related equipment. Remaining upgrades will
be completed within the first quarter 1999. The Company expects to bring its' IT
systems into compliance without incurring material costs. To date it has
completed the remediation of business systems by redirecting its existing
internal programming resources, with costs expensed as incurred. The Company
expects total costs to be less than $10,000.
With regard to non-IT systems, the Company is continuing to assess its
facilities equipment, including but not limited to bank card terminals, alarm
systems and fax machines. These are being reviewed for Year 2000 compliance.
Disruption of these services would have a negligible impact on Company
operations and remediation costs are expected to be less than $5,000. The
Company plans to achieve readiness in this area by the second quarter of 1999.
Depending on whether suppliers and other entities with which the Company
does business are able to successfully address the Year 2000 issue, the
Company's results of operations could be materially adversely affected in any
given future reporting period during which such a Year 2000 event occurs. As a
result, the Company is communicating with such entities to determine their state
of readiness. The Company is also developing contingency plans to allow primary
operations of the Company to continue if the Company's significant systems or
such entities are disrupted by the Year 2000 problem. The Company expects that
its contingency plans will be developed by the end of the third quarter of 1999,
and that it will be prepared in the event of systems failures to continue to do
business, although such operations may be at a higher cost.
These estimates and conclusions contain forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially. New developments may occur that could affect the Company's
estimates, such as the amount of planning and modification needed to achieve
full resolution of the Year 2000 problem; the availability and cost of
resources; the Company's ability to discover and correct all Year 2000 sensitive
computer code and equipment; and the ability of suppliers and other entities to
bring their systems into compliance.
9. RELATED PARTY TRANSACTIONS
In fiscal 1996, Permal Capital Management, Inc. (PCMI) provided various
management services for the Company and its subsidiaries, for which PCMI
received $58,333. PCMI's services for the Company included assistance with
regard to executive management, financial consulting and strategic planning.
Thomas M. DeLitto, President of PCMI, served as President and Chief Executive
Officer of the Company from January to December 1994, served as Chief Executive
Officer from April 1995 to August 1996 and is currently Vice Chairman of the
Company's Board of Directors.
10. MAJOR SUPPLIERS
During the year ended January 31, 1999, the Company's 10 largest
suppliers accounted for 52.9% of its aggregate purchases. One supplier
represented approximately 10.2% of aggregate purchases for fiscal 1998.
<PAGE> 42
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Krause's Furniture, Inc.
We have audited in accordance with generally accepted auditing
standards, the financial statements of Krause's Furniture, Inc. as of and for
the years ended January 31, 1999 and February 1, 1998, included in this Form
10-K and have issued our report thereon dated March 31, 1999. Our audit was made
for the purpose of forming an opinion on the basic financial statements taken as
a whole. The schedule listed in the index above is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule, for the years ended January 31, 1999 and
February 1, 1998, has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
March 31, 1999
<PAGE> 43
KRAUSE'S FURNITURE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JANUARY 31, 1999, FEBRUARY 1, 1998, AND
FEBRUARY 2, 1997
<TABLE>
<CAPTION>
Additions
Balance Charged to Charged Balance
Allowance for Beginning Cost and to Other End
Doubtful Accounts of Period Expenses Accounts Deductions(a) of Period
- --------------------------- ------------- ------------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1998 $ 163,924 $ 286,000 $ - $ 269,557 $ 180,367
Fiscal 1997 326,807 180,736 - 343,619 163,924
Fiscal 1996 291,487 244,613 - 209,293 326,807
</TABLE>
(a) Represents accounts written off.
<PAGE> 44
EXHIBIT INDEX
Exhibit
No. Description
- --------- -----------
3.1 Certificate of Incorporation.(1)
3.1(a) Certificate of Amendment of Certificate of Incorporation dated
November 28, 1994. (5)
3.1(b) Certificate of Amendment of Certificate of Incorporation dated
August 1, 1995.(6)
3.1(c) Certificate of Amendment of Certificate of Incorporation dated June
7,1996.(7)
3.1(d) Certificate of Amendment of Certificate of Incorporation dated
August 1, 1996.(7)
3.2 By Laws.
4.1 Loan and Security Agreement dated January 20, 1995 by and between
Congress Financial Corporation (Western) and Krause's Sofa Factory
and Castro Convertible Corporation. (3)
4.1(a) First Amendment to Loan and Security Agreement dated as of May 10,
1996 by and between Congress Financial Corporation (Western) and
Krause's Sofa Factory and Castro Convertible Corporation.(6)
4.1(b) Second Amendment to Loan and Security Agreement dated as of August
26, 1996 by and between Congress Financial Corporation (Western) and
Krause's Sofa Factory and Castro Convertible Corporation.(14)
4.1(c) Third Amendment to Loan and Security Agreement dated as of November
25, 1996 by and between Congress Financial Corporation (Western) and
Krause's Sofa Factory and Castro Convertible Corporation.(14)
4.1(d) Amended and Restated Subordination Agreement dated as of August 26,
1996 by and between Congress Financial Corporation (Western) and
Krause's Furniture, Inc.(14)
4.1(e) Fourth Amendment to Loan and Security Agreement dated as of August
14, 1997 by and between Congress Financial Corporation (Western) and
Krause's Sofa Factory and Castro Convertible Corporation.(12)
4.1(f) Fifth Amendment to Loan and Security Agreement dated as of December
11, 1997 by and between Congress Financial Corporation (Western) and
Krause's Sofa Factory and Castro Convertible Corporation. (15)
4.1(g) Sixth Amendment to Loan and Security Agreement dated as of March 15,
1999 by and between Congress Financial Corporation (Western) and
Krause's Custom Crafted Furniture Corp. and Castro Convertible
Corporation.
4.1(h) Letter agreement between Krause's Furniture, Inc. and Congress
Financial Corporation (Western).(12)
4.2 Guarantee dated January 20, 1995 by Krause's Furniture, Inc. to
Congress Financial Corporation (Western). (3)
4.5 Certificate of Designations of Preferred Stock. (4)
10.1 1994 Directors Stock Option Plan.
10.2 1990 Employees Stock Option Plan.
10.3 Form of Securities Purchase Agreement between the Company, GECC and
certain other stockholders of the Company dated as if August 26,
1996.(8)
10.4 Form of $5,000,000 10% Subordinated Pay-In-Kind Note due August 31,
2001.(8)
10.5 Form of Warrant to Purchase 1,400,000 Shares of Common Stock.(8)
10.6 Form of Securities Purchase Agreement between the Company and
Certain Stockholders dated as of August 26, 1996.(8)
10.7 Form of Stockholders Agreement among the Company, GECC and certain
other stockholders of the Company dated as of August 26, 1996.(8)
10.8 Form of Registration Rights Agreement among the Company and GECC and
certain other stockholders of the Company dated as of August 26,
1996.(8)
10.9 Employment agreement with Philip M. Hawley.(8)
10.10 1997 Stock Incentive Plan. (9)
10.11 Supplemental Securities Purchase Agreement among Krause's Furniture,
Inc., General Electric Corporation and Japan Omnibus Ltd., dated as
of August 14, 1997. (12)
10.12 Letter agreement dated August 14, 1997 regarding Permal Group
shares.(12)
10.13 Letter agreement dated August 14, 1997 regarding warrant dilution
provisions.(12)
10.14 Amendment to the Supplemental Securities Purchase Agreement among
Krause's Furniture, Inc., General Electric Corporation and Japan
Omnibus Ltd., dated as of March 31, 1999.
11 Statement regarding computation of per share earnings.
<PAGE> 45
Exhibit
No. Description
- ------- -----------
21 Subsidiaries.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants
23.2 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
(1) Incorporated herein by reference to Exhibits to Registrant's Form S-4
dated June 19, 1992 (File No. 33-48725).
(2) Incorporated herein by reference to Exhibit 10.2 to Registrant's Form 10-K
for the year ended December 31, 1990 (File No. 0-17868).
(3) Incorporated herein by reference to Exhibit to Registrant's Form 8-K dated
as of January 20, 1995 (File No. 0-17868).
(4) Incorporated herein by reference to Exhibit 4.3 to Registrant's Form 8-K
dated as of October 7, 1993 (File No. 0-17868).
(5) Incorporated herein by reference to Exhibit 10.1 to Registrant's Form 10-K
dated as of December 31, 1994 (File No. 0-17868).
(6) Incorporated herein by reference to Exhibits to Registrant's Form 10-K
dated as of January 28, 1996 (File No. 0-17868).
(7) Incorporated herein by reference to Exhibits to Registrant's Form 10-Q
dated as of July 28, 1996 (File No. 0-17868).
(8) Incorporated herein by reference to Exhibits to Registrant's Form 8-K
dated as of August 26, 1996 (File No. 0-17868).
(9) Incorporated herein by reference to Exhibits to Registrant's Form S-1
dated March 12, 1997 (File No. 333-19485).
(10) Incorporated herein by reference to Exhibits to Registrant's Form 10-K
dated May 2, 1997 (File No. 0-17868).
(11) Incorporated herein by reference to Exhibits to Registrant's Proxy
Statement on Schedule 14A dated May 7, 1997 (File No. 0-17868).
(12) Incorporated herein by reference to Exhibits to Registrant's Form 8-K
dated as of August 14, 1997 (File No. 0-17868).
(13) Incorporated herein by reference to Exhibits to Registrant's Form 10-Q
dated as of December 17, 1997 (File No. 0-17868).
(14) Incorporated herein by reference to Exhibits to Registrant's Form 10-K
dated May 2, 1997 (File No. 0-17868).
(15) Incorporated herein by reference to Exhibits to Registrant's Form 10-K
dated April 30, 1998 (File No. 0-17868).
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
KRAUSE'S FURNITURE, INC.
A DELAWARE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I OFFICES..........................................................................21
Section 1.1 Registered Office............................................................21
Section 1.2 Other Offices................................................................21
ARTICLE II STOCKHOLDERS' MEETINGS .........................................................21
Section 2.1 Place of Meetings............................................................21
Section 2.2 Annual Meetings..............................................................21
Section 2.3 Special Meetings.............................................................21
Section 2.4 Notice of Meetings...........................................................22
Section 2.5 Quorum and Voting............................................................22
Section 2.6 Voting Rights................................................................23
Section 2.7 Voting Procedures and Inspectors of Elections................................24
Section 2.8 List of Stockholders.........................................................24
Section 2.9 Stockholder Proposals at Annual Meetings.....................................24
Section 2.10 Nominations of Persons for Election to the Board of Directors..............25
Section 2.11 Action Without Meeting.....................................................26
ARTICLE III DIRECTORS......................................................................26
Section 3.1 Number and Term of Office....................................................26
Section 3.2 Powers.......................................................................26
Section 3.3 Vacancies....................................................................26
Section 3.4 Resignations and Removals....................................................27
Section 3.5 Meetings.....................................................................27
Section 3.6 Quorum and Voting............................................................27
Section 3.7 Action Without Meeting.......................................................28
Section 3.8 Fees and Compensation........................................................28
Section 3.9 Committees...................................................................28
ARTICLE IV OFFICERS........................................................................29
Section 4.1 Officers Designated..........................................................29
Section 4.2 Tenure and Duties of Officers................................................29
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE V EXECUTION OF CORPORATE INSTRUMENTS, AND VOTING OF SECURITIES OWNED
BY THE CORPORATION..........................................................................30
Section 5.1 Execution of Corporate Instruments...........................................30
Section 5.2 Voting of Securities Owned by Corporation....................................30
ARTICLE VI SHARES OF STOCK.................................................................31
Section 6.1 Form and Execution of Certificates...........................................31
Section 6.2 Lost Certificates............................................................31
Section 6.3 Transfers....................................................................31
Section 6.4 Fixing Record Dates..........................................................31
Section 6.5 Registered Stockholders......................................................32
ARTICLE VII OTHER SECURITIES OF THE CORPORATION............................................32
ARTICLE VIII CORPORATE SEAL................................................................33
ARTICLE IX INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS....................33
Section 9.1 Right to Indemnification.....................................................33
Section 9.2 Authority to Advance Expenses................................................33
Section 9.3 Right of Claimant to Bring Suit..............................................34
Section 9.4 Provisions Nonexclusive......................................................34
Section 9.5 Authority to Insure..........................................................34
Section 9.6 Survival of Rights...........................................................34
Section 9.7 Settlement of Claims.........................................................34
Section 9.8 Effect of Amendment..........................................................34
Section 9.9 Subrogation..................................................................35
Section 9.10 No Duplication of Payments.................................................35
ARTICLE X NOTICES..........................................................................35
ARTICLE XI AMENDMENTS......................................................................36
</TABLE>
<PAGE> 4
EXHIBIT 3.2
BYLAWS
OF
KRAUSE'S FURNITURE, INC.,
A DELAWARE CORPORATION
ARTICLE I
OFFICES
SECTION 1.1 REGISTERED OFFICE.
The registered office of the corporation in the State of Delaware shall
be in the City of Wilmington, County of New Castle.
SECTION 1.2 OTHER OFFICES.
The corporation shall also have and maintain an office or principal
place of business at 200 North Berry Street, Brea, California 92821-3903, and
may also have offices at such other places, both within and without the State of
Delaware as the Board of Directors may from time to time determine or the
business of the corporation may require.
ARTICLE II
STOCKHOLDERS' MEETINGS
SECTION 2.1 PLACE OF MEETINGS.
Meetings of the stockholders of the corporation shall be held at such
place, either within or without the State of Delaware, as may be designated from
time to time by the Board of Directors, or, if not so designated, then at the
office of the corporation required to be maintained pursuant to Section 1.2 of
Article I hereof.
SECTION 2.2 ANNUAL MEETINGS.
The annual meetings of the stockholders of the corporation, commencing
with the year 1999, for the purpose of election of directors and for such other
business as may lawfully come before it, shall be held on such date and at such
time as may be designated from time to time by the Board of Directors, or, if
not so designated, then at 10:00 a.m. on May 28 in each year if not a legal
holiday, and, if a legal holiday, at the same hour and place on the next
succeeding day not a holiday.
SECTION 2.3 SPECIAL MEETINGS.
Special Meetings of the stockholders of the corporation may be called,
for any purpose or purposes, by the Chairman of the Board or the President or
the Board of Directors at any time. Upon written request of any stockholder or
stockholders holding in the aggregate one-fifth of the voting power of all
stockholders delivered in person or sent by registered mail to the Chairman of
the Board, President or Secretary of the Corporation, the
<PAGE> 5
Secretary shall call a special meeting of stockholders to be held at the office
of the corporation required to be maintained pursuant to Section 1.2 of Article
I hereof at such time as the Secretary may fix, such meeting to be held not less
than ten nor more than sixty days after the receipt of such request, and if the
Secretary shall neglect or refuse to call such meeting, within seven days after
the receipt of such request, the stockholder making such request may do so.
SECTION 2.4 NOTICE OF MEETINGS.
(a) Except as otherwise provided by law or the Certificate of
Incorporation, written notice of each meeting of stockholders, specifying the
place, date and hour and purpose or purposes of the meeting, shall be given not
less than ten nor more than sixty days before the date of the meeting to each
stockholder entitled to vote thereat, directed to his address as it appears upon
the books of the corporation; except that where the matter to be acted on is a
merger or consolidation of the Corporation or a sale, lease or exchange of all
or substantially all of its assets, such notice shall be given not less than
twenty (20) nor more than sixty (60) days prior to such meeting.
(b) If at any meeting action is proposed to be taken which, if taken,
would entitle shareholders fulfilling the requirements of section 262(d) of the
Delaware General Corporation Law to an appraisal of the fair value of their
shares, the notice of such meeting shall contain a statement of that purpose and
to that effect and shall be accompanied by a copy of that statutory section.
(c) When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken unless the
adjournment is for more than thirty days, or unless after the adjournment a new
record date is fixed for the adjourned meeting, in which event a notice of the
adjourned meeting shall be given to each stockholder of record entitled to vote
at the meeting.
(d) Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, either before or after such meeting, and to the extent
permitted by law, will be waived by any stockholder by his attendance thereat,
in person or by proxy. Any stockholder so waiving notice of such meeting shall
be bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
(e) Unless and until voted, every proxy shall be revocable at the
pleasure of the person who executed it or of his legal representatives or
assigns, except in those cases where an irrevocable proxy permitted by statute
has been given.
SECTION 2.5 QUORUM AND VOTING.
(a) At all meetings of stockholders, except where otherwise provided by
law, the Certificate of Incorporation, or these Bylaws, the presence, in person
or by proxy duly authorized, of the holders of a majority of the outstanding
shares of stock entitled to vote shall constitute a quorum for the transaction
of business. Shares, the voting of which at said meeting have been enjoined, or
which for any reason cannot be lawfully voted at such meeting, shall not be
counted to determine a quorum at said meeting. In the absence of a quorum, any
meeting of stockholders may be adjourned, from time to time, by vote of the
holders of a majority of the shares represented thereat, but no other business
shall be transacted at such meeting. At such adjourned meeting at which a quorum
is present or represented any business may be transacted which might have been
transacted at the original meeting. The stockholders present at a duly called or
convened meeting, at which a quorum is present, may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
(b) Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, all action taken by the holders of a majority of
the voting power represented at any meeting at which a quorum is present shall
be valid and binding upon the corporation.
<PAGE> 6
(c) Where a separate vote by a class or classes is required, a majority
of the outstanding shares of such class or classes, present in person or
represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter and the affirmative vote of the majority of
shares of such class or classes present in person or represented by proxy at the
meeting shall be the act of such class.
SECTION 2.6 VOTING RIGHTS.
(a) Except as otherwise provided by law, only persons in whose names
shares entitled to vote stand on the stock records of the corporation on the
record date for determining the stockholders entitled to vote at said meeting
shall be entitled to vote at such meeting. Shares standing in the names of two
or more persons shall be voted or represented in accordance with the
determination of the majority of such persons, or, if only one of such persons
is present in person or represented by proxy, such person shall have the right
to vote such shares and such shares shall be deemed to be represented for the
purpose of determining a quorum.
(b) Every person entitled to vote or execute consents shall have the
right to do so either in person or by an agent or agents authorized by a written
proxy executed by such person or his duly authorized agent, which proxy shall be
filed with the Secretary of the corporation at or before the meeting at which it
is to be used. Said proxy so appointed need not be a stockholder. No proxy shall
be voted on after three years from its date unless the proxy provides for a
longer period.
(c) Without limiting the manner in which a stockholder may authorize
another person or persons to act for him as proxy pursuant to subsection (b) of
this section, the following shall constitute a valid means by which a
stockholder may grant such authority:
(1) A stockholder may execute a writing authorizing another person
or persons to act for him as proxy. Execution may be accomplished by the
stockholder or his authorized officer, director, employee or agent signing such
writing or causing his or her signature to be affixed to such writing by any
reasonable means including, but not limited to, by facsimile signature.
(2) A stockholder may authorize another person or persons to act for
him as proxy by transmitting or authorizing the transmission of a telegram,
cablegram, or other means of electronic transmission to the person who will be
the holder of the proxy or to a proxy solicitation firm, proxy support service
organization or like agent duly authorized by the person who will be the holder
of the proxy to receive such transmission, provided that any such telegram,
cablegram or other means of electronic transmission must either set forth or be
submitted with information from which it can be determined that the telegram,
cablegram or other electronic transmission was authorized by the stockholder. If
it is determined that such telegrams, cablegrams or other electronic
transmissions are valid, the inspectors or, if there are no inspectors, such
other persons making that determination shall specify the information upon which
they relied.
(d) Any copy, facsimile telecommunication or other reliable reproduction
of the writing or transmission created pursuant to subsection (c) of this
section may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile telecommunication
or other reproduction shall be a complete reproduction of the entire original
writing or transmission.
<PAGE> 7
SECTION 2.7 VOTING PROCEDURES AND INSPECTORS OF ELECTIONS.
(a) The corporation shall, in advance of any meeting of stockholders,
appoint one or more inspectors to act at the meeting and make a written report
thereof. The corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the person presiding at
the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector with strict impartiality
and according to the best of his ability.
(b) The inspectors shall (i) ascertain the number of shares outstanding
and the voting power of each, (ii) determine the shares represented at a meeting
and the validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and (v) certify their
determination of the number of shares represented at the meeting, and their
count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of the duties of
the inspectors.
(c) The date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting. No ballot, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the Inspectors after the
closing of the polls unless the Court of Chancery upon application by a
stockholder shall determine otherwise.
(d) In determining the validity and counting of proxies and ballots, the
inspectors shall be limited to an examination of the proxies, any envelopes
submitted with those proxies, any information provided in accordance with
Section 212(c)(2) of the Delaware General Corporation Law, ballots and the
regular books and records of the corporation, except that the inspectors may
consider other reliable information for the limited purpose of reconciling
proxies and ballots submitted by or on behalf of banks, brokers, their nominees
or similar persons which represent more votes than the holder of a proxy is
authorized by the record owner to cast or more votes than the stockholder holds
of record. If the inspectors consider other reliable information for the limited
purpose permitted herein, the inspectors at the time they make their
certification pursuant to subsection (b)(v) of this section shall specify the
precise information considered by them including the person or persons from whom
they obtained the information, when the information was obtained, the means by
which the information was obtained and the basis for the inspectors' belief that
such information is accurate and reliable.
SECTION 2.8 LIST OF STOCKHOLDERS.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at said meeting, arranged in
alphabetical order, showing the address of and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held and which place shall
be specified in the notice of the meeting, or, if not specified, at the place
where said meeting is to be held, and the list shall be produced and kept at the
time and place of meeting during the whole time thereof, and may be inspected by
any stockholder who is present.
SECTION 2.9 STOCKHOLDER PROPOSALS AT ANNUAL MEETINGS.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, otherwise properly brought before the meeting by or at the direction
of the Board of Directors or otherwise properly brought before the meeting by a
stockholder. In addition to any other applicable requirements, for business to
be properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or mailed
and received
<PAGE> 8
at the principal executive offices of the corporation, not less than 45 days nor
more than 75 days prior to the date on which the corporation first mailed its
proxy materials for the previous year's annual meeting of stockholders (or the
date on which the corporation mails its proxy materials for the current year if
during the prior year the corporation did not hold an annual meeting or if the
date of the annual meeting was changed by more than 30 days from the prior
year). A stockholder's notice to the Secretary shall set forth as to each matter
the stockholder proposes to bring before the annual meeting, (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and record address of the stockholder proposing such business, (iii) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, and (iv) any material interest of the stockholder in such business.
Notwithstanding anything in the Bylaws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 2.9, provided, however, that nothing in
this Section 2.9 shall be deemed to preclude discussion by any stockholder of
any business properly brought before the annual meeting in accordance with said
procedure.
The Chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 2.9, and if he should
so determine, he shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
Nothing in this Section 2.9 shall affect the right of a stockholder to
request inclusion of a proposal in the corporation's proxy statement to the
extent that such right is provided by an applicable rule of the Securities and
Exchange Commission.
SECTION 2.10 NOMINATIONS OF PERSONS FOR ELECTION TO THE BOARD OF DIRECTORS.
In addition to any other applicable requirements, only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors. Nominations of persons for election to the Board of
Directors of the corporation may be made at a meeting of stockholders by or at
the direction of the Board of Directors, by any nominating committee or person
appointed by the Board of Directors or by any stockholder of the corporation
entitled to vote for the election of directors at the meeting who complies with
the notice procedures set forth in this Section 2.10. Such nominations, other
than those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the corporation. To be
timely, a stockholder's notice shall be delivered to or mailed and received
at the principal executive offices of the corporation not less than 30 days nor
more than 60 days prior to the days prior to the date on which the corporation
first mailed its proxy materials for the previous year's annual meeting of
stockholders (or the date on which the corporation mails its proxy materials for
the current year if during the prior year the corporation did not hold an annual
meeting or if the date of the annual meeting was changed by more than 30 days
from the prior year). Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or re-election as
a director, (i) the name, age, business address and residence address of the
person, (ii) the principal occupation or employment of the person, (iii) the
class and number of shares of the corporation which are beneficially owned by
the person, and (iv) any other information relating to the person that is
required to be disclosed in solicitations for proxies for election of directors
pursuant to Rule 14a under the Securities Exchange Act of 1934; and (b) as to
the stockholder giving the notice, (i) the name and record address of the
stockholder, and (ii) the class and number of shares of the corporation which
are beneficially owned by the stockholder. The corporation may require any
proposed nominee to furnish such other information as may reasonably be required
by the corporation to determine the eligibility of such proposed nominee to
serve as a director of the corporation. No person shall be eligible for election
as a director of the corporation unless nominated in accordance with the
procedures set forth herein. These provisions shall not apply to nomination of
any persons entitled to be separately elected by holders of preferred stock.
The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
<PAGE> 9
SECTION 2.11 ACTION WITHOUT MEETING.
Unless otherwise provided in the Certificate of Incorporation, any
action required by statute to be taken at any annual or special meeting of
stockholders of the corporation, or any action which may be taken at any annual
or special meeting of such stockholders, may be taken without a meeting, without
prior notice and without a vote, if a consent or consents in writing, setting
forth the action so taken, are signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. To be effective, a written consent must be delivered to
the corporation by delivery to its registered office in Delaware, its principal
place of business, or an officer or agent of the corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to a corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. Every written consent shall bear the
date of signature of each stockholder who signs the consent and no written
consent shall be effective to take the corporate action referred to therein
unless, within sixty days of the earliest dated consent delivered in the manner
required by this Section to the corporation, written consents signed by a
sufficient number of holders to take action are delivered to the corporation in
accordance with this Section. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
SECTION 3.1 NUMBER AND TERM OF OFFICE.
The number of directors of the corporation shall not be less than three (3) nor
more than twelve (12) until changed by amendment of the Certificate of
Incorporation or by a Bylaw amending this Section 3.1 duly adopted by the
vote or written consent of holders of a majority of the outstanding shares
or by the Board of Directors. The exact number of directors shall be fixed
from time to time, within the limits specified in the Certificate of
Incorporation or in this Section 3.1, by a bylaw or amendment thereof duly
adopted by the vote of a majority of the shares entitled to vote represented
at a duly held meeting at which a quorum is present, or by the written
consent of the holders of a majority of the outstanding shares entitled to
vote, or by the Board of Directors. Subject to the foregoing provisions for
changing the number of directors, the number of directors of the corporation
has been fixed at six (6).
With the exception of the first Board of Directors, which shall be
elected by the incorporators, and except as provided in Section 3.3 of this
Article III, the directors shall be elected by a plurality vote of the shares
represented in person or by proxy, at the stockholders annual meeting in each
year and entitled to vote on the election of directors. Elected directors shall
hold office until the next annual meeting and until their successors shall be
duly elected and qualified. Directors need not be stockholders. If, for any
cause, the Board of Directors shall not have been elected at an annual meeting,
they may be elected as soon thereafter as convenient at a special meeting of the
stockholders called for that purpose in the manner provided in these Bylaws.
SECTION 3.2 POWERS.
The powers of the corporation shall be exercised, its business conducted
and its property controlled by or under the direction of the Board of Directors.
SECTION 3.3 VACANCIES.
Vacancies and newly created directorships resulting from any increase in
the authorized number of directors may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director,
and each director so elected shall hold office for the unexpired portion of the
term of the director whose place shall be vacant, and until his successor shall
have been duly elected and qualified. A vacancy in the
<PAGE> 10
Board of Directors shall be deemed to exist under this section in the case of
the death, removal or resignation of any director, or if the stockholders fail
at any meeting of stockholders at which directors are to be elected (including
any meeting referred to in Section 3.4 below) to elect the number of directors
then constituting the whole Board.
SECTION 3.4 RESIGNATIONS AND REMOVALS.
(a) Any director may resign at any time by delivering his written resignation to
the Secretary, such resignation to specify whether it will be effective at a
particular time, upon receipt by the Secretary or at the pleasure of the Board
of Directors. If no such specification is made it shall be deemed effective at
the pleasure of the Board of Directors. When one or more directors shall resign
from the Board, effective at a future date, a majority of the directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office for the unexpired portion of the term of the director whose place shall
be vacated and until his successor shall have been duly elected and qualified.
(b) At a special meeting of stockholders called for the purpose in the manner
hereinabove provided, the Board of Directors, or any individual director, may be
removed from office, with or without cause, and a new director or directors
elected by a vote of stockholders holding a majority of the outstanding shares
entitled to vote at an election of directors.
SECTION 3.5 MEETINGS.
(a) Regular meetings of the Board of Directors shall be held at such
places within or without the State of Delaware which have been designated from
time to time by resolutions of the Board of Directors or the written consent of
all directors.
(b) Special meetings of the Board of Directors may be held at any time
and place within or without the State of Delaware whenever called by the
Chairman of the Board or, if there is no Chairman of the Board, by the
President, or by the Secretary on the written request of any two directors.
(c) Written notice of the time and place of all regular and special
meetings of the Board of Directors shall be delivered personally or by telephone
to each director or sent by telegram or facsimile transmission at least 48 hours
before the start of the meeting, or sent by first class mail at least 120 hours
before the start of the meeting. Notice of any meeting may be waived in writing
at any time before or after the meeting and will be waived by any director by
attendance thereat.
SECTION 3.6 QUORUM AND VOTING.
(a) A quorum of the Board of Directors shall consist of one-third (1/3) of the
total number of directors as fixed in accordance with these bylaws, but not
less than one (1). So long as the number of directors has been fixed at six
directors, two directors shall constitute a quorum for the transaction of
business. If at any meeting of the board there shall be less than a quorum
present, a majority of those present may adjourn the meeting from time to
time until a quorum is obtained, and no further notice thereof need be
given other than by announcement at the meeting which shall be so
adjourned.
(b) At each meeting of the Board at which a quorum is present all questions and
business shall be determined by a vote of a majority of the directors
present, unless a different vote be required by law, the Certificate of
Incorporation, or these Bylaws.
(c) Any member of the Board of Directors, or of any committee thereof, may
participate in a meeting by means of conference telephone or similar
communication equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting by such means
shall constitute presence in person at such meeting.
(d) The transactions of any meeting of the Board of Directors, or any committee
thereof, however called or noticed, or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice, if
<PAGE> 11
a quorum be present and if, either before or after the meeting, each of the
directors not present shall sign a written waiver of notice, or a consent
to holding such meeting, or an approval of the minutes thereof. All such
waivers, consents or approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.
SECTION 3.7 ACTION WITHOUT MEETING.
Unless otherwise restricted by the Certificate of Incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the Board
of Directors or of any committee thereof may be taken without a meeting, if all
members of the Board or of such committee, as the case may be, consent thereto
in writing, and such writing or writings are filed with the minutes of
proceedings of the Board or committee.
SECTION 3.8 FEES AND COMPENSATION.
Directors and members of committees may receive such compensation, if
any, for their services, and such reimbursement for expenses, as may be fixed or
determined by resolution of the Board of Directors.
SECTION 3.9 COMMITTEES.
(a) EXECUTIVE COMMITTEE: The Board of Directors may appoint an Executive
Committee of not less than one member, each of whom shall be a director. The
Executive Committee, to the extent permitted by law, shall have and may exercise
when the Board of Directors is not in session all powers of the Board in the
management of the business and affairs of the Corporation, except such committee
shall not have the power or authority to amend these Bylaws or to approve or
recommend to the stockholders any action which must be submitted to stockholders
for approval under the General Corporation Law.
(b) OTHER COMMITTEES: The Board of Directors may, by resolution passed
by a majority of the whole Board, from time to time appoint such other
committees as may be permitted by law. Such other committees appointed by the
Board of Directors shall have such powers and perform such duties as may be
prescribed by the resolution or resolutions creating such committee, but in no
event shall any such committee have the powers denied to the Executive Committee
in these Bylaws.
(c) TERM: The members of all committees of the Board of Directors shall
serve a term coexistent with that of the Board of Directors which shall have
appointed such committee. The Board, subject to the provisions of subsections
(a) or (b) of this Section 3.9, may at any time increase or decrease the number
of members of a committee or terminate the existence of a committee; provided,
that no committee shall consist of less than one member. The membership of a
committee member shall terminate on the date of his death or voluntary
resignation, but the Board may at any time for any reason remove any individual
committee member and the Board may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
(d) MEETINGS: Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 3.9 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter; special meetings of any such
committee may be held at the principal office of the corporation required to be
maintained pursuant to Section 1.2 of Article I hereof or at any place which has
been designated from time to time by resolution of such committee or by written
consent of all members thereof, and may be called by any director who is a
member of such committee, upon written notice to the members of such committee
of the time and place of such special meeting given in the manner provided for
the giving of written notice to members of the Board of Directors of the
<PAGE> 12
time and place of special meetings of the Board of Directors. Notice of any
special meeting of any committee may be waived in writing at any time after the
meeting and will be waived by any director by attendance thereat. A majority of
the authorized number of members of any such committee shall constitute a quorum
for the transaction of business, and the act of a majority of those present at
any meeting at which a quorum is present shall be the act of such committee.
ARTICLE IV
OFFICERS
SECTION 4.1 OFFICERS DESIGNATED.
The officers of the corporation shall be a President, a Secretary, and a
Treasurer. The Board of Directors or the President may also appoint a Chairman
of the Board, one or more Vice-Presidents, assistant secretaries, assistant
treasurers, and such other officers and agents with such powers and duties as it
or he shall deem necessary. The order of the seniority of the Vice- Presidents
shall be in the order of their nomination, unless otherwise determined by the
Board of Directors. The Board of Directors may assign such additional titles to
one or more of the officers as they shall deem appropriate. Any one person may
hold any number of offices of the corporation at any one time unless
specifically prohibited therefrom by law. The salaries and other compensation of
the officers of the corporation shall be fixed by or in the manner designated by
the Board of Directors.
SECTION 4.2 TENURE AND DUTIES OF OFFICERS.
(a) GENERAL: All officers shall hold office at the pleasure of the Board
of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the office
of any officer becomes vacant for any reason, the vacancy may be filled by the
Board of Directors. Nothing in these Bylaws shall be construed as creating any
kind of contractual right to employment with the corporation.
(b) DUTIES OF THE CHAIRMAN OF THE BOARD OF DIRECTORS: The Chairman of
the Board of Directors (if there be such an officer appointed) shall be the
chief executive officer of the corporation and, when present, shall preside at
all meetings of the shareholders and the Board of Directors. The Chairman of the
Board of Directors shall perform such other duties and have such other powers as
the Board of Directors shall designate from time to time.
(c) DUTIES OF PRESIDENT: The President shall be the chief executive
officer of the corporation in the absence of the Chairman of the Board and shall
preside at all meetings of the shareholders and at all meetings of the Board of
Directors, unless the Chairman of the Board of Directors has been appointed and
is present. The President shall perform such other duties and have such other
powers as the Board of Directors shall designate from time to time..
(d) DUTIES OF VICE-PRESIDENTS: The Vice-Presidents, in the order of
their seniority, may assume and perform the duties of the President in the
absence or disability of the President or whenever the office of the President
is vacant. The Vice-President shall perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
time to time.
(e) DUTIES OF SECRETARY: The Secretary shall attend all meetings of the
shareholders and of the Board of Directors and any committee thereof, and shall
record all acts and proceedings thereof in the minute book of the corporation.
The Secretary shall give notice, in conformity with these Bylaws, of all
meetings of the shareholders, and of all meetings of the Board of Directors and
any Committee thereof requiring notice. The Secretary shall perform such other
duties and have such other powers as the Board of Directors shall designate from
time to time. The President may direct any Assistant Secretary to assume and
perform the duties of the Secretary in the absence
<PAGE> 13
or disability of the Secretary, and each Assistant Secretary shall perform such
other duties and have such other powers as the Board of Directors or the
President shall designate from time to time.
(f) DUTIES OF TREASURER: The Treasurer shall keep or cause to be kept
the books of account of the corporation in a thorough and proper manner, and
shall render statements of the financial affairs of the corporation in such form
and as often as required by the Board of Directors or the President. The
Treasurer, subject to the order of the Board of Directors, shall have the
custody of all funds and securities of the corporation. The Treasurer shall
perform all other duties commonly incident to his office and shall perform such
other duties and have such other powers as the Board of Directors or the
President shall designate from time to time. The President may direct any
Assistant Treasurer to assume and perform the duties of the Treasurer in the
absence or disability of the Treasurer, and each Assistant Treasurer shall
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
ARTICLE V
EXECUTION OF CORPORATE INSTRUMENTS, AND VOTING OF SECURITIES
OWNED BY THE CORPORATION
SECTION 5.1 EXECUTION OF CORPORATE INSTRUMENTS.
(a) The Board of Directors may, in its discretion, determine the method
and designate the signatory officer or officers, or other person or persons, to
execute any corporate instrument or document, or to sign the corporate name
without limitation, except where otherwise provided by law, and such execution
or signature shall be binding upon the corporation.
(b) Unless otherwise determined by the Board of Directors or otherwise
required by law, formal contracts of the corporation, promissory notes, deeds of
trust, mortgages and other evidences of indebtedness of the corporation, and
other corporate instruments or documents requiring the corporate seal, and
certificates of shares of stock owned by the corporation, shall be executed,
signed or endorsed by the Chairman of the Board (if there be such an officer
appointed) or by the President; such documents may also be executed by any
Vice-President and by the Secretary or Treasurer or any Assistant Secretary or
Assistant Treasurer. All other instruments and documents requiring the corporate
signature, but not requiring the corporate seal, may be executed as aforesaid or
in such other manner as may be directed by the Board of Directors.
(c) All checks and drafts drawn on banks or other depositaries on funds
to the credit of the corporation, or in special accounts of the corporation,
shall be signed by such person or persons as the Board of Directors shall
authorize so to do.
SECTION 5.2 VOTING OF SECURITIES OWNED BY CORPORATION.
All stock and other securities of other corporations owned or held by
the corporation for itself, or for other parties in any capacity, shall be
voted, and all proxies with respect thereto shall be executed, by the person
authorized so to do by resolution of the Board of Directors or, in the absence
of such authorization, by the Chairman of the Board (if there be such an officer
appointed), or by the President, or by any Vice-President, or by the Secretary.
<PAGE> 14
ARTICLE VI
SHARES OF STOCK
SECTION 6.1 FORM AND EXECUTION OF CERTIFICATES.
Certificates for the shares of stock of the corporation shall be in such
form as is consistent with the Certificate of Incorporation and applicable law.
Every holder of stock in the corporation shall be entitled to have a certificate
signed by, or in the name of the corporation by, the Chairman of the Board (if
there be such an officer appointed), or by the President or any Vice-President
and by the Treasurer or Assistant Treasurer or the Secretary or Assistant
Secretary, certifying the number of shares owned by him in the corporation. Any
or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued, it may
be issued with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue. If the corporation shall be authorized to issue
more than one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in section 202 of the Delaware General
Corporation Law, in lieu of the foregoing requirements, there may be set forth
on the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
SECTION 6.2 LOST CERTIFICATES.
The Board of Directors may direct a new certificate or certificates to
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be
lost or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates, or his legal representative, to indemnify the
corporation in such manner as it shall require and/or to give the corporation a
surety bond in such form and amount as it may direct as indemnity against any
claim that may be made against the corporation with respect to the certificate
alleged to have been lost or destroyed.
SECTION 6.3 TRANSFERS.
Transfers of record of shares of stock of the corporation shall be made
only upon its books by the holders thereof, in person or by attorney duly
authorized, and upon the surrender of a certificate or certificates for a like
number of shares, properly endorsed.
SECTION 6.4 FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall not be more
than sixty nor less than ten days before the date of such meeting. If no record
date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the date on which the meeting is held. A determination of stockholders
of record entitled notice of or to vote at a meeting of stockholders shall apply
<PAGE> 15
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by the Delaware General Corporation Law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the corporation by delivery to its registered office in
Delaware, its principal place of business, or an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to a corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of Directors is required by law, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
SECTION 6.5 REGISTERED STOCKHOLDERS.
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends, and
to vote as such owner, and shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
ARTICLE VII
OTHER SECURITIES OF THE CORPORATION
All bonds, debentures and other corporate securities of the corporation,
other than stock certificates, may be signed by the Chairman of the Board (if
there be such an officer appointed), or the President or any Vice-President or
such other person as may be authorized by the Board of Directors and the
corporate seal impressed thereon or a facsimile of such seal imprinted thereon
and attested by the signature of the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer; provided, however, that where any such
bond, debenture or other corporate security shall be authenticated by the manual
signature of a trustee under an indenture pursuant to which such bond, debenture
or other corporate security shall be issued, the signature of the persons
signing and attesting the corporate seal on such bond, debenture or other
corporate security may be the imprinted facsimile of the signatures of such
persons. Interest coupons appertaining to any such bond, debenture or other
corporate security, authenticated by a trustee as aforesaid, shall be signed by
the Treasurer or an Assistant Treasurer of the corporation, or such other person
as may be authorized by the Board of Directors, or bear imprinted thereon the
facsimile signature of such person. In case any officer who shall have signed or
attested any bond, debenture or other corporate security, or whose facsimile
signature shall appear thereon shall have ceased to be such officer before the
bond, debenture or other corporate security so signed or attested shall have
been delivered, such bond, debenture or other corporate security nevertheless
may be adopted by the corporation and issued and delivered as
<PAGE> 16
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.
ARTICLE VIII
CORPORATE SEAL
The corporate seal shall consist of a die bearing the name of the
corporation and the state and date of its incorporation. Said seal may be used
by causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
ARTICLE IX
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
SECTION 9.1 RIGHT TO INDEMNIFICATION.
Each person who was or is a party or is threatened to be made a party to
or is involved (as a party, witness, or otherwise), in any threatened, pending,
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (hereinafter a "Proceeding"), by reason of the
fact that he, or a person of whom he is the legal representative, is or was a
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation or of a partnership, joint venture, trust, or other
enterprise, including service with respect to employee benefit plans, whether
the basis of the Proceeding is alleged action in an official capacity as a
director, officer, employee, or agent or in any other capacity while serving as
a director, officer, employee, or agent (hereafter an "Agent"), shall be
indemnified and held harmless by the corporation upon such terms and conditions
as authorized by the Board of Directors, subject to the provisions of Delaware
law that make indemnification mandatory, against all expenses, liability, and
loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties, and amounts paid or to be paid in settlement, and any interest,
assessments, or other charges imposed thereon, and any federal, state, local, or
foreign taxes imposed on any Agent as a result of the actual or deemed receipt
of any payments under this Article) reasonably incurred or suffered by such
person in connection with investigating, defending, being a witness in, or
participating in (including on appeal), or preparing for any of the foregoing
in, any Proceeding (hereinafter "Expenses"); provided, however, that except as
to actions to enforce indemnification rights pursuant to Section 9.3 of this
Article, the corporation shall indemnify any Agent seeking indemnification in
connection with a Proceeding (or part thereof) initiated by such person only if
the Proceeding (or part thereof) was authorized by the Board of Directors of the
corporation. The right to indemnification conferred in this Article shall be a
contract right.
SECTION 9.2 AUTHORITY TO ADVANCE EXPENSES.
Expenses incurred by an officer or director (acting in his capacity as
such) in defending a Proceeding shall be paid by the corporation in advance of
the final disposition of such Proceeding, provided, however, that if required by
the Delaware General Corporation Law, as amended, such Expenses shall be
advanced only upon delivery to the corporation of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized in this Article or otherwise. Expenses incurred by other Agents of
the corporation (or by the directors or officers not acting in their capacity as
such, including service with respect to employee benefit plans) may be advanced
upon such terms and conditions as the Board of Directors deems appropriate. Any
obligation to reimburse the corporation for Expense advances shall be unsecured
and no interest shall be charged thereon.
<PAGE> 17
SECTION 9.3 RIGHT OF CLAIMANT TO BRING SUIT.
If a claim under Section 9.1 or 9.2 of this Article is not paid in full
by the corporation within 90 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense
(including attorneys' fees) of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending a Proceeding in advance of its final disposition where the
required undertaking has been tendered to the corporation) that the claimant has
not met the standards of conduct that make it permissible under the Delaware
General Corporation Law for the corporation to indemnify the claimant for the
amount claimed. The burden of proving such a defense shall be on the
corporation. Neither the failure of the corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper under the circumstances because he has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the claimant had not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that claimant has not met the applicable standard of conduct.
SECTION 9.4 PROVISIONS NONEXCLUSIVE.
The rights conferred on any person by this Article shall not be
exclusive of any other rights that such person may have or hereafter acquire
under any statute, provision of the Certificate of Incorporation, agreement,
vote of stockholders or disinterested directors, or otherwise, both as to action
in an official capacity and as to action in another capacity while holding such
office. To the extent that any provision of the Certificate, agreement, or vote
of the stockholders or disinterested directors is inconsistent with these
bylaws, the provision, agreement, or vote shall take precedence.
SECTION 9.5 AUTHORITY TO INSURE.
The corporation may purchase and maintain insurance to protect itself
and any Agent against any Expense, whether or not the corporation would have the
power to indemnify the Agent against such Expense under applicable law or the
provisions of this Article.
SECTION 9.6 SURVIVAL OF RIGHTS.
The rights provided by this Article shall continue as to a person who
has ceased to be an Agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
SECTION 9.7 SETTLEMENT OF CLAIMS.
The corporation shall not be liable to indemnify any Agent under this
Article (a) for any amounts paid in settlement of any action or claim effected
without the corporation's written consent, which consent shall not be
unreasonably withheld; or (b) for any judicial award if the corporation was not
given a reasonable and timely opportunity, at its expense, to participate in the
defense of such action.
SECTION 9.8 EFFECT OF AMENDMENT.
Any amendment, repeal, or modification of this Article shall not
adversely affect any right or protection of any Agent existing at the time of
such amendment, repeal, or modification.
<PAGE> 18
SECTION 9.9 SUBROGATION.
In the event of payment under this Article, the corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of the
Agent, who shall execute all papers required and shall do everything that may be
necessary to secure such rights, including the execution of such documents
necessary to enable the corporation effectively to bring suit to enforce such
rights.
SECTION 9.10 NO DUPLICATION OF PAYMENTS.
The corporation shall not be liable under this Article to make any
payment in connection with any claim made against the Agent to the extent the
Agent has otherwise actually received payment (under any insurance policy,
agreement, vote, or otherwise) of the amounts otherwise indemnifiable hereunder.
ARTICLE X
NOTICES
Whenever, under any provisions of these Bylaws, notice is required to be
given to any stockholder, the same shall be given in writing, timely and duly
deposited in the United States Mail, postage prepaid, and addressed to his last
known post office address as shown by the stock record of the corporation or its
transfer agent. Any notice required to be given to any director may be given by
the method hereinabove stated, or by telegram or other means of electronic
transmission, except that such notice other than one which is delivered
personally, shall be sent to such address or (in the case of facsimile
telecommunication) facsimile telephone number as such director shall have filed
in writing with the Secretary of the corporation, or, in the absence of such
filing, to the last known post office address of such director. If no address of
a stockholder or director be known, such notice may be sent to the office of the
corporation required to be maintained pursuant to Section 1.2 of Article I
hereof. An affidavit of mailing, executed by a duly authorized and competent
employee of the corporation or its transfer agent appointed with respect to the
class of stock affected, specifying the name and address or the names and
addresses of the stockholder or stockholders, director or directors, to whom any
such notice or notices was or were given, and the time and method of giving the
same, shall be conclusive evidence of the statements therein contained. All
notices given by mail, as above provided, shall be deemed to have been given as
at the time of mailing and all notices given by telegram or other means of
electronic transmission shall be deemed to have been given as at the sending
time recorded by the telegraph company or other electronic transmission
equipment operator transmitting the same. It shall not be necessary that the
same method of giving be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
The period or limitation of time within which any stockholder may exercise any
option or right, or enjoy any privilege or benefit, or be required to act, or
within which any director may exercise any power or right, or enjoy any
privilege, pursuant to any notice sent him in the manner above provided, shall
not be affected or extended in any manner by the failure of such a stockholder
or such director to receive such notice. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation, or of these Bylaws, a waiver thereof in writing signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Whenever notice is required
to be given, under any provision of law or of the Certificate of Incorporation
or Bylaws of the corporation, to any person with whom communication is unlawful,
the giving of such notice to such person shall not be required and there shall
be no duty to apply to any governmental authority or agency for a license or
permit to give such notice to such person. Any action or meeting which shall be
taken or held without notice to any such person with whom communication is
unlawful shall have the same force and effect as if such notice had been duly
given. In the event that the action taken by the corporation is such as to
require the filing of a certificate under any provision of the Delaware General
Corporation Law, the certificate shall state, if such is the fact and if notice
is required, that notice was given to all persons entitled to receive notice
except such persons with whom communication is unlawful.
<PAGE> 19
ARTICLE XI
AMENDMENTS
These Bylaws may be repealed, altered or amended or new Bylaws adopted
by written consent of stockholders in the manner authorized by Section 2.11 of
Article II, or at any meeting of the stockholders, either annual or special, by
the affirmative vote of a majority of the stock entitled to vote at such
meeting, unless a larger vote is required by these Bylaws or the Certificate of
Incorporation. The Board of Directors shall also have the authority to repeal,
alter or amend these Bylaws or adopt new Bylaws (including, without limitation,
the amendment of any Bylaws setting forth the number of directors who shall
constitute the whole Board of Directors) by unanimous written consent or at any
annual, regular, or special meeting by the affirmative vote of a majority of the
whole number of directors, subject to the power of the stockholders to change or
repeal such Bylaws and provided that the Board of Directors shall not make or
alter any Bylaws fixing the qualifications, classifications, or term of office
of directors.
CERTIFICATE OF SECRETARY
The undersigned, Secretary of Krause's Furniture, Inc., a Delaware
corporation, hereby certifies that the foregoing is a full, true and correct
copy of the Bylaws of said corporation, with all amendments to date of this
Certificate.
WITNESS the signature of the undersigned and the seal of the
Corporation this 19TH day of November, 1998.
/s/ JUDITH OLSON LASKER
--------------------------------
Judith Olson Lasker, Secretary
<PAGE> 1
EXHIBIT 4.1(G)
SIXTH AMENDMENT TO LOAN AND
SECURITY AGREEMENT
THIS SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"),
dated as of March 15, 1999, is entered into by and between CONGRESS FINANCIAL
CORPORATION (WESTERN), a California corporation ("Lender"), with a place of
business at 225 South Lake Avenue, Suite 1000, Pasadena, California 91101 and
KRAUSE'S CUSTOM CRAFTED FURNITURE CORP., a California corporation (formerly
known as Krause's Sofa Factory), and its wholly owned subsidiary, CASTRO
CONVERTIBLE CORPORATION, a New York corporation (jointly and severally,
"Borrower"), with its chief executive office located at 200 North Berry Street,
Brea, California 92821.
RECITALS
A. Borrower and Lender have previously entered into that certain Loan
and Security Agreement dated as of January 20, 1995, as amended by that certain
First Amendment to Loan and Security Agreement dated as of May 10, 1996, that
certain Second Amendment to Loan and Security Agreement dated as of August 26,
1996, that certain Third Amendment to Loan and Security Agreement dated as of
November 25, 1996, that certain Fourth Amendment to Loan and Security Agreement
dated as of August 14, 1997 and that certain Fifth Amendment to Loan and
Security Agreement dated as of December 11, 1997 (collectively, the "Loan
Agreement"), pursuant to which Lender has made certain loans and financial
accommodations available to Borrower. Terms used herein without definition shall
have the meanings ascribed to them in the Loan Agreement.
B. Borrower has requested that Lender extend the term of the Loan
Agreement to March 31, 2002 and in connection therewith (i) increase the Maximum
Credit, (ii) increase the sub-limit for Eligible Raw Materials, (iii) decrease
the sub-limit for Letter of Credit Accommodations, (iv) adjust the rate of
interest, (v) adjust the calculation of the unused line fee, (vi) amend the
Adjusted Net Worth and EBITDA financial covenants and (vii) adjust the early
termination fee provision.
C. Lender is willing to extend the term of and further amend the Loan
Agreement under the terms and conditions set forth in this Amendment. Borrower
is entering into this Amendment with the understanding and agreement that none
of Lender's rights or remedies as set forth in the Loan Agreement is being
waived or modified by the terms of this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
37
<PAGE> 2
1. Amendments to Loan Agreement.
(a) The following definition shall hereby be added to Section 1 of
the Loan Agreement (entitled "Definitions") in its proper
alphabetical and numerical order:
"1.__ `Applicable Margin' shall mean, as of the date of
determination, one (1) percentage point per annum; provided,
however, (a) if Borrower as of any date set forth below has
EBITDA for the trailing four fiscal quarter period ending on
such date of not less than the amount set forth below next
to such date, the Applicable Margin shall be reduced to
three-quarters of one (0.75) percentage point per annum or
(ii) if Borrower as of any date set forth below has EBITDA
for the trailing four fiscal quarter period ending on such
date of not less than Seven Million Dollars ($7,000,000),
the Applicable Margin shall be reduced to one-half of one
(0.5) percentage point per annum; and further, provided,
however, if the Applicable Margin has been reduced as
provided above and EBITDA of Borrower, as of any date set
forth below for the trailing four fiscal quarter period
ending on such date is less than the amount set forth next
to such date, the Applicable Margin shall be increased to
one (1) percentage point per annum:
<TABLE>
<CAPTION>
Four Quarter
Period Ending Amount
- ------------- ------
<S> <C>
May 2, 1999 $2,750,000
August 1, 1999 $4,500,000
October 31, 1999 $6,500,000
January 30, 2000 and thereafter $7,000,000
</TABLE>
Such adjustments to the Applicable Margin (whether upwards or downwards)
shall be effective as of the first day of the next calendar month following
receipt by Lender of Borrower's financial statements for the fiscal periods
ended on the specified dates."
(b) The definition of "Maximum Credit" set forth in Section 1.24
is hereby amended in its entirety to read as follows:
"1.24 `Maximum Credit' shall mean the amount of Fifteen Million Dollars
($15,000,000)."
(b) Clause (ii) of Paragraph (a) of Section 2.1 of the Loan
Agreement (entitled "Revolving Loans") is hereby amended in its entirety
to read as follows:
"(ii) notwithstanding the exclusion of raw materials from
the definition of Eligible Inventory, the lesser of (x)
fifty percent (50%) of the Value of Borrower's raw
materials consisting of fabric and leather (`Eligible Raw
Materials') or (y) One Million Five Hundred Thousand
Dollars ($1,500,000); less"
(c) Paragraph (d) of Section 2.3 of the Loan Agreement (entitled "Letter of
Credit Accommodations") is hereby amended in its entirety to read as
follows:
"(d) Except in Lender's discretion, the amount of all outstanding Letter of
Credit Accommodations and all other commitments and obligations made or
incurred by Lender in connection therewith shall not at any time exceed
One Million Dollars ($1,000,000). At any time an Event of Default exists
or has occurred and is continuing, upon Lender's request, Borrower will
either furnish cash collateral to secure the reimbursement obligation to
the issuer in connection with any Letter of Credit Accommodations or
furnish cash collateral of Lender for the Letter of Credit
Accommodations, and in either case, the Revolving Loans otherwise
available to Borrower shall not be reduced as provided in Section 2.3(c)
to extent of such cash collateral."
(d) Paragraph (a) of Section 3.1 of the Loan Agreement (entitled, "Interest")
is hereby amended in its entirety to read as follows:
38
<PAGE> 3
"(a) Borrower shall pay to Lender interest on the
outstanding principal amount of the non-contingent
Obligations at the rate equal to the Prime Rate plus the
Applicable Margin, except that Borrower shall pay to
Lender interest, at Lender's option, without notice, at
the rate of three(3) percentage points per annum in excess
of the Prime Rate (i) on the non-contingent Obligations
for the period from and after the date of termination or
non-renewal hereof, or the date of the occurrence of an
Event of Default, and for so long as such Event of Default
is continuing as determined by Lender or until such time
as the Event of Default has been cured by Borrower or
waived by Lender or Lender has received full and final
payment of all such Obligations (notwithstanding entry of
any judgement against Borrower) and (ii) on the Loans at
any time outstanding in excess of the amounts available to
Borrower under Section 2 (whether or not such excess(es),
arise or are made with or without Lender's knowledge or
consent and whether made before or after an Event of
Default). All interest accruing hereunder on and after the
occurrence of any of the events referred to in Section
3.1(a)(i) or Section 3.1(a)(ii) above shall be payable on
demand."
(e) Section 3.4 of the Loan Agreement (entitled "Unused
Line Fee") is hereby amended in its entirety to read as follows:
"3.4 Unused Line Fee. Borrower shall pay to Lender monthly an unused line fee at
a rate equal to one-quarter of one percent (.25%) per annum calculated
upon the amount by which Ten Million Dollars ($10,000,000) exceeds the
average daily principal balance of the outstanding Revolving Loans and
Letter of Credit Accommodations during the immediately preceding months
(or part thereof) while this Agreement is in effect and for so long
thereafter as any of the Obligations are outstanding, which fee shall be
payable on the first day of each month in arrears."
(f) Section 9.14 of the Loan Agreement (entitled "Adjusted Net Worth") is hereby
amended in its entirety to read as follows:
"9.14 Adjusted Net Worth. Borrower shall at all times maintain Adjusted Net
Worth of not less than Ten Million Dollars ($10,000,000)."
(g) Section 9.15 of the Loan Agreement (entitled "Minimum EBITDA") is hereby
amended in its entirety to read as follows:
"9.15 Minimum EBITDA. Borrower shall for each trailing four fiscal quarter
period ending on the dates set forth below, measured on and as of each
such dates, have EBITDA of not less than the amount set forth next to
such ending date:
<TABLE>
<CAPTION>
Four Quarter
Period Ending Amount
- ------------- ------
<S> <C>
May 2, 1999 $2,500,000
August 1, 1999 $4,000,000
October 31, 1999 $5,000,000
January 30, 2000 $8,000,000
April 30, 2000 $9,000,000
July 30, 2000 and thereafter $10,000,000."
</TABLE>
(h) The first sentence of Paragraph (a) of Section 12.1 of the Loan Agreement
(entitled "Term") is hereby amended in its entirety to read as follows:
"This Agreement and the other Financing Agreements shall become effective as of
the date set forth on the first page hereof and shall continue in full
force and effect for a term ending on March 31, 2002 (the "Renewal
Date"), and from year to year thereafter, unless sooner terminated
pursuant to the terms hereof."
39
<PAGE> 4
(i) The first sentence of Paragraph (c) of Section 12.1 of the Loan Agreement
(entitled "Term") is hereby amended in its entirety to read as follows:
"If for any reason this Agreement is terminated, except by Lender in bad faith,
prior to the end of the then current term or renewal term of this
Agreement, in view of the impracticality and extreme difficulty of
ascertaining actual damages and by mutual agreement of the parties as to
a reasonable calculation of Lender's lost profits as a result thereof,
Borrower agrees to pay to Lender, upon the effective date of such
termination, an early termination fee in the amount of two percent (2%)
of the Maximum Credit if such termination occurs on or before July 20,
2000 or in the amount of one percent (1%) of the Maximum Credit if such
termination occurs thereafter."
2. Effectiveness of this Amendment. Lender must have received the
following items, in form and substance acceptable to Lender, or evidence of the
occurrence thereof, before this Amendment is effective and before Lender is
required to extend any credit to Borrower as provided for by this Amendment. The
date on which all of the following conditions have been satisfied is the
"Closing Date".
(a) Amendment. This Amendment fully executed in a sufficient
number of counterparts for distribution to Lender and Borrower.
(b) Authorizations. Evidence that the execution, delivery and
performance by Borrower and each guarantor or subordinating creditor of
this Amendment and any instrument or agreement required under this
Amendment have been duly authorized.
(c) Representations and Warranties. The representations and
warranties of Borrower set forth in the Loan Agreement must be true and
correct.
(d) Other Required Documentation. All other documents and legal
matters in connection with the transactions contemplated by this
Amendment shall have been delivered or executed or recorded and shall be
in form and substance satisfactory to Lender.
(f) Payment of Modification Fee. Lender shall have received from
Borrower a modification fee of Fifteen Thousand Dollars ($15,000) for
the processing and approval of this Amendment, which fee shall be fully
earned as of and payable on the Closing Date.
3. Choice of Law. The validity of this Amendment, its construction,
interpretation and enforcement, and the rights of the parties hereunder, shall
be determined under, governed by, and construed in accordance with the laws of
the State of California governing contracts wholly to be performed in that
State.
4. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties on separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute but one and the same instrument.
5. Due Execution. The execution, delivery and performance of this
Amendment are within the powers of the Borrower, have been duly authorized by
all necessary corporate action, have received all necessary governmental
approval, if any, and do not contravene any law or any contractual restrictions
binding on Borrower.
6. Otherwise Not Affected. In the event of any conflict or inconsistency
between the Loan Agreement and the provisions of this Amendment, the provisions
of this Amendment shall govern. Except to the extent set forth herein, the Loan
Agreement shall remain in full force and effect.
7. Ratification. Borrower hereby restates, ratifies and reaffirms each
and every term and condition set forth in the Loan Agreement, as amended hereby,
and the Financing Agreements effective as of the date hereof.
8. Estoppel. To induce Lender to enter into this Amendment and to
continue to make advances to Borrower under the Loan Agreement, Borrower hereby
acknowledges and agrees that, after giving effect to this Amendment, as of the
date hereof, there exists no Event of Default and no right of offset, defense,
counterclaim or objection in favor of Borrower as against Lender with respect to
the Obligations.
40
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
KRAUSE'S CUSTOM CRAFTED FURNITURE CORP.,
a California corporation
By: /s/ ROBERT A. BURTON
----------------------------------
Name: Robert A. Burton
----------------------------------
Title: Executive Vice President/CFO
----------------------------------
CASTRO CONVERTIBLE CORPORATION,
a New York corporation
By: /s/ ROBERT A. BURTON
----------------------------------
Name: Robert A. Burton
----------------------------------
Title: Executive Vice President/CFO
----------------------------------
CONGRESS FINANCIAL CORPORATION (WESTERN),
a California corporation
By: /s/ D.B. LAUGHTON
----------------------------------
Name: D.B. Laughton
----------------------------------
Title: Vice President
----------------------------------
41
<PAGE> 6
ACKNOWLEDGMENT
The undersigned Krause Furniture, Inc., a Delaware corporation ("KFI"),
parent of Krause's Custom Crafted Furniture Corp. ("Krause's"), in consideration
of Congress Financial Corporation (Western) ("Congress") continued extension of
credit to Krause's and Castro Convertible Corporation, hereby consents to the
foregoing Sixth Amendment to Loan and Security Agreement and acknowledges and
confirms that its Guarantee dated November 25, 1996 (the "Guarantee") in favor
of Congress remains in full force and effect. Although Congress has informed KFI
of the matters set forth above, and KFI has acknowledged the same, KFI
understands and agrees that Congress has no duty under the Loan Agreement as
defined above, the Guarantee or any other agreement with KFI to so notify KFI or
to seek such an acknowledgment, and nothing contained herein is intended to or
shall create such a duty as to any advances or transactions hereafter.
Dated: March 15, 1999 KRAUSE'S CUSTOM CRAFTED FURNITURE CORP.,
a Delaware corporation
By: /s/ ROBERT A. BURTON
----------------------------------
Name: Robert A. Burton
----------------------------------
Title: Executive President/CFO
----------------------------------
42
<PAGE> 1
WORTH CORPORATION
1994 DIRECTORS STOCK OPTION PLAN
1. Purpose. This 1994 Directors Stock Option Plan (the "Plan") is
intended to encourage ownership of common stock of WORTH CORPORATION (the
"Company") by directors of the Company and its subsidiaries, to provide an
additional incentive to the nonemployee directors of the Company and its
subsidiaries to serve as Directors and to provide incentives for them to
continue their service on the Board and to exert maximum efforts for the
Company's success.
2. Administration. The following provisions shall govern the
administration of the Plan:
a. Administrators. The Plan shall be administered by the
Board of Directors (the "Board"). The Board shall be authorized and directed to
adopt such rules and regulations for implementing the Plan so as to satisfy the
requirements for a formula award plan within the meaning of Rule 16b-3(c)(ii) of
the Securities Exchange Act of 1934 (the "Act").
b. Powers. The Company shall effect the grant of options
under the Plan by execution of written stock option agreements in such form as
shall be approved by the Board. Subject to the express terms and conditions of
the Plan and the terms of any option outstanding under the Plan, the Board shall
have full power to construe the Plan and the terms of any option granted under
the Plan, to prescribe, amend and rescind rules and regulations relating to the
Plan or such options and to make all other determinations necessary or advisable
for the administration of the Plan, including, without limitation, the power to:
(i) determine which persons meet the requirements of Paragraph 3 hereof for
participation in the Plan (a "Participant"); (ii) establish the terms and
conditions required or permitted to be included in every option agreement or any
amendments thereto; (iii) determine and incorporate such terms and provisions,
as well as amendments thereto, as shall be required in the judgment of the
Board, so as to provide for or conform such option to any change in any law,
regulation, ruling or interpretation applicable thereto; and (iv) make all other
determinations deemed necessary or advisable for administering the Plan;
provided, however, that the Board shall not possess discretionary powers with
respect to the Plan which would disqualify it as a formula award plan within the
meaning of the above-cited section of Rule 16b-3 of the Act. Consistent with the
foregoing, the Board shall not have the power to determine which Participants
shall be eligible for option grants under the Plan, to determine the timing of
grants of any option, or to specify the number of Shares covered by each option,
which requirements shall be specified in the Plan and shall not be within the
discretion of
<PAGE> 2
the Board. The determination on the foregoing matters by the Board shall be
conclusive.
3. Participants.
a. All Non-Employee Directors. Each non-employee director
of the Company or any of its subsidiaries shall be a participant in the Plan and
shall automatically receive option grants pursuant to the provisions of
Paragraph 5 below. A nonemployee director who has been granted an option may, if
he is otherwise eligible, be granted an additional option or options in
accordance with such provisions. No person shall have any discretion to select
which non-employee directors shall be granted options.
b. No Rights As Director. The Plan shall not confer upon
any optionee any right with respect to continuation of service as a director or
nomination to serve as a director, nor shall it interfere in any way with any
rights which the director or the Company may have to terminate his directorship
at any time.
4. The Shares. The shares of stock initially subject to options
authorized to be granted under the Plan shall consist of Two Hundred Thousand
(200,000) shares of $.001 par value common stock of the Company (the "Shares")
or the number and kind of shares of stock or other securities which shall be
substituted for such shares or to which such shares shall be adjusted as
provided in Paragraph 6 below. The Shares subject to the Plan may be set aside
out of the authorized but unissued shares of common stock of the Company not
reserved for any other purpose or out of shares of common stock subject to an
option which, for any reason, terminates unexercised as to the Shares.
5. Grants Of Options. All grants of options hereunder shall be
automatic and non-discretionary and shall be made strictly in accordance with
the following provisions:
a. No Discretion In Determining Awards. No person shall
have discretion to determine the number of shares to be covered by options
granted under the Plan to non-employee directors.
b. Grant Of First Option. Each non-employee director
automatically shall be granted an option to purchase 5,000 Shares (the "First
option") upon the latest to occur of (i) the effective date of this Plan, as
determined in accordance with Paragraph 10 hereof, or (ii) the date on which
such person first becomes a non-employee director, whether through election by
the stockholders of the Company, appointment by the Board of Directors to fill a
vacancy, or by the termination of employment with the Company of a
employee-director under circumstances where the Board
<PAGE> 3
of Directors requests his continued service on the Board, (iii) one year from
the date of the last grant of a stock option to the director under the Company's
1990 Directors Stock Option Plan which precedes the adoption of this plan.
c. Subsequent Awards. After the First Option has been
granted to a non-employee director, such participant shall thereafter
automatically be granted an option to purchase 5,000 Shares (a "Subsequent
Option") (i) in the case of non-employee directors who join the Board after the
effective date of this Plan, on a date one year after the date of grant of the
First Option and on the same date each year thereafter, and (ii) in the case of
non-employee directors as of the effective date of this Plan, on the first
anniversary of the effective date and on the same date thereafter.
d. Adjustments In Number Of Shares Subject To Awards.
Notwithstanding the provisions of subparagraphs b and c hereof, in the event
that a grant would cause the number of Shares subject to outstanding options
plus the number of Shares previously purchased upon exercise of options to
exceed the number of Shares authorized pursuant to Paragraph 4 hereof, then each
such automatic grant shall be for that number of Shares determined by dividing
the total number of Shares remaining available for grant by the number of
non-employee directors eligible for grants on the automatic grant date. Any
additional grants shall be deferred until such time, if any, as additional
Shares become available for grant under the Plan through action of the
stockholders to increase the number of Shares authorized to be issued under the
Plan or through cancellation or expiration of options previously granted
hereunder.
6. Option Price. The purchase price under each option (the
"Option Price") shall be not less than one hundred percent (100%) of the fair
market value of the Shares subject thereto on the date the option is granted.
For purposes of the Plan, (a) the "fair market value" of any Share of common
stock, if listed on an established stock exchange or exchanges, shall be the
last reported sale price per share on the date prior to such date on the
principal exchange on which it is traded, or if no sale was made on such day on
such principal exchange, at the closing reported bid price on such day on such
exchange; (b) if the common stock is not then listed on an exchange, the "fair
market value" of any Share of common stock shall be the average of the closing
bid and asked prices per share for the common stock in the over-the-counter
market as quoted on NASDAQ on the day prior to such date; or (c) if the common
stock is not then listed on an exchange or quoted on NASDAQ, an amount
determined in good faith by the Board.
<PAGE> 4
7. Duration And Exercise Of Options.
a. Duration And Vesting. Each option grant shall vest on
the one year anniversary of the date of grant and shall be exercisable up to but
not exceeding ten (10) years from the date when the option is granted. Each
vested option grant, while exercisable, may be exercised in whole or in part, by
itself or cumulatively with any and all other vested option grants which have
not yet terminated or expired. The termination of the Plan shall not alter the
maximum duration, the vesting provisions, or any term or condition of any option
granted prior to the termination of the Plan.
b. Manner Of Payment. To the extent an option grant has
vested, options may be exercised from time to time by delivering payment in full
at the Option Price for the number of Shares being purchased by either cash or
certified check, plus the amount of any tax required to be withheld by the
Company or any subsidiary corporation as a result of the exercise of an option.
The optionee shall make any arrangements required by the Company to ensure that
there is available for payment the amount of tax required to be withheld by the
Company or any subsidiary corporation as a result of either the grant or
exercise of an option or any sale or other disposition of Shares acquired by
exercise of an option.
c. Manner Of Exercise. The Option Price shall be
accompanied by written notice to the Secretary of the Company identifying the
option or portion thereof being exercised and specifying the number of Shares
for which payment is being tendered. Not be less than fifteen (15) and not more
than thirty (30) days after the giving of such notice, without transfer or issue
tax to the optionee (or other person entitled to exercise the option), at the
principal office of the Company or such other place as shall be mutually
acceptable, the Company shall deliver to the optionee a certificate or
certificates for such Shares dated as of the date when the options were validly
exercised; provided, however, that the time of such delivery may be postponed by
the Company for such period as may be required for it with reasonable diligence
to comply with any requirements of law.
d. Termination Of Director Status. Upon the termination of
an optionee's status as a director of the Company or any of its subsidiaries,
his or her rights to exercise an option then held shall be only as follows:
i. Disability. If an optionee's status as a director
is terminated by disability, such optionee or such optionee's qualified
representative (in the event of the optionee's mental disability) shall have the
right for a period of twelve (12) months following the date of such disability
termination to
<PAGE> 5
exercise such option, provided the actual date of exercise is in no event after
the expiration of the term of the option. For purposes of this Plan,
"disability" shall be as "permanent and total disability" is defined by
Paragraph 22(e)(3) of the Internal Revenue Code of 1986, as amended, or any
successor provision. Paragraph 22(e)(3) presently defines "permanent and total
disability" as follows:
An individual is permanently and totally disabled if he is
unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment
which can be expected to result in death or which has lasted
or can be expected to last for a continuous period of not less
than 12 months. An individual shall not be considered to be
permanently and totally disabled unless he furnished proof of
the existence thereof in such form and manner, and at such
times, as the Secretary may require.
ii. Death. If an optionee shall die (1) while a
director of the Company or any of its subsidiaries, or (2) within three (3)
months after termination of his or her status as a director except for cause,
the optionee's estate shall have the right for a period of twelve (12) months
following the date of death to exercise the option to the extend the optionee
was entitled to exercise the option on the date of death, provided the actual
date of exercise is in no event after the expiration of the term of the option.
Any interruption in continuous director status with the Company and any of its
subsidiaries shall constitute termination of the same under this Plan even if
the optionee resumes director status after such interruption; provided, however,
that a leave duly approved by the Company or in accordance with law shall not
constitute an interruption hereunder. An optionee's "estate" shall mean the
optionee's legal representative or any person who acquires the right to exercise
an option by reason of the optionee's death.
iii. Cause. If a director is determined by the Board of
Directors of the Company or any of its subsidiaries to have committed an act of
embezzlement, fraud, dishonesty, breach of fiduciary duty to the Company or the
subsidiary, or to have deliberately disregarded the rules of the Company or its
subsidiary which resulted in loss, damage or injury to the Company or the
subsidiary, or if an optionee makes any unauthorized disclosure of any of the
secrets or confidential information of the Company or any of its subsidiaries,
induces any client or customer of the Company or any of its subsidiaries to
break any contract with the Company or the subsidiary or induces any principal
for whom the Company or any of its subsidiaries acts as agent to terminate such
<PAGE> 6
agency relations, or engages in any conduct which constitutes unfair competition
with the Company or any of its subsidiaries, or if an optionee is removed from
the Board or from any office of the Company or any of its subsidiaries by any
regulatory agency, neither the optionee nor the optionee's estate shall be
entitled to exercise any option with respect to any shares whatsoever. For the
purpose of this paragraph, termination of director status shall be deemed to
occur when the Company dispatches notice or advice to the optionee that the
optionee's status as a director of the Company or any of its subsidiaries is
terminated and not at the time of optionee's receipt thereof.
iv. Other Reasons. If an optionee's status as a
director is terminated for any reason other than those mentioned above under
"Death," "Disability" and "Cause", the optionee may, within three (3) months
following such termination, exercise any vested option, provided the date of
exercise is in no event after the expiration of the term of the option.
e. Transferability Of Option. Each option shall be
transferable only by will or the laws of descent and distribution and shall be
exercisable during the optionee's lifetime only by the optionee.
f. Other Terms And Conditions. Options may also contain
such other provisions which shall not be inconsistent with any of the foregoing
terms as the Board shall deem appropriate. No option, however, nor anything
contained in the Plan, shall confer upon any optionee any right to continue in
the status as a director of the Company or any of its subsidiaries, nor limit in
any way the right of the Company or a subsidiary to terminate an optionee's
status as one of its directors at any time.
g. Rights As A Shareholder. The optionee shall have no
rights as a shareholder with respect to any Shares until the date of issuance of
a stock certificate for such Shares. No adjustment shall be made for dividends
or other rights for which the record date is prior to the date of such issuance,
except as provided in Paragraph 6 hereof.
h. Withholding. The Company shall have the right upon the
grant or exercise of an option or the sale or other disposition of Shares
acquired by exercise of an option to deduct any sums required to be withheld
under federal, state or local tax laws or regulations. The Company may condition
the issuance of Shares upon exercise of any option upon the payment by optionee
of any sums required to be withheld under applicable laws or regulations. The
Company has no duty to advise any optionee of the existence of any tax or any
amounts which may be withheld.
<PAGE> 7
8. Adjustment Of And Changes In The Shares.
a. Stock Split Or Recapitalization. In the event the shares
of the Company as presently constituted shall be changed into or exchanged for a
different number or kind of shares of stock or other securities of the Company
or of another corporation (whether by reason of reorganization, merger,
consolidation, recapitalization, reclassification, split-up, combination of
shares or otherwise), or if the number of shares of common stock of the Company
shall be increased through the payment of a stock dividend or through a stock
split, there shall be substituted for or added to each share of common stock of
the Company theretofore appropriated or thereafter subject or which may become
subject to an option under the Plan, the number and kind of shares of stock or
other securities into which each outstanding share of common stock of the
Company shall be so changed, or for which each share shall be exchanged, or to
which each such share shall be entitled, as the case may be. In addition, the
Board shall make appropriate adjustment in the number and kind of shares as to
which outstanding options, or portions thereof then unexercised, shall be
exercisable, so that any optionee's proportionate interest in the Company by
reason of his rights under unexercised portions of such options shall be
maintained as before the occurrence of such event. Such adjustment in
outstanding options shall be made without change in the total price of the
unexercised portion of the option and with a corresponding adjustment in the
option price per share.
b. Merger Or Consolidation. In the event of a merger or
consolidation of the Company with any other corporation in which the Company is
not the surviving corporation and the surviving corporation does not assume the
obligations of the Company under the Plan, then upon the execution by the
Company of an agreement providing for such merger or consolidation, all options
outstanding hereunder shall be automatically accelerated and may be exercised by
the respective optionee in the manner set forth in the remainder of this
subparagraph. Each optionee shall have not less than twenty (20) days from and
after the execution by the Company of an agreement providing for such merger or
consolidation to exercise any or all of the options outstanding hereunder which
such optionee is eligible to exercise or which have been accelerated pursuant to
the first sentence of this paragraph, unless such transaction is scheduled to
close within less than twenty (20) days from the execution of such agreement, in
which case each optionee shall have until three (3) days prior to the scheduled
closing date to exercise his or her options, but in no event less than ten (10)
days. Any such option not exercised within such period shall lapse. In the event
such merger or consolidation shall fail to close, the options outstanding
hereunder shall not be terminated or accelerated but shall continue in
accordance with the terms of the Plan and the respective agreements.
<PAGE> 8
c. No Fractional Shares. No right to purchase fractional
Shares shall result from any adjustment in options pursuant to this Paragraph 6.
In case of any such adjustment, the Shares subject to the option shall be
rounded down to the nearest whole Share. Notice of any adjustment shall be given
by the Company to each holder of an option which was in fact so adjusted, and
such adjustment (whether or not such notice is given) shall be effective and
binding for all purposes of the Plan.
d. Determination By Board. To the extent the foregoing
adjustments relate to stock or securities of the Company, such adjustments shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive.
e. No Additional Rights. Except as expressly provided in
this Paragraph 6, an optionee shall have no rights by reason of any of the
following events: (i) subdivision or consolidation of shares of stock of any
class; (ii) payment of any stock dividend; (iii) any other increase or decrease
in the number of shares of stock of any class; (iv) any dissolution,
liquidation, merger, consolidation, spin-off of assets or stock of another
corporation. Any issue by the Company of shares of stock of any class, or
securities convertible into shares of any class, shall not affect the number or
price shares of common stock subject to the option, and no adjustment by reason
thereof shall be made. The grant of an option pursuant to the Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate, or sell or
transfer all or any part of its business or assets.
9. Listing or Qualification Of Shares. All options granted under
the Plan are subject to the requirement that if at any time the Company shall
determine in its discretion that the listing or qualification of the Shares
subject thereto on any securities exchange or under any applicable law, or the
consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of or in connection with the issuance of Shares under
the option, the option may not be exercised in while or in part unless such
listing, qualification, consent or approval shall have been effected or obtained
free or any condition not acceptable to the Company; and the Company shall be
relieved from any liability for failure to issue and sell Shares to satisfy such
options pending the time when such authority is obtainable in accordance with
foregoing.
10. Binding Effect Of Conditions. The conditions and stipulations
contained herein or in any stock option agreement executed pursuant to the Plan
shall be and constitute a covenant running with all of the Shares acquired by
the optionee pursuant to
<PAGE> 9
this Plan, directly or indirectly, whether such Shares have been issued or not,
and those Shares owned by the optionee shall not be sold, assigned or
transferred by any person save and except in accordance with the terms and
conditions herein provided, and the optionee shall agree to sue the optionee's
best efforts to cause the officers of the Company to refuse to record on the
books of the Company any assignment or transfer made or attempted to be made
except as provided in the Plan and to cause said officer to refuse to cancel old
certificates or to issue or deliver new certificates therefor when the pursuant
or assignee has acquired certificates or the Shares represented thereby, except
strictly in accordance with the provisions of the Plan.
11. Amendment And Termination Of The Plan. The Board of Directors
shall have complete power and authority to terminate or amend the Plan;
provided, however, that the Plan may not be amended more often than once every
six months and the Board of Directors or the Board shall not, without the
approval of the stockholders of the Company, (a) increase the maximum number of
shares for which options may be granted under the Plan; (b) change the
computation as to minimum option prices set forth in Paragraph 5.b; (c) extend
the period during which options may be granted or exercised; or (d) amend the
requirements as to the Participants eligible to receive options or the manner of
determining automatic option grants. Except as provided in Paragraph 6, no
termination, modification or amendment of the Plan may, without consent of the
directors to whom such option shall theretofore have been granted, adversely
affect the rights of such director under such option. Unless the Plan shall have
been terminated by action of the Board of Directors prior thereto, it shall
terminate on the last day of February, 2004.
12. Effectiveness Of The Plan. The Plan shall become effective
upon the earlier of the adoption by the Board of Directors or approval by the
affirmative vote of the holders of a majority of the voting stock of the Company
represented at a duly called meeting of stockholders at which a quorum is
present, which approval must occur within one (1) year of the adoption date. The
exercise of any options granted pursuant to the Plan shall be conditioned upon
the registration of the Shares with the Securities and Exchange Commission and
qualification of the offer and sale of the Shares pursuant to Plan with the
Commissioner of Corporations of the State of California, unless in the opinion
of counsel to the company such registration or qualification is not necessary.
13. Privileges Of Stock Ownership; Securities Law Compliance;
Notice Of Sale. No optionee shall be entitled to the privileges of stock
ownership as to any Shares not actually issued and delivered to the optionee.
Optionees shall be entitled to such financial information concerning the Company
as may be made available to stockholders of the Company from time to time. No
<PAGE> 10
Shares shall be purchased upon the exercise of any option unless and until any
then applicable requirements of any regulatory agencies having jurisdiction and
of any exchanges upon which the common stock of the Company may be listed shall
have been fully complied with. The Company shall diligently endeavor to comply
with all applicable securities laws before any options are granted under the
Plan and before any Shares are issued pursuant to the exercise of such options.
The optionee shall give the Company notice of any sale or other disposition of
any such Shares not more than five (5) days after such sale or other
disposition.
14. Indemnification. To the extent permitted by applicable law in
effect from time to time, no member of the Board shall be liable for any action
or omission of any other member of the Board nor for any act or omission on the
member's own part, excepting only the member's own willful misconduct or gross
negligence. The Company shall pay expenses incurred by, and satisfy a judgment
or fine rendered or levied against, a present or former director in any action
against such person (whether or not the company is joined as a party defendant)
to impose a liability or penalty on such person for an act alleged to have been
committed by such person while a director arising with respect to the Plan or
administration thereof or out of membership on the Board, or all or any
combination thereof; provided that the director was acting in good faith, within
what such director reasonably believed to have been within the scope of his or
her employment or authority and for a purpose which he or she reasonably
believed to be in the best interests of the Company or its stockholders.
Payments authorized hereunder include amounts paid and expenses incurred in
settling any such action or threatened action. This paragraph does not apply to
any action instituted or maintained in the right of the Company by a stockholder
or holder of a voting trust certificate representing shares of the Company. The
provisions of this action shall apply to the estate, executor, administrator,
heirs, legatees or devisees of a director, and the term "person" as used in this
paragraph shall include the estate, executor, administrator, heirs, legatees or
devisees of such person.
IN WITNESS WHEREOF, the Company has caused this 1994 Directors Stock
option Plan to be executed and adopted this 16 day of March, 1994, by its
authorized representatives.
WORTH CORPORATION
By /s/ THOMAS M. DELITTO
---------------------------------------
THOMAS M. DELITTO
President
<PAGE> 1
KRAUSE'S FURNITURE, INC.
1990 EMPLOYEES STOCK OPTION PLAN
1. Purpose. This 1990 Employees Stock Option Plan (the "Plan") is an
amendment and restatement of the Worth Corporation 1988 Incentive Stock Option
Plan. The Plan is intended to encourage ownership of Common Stock of Krause's
Furniture, Inc., a Delaware corporation which is the successor in interest to
Worth Corporation, a Nevada corporation, by key employees of the Company and
its subsidiaries (collectively, the "Company"), and to provide incentives for
them to exert maximum efforts for its success.
2. Incentive and Non-Qualified Stock Options. Two types of options
(referred to herein as "options" without distinction between such two types)
may be granted under the Plan: options intended to qualify as incentive stock
options ("incentive stock Options") under Paragraph 422A of the Internal
Revenue Code of 1986, as amended, and any successor statutes ("Code"); and
other options not specifically authorized or qualified for favorable income tax
treatment by the Code ("non-qualified stock options").
3. Administration. The following provisions shall govern the
administration of the Plan:
a. Administration. The Plan shall be administered by the Board of
Directors, a majority of which shall be "disinterested persons" as defined in
Rule 16b-3 promulgated by the Securities and Exchange Commission, as amended
from time to time, who are not eligible to participate in the Plan, or a Stock
Option Committee composed of not less than three (3) directors, all of whom
shall be disinterested persons who are not eligible to participate in the Plan
(the Board and any such committee is referred to hereinafter as the
"Committee", except where the context requires otherwise). The Committee shall
be authorized and directed to adopt such rules and regulations for implementing
the Plan so as to satisfy the requirements for exemption under Rule 16b-3. The
Board of Directors may from time to time remove members from or add members to
the Committee. Vacancies on the Committee, however caused, shall be filled by
the Board of Directors. The Board of Directors shall designate a Chairman of
the Committee from among the Committee members. Acts of the Committee taken at
a duly constituted meeting, or approved in writing by a majority of the members
of the Committee shall be the valid acts of the Committee.
b. Powers. The Company shall effect the grant of options under the
Plan by execution of written stock option agreements in such form as shall be
approved by the Committee. Subject to the express terms and conditions of the
Plan and the terms of any option outstanding under the Plan, the Committee
1
<PAGE> 2
shall have full power to construe the Plan and the terms of any option granted
under the Plan, to prescribe, amend and rescind rules and regulations relating
to the Plan or such options and to make all other determinations necessary or
advisable for the administration of the Plan, including, without limitation,
the power to: (i) determine which persons meet the requirements of Paragraph 4
hereof for selection as participants in the Plan (a "Participant"); (ii)
determine to whom of the eligible persons, if any, options shall be granted
under the Plan; (iii) establish the terms and conditions required or permitted
to be included in every option agreement or any amendments thereto; (iv)
specify the number of shares to be covered by each option; (v) determine and
incorporate such terms and provisions, as well as amendments thereto, as shall
be required in the judgment of the Committee, so as to provide for or conform
such option to any change in any law, regulation, ruling or interpretation
applicable thereto; and (vi) make all other determinations deemed necessary or
advisable for administering the Plan. The determination on the foregoing
matters by the Committee shall be conclusive.
4. Participants. Participants in the Plan shall be those officers and key
employees of the Company who at the time the option is granted do not own stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any of its parent or subsidiary corporations, and to
whom options may be granted from time to time. In the sole discretion of the
Committee, officers and key employees who own stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or any
of its parent or subsidiary corporations, shall be eligible to participate
provided any incentive stock option granted to such more than 10% shareholder
satisfies the restrictions regarding option price and duration set forth in
Paragraphs 6.a and 6.b of the Plan.
5. The Shares. The shares of stock subject to options authorized to be
granted under the Plan shall consist of Two Hundred Fifty Thousand (250,000)
shares of $.001 par value Common Stock of the Company, as adjusted (the
"Shares") or the number and kind of shares of stock or other securities which
shall be substituted for such shares or to which such shares shall be adjusted
as provided in Paragraph 7, including shares and outstanding options previously
issued under the Worth Corporation 1988 Incentive Stock Option Plan prior to
this amendment and restatement. The Shares subject to the Plan may be set aside
out of the authorized but unissued shares of Common Stock of the Company not
reserved for any other purpose or out of shares of Common Stock subject to an
option which, for any reason, terminates unexercised as to the Shares.
6. Grant, Terms and Conditions Of Options. Options may be granted at any
time prior to the termination of the Plan to
2
<PAGE> 3
officers and other key employees of the Company who, in the judgment of the
Committee, contribute to the successful conduct of the operation of the Company
through their judgment, interest, ability and special efforts; provided,
however, that (a) for incentive stock options granted under the Plan prior to
1987, the aggregate fair market value (determined as of the date the option is
granted) of the Shares for which any one employee may be granted incentive
stock options in any calendar year (under all stock option plans of the Company
and under any plan of any parent or subsidiary of the Company) shall not exceed
$100,000 plus any unused limit carryover to such year as defined and in the
manner provided in Paragraph 422A of the Code, (b) for incentive stock options
granted after 1986, the aggregate fair market value (determined as of the date
the option is granted) of the stock with respect to which incentive stock
options are exercisable for the first time by an optionee during any calendar
year (under all incentive stock option plans of the Company and any parent or
subsidiary corporations) shall not exceed $100,000, and (c) except in the case
of termination by death or disability, as set forth in Paragraph 6.d below, the
granted option must be exercised by the optionee no later than three (3) months
after any termination of office or employment with the Company, and said office
or employment must have been continuous since the granting of the option.
In addition, options granted pursuant to the Plan shall be subject to
the following terms and conditions:
a. Option Price. The purchase price under each option shall be
not less than one hundred percent (100%) of the fair market value of the Shares
subject thereto on the date the option is granted. In the case of an Incentive
stock option granted to an employee who owns stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or any
of its parent or subsidiary corporation, the option price shall not be less
than 110% of the fair market value of the Shares of the Common Stock of the
Company on the date the option is granted. For purposes of the Plan, the "fair
market value" of any Share of Common Stock of the Company at any date shall be
(i) if the Common Stock is listed on an established stock exchange or
exchanges, the last reported sale price per share on the day prior to such date
on the principal exchange on which it is traded, or if no sale was made on such
day on such principal exchange, at the closing reported bid price on such day
on such exchange, or (ii) if the Common Stock is not then listed on an
exchange, the average of the closing bid and asked prices per share for the
Common Stock in the over-the-counter market as quoted on NASDAQ on the day
prior to such date, or (iii) if the Common Stock is not then listed on an
exchange or quoted on NASDAQ, an amount determined in good faith by the
Committee.
3
<PAGE> 4
b. Duration and Exercise of Options.
(i) Duration. Each option shall vest and shall be exercisable in
such manner and at such time up to but not exceeding ten (10) years from the
date the option is granted as the Committee shall determine in it sole
discretion. In the case of an incentive stock option granted to an employee
who owns stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company or any of its parent or subsidiary
corporations, the maximum term set forth above shall not be more than five
years after the date the option is granted. No incentive stock option granted
under the Plan prior to 1987 shall be exercisable by any optionee while there
is outstanding (within the meaning of Paragraph 422A of the Code) any
previously granted incentive stock option to such optionee to purchase stock
of the optionee's employer or in a corporation which (at the time of the
granting of the later option) is a parent or subsidiary corporation of the
optionee's employer, or in a predecessor corporation of any such corporations.
The termination of the Plan shall not alter the maximum duration, the vesting
provisions, or any term or condition of any option granted prior to the
termination of the Plan.
(ii) Manner of Payment. To the extent the right to purchase Shares
has vested under a Participant's stock option agreement, options may be
exercised from time to time by delivering payment in full at the Option Price
for the number of Shares being purchased by either cash or certified check,
plus the amount of any tax required to be withheld by the Company or any parent
or subsidiary corporation as a result of the exercise of an option. At the
discretion of the Committee, upon such terms as the Committee shall approve,
optionee may pay all or a portion of the purchase price for the number of
Shares being purchased, by tendering to the Company, shares of the Company's
Common Stock owned by the optionee, duly endorsed for transfer to the Company,
with a fair market value (determined under Paragraph 6.a hereof) on the date of
delivery equal to the aggregate purchase price of the shares with respect to
which such option or portion is thereby exercised. Notwithstanding the
foregoing, the Company may extend and maintain, or arrange for the extension
and maintenance of, credit to the optionee to finance the optionee's purchase
of Shares pursuant to the exercise of any option, on such terms as may be
approved by the Committee, subject to applicable regulations of the Federal
Reserve Board and any other laws or regulations in effect at the time such
credit is extended. The optionee shall make any arrangements required by the
Company to ensure that there is available for payment the amount of tax
required to be withheld by the Company or any parent of subsidiary corporation
as a result of either the grant or exercise of an option or any sale or other
disposition of Shares acquired by exercise of an option.
4
<PAGE> 5
(iii) Manner of Exercise. The option price shall be accompanied
by written notice to the Secretary of the Company identifying the option or
part thereof being exercised and specifying the number of shares tax which
payment is being tendered. The Company shall deliver to the optionee, which
delivery shall be not less than fifteen (15) days and not more than thirty (30)
days after the giving of such notice, without transfer nor issue tax to the
optionee (or other person entitled to exercise the option) at the principal
office of the Company or such other place as shall be mutually acceptable, a
certificate or certificates for such Shares dated the date the options were
validly exercised provided, however, that the time of such delivery may be
postponed by the Company for such period as may be required for it with
reasonable diligence to comply with any requirements of law.
c. Disposition of Shares. Each option shall provide that no
disposition of the share - obtained by exercise shall be made within two (2)
years from the date of the grant of the option or within one (1) year after the
transfer of such shares to the optionee.
d. Termination of Employment or Officer Status. Upon the termination
of an optionee's status as an employee or officer of the Company, his or her
rights to exercise an option then held shall be only as follows:
(i) Disability. If an optionee's employment or status as an
officer is terminated by disability, such optionee or such optionee's qualified
representative (in the event of the optionee's mental disability) shall have the
right for a period of twelve (12) months following the date of such disability
termination to exercise such option, provided the actual date of exercise is in
no event after the expiration of the term of the option. For purposes of this
Plan disability shall be defined by Paragraph 22(e)(3) of the Code. Paragraph
22(e)(3) defines "permanent and total disability" as follows: An individual is
permanently and totally disabled if he is unable to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or can
be expected to last for a continuous period of not less than 12 months. An
individual shall not be considered to be permanently - and totally disabled
unless he furnished proof of the existence thereof in such form and manner, and
at such times, as the Secretary may require.
(ii) Death. If an optionee shall die (1) while an officer or
employee of the Company, or (2) within three (3) months after termination of
employment or officer status except for cause, the optionee's estate shall have
the right for a
5
<PAGE> 6
period of twelve (12) months following the date of death to exercise the option
to the extent the optionee was entitled to exercise the option on the date of
death, provided the actual date of exercise is in no event after the expiration
of the term of the option. Any interruption in continuous full-time employment
or continuous officer status with the Company, its parent or any subsidiary
shall constitute termination of the same under this Plan even if the optionee
is re-employed after such interruption; provided, however, that a leave duly
approved by the Company or in accordance with law shall not constitute an
interruption hereunder. An optionee's "estate" shall mean the optionee's legal
representative or any person who acquires the right to exercise an option by
reason of the optionee's death.
(iii) Cause. If an employee or officer is determined by the Board of
Directors to have committed an act of embezzlement, fraud, dishonesty, breach of
fiduciary duty to the Company, or to have deliberately disregarded the rules of
the Company which resulted in loss, damage or injury to the Company, or if an
optionee makes any unauthorized disclosure of any of the secrets or confidential
information of the Company, induces any client or customer of the Company to
break any contract with the Company or induces any principal for whom the
Company acts as agent to terminate such agency relations, or engages in any
Conduct which constitute unfair competition with the Company, or if after
optionee is removed from any office of the Company by any regulatory agency,
neither the optionee nor the optionee's estate shall be entitled to exercise any
option with respect to any shares whatsoever, whether after termination of
employment or officer status, the optionee may receive payment from the Company
for vacation pay, for services rendered prior to termination, for services for
the day on which termination occurred, for salary in lieu of notice, or for
other benefits. For the purpose of this paragraph, termination of employment or
officer status shall be deemed to occur when the Company dispatches notice or
advice to the optionee that the optionee's employment or status as an officer is
terminated and not at the time of optionee's receipt thereof.
(iv) Other Reasons. If an optionee's employment or status as an
officer is terminated for any reason other than those mentioned above under
"Death," "Disability" and "Cause", the optionee may, within three (3) months
following such termination, exercise any vested option, provided the date of
exercise is in no event after the expiration of the term of the option.
e. Transferability of Option. Each option shall be transferable only by
will or the laws of descent and distribution and shall be exercisable during
the optionee's lifetime only by the optionee.
6
<PAGE> 7
f. Other Terms and Conditions. Options may also contain such other
provisions, which shall not be inconsistent with any of the foregoing terms, as
the Committee shall deem appropriate. No option, however, nor anything contained
in the Plan, shall confer upon any optionee any right to continue in the employ
or in the status as an officer of the Company, nor limit in any way the right of
the Company to terminate an optionee's employment or status as an officer at any
time.
g. Use of Proceeds from Stock. Proceeds from the sale of shares
pursuant to the exercise of options granted under the Plan shall constitute
general funds of the Company.
h. Rights as a Shareholder. The optionee shall have no rights as a
shareholder with respect to any shares until the date of issuance of a stock
certificate for such shares. No adjustment shall be made for dividends or other
rights for which the record date is prior to the date of such issuance, except
as provided in Paragraph 7 hereof.
i. Withholding. The Company shall have the right upon the grant or
exercise of an option or the sale or other disposition of shares acquired by
exercise of an option to deduct any sums required to be withheld under federal,
state or local tax laws or regulations. The Company may condition of shares
upon exercise of any option upon the payment by the optionee of any sums
required to be withheld under applicable laws or regulations. The Company has
no duty to advise any optionee of the existence of any tax or any amounts which
may be withheld.
7. Adjustment of and Changes in the Shares.
a. Stock Split or Recapitalization. In the event the shares of the
Company as presently constituted shall be changed into or exchanged for a
different number or kind of shares of stock or other securities of the Company
or of another corporation (whether by reason of reorganization, merger,
consolidation, recapitalization, reclassification, split-up, combination of
shares or otherwise), or if the number of shares of Common Stock of the Company
shall be increased through the payment of a stock dividend or through a stock
split, there shall be substituted for or added to each share of Common Stock of
the Company theretofore appropriated or thereafter subject or which may become
subject to, an option under the Plan, the number and kind of shares of stock or
other securities into which each outstanding share of Common Stock of the
Company shall be so changed, or for which each share shall be so changed, or
for which each share shall be exchanged, or to which each such share shall be
entitled, as the case may be. In addition, the Committee shall make appropriate
adjustment in the number and kind of shares as to which outstanding options, or
portions
7
<PAGE> 8
thereof then unexercised, shall be exercisable, so that any optionee's
proportionate interest in the Company by reason of his rights under unexercised
portions of such options shall be maintained as before the occurrence of such
event. Such adjustment in outstanding options shall be made without change in
the total price of the unexercised portion of the option and with a
corresponding adjustment in the option price per share.
b. Merger or Consolidation. In the event of a merger or
consolidation of the Company with any other corporation in which the Company is
not the surviving corporation and the surviving corporation does not assume the
obligations of the Company under the Plan, then upon the execution by the
Company of an agreement providing for such merger or consolidation, all options
outstanding hereunder shall be automatically accelerated and may be exercised by
the respective optionee as follows. Each optionee shall have not less than
twenty (20) days from and after the execution by the Company of an agreement
providing for such merger or consolidation to exercise any or all of the options
outstanding hereunder which such optionee is eligible to exercise or which have
been accelerated pursuant to the first sentence of this paragraph, unless such
transaction is scheduled to close within less than twenty (20) days from the
execution of such agreement, in which case each optionee shall have until three
(3) days prior to the scheduled closing date to exercise his or her options, but
in no event less than ten (10) days. Any such options not exercised within such
period shall lapse. In the event such merger or consolidation shall fail to
close, the options outstanding hereunder shall not be terminated or accelerated
but shall continue in accordance with the terms of the Plan and the respective
agreements.
c. No Fractional Shares. No right to purchase fractional
shares shall result from any adjustment in options pursuant to this Paragraph 7.
In case of any such adjustment, the shares subject to the option shall be
rounded down to the nearest whole share. Notice of any adjustment shall be given
by the Company to each holder of an option which was in fact so adjusted and
such adjustment (whether or not such notice is given) shall be effective and
binding for all purposes of the Plan.
d. Determination By Committee. To the extent the foregoing
adjustments relate to stock or securities of the Company, such adjustments shall
be made by the Committee, whose determination in that respect shall be final,
binding and conclusive.
e. No Additional Rights. Except as expressly provided in
this Paragraph 7, an optionee shall have no rights by reason of any of the
following events: (i) subdivision or consolidation of shares of stock of any
class; (ii) payment of
8
<PAGE> 9
any stock dividend; (iii) any other increase or decrease in the number of
shares of stock of any class; or (iv) any dissolution, liquidation, merger,
consolidation, spin-off of assets or stock of another corporation. Any issuance
by the Company of shares of stock of any class, or securities convertible into
shares of any class, shall not affect the number or price of shares of Common
Stock subject to the option, and no adjustment by reason thereof shall be made.
The grant of an option pursuant to the Plan shall not affect in any way the
right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge or
to consolidate or dissolve, liquidate or sell, or transfer all or any part of
its business or assets.
8. Listing or Qualification of Shares. All options granted under the
Plan are subject to the requirement that if at any time the Company shall
determine in its discretion that the listing or qualification of the Shares
subject thereto on any securities exchange or under any applicable law, or the
consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of or in connection with the issuance of Shares under
the option, the option may not be exercised in whole or in part unless such
listing, qualification, consent or approval shall have been effected or
obtained free or any condition not acceptable to the Company and the Company
shall be relieved from any liability for failure to issue and sell stock to
satisfy such options pending the time when such authority is obtainable in
accordance with the foregoing.
9. Binding Effect of Conditions. The conditions and stipulations herein
contained, or in any option granted pursuant to the Plan shall be, and
constitute, a covenant running with all of the Shares acquired by the optionee
pursuant to this Plan, directly or indirectly, whether the same have been
issued or not, and those Shares owned by the optionee shall not be sold,
assigned or transferred by any person save and except in accordance with the
terms and conditions herein provided, and the optionee shall agree to use the
optionee's best efforts to cause the officers of the Company to refuse to
record on the books of the Company any assignment or transfer made or attempted
to be made except as provided in the Plan and to cause said officer to refuse
to cancel old certificates or to issue or deliver new certificates therefor
when the purchaser or assignee has acquired certificates or the Shares
represented thereby, except strictly in accordance with the provisions of the
Plan.
10. Amendment And Termination Of The Plan. The Board of Directors shall
have complete power and authority to terminate or amend the Plan; provided,
however, that the Board of Directors or the Committee shall not, without the
approval of the shareholders of the Company, (a) increase the maximum number of
shares for
9
<PAGE> 10
which options may be granted under the Plan; (b) change the computation as to
minimum option prices set forth in Paragraph 6.a; (c) extend the period during
which options may be granted or exercised; or (d) amend the requirements as to
the class of employees or officers eligible to receive options. Except as
provided in Paragraph 7, no termination, modification or amendment of the Plan
may, without the consent of an employee or officer to whom such option shall
theretofore have been granted, adversely affect the rights of such employee or
officer under such option. Unless the Plan shall have been terminated by
action of the Board of Directors prior thereto, it shall terminate on December
31, 1999.
11. Effectiveness of the Plan. This amendment and restatement of the Plan
shall become effective only upon adoption by the Board of Directors and
approval by the affirmative vote of a majority of the voting stock of the
Company represented at a duly called meeting of shareholders at which a quorum
is present, which approval must occur within one (1) year of the adoption date.
The exercise of any options granted pursuant to the Plan shall be conditioned
upon the registration of the Shares with the Securities and Exchange Commission
and qualification of the offer and sale of the Shares pursuant to Plan with the
Commissioner of Corporations of the State of California, unless in the opinion
of counsel of the Company such registration or qualification is not necessary.
12. Privileges of Stock Ownership; Securities Law Compliance; Notice of
Sale. No optionee shall be entitled to the privileges of stock ownership as to
any Shares not actually issued and delivered to the optionee. Optionees shall be
entitled to such financial information concerning the Company as may be made
available to shareholders of the Company from time to time. No Shares shall be
purchased upon the exercise of any option unless and until any then applicable
requirements of any regulatory agencies having jurisdiction and of any
exchanges upon which the Common Stock of the Company may be listed shall have
been fully complied with. The Company shall diligently endeavor to comply with
all applicable securities laws before any options are granted under the Plan
and before any Shares are issued pursuant to the exercise of such options. The
optionee shall give the Company notice of any sale or other disposition of any
such Shares not more than five (5) days after such sale or other disposition.
13. Indemnification. To the extent permitted by applicable law in effect
from time to time, no member of the Board of Directors or the Committee shall
be liable for any action or omission of any other member of the Board of
Directors or Committee nor for any act or omission on the member's own part,
excepting only the member's own willful misconduct or gross
10
<PAGE> 11
negligence. The Company shall pay expenses incurred by, and satisfy a judgment
or fine rendered or levies against, a present or former director or member of
the Committee in any action against such person (whether or not the Company is
joined as a party defendant) to impose a liability or penalty on such person
for an act alleged to have been committed by such person while a director or
member of the Committee arising with respect to the Plan or administration
thereof or out of membership on the Committee or by the Company, or all or any
combination of the preceding provided that the director or Committee member was
acting in good faith, within what such director or Committee member reasonably
believed to have been within the scope of his or her employment or authority
and for a purpose which he or she reasonably believed to be in the best
interests of the Company or its shareholders. Payments authorized hereunder
include amounts paid and expenses incurred in settling any such action or
threatened action. This paragraph does not apply to any action instituted or
maintained in the right of the Company by a shareholder or holder of a voting
trust certificate representing shares of the Company. The provisions of this
action shall apply to the estate, executor, administrator, heirs, legatees or
devisees of a director or Committee member, and the term "Person" as used in
this Paragraph shall include the estate, executor, administrator, heirs,
legatees or devisees of such person.
* * *
11
<PAGE> 1
EXHIBIT 10.14
AMENDMENT TO THE SUPPLEMENTAL
SECURITIES PURCHASE AGREEMENT
This agreement is made as of March 31, 1999 by and among Krauses's
Furniture, Inc., a Delaware corporation (the "Company"), General Electric
Capital Corporation, a New York corporation ("GECC"), and Japan Omnibus Ltd., an
international business incorporated in the British Virgin Islands ("JOL").
Whereas, the Company, GECC and JOL are parties to the Supplemental
Securities Purchase Agreement, dated as of August 14, 1997 (the "Supplemental
Purchase Agreement"), which provided for the purchase and sale of the New
Securities and amended and restated certain provisions of the Original Agreement
(all capitalized terms not defined herein shall have the meanings set forth in
the Supplemental Purchase Agreement).
Whereas, the parties hereto have agreed to amend and restate the
provisions of the Notes and to replace the Notes with amended notes in the same
initial principal amounts in the forms attached hereto as Exhibits A - E (the
"Amended Notes").
Whereas, the parties hereto have further agreed to amend certain
financial covenants contained in Section 6.2 of the Supplemental Purchase
Agreement.
Intending to be legally bound and in consideration of the mutual
covenants and obligations contained herein and in the Supplemental Purchase
Agreement, the parties agree as follows:
1. Any reference in the Supplemental Purchase Agreement to "Note" or
"Notes" shall mean an Amended Note or the Amended Notes.
2. Effective as of January 30, 1999, Section 6.2 Financial Covenants
shall be amended in its entirety to read as follows:
6.2. Financial Covenants. For purposes of this Section
6.2, "fiscal year" and "fiscal quarter" are both measured on the
basis of the fiscal year of the Company ending on the Sunday
closest to the last day of January of the succeeding calendar
year as determined by the 52/53 week retail fiscal year.1
(a) The Company will not permit its Consolidated Net Worth
at the end of any fiscal quarter to be less than the amount set forth below for
such fiscal quarter, provided that, upon any public or private offering of
capital stock of the Company for the Company's account, the amounts set forth
below for fiscal quarters subsequent to such offering shall be adjusted upward
by an amount equal to the net proceeds of any such offering multiplied by 0.9:
<TABLE>
<CAPTION>
Year Q1 Q2 Q3 Q4
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
1998 N/A N/A N/A 11.5 MM
1999 11.5 MM 11.5 MM 11.5 MM 13.0 MM
2000 14.5 MM 16.5 MM 19.0 MM 21.0 MM
2001 23.5 MM 26.0 MM 28.5 MM 31.0 MM
2002 34.0 MM 37.0 MM 40.0 MM N/A
</TABLE>
- ------------------------
1 E.g. Fiscal year 1999 is the twelve-month period ending 1/30/2000 and the
fiscal quarters of fiscal year 1999 are the quarterly periods ending 5/02/99,
8/01/99, 10/31/99 and 1/30/00.
43
<PAGE> 2
(b) The Company will not incur, create, assume or permit
to exist any Indebtedness at the end of any fiscal quarter if such Indebtedness
would result in a ratio of Consolidated Total Indebtedness to Consolidated Net
Worth of more than the amount for such fiscal quarter indicated set forth below:
<TABLE>
<CAPTION>
Year Q1 Q2 Q3 Q4
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
1999 2.75 2.75 2.75 2.45
2000 2.10 1.75 1.50 1.30
2001 1.10 1.00 1.00 1.00
2002 1.00 1.00 1.00 N/A
</TABLE>
(c) The Company will not permit its Fixed Charge Ratio at
the end of any fiscal quarter to be less than the amount set forth below for
such fiscal quarter:
<TABLE>
<CAPTION>
Year Q1 Q2 Q3 Q4
---- ------- ------- ------- -------
<S> <C> <C> <C> <C>
1998 N/A N/A N/A 0.85
1999 .95 1.05 1.15 1.20
2000 1.25 1.30 1.35 1.40
2001 1.45 1.45 1.45 1.45
2002 1.45 1.45 1.45 N/A
</TABLE>
(d) The Company and its Subsidiaries will not make capital
expenditures (net of any sale leasebacks incurred within such fiscal year) in
excess of the amounts set forth below for the fiscal years indicated:
<TABLE>
<S> <C>
1998 $ 7,600,000
1999 $10,000,000
2000 $ 9,000,000
2001 $ 8,000,000
20022 $ 4,000,000(2)
</TABLE>
Any amount not spent in any one fiscal year may be spent in a succeeding fiscal
year, subject to the Company's annual business plan.
- ----------------
(2) Applicable to the first two fiscal quarters of 2002.
44
<PAGE> 3
IN WITNESS WHEREOF, the Company, GECC and JOL have caused this Agreement
to be executed and delivered by their respective officers thereunto duly
authorized.
KRAUSE'S FURNITURE, INC.
By: /s/ ROBERT A. BURTON
-----------------------------------------------------------
Name: Robert A. Burton
Title: Executive Vice President and Chief Financial Officer
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ GEORGE L. HASBARGER, JR.
-----------------------------------------------------------
Name: George L. Hashbarger, Jr.
Title: Department Operations Manager
JAPAN OMNIBUS LTD.
By: JAMES R. HODGE
-----------------------------------------------------------
Name: James R. Hodge
Title: Portfolio Manager
45
<PAGE> 1
Exhibit 11
KRAUSE'S FURNITURE, INC.
COMPUTATION OF NET LOSS PER SHARE
(In thousands, except per share data)
(a)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------
January 31, February 1, February 2,
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Net loss $ (5,134) $ (7,480) $(13,389)
========= ========= ========
Weighted average number of
shares outstanding: 21,490 19,021 10,445
========= ========= ========
Basic and diluted loss per share $ (0.24) $ (0.39) $ (1.28)
========= ========= ========
</TABLE>
(a) Common stock equivalents are excluded from the calculation in loss years
since they are anti-dilutive.
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ----------------- ----------------------
<S> <C>
Krause's Custom Crafted Furniture Corp. California
(business operated under the names
"Krause's Custom Crafted Furniture Corp.", "Krause's Sofa Factory",
"Sofa Factory", and "Castro Convertibles")
KMC Enterprises, Inc. Delaware
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements File Nos. 33-81168 and 333-59317.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
April 21, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-81168 and Form S-8 No. 333-59317) of Krause's Furniture, Inc.
and in the related prospectuses of our report dated March 28, 1997, except for
Note 2, as to which the date is December 17, 1997, with respect to the
consolidated financial statements and schedule of Krause's Furniture, Inc.
included in this Annual Report (Form 10K) for the year ended January 31, 1999.
/s/ ERNST & YOUNG LLP
Orange County, California
April 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-02-1998
<PERIOD-END> JAN-31-1999
<CASH> 80
<SECURITIES> 0
<RECEIVABLES> 1,373
<ALLOWANCES> 180
<INVENTORY> 20,413
<CURRENT-ASSETS> 23,151
<PP&E> 19,320
<DEPRECIATION> 6,254
<TOTAL-ASSETS> 52,506
<CURRENT-LIABILITIES> 20,293
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 12,207
<TOTAL-LIABILITY-AND-EQUITY> 52,506
<SALES> 130,447
<TOTAL-REVENUES> 130,447
<CGS> 60,987
<TOTAL-COSTS> 60,987
<OTHER-EXPENSES> 71,572
<LOSS-PROVISION> 156
<INTEREST-EXPENSE> 2,584
<INCOME-PRETAX> (5,134)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,134)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,134)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
