<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission file number: 0-17868
KRAUSE'S FURNITURE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0310773
- ---------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) 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)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
As of December 1, 1999 the Registrant had 22,050,328 shares of common stock
outstanding.
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INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated balance sheet 3
- Consolidated statement of operations (unaudited) 4
- Consolidated statement of cash flows (unaudited) 5
- Notes to consolidated financial statements (unaudited) 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 14
Item 3. Market Risk 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
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PART I, ITEM 1
KRAUSE'S FURNITURE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
October 31,
1999 January 31,
(unaudited) 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 80 $ 80
Accounts receivable, net of allowance of $275 for doubtful accounts
($180 at January 31, 1999) 1,342 1,193
Inventories 24,385 20,413
Prepaid expenses 1,136 1,465
-------- --------
Total current assets 26,943 23,151
Property, equipment, and leasehold improvements, net 14,610 13,066
Goodwill, net 12,582 13,346
Leasehold interests, net 737 915
Other assets 2,459 2,028
-------- --------
$ 57,331 $ 52,506
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,707 $ 7,750
Accrued payroll and related expenses 1,977 2,502
Other accrued liabilities 4,272 3,849
Customer deposits 6,099 5,650
Notes payable 2,306 542
-------- --------
Total current liabilities 25,361 20,293
-------- --------
Long-term liabilities:
Notes payable 20,907 17,990
Other 2,087 1,994
-------- --------
Total long-term liabilities 22,994 19,984
-------- --------
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,
22,050,328 shares outstanding (21,984,428 at January 31, 1999) 22 22
Capital in excess of par value 60,892 59,171
Accumulated deficit (51,938) (46,964)
-------- --------
Total stockholders' equity 8,976 12,229
-------- --------
$ 57,331 $ 52,506
======== ========
</TABLE>
See accompanying notes.
3
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KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------- -----------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 35,770 $ 32,081 $ 108,800 $ 94,418
Cost of sales 16,050 14,525 49,582 44,446
-------- -------- --------- --------
Gross profit 19,720 17,556 59,218 49,972
Operating expenses:
Selling 17,876 15,170 52,444 44,676
General and administrative 2,805 2,311 8,050 7,029
Amortization of goodwill 255 255 765 765
-------- -------- --------- --------
20,936 17,736 61,259 52,470
-------- -------- --------- --------
Loss from operations (1,216) (180) (2,041) (2,498)
Interest expense (965) (666) (2,371) (1,897)
Other expense (341) (89) (562) (349)
-------- -------- --------- --------
Net loss $ (2,522) (935) (4,974) (4,744)
======== ======== ========= ========
Basic and diluted loss per share $ (.11) $ (.04) $ (.23) $ (.22)
======== ======== ========= ========
Number of shares used in computing loss per share 22,034 21,984 22,001 21,326
======== ======== ========= ========
</TABLE>
See accompanying notes.
4
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KRAUSE'S FURNITURE, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
----------------- ---------------
October 31, November 1,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,974) $ (4,744)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 2,470 2,184
Other non-cash charges 1,228 1,019
Change in assets and liabilities
Accounts receivable (149) 118
Inventories (3,972) (4,431)
Prepaid expenses and other assets (164) (605)
Accounts payable and other liabilities 2,948 103
Customer deposits 449 726
--------- ---------
Net cash used by operating activities (2,164) (5,630)
--------- ---------
Cash flows from investing activities:
Capital expenditures (3,387) (4,523)
--------- ---------
Net cash used by investing activities (3,387) (4,523)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 124,936 117,245
Principal payments on long-term borrowings (119,487) (115,165)
Net proceeds from issuance of common stock 102 7,267
--------- ---------
Net cash provided by financing activities 5,551 9,347
--------- ---------
Net increase (decrease) in cash 0 (806)
Cash and cash equivalents at beginning of period 80 916
--------- ---------
Cash and cash equivalents at end of period $ 80 $ 110
========= =========
Supplemental disclosures of cash flow information -
Cash paid during the period for interest $ 1,609 $ 1,258
Noncash investing and financing activities:
Recording of common stock purchase warrant $ 1,500 0
</TABLE>
See accompanying notes.
5
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KRAUSE'S FURNITURE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation.
The accompanying consolidated financial statements of Krause's
Furniture, Inc. (the "Company") and its wholly owned subsidiaries, including the
Company's principal subsidiary, Krause's Custom Crafted Furniture Corp.
("Krause's") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect all normal recurring adjustments
which are, in the opinion of management, necessary for a fair presentation for
the periods reported. Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules or
regulations, although management believes that the disclosures made are adequate
to make the information presented not misleading.
These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended January 31, 1999. The
results of operations for the thirty-nine weeks ended October 31, 1999 are not
necessarily indicative of results to be expected in future periods.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
periods. Actual results could differ from those estimates.
2. Inventories
Inventories are carried at the lower of cost or market using the
first-in, first-out method and are comprised of the following:
October 31, January 31,
1999 1999
----------- -----------
(in thousands)
Finished goods $18,006 $15,992
Work in progress 119 47
Raw materials 6,260 4,374
------- -------
$24,385 $20,413
======= =======
6
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3. Notes Payable
Notes payable consists of the following:
<TABLE>
<CAPTION>
October 31, January 31,
1999 1999
----------- -----------
(in thousands)
<S> <C> <C>
Secured revolving credit notes $ 12,758 $ 6,992
Subordinated notes payable to shareholders 12,001 12,001
Unamortized debt discount, net of
accumulated amortization of $2,052
($1,320 at January 31, 1999) (2,473) (1,705)
Other notes 927 1,244
-------- --------
23,213 18,532
Less current portion 2,306 542
-------- --------
$ 20,907 $ 17,990
======== ========
</TABLE>
The secured revolving credit notes were issued under a revolving credit
agreement, which was most recently amended as of August 23, 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 Revolving Credit Facility, at October 31, 1999, was
approximately $2,009,000. Substantially all of Krause's assets are pledged as
collateral for the loans which are guaranteed by the Company. Interest on the
loan is payable monthly at a margin ranging from .5% to 1.0% in excess of the
prime rate (8.25% at October 31, 1999) which margin varies depending on the
Company's performance.
Pursuant to the terms of the agreements related to the subordinated
notes 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 October 31, 1999, the Company and Krause's were not in compliance
with certain of the covenants contained in the agreements but, subsequent to
October 31, 1999, obtained a waiver and amendments with respect to such
covenants.
In conjunction with a financing concluded on August 14, 1997 with
certain shareholders, the Company issued a warrant to such shareholders 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. This warrant would be completely or
partially cancelled depending on the economic performance of the Company in
fiscal 1999. The Company has assessed the likelihood of vesting of this warrant
as probable, and as such, has reflected the estimated fair value of the warrant
of $1,500,000 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 remaining term of the subordinated notes.
7
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4. Net Loss Per Share
Net loss per share amounts were computed based on the weighted average
number of common shares outstanding during the periods reported. Common
equivalent shares are not included in the computation since such share
equivalents are antidilutive. There were no differences between basic and
diluted loss per share.
5. Stockholders' Equity
In August 1999, 65,900 warrants to purchase an equal number of shares
of the Company's common stock were exercised. As a result of this transaction,
Common Stock and Capital in Excess of Par Value increased by $65 and $102,079,
respectively.
8
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PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q and particularly the Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in this
report contain forward-looking statements within the meaning of the Private
Securities Reform Act of 1995. These statements include those related to
management's strategy for opening new stores, remodeling existing stores and
improving the Company's marketing approach, and those related to management's
expectation that the company will ultimately return to profitability. They also
include statements throughout the report using such forward-looking terminology
as "may," "will," "expect," "anticipate," "continue," "estimate," or the
negative of these terms or other comparable terminology. These statements
involve risks and uncertainties which may cause results to differ materially
from those set forth in these statements. Among other things, demand for and
acceptance of the Company's products could decrease; the retail environment and
the ability of the Company to execute its operating strategies could
deteriorate; the company's planned marketing and promotional campaigns may not
be successful; developer delays, weather and other conditions could slow the
opening of new stores; and competition from existing and new competitors could
increase. These risks and the other economic, competitive and other factors
noted elsewhere in this Form 10-Q and in filings recently made by the Company
with the Securities and Exchange Commission, including the Company's Form 10-K
and a Registration Statement on Form S-1, which became effective on March 30,
1998, constitute cautionary statements that identify risks and uncertainties
that could cause actual results to differ materially from those contained in the
forward-looking statements.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere herein.
The Company's management, which underwent a substantial restructuring
late in 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, adding new showrooms, closing underperforming 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
1996, are believed to have contributed significantly to improving the Company's
performance since 1996 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 will have sufficient sources of
financing to continue operations for the next 12 months. 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; for 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 capital 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,
9
<PAGE> 10
management plans to add approximately 18 additional showrooms (of which 12 have
been opened through October 31, 1999), at an aggregate cost of approximately
$3.5 million. In addition, current plans call for the closing of approximately
11 showrooms (of which 9 have been closed through October 31, 1999) in fiscal
1999. Management expects to fund such capital expenditures by internally
generated cash and by borrowings under the Company's Revolving Credit Facility.
During and previous to the quarter ended October 31, 1999, the Company
committed itself to a consulting agreement and capital lease that will enable it
to upgrade its management information systems infrastructure. Fiscal 1999
capital expenditures related to this project presently are estimated at $1.1
million and are not related to any Year 2000 issues.
As of October 31, 1999, the Company had cash and cash equivalents of
$80,000 and unused borrowing capacity under its revolving credit agreement of
approximately $2,009,000. Cash flow activity for the thirty-nine weeks ended
October 31, 1999 and November 1, 1998 is presented in the Consolidated Statement
of Cash Flows.
Cash Flow - Thirty-nine weeks ended October 31, 1999
During the thirty-nine weeks ended October 31, 1999, cash and cash
equivalents did not change. Operating activities used net cash of $2,164,000,
principally from a cash loss from operations of $1,276,000 and increases in
inventories, prepaid expenses and other assets, and accounts receivable of
$3,972,000, $164,000, and $149,000, respectively, offset by increases in
accounts payable and other liabilities and customer deposits of $2,948,000 and
$449,000 respectively. The increase in inventory is due to a combination of
higher levels of finished goods required in part by the addition of new
showrooms and the Company's decision to increase the amount of raw materials in
order to meet forecasted production levels. Investing activities during the
period included capital expenditures of $3,387,000 which was used primarily to
open 12 new showrooms and to fund capital requirements of the ongoing upgrade of
the management information systems infrastructure. Financing activities during
the period consisted of net borrowings of $5,766,000 on the Company's Revolving
Credit Facility, proceeds of $102,000 from the exercise of certain common stock
warrants, offset by $317,000 of principal payments on other indebtedness.
Management plans to continue its strategy of adding new showrooms. The Company
expects to fund the related expenditures from internally generated cash and from
borrowings under the Company's Revolving Credit Facility. The Company expects to
incur costs of approximately $3.5 million related to this program in fiscal
1999.
Cash Flow - Thirty-nine weeks ended November 1, 1998
During the thirty-nine weeks ended November 1, 1998, cash and cash
equivalents decreased by $806,000. Operating activities used net cash of
$5,630,000, principally from a cash loss from operations of $1,541,000, and
increases in inventories and prepaid expenses of $4,431,000 and $605,000,
respectively, offset in part by an increase in accounts payable and other
liabilities of $103,000, an increase in customer deposits of $726,000, and a
decrease in accounts receivable of $118,000. The increase in inventory is
principally due to the Company's decision to expand its accessories business and
higher levels of finished goods required in part by the addition of five stores.
Investing activities during the period included capital expenditures of
$4,523,000, nearly all of which was used to remodel certain retail showrooms and
open five new showrooms. Financing activities during the period consisted of the
sale of 2,963,889 shares of common stock, the proceeds from which totaled
$8,892,000 less expenses of $1,625,000 and net borrowings of $2,080,000,
primarily under the Company's revolving credit facility.
10
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RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of net sales
to certain items included in the Consolidated Statement of Operations:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------- -----------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 44.9 45.3 45.6 47.1
----- ----- ----- -----
Gross profit 55.1 54.7 54.4 52.9
Operating expenses:
Selling 50.0 47.3 48.2 47.3
General and administrative 7.8 7.2 7.4 7.4
Amortization of goodwill 0.7 0.8 0.7 0.8
----- ----- ----- -----
58.5 55.3 56.3 55.5
----- ----- ----- -----
Loss from operations (3.4) (0.6) (1.9) (2.6)
Interest expense (2.7) (2.1) (2.2) (2.0)
Other income (expense) (1.0) (0.2) (0.5) (0.4)
----- ----- ----- -----
Net loss (7.1)% (2.9)% (4.6)% (5.0)%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
---------------------------- -------------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Store Data
Stores open at beginning of period 88 84 88 81
Stores opened during period 6 1 12 5
Stores closed during period 3 -- 9 1
---- ---- ------ ------
Stores open at end of period 91 85 91 85
==== ==== ====== ======
Average sales per showroom (1) $397 $380 $1,214 $1,130
Comparable store sales increase (2) 4.3% 3.1% 7.6% 7.3%
</TABLE>
- ------------------
(1) Based upon the weighted average number of stores open during the period
indicated.
(2) Comparable store sales are calculated by excluding the net sales of any
store for any month of the period if the store was not open during the
same month of the prior period. Also, a store opened at any time during
the month is deemed to have been open for the entire month.
11
<PAGE> 12
Thirteen weeks ended October 31, 1999 compared to Thirteen weeks ended
November 1, 1998
Net Sales. Net sales for the third quarter of fiscal 1999 were
$35,770,000 compared to $32,081,000 for the comparable quarter of fiscal 1998.
The increase in sales was due principally to management's continuing strategy of
opening new showrooms in existing markets, developing new products, increasing
the promotion and sale of accessories, and revamping the marketing and sales
promotion program. The overall $3,689,000 increase in net sales is attributable
to a $1,311,000 or 4.3%, increase in same-store sales and a $3,893,000 increase
from new stores; such increases were offset in part by a decrease of $1,515,000
from closed stores. Sales were adversely affected by the loss of sales from
three stores that were operating in the third quarter of the last year but were
closed this year and not replaced.
Gross Profit. Gross profit was 55.1% of net sales in the third quarter
of fiscal 1999, as compared to 54.7% of net sales in the third quarter of fiscal
1998. The increase in gross profit was primarily the result of several factors
including improved efficiency in factory operations, reduced discounting, higher
retail prices, negotiated reductions in raw material prices and new product
acceptance by customers.
Selling Expenses. Selling expenses were $17,876,000 or 50.0% of sales
in the third quarter of fiscal 1999 as compared to $15,170,000 or 47.3% of sales
in the same period last year. The increase of $2,706,000 in selling expenses was
primarily due in large part to higher variable expenses related to higher sales
volume and higher occupancy costs related to operating six net new stores in the
current quarter as compared to the same period in the prior fiscal year
General and Administrative Expenses. General and administrative
expenses increased as a percentage of sales from 7.2% for the quarter ended
November 1, 1998 to 7.8% for the quarter ended October 31, 1999, primarily as a
result of higher payroll costs.
Interest Expense. Interest expense, including amortization of debt
discounts and deferred financing costs, for the quarter ended October 31, 1999
increased by $299,000 over the same quarter in the prior fiscal year. Of this
amount, $184,000 was related to amortization of a debt discount attributable to
a performance warrant recorded in the third quarter of fiscal 1999 (see Note 3),
and the balance of the increase was due primarily to higher average debt
outstanding and higher interest rates on revolving debt. Amortization of debt
discounts and deferred financing costs for the third quarter of fiscal 1999 and
1998, totaled $377,000 and $201,000, respectively.
Income Taxes. The Company paid no income taxes and no income tax
benefit was recorded for either the third quarter of fiscal 1999 or fiscal 1998
due to uncertainties regarding the realization of deferred tax assets available.
Net Loss. As a result of the above factors, the net loss was $2,522,000
for the quarter ended October 31, 1999 as compared to a loss of $935,000 in the
same period of the prior fiscal year. Net loss per share in the 1999 quarter was
$0.11 versus a loss of $0.04 in the same period of fiscal 1998.
Thirty-nine Weeks Ended October 31, 1999 Compared to Thirty-nine Weeks
Ended November 1, 1998
Net Sales. Net sales for the thirty-nine weeks ended October 31, 1999
were $108,800,000, which was a increase of $14,382,000 or 15.2% over the
comparable period of fiscal 1998.
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The increase in sales was due principally to management's continuing strategy of
opening new showrooms in existing markets, developing new products, increasing
the promotion and sale of accessories, and revamping the marketing and sales
promotion program. The overall increase in net sales is attributable to a
$6,887,000, or 7.6%, increase in same-store sales and a $9,902,000 increase from
six new stores; such increases were offset in part by a decrease of $2,407,000
from closed stores.
Gross Profit. Gross profit was 54.4% of net sales for the thirty-nine
weeks ended October 31, 1999 as compared to 52.9% of net sales in the comparable
period of fiscal 1998. The increase in gross profit was primarily the result of
several factors including improved efficiency in factory operations, reduced
discounting, higher retail prices, negotiated reductions in raw material prices
and new product acceptance by customers offset in part by liquidation of
discontinued stock in the second quarter of fiscal 1999.
Selling Expenses. Selling expenses were $52,444,000 or 48.2% of sales
for the thirty-nine weeks ended October 31, 1999 as compared to $44,676,000 or
47.3% of sales in the same period of fiscal 1998. The increase of $7,768,000 in
selling expenses was primarily due to a combination of higher sales volume and
the opening of six net new showrooms between November 1, 1998 and October 31,
1999.
General and Administrative Expenses. General and administrative
expenses for the thirty-nine weeks ended October 31, 1999 increased by
$1,021,000 as compared with the same period in the prior fiscal year primarily
as a result of higher payroll costs.
Interest Expense. Interest expense, including amortization of debt
discounts and deferred financing costs, for the thirty-nine weeks ended October
31, 1999 increased by $474,000 over the same period in the prior fiscal year. Of
this amount, $184,000 was related to amortization of a debt discount
attributable to a performance warrant recorded in the third quarter of fiscal
1999 (see Note 3) and the balance of the increase was due to higher average debt
outstanding and higher interest rates on revolving debt. Amortization of debt
discounts and deferred financing costs, for the thirty-nine weeks ended October
31, 1999 and November 1, 1998, totaled $763,000 and $612,000, respectively.
Income Taxes. Due to uncertainties regarding the realization of
deferred tax assets, no tax benefits were recorded for either fiscal 1999 or
fiscal 1998.
Net Loss. As a result of the above factors, the net loss was $4,974,000
for the thirty-nine weeks ended October 31, 1999 as compared to a loss of
$4,744,000 in the same period of the prior fiscal year. Net loss per share in
the 1999 period was $0.23 based on 22,001,000 weighted average shares
outstanding. In the comparable 1998 period the net loss per share was $0.22
based on 21,326,000 shares outstanding.
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
13
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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
financials) 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.
All necessary upgrades were completed in the first quarter of fiscal 1999. The
Company has brought its IT systems into compliance without incurring material
costs. It has completed the remediation of business systems by redirecting its
existing internal programming resources, with costs expensed as incurred. The
Company's total costs for the effort was less than $10,000.
With regard to non-IT systems, the Company has completed its facilities
equipment compliance, including bank card terminals. These have been updated and
validated for Year 2000 compliance. Disruption of these services would have a
negligible impact on Company operations and remediation costs were less than
$5,000.
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 occurred. As a
result, the company is communicating with such entities to determine their state
of readiness. The Company has developed 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 continue to be refined through the end 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, customers and other
entities to bring their systems into compliance.
PART I, ITEM 3
Market Risk Exposure
There were no material changes in items affecting market risk. Refer to
the Company's Annual Report on Form 10-K for the year ended January 31, 1999 for
more detail.
14
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 in the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1999. There has been no
material change.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security-Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K filed during the quarter
ended October 31, 1999
(a) Exhibits
Exhibit
No. Description
------- -----------
10.1 Seventh Amendment to Loan and Security Agreement dated as of
August 23, 1999 by and between Congress Financial Corporation
(Western) and Krause's Custom Crafted Furniture Corp. and
Castro Convertible Corporation.
10.2 Amendment to the Supplemental Securities Purchase Agreement
among Krause's Furniture, Inc., General Electric Corporation
and Japan Omnibus Ltd., dated as of September 14, 1999.
27.1 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the
quarter covered by this report.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
KRAUSE'S FURNITURE, INC.
(Registrant)
Date: December 15, 1999 /s/ Philip M. Hawley
-----------------------------------
Philip M. Hawley
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: December 15, 1999 /s/ Robert A. Burton
-----------------------------------
Robert A. Burton
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
10.1 Seventh Amendment to Loan and Security Agreement dated as of
August 23, 1999 by and between Congress Financial Corporation
(Western) and Krause's Custom Crafted Furniture Corp. and
Castro Convertible Corporation.
10.2 Amendment to the Supplemental Securities Purchase Agreement
among Krause's Furniture, Inc., General Electric Corporation
and Japan Omnibus Ltd., dated as of September 14, 1999.
27.1 Financial Data Schedule (EDGAR version only)
<PAGE> 1
EXHIBIT 10.1
SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SEVENTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), dated as of August 23, 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, that certain Fifth Amendment to Loan and Security
Agreement dated as of December 11, 1997 and that certain Sixth Amendment to Loan
and Security Agreement dated as of March 15, 1999 (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 (i) temporarily increase the
advance rates set forth in Section 2.1(a) of the Loan Agreement during the
period commencing August 23, 1999 and ending January 21, 2000, (ii) delete
paragraph (c) of Section 2.1 to eliminate duplication with Section 2.4 of the
Loan Agreement, (iii) modify the negative covenant relating to permitted
indebtedness to allow additional indebtedness to Parent in an amount not to
exceed Eight Million One Hundred Nineteen Thousand Four Hundred Seventeen
Dollars ($8,119,417), (iv) adjust the financial covenant relating to EBITDA for
the period after August 1, 1999 and (v) waive breach by Borrower of the
financial covenant relating to EBITDA for the trailing four fiscal quarter
period ended August 1, 1999 and the negative covenant relating to indebtedness
resulting from the additional indebtedness to Parent.
C. Lender is willing to agree to such temporary increase and to make
such further amendments to the Loan Agreement and such waiver 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:
1
<PAGE> 2
1. Temporary Increase in Advance Rate. During the period commencing
August 23, 1999 and ending January 21, 2000, Section 2.1(a) of the Loan
Agreement shall be temporarily amended in its entirety to read as follows;
provided, that on January 22, 2000, Borrower shall immediately repay to Lender
any outstanding amount of the Revolving Loans in excess of the amount available
under the lending formula provided in Section 2.1(a) of the Loan Agreement in
effect prior to this Amendment and this temporary amendment to Section 2.1(a)
shall be of no further force or effect:
"(a) Subject to and upon terms and conditions contained herein,
Lender agrees to make Revolving Loans to Borrower from time to time in
amounts requested by Borrower up to the amount equal to the sum of:
(i) seventy-five percent (75%) of the Value of
Eligible Inventory; plus
(ii) notwithstanding the exclusion of raw materials
from the definition of Eligible Inventory, the lesser of (i)
fifty percent (50%) of the Value of Eligible Raw Materials or
(ii) One Million Five Hundred Thousand Dollars ($1,500,000);
less
(iii) any Availability Reserves."
2. Amendments to Loan Agreement.
(a) Paragraph (c) of Section 2.1 of the Loan Agreement (entitled
"Revolving Loans") is hereby deleted in its entirety.
(b) Paragraph (e) of Section 9.9 of the Loan Agreement (entitled
"Indebtedness") is hereby amended and restated in its entirety as
follows:
"(e) unsecured indebtedness of Borrower to Krause's Furniture,
Inc., a Delaware corporation ("Parent"), in a maximum amount of
Thirty Two Million Three Hundred Sixty Nine Thousand Four Hundred
Seventeen Dollars ($32,369,417) consisting of: (i) Two Million
Seven Hundred Thousand Dollars ($2,700,000) evidenced by that
certain amended and restated Promissory Note, dated as of January
20, 1995, issued by Borrower payable to Parent, which amount is the
result of reducing the outstanding principal amount of such
indebtedness of Four Million Seven Hundred Thousand Dollars
($4,700,000) as of January 20, 1995 by Two Million Dollars
($2,000,000) funded from the initial advances hereunder; (ii) up to
One Million Dollars ($1,000,000) in payment under Borrower's
agreement to indemnify Parent from any loss, cost, expense or
liability incurred by Parent in providing cash collateral for the
issuance of an One Million Dollars ($1,000,000) standby letter of
credit for the benefit of the landlord of Borrower's Brea,
California facility, which letter of credit expires in 1999 and, if
drawn prior to its expiry, will be treated as a bullet loan from
Parent to Borrower due January 20, 2000 in the amount of any draw
thereunder; (iii) One Million Seven Hundred Fifty Thousand Dollars
($1,750,000) of indebtedness advanced by Parent to Borrower during
the period from January 20, 1995 through August 22, 1996, evidenced
by those certain Promissory Notes, dated, respectively: as of
September 22, 1995 in the original principal amount of Five Hundred
Thousand Dollars ($500,000); as of May 3, 1996 in the original
principal amount of Five Hundred Thousand Dollars ($500,000); and
as of May 22, 1996 in the original amount of Seven Hundred Fifty
Thousand Dollars
2
<PAGE> 3
($750,000), each issued by Borrower payable to Parent; (iv) Five
Million Dollars ($5,000,000) of indebtedness evidenced by that
certain Promissory Note, dated as of August 26, 1996, issued by
Borrower payable to Parent; (v) One Million Dollars ($1,000,000) of
indebtedness evidenced by that certain Promissory Note, dated as of
September 27, 1996, issued by Borrower payable to Parent; (vi) One
Million Five Hundred Thousand Dollars ($1,500,000) of indebtedness
evidenced by that certain Promissory Note, dated as of October 18,
1996, issued by Borrower payable to Parent; (vii) Two Million Five
Hundred Thousand Dollars ($2,500,000) of indebtedness evidenced by
that certain Promissory Note, dated as of November 26, 1996, issued
by Borrower payable to Parent; (viii) One Million Five Hundred
Thousand Dollars ($1,500,000) of indebtedness evidenced by that
certain Promissory Note, dated as of January 10, 1997, issued by
Borrower payable to Parent; (ix) Five Hundred Thousand Dollars
($500,000) of indebtedness evidenced by that certain Promissory
Note, dated as of April 3, 1997, issued by Borrower payable to
Parent; (x) Two Hundred Thousand Dollars ($200,000) of indebtedness
evidenced by that certain Promissory Note, dated as of May 14,
1997, issued by Borrower payable to Parent; (xi) Three Million
Dollars ($3,000,000) of indebtedness as evidenced by that certain
Promissory Note, dated as of August 15, 1997, issued by Borrower
payable to Parent; (xii) Three Million Five Hundred Thousand
Dollars ($3,500,000) of indebtedness evidenced by that certain
Promissory Note, dated as of December 31, 1997, issued by Borrower
payable to Parent; (xiii) Six Million One Hundred Eighty-Nine
Thousand Six Hundred Seventeen Dollars ($6,189,617) of indebtedness
evidenced by that certain Promissory Note, dated as of April 3,
1998, issued by Borrower payable to Parent; (xiv) One Million Eight
Hundred One Thousand Eight Hundred Dollars ($1,801,800) of
indebtedness evidenced by that certain Promissory Note, dated as of
April 7, 1998, issued by Borrower payable to Parent; (xv) One
Hundred Twenty-Eight Thousand Dollars ($128,000) of indebtedness
evidenced by that certain Promissory Note, dated as of July 16,
1998, issued by Borrower payable to Parent; and (xvi) up to One
Hundred Thousand Dollars ($100,000) of additional indebtedness to
be extended by Parent to Borrower, from time to time; all of which
indebtedness is subject to, and subordinate in right of payment to,
the right of Lender to receive the prior payment in full of all of
the Obligations; provided, that: (i) Borrower shall not, directly
or indirectly, make any payments in respect of such indebtedness,
including, but not limited to, any prepayments or other
non-mandatory payments, except that until an Event of Default, or
event which with notice or passage of time or both would constitute
an Event of Default, shall exist or have occurred and be
continuing, Borrower may make payments of principal and interest in
accordance with the terms of that certain Amended and Restated
Subordination Agreement between Parent and Lender dated August 26,
1996 (the "Subordination Agreement"), (ii) Borrower shall not,
directly or indirectly, (A) amend, modify, alter or change any
terms of such indebtedness or any agreement, document or instrument
related thereto, or (B) redeem, retire, defease, purchase or
otherwise acquire such indebtedness, or set aside or otherwise
deposit or invest any sums for such purpose, except as permitted by
the Subordination Agreement, and (iii) Borrower shall furnish to
Lender all notices, demands or other materials concerning such
indebtedness either received by Borrower or on its behalf, promptly
after receipt thereof, or sent by Borrower or on its behalf,
concurrently with the sending thereof, as the case may be."
3
<PAGE> 4
(c) Section 9.15 of the Loan Agreement (entitled "Minimum EBITDA")
is hereby amended and restated 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:
Four Quarter
Period Ending Amount
------------- -----------
October 31, 1999 $ 4,250,000
January 30, 2000 $ 4,750,000
April 30, 2000 $ 5,800,000
July 30, 2000 $ 8,750,000
October 29, 2000 and thereafter $10,000,000."
3. Waiver by Lender of Compliance with Covenants in the Loan Agreement.
Borrower hereby acknowledges that (a) as of the end of the fiscal quarter ended
August 1, 1999, it was not in compliance with the financial covenant relating to
EBITDA set forth in Section 9.15 of the Loan Agreement and (b) it has failed to
obtain Lender's written consent prior to incurring additional indebtedness to
Parent in the amount of Eight Million One Hundred Nineteen Thousand Four Hundred
Seventeen Dollars ($8,119,417) in violation of Section 9.9 of the Loan
Agreement, and that such non-compliance and failure constitute Events of Default
under the Loan Agreement. Lender hereby waives compliance by Borrower with the
financial covenant set forth in Section 9.15 of the Loan Agreement through the
end of the fiscal quarter ended August 1, 1999, and shall not exercise its
rights and remedies under the Loan Agreement or applicable law in respect of
such Event of Default; provided, however, that Lender shall be free to exercise
all of its rights and remedies under the Loan Agreement in the event of
Borrower's non-compliance with Section 9.15 of the Loan Agreement after August
1, 1999. Lender further waives Borrower's violation with the negative covenant
set forth in Section 9.9 of the Loan Agreement resulting from Borrower's failure
to obtain Lender's written consent prior to incurring additional indebtedness to
Parent in the amount of Eight Million One Hundred Nineteen Thousand Four Hundred
Seventeen Dollars ($8,119,417) and shall not exercise its rights and remedies
under the Loan Agreement or applicable law in respect of such Event of Default;
provided, however, that Lender shall be free to exercise all of its rights and
remedies under the Loan Agreement in the event that Borrower has incurred or
incurs indebtedness not permitted by the Loan Agreement, as amended hereby. The
foregoing waiver is not a continuing waiver, and Lender does not by this waiver
amend the terms and provisions of the Loan Agreement. Upon the occurrence of any
Event of Default after the date hereof, or in the event that Lender learns of
any Event of Default which occurred prior to the date hereof (other than a
breach of the financial covenant set forth in Section 9.15 of the Loan Agreement
for the fiscal quarter ended August 1, 1999 or a violation of the negative
covenant set forth in Section 9.9 of the Loan Agreement resulting from
indebtedness of Borrower expressly permitted hereby), Lender shall be free to
exercise any and all of its various rights and remedies under the Loan
Agreement.
4. 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.
(a) Amendment. This Amendment fully executed in a sufficient number
of counterparts for distribution to Lender and Borrower.
4
<PAGE> 5
(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) Acknowledgement from Parent. Lender shall have received, in form
and substance satisfactory to Lender, an acknowledgement from Parent that the
additional indebtedness of Borrower in the amount of Eight Million One Hundred
Nineteen Thousand Four Hundred Seventeen Dollars ($8,119,417.00) is "Junior
Debt" as defined in that certain Amended and Restated Subordination Agreement
dated as of August 26, 1996, between Parent and Lender, and is subject to the
terms and conditions thereof.
(d) Representations and Warranties. The representations and
warranties of Borrower set forth in the Loan Agreement must be true and correct.
(e) 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 Thirty-Seven Thousand Dollars ($37,500) for the
processing and approval of this Amendment, which fee shall be fully earned as of
and payable on the date hereof.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
5
<PAGE> 6
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 and
Chief Financial Officer
CASTRO CONVERTIBLE CORPORATION,
a New York corporation
By: /s/ Robert A. Burton
----------------------------------
Name: Robert A. Burton
Title: Executive Vice President and
Chief Financial Officer
CONGRESS FINANCIAL CORPORATION (WESTERN),
a California corporation
By: D.B. Laughton
----------------------------------
Name: D.B. Laughton
Title: Vice President
6
<PAGE> 7
ACKNOWLEDGMENT
The undersigned Krause's 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 Seventh 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: August 23, 1999 KRAUSE'S FURNITURE, INC.,
a Delaware corporation
By: /s/ Robert A. Burton
-----------------------------
Name: Robert A. Burton
-----------------------------
Title: Executive Vice President and
Chief Financial Officer
----------------------------
7
<PAGE> 1
EXHIBIT 10.2
AMENDMENT TO THE SUPPLEMENTAL
SECURITIES PURCHASE AGREEMENT
This agreement is made as of September 14, 1999 by and among Krause'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, as amended (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 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:
Effective as of August 1, 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:
- --------
(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.
1
<PAGE> 2
Year Q1 Q2 Q3 Q4
---- ------- ------- ------- -------
1998 N/A N/A N/A 11.5 MM
1999 11.5 MM 9.0 MM 11.3 MM 11.3 MM
2000 11.7 MM 13.0 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
(b) The Company will not incur, create, assume or permit to exist any
Indebtness at the end of any fiscal quarter if such Indebtness would result in a
ratio of Consolidated Total Indebtness to Consolidated Net Worth of more than
the amount of such fiscal quarter indicated set forth below:
Year Q1 Q2 Q3 Q4
---- ---- ---- ---- ----
1998 N/A N/A N/A 2.25
1999 2.75 2.75 2.70 2.70
2000 2.55 2.30 1.50 1.30
2001 1.10 1.00 1.00 1.00
2002 1.00 1.00 1.00 N/A
2
<PAGE> 3
(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:
Year Q1 Q2 Q3 Q4
---- ---- ---- ---- ----
1998 N/A N/A N/A 0.85
1999 0.95 0.70 1.04 1.12
2000 1.20 1.20 1.35 1.40
2001 1.45 1.45 1.45 1.45
2002 1.45 1.45 1.45 N/A
(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:
1998 $ 7,600,000
1999 $10,000,000
2000 $ 9,000,000
2001 $ 8,000,000
2002 $ 4,000,000(2)
- ---------------
(2) Applicable to the first two fiscal quarters of 2002.
3
<PAGE> 4
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. Hashbarger, Jr.
----------------------------------
Name: George L. Hashbarger, Jr.
Title: Department Operations Manager
JAPAN OMNIBUS LTD.
By:
----------------------------------
Name:
Title:
4
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<ARTICLE> 5
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 80
<SECURITIES> 0
<RECEIVABLES> 1,617
<ALLOWANCES> 275
<INVENTORY> 24,385
<CURRENT-ASSETS> 26,943
<PP&E> 22,036
<DEPRECIATION> 7,426
<TOTAL-ASSETS> 57,331
<CURRENT-LIABILITIES> 25,361
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 8,954
<TOTAL-LIABILITY-AND-EQUITY> 57,331
<SALES> 108,800
<TOTAL-REVENUES> 108,800
<CGS> 49,582
<TOTAL-COSTS> 49,582
<OTHER-EXPENSES> 61,259
<LOSS-PROVISION> 159
<INTEREST-EXPENSE> 2,371
<INCOME-PRETAX> (4,974)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,974)
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