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                                                                     EXHIBIT 4.6

                           CERTIFICATE OF DESIGNATION
                                       OF
                      SERIES A CONVERTIBLE PREFERRED STOCK
                                       OF
                            KRAUSE'S FURNITURE, INC.

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                         Pursuant to Section 151 of the
                General Corporation Law of the State of Delaware

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               Krause's Furniture, Inc. (the "Corporation"), a corporation
organized and existing under and by virtue of the provisions of the General
Corporation Law of the State of Delaware (the "DGCL"), certifies as follows:

               FIRST: The Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation") authorizes the issuance of Six Hundred Sixty Six
Thousand, Six Hundred Sixty-Seven (666,667) shares of Preferred Stock, par value
$0.001 per share (the "Preferred Stock"), and further provides that Preferred
Stock may be issued in one or more series and the number of shares,
designations, preferences, rights and restrictions of each series as shall be
fixed by resolution or resolutions adopted by the Board of Directors prior to
the issuance of any shares of a particular series of Preferred Stock.

               SECOND: The Board of Directors of the Corporation, at a special
meeting of the Board of Directors on January 12, 2000 did duly adopt the
following resolutions authorizing the creation and issuance of up to 450,000
shares of a series of Preferred Stock to be known as "Series A Convertible
Preferred Stock."

               RESOLVED that, pursuant to the authority vested in the Board of
Directors by the Certificate of Incorporation, a series of the class of
authorized Preferred Stock, par value $0.001 per share (the "Preferred Stock"),
of the Corporation is hereby created, such series to consist of 450,000 shares,
which shall be designated as Series A Convertible Preferred Stock ("Series A
Preferred Stock"), having the following designations, preferences, rights,
qualifications, powers, privileges, limitations and restrictions of the shares
of such series:

        1. CERTAIN DEFINITIONS. Unless the context otherwise requires, the terms
defined in this paragraph 1 shall have, for all purposes of this resolution, the
meanings herein specified.

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        Adjusted E-Commerce Proceeds as of any date shall mean $10,000,000 less
any amounts spent on or prior to such date for E-Commerce Proceed Uses (as
defined in the Securities Purchase Agreement) either (a) in accordance with the
E-Commerce Plan (as defined in the Securities Purchase Agreement) or (b)
otherwise as consented to in writing by THLi.

        Affiliate shall have the meaning ascribed to it in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act.

        Change of Control shall mean:

               (a) the acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of more than 30% of the combined voting power of the then outstanding Voting
Securities of the Corporation entitled to vote generally in the election of
directors, but excluding, for this purpose, any such acquisition by (i) the
Corporation or any of its subsidiaries, (ii) any employee benefit plan (or
related trust) of the Corporation or its subsidiaries, (iii) any corporation
with respect to which, following such acquisition, a majority of the combined
voting power of the then outstanding Voting Securities of such corporation
entitled to vote generally in the election of directors is then beneficially
owned, directly or indirectly, by individuals and entities who were the
beneficial owners of Voting Securities of the Corporation immediately prior to
such acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the combined voting power of the then
outstanding Voting Securities of the Corporation entitled to vote generally in
the election of directors, (iv) GECC or an Affiliate of GECC or (v) THLi or an
Affiliate of THLi; or

               (b) a reorganization, merger or consolidation, in each case, with
respect to which all or substantially all the individuals and entities who were
the respective beneficial owners of the Voting Securities of the Corporation
immediately prior to such reorganization, merger or consolidation do not,
following such reorganization, merger or consolidation beneficially own,
directly or indirectly, more than 50% of the combined voting power of the then
outstanding Voting Securities entitled to vote generally in the election of
directors of the corporation resulting from such reorganization, merger or
consolidation; or

               (c) the sale or other disposition of a majority or more of the
consolidated assets or property of the Corporation and its subsidiaries in one
transaction or series of related transactions;

provided, however, that a "Change of Control" as defined in either (b) or (c)
above shall not include any transaction among GECC or any Affiliate of GECC,
THLi or any Affiliate THLi, and the Corporation.

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        Common Stock shall mean all shares now or hereafter authorized of any
class of Common Stock of the Corporation and any other stock of the Corporation,
howsoever designated, authorized after the Issue Date, which has the right
(subject always to prior rights of any class or series of preferred stock) to
participate in the distribution of the assets and earnings of the Corporation
without limit as to per share amount.

        Conversion Price shall mean the price per share of Common Stock used to
determine the number of shares of Common Stock deliverable upon conversion of a
share of the Series A Preferred Stock, which price shall initially be $1.10 per
share, subject to adjustment in accordance with the provisions of paragraph 6
below.

        Convertible Securities shall mean all options, warrants or other rights
to purchase or subscribe for Common Stock other than Options.

        Exchange Act shall mean the Securities Exchange Act of 1934, as amended.

        GECC shall mean, collectively, General Electric Capital Corporation and
GE Capital Equity Investments, Inc.

        Issue Date shall mean the date that shares of Series A Preferred Stock
are first issued by the Corporation.

        Issue Price shall mean $50 per share of Series A Preferred Stock.

        Junior Stock shall mean the Common Stock and any other class or series
of stock of the Corporation other than Parity Stock or Senior Stock.

        Maximum Amount shall mean as to any holder on any date:

        (a) if such date is prior to the sixth anniversary of the Issue Date,
the product of (i) the sum of (x) 125,400 and (y) 33% of the number of shares of
Series A Preferred Stock issued after the Second Closing Date (as defined in the
Securities Purchase Agreement) and (ii) the ratio of (x) the number of shares of
Series A Preferred Stock then held by such holder to (y) the total number of
shares of Series A Preferred Stock then outstanding,

        (b) if such date is from the sixth anniversary of the Issue Date through
the seventh anniversary of the Issue Date, the product of (i) the sum of (x)
315,400 and (y) 83% of the number of shares of Series A Preferred Stock issued
after the Second Closing Date and (ii) the ratio of (x) the number of shares of
Series A Preferred Stock then held by such holder to (y) the total number of
shares of Series A Preferred Stock then outstanding, and

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        (c) thereafter, 100% of the shares of Series A Preferred Stock.

        Maximum Number shall mean, on any date, with respect to any holder of
Series A Preferred Stock, that number of shares of Series A Preferred Stock
equal to the product of (a) the ratio of (i) the Adjusted E-Commerce Proceeds on
such date divided by (ii) the Redemption Price times (b) the ratio of (i) the
number of shares of Series A Preferred Stock purchased by such holder pursuant
to the Purchase Agreement divided by (ii) 380,000.

        Options shall mean securities by their terms convertible into or
exchangeable for Common Stock.

        Parity Stock shall mean any class or series of stock of the Corporation
issued after the Issue Date ranking on a parity with the Series A Preferred
Stock in respect of (i) the right to receive dividends or (ii) the right to
receive assets upon the liquidation, dissolution or winding up of the affairs of
the Corporation.

        Redemption Date shall mean, with respect to any redemption of shares of
Series A Preferred Stock pursuant to paragraph 5 below, the date on which such
shares are redeemed.

        Redemption Price shall mean the Issue Price.

        Securities Purchase Agreement shall mean the Securities Purchase
Agreement dated as of January 11, 2000 among the Corporation and the purchasers
listed on the signature pages thereto.

        Senior Stock shall mean any class or series of stock of the Corporation
issued after the Issue Date ranking senior to the Series A Preferred Stock in
respect of (i) the right to receive dividends or (ii) the right to receive
assets upon the liquidation, dissolution or winding up of the affairs of the
Corporation.

        Subordinated Notes shall mean the 9.5% Subordinated Notes due 2003
issued by the Corporation pursuant to the Supplemental Securities Agreement.

        Supplemental Securities Agreement shall mean the Supplemental Securities
Purchase Agreement dated as of August 14, 1997 among the Corporation, General
Electric Capital Corporation and Japan Omnibus Ltd., as in effect on the Issue
Date.

        THLi shall mean, collectively, TH Lee.Putnam Internet Partners, L.P. and
TH Lee.Putnam Internet Parallel Partners, L.P., together with their affiliates.

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        Voting Securities of any person shall mean at any time shares of any
class of capital stock of such person which are then entitled to vote generally
in the election of directors.

        2. DIVIDEND RIGHTS. So long as any shares of Series A Preferred Stock
shall be outstanding, the Corporation shall not declare or pay on any Junior
Stock any dividend whatsoever, whether in cash, property or otherwise, nor shall
the Corporation or any of its subsidiaries make any distribution on any Junior
Stock, nor shall the Corporation or any of its subsidiaries purchase or redeem
any Junior Stock or pay or make available any monies for a sinking fund for the
purchase or redemption of any Junior Stock.

        3. LIQUIDATION PREFERENCE. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation (a "Liquidation"), the
holders of the outstanding shares of Series A Preferred Stock shall be entitled
to receive, out of the assets of the Corporation available for distribution to
its stockholders, whether from capital, surplus funds or earnings, prior and in
preference to any distribution of any of the assets of the Corporation to the
holders of Junior Stock, an amount per share equal to the Issue Price for such
share (the "Series A Liquidation Preference Price"). After the full liquidation
preference of the holders of the outstanding shares of Series A Preferred Stock
has been satisfied as set forth in this paragraph 3, the remaining assets of the
Corporation shall be distributed to the holders of shares of Common Stock and
Series A Preferred Stock in an equal amount per share as if all shares of Series
A Preferred Stock had been converted into shares of Common Stock immediately
prior to the Liquidation.

        4. CHANGE OF CONTROL. The Corporation shall give each holder of record
of Series A Preferred Stock written notice of an impending Change of Control not
later than twenty-five (25) days prior to the earlier of (i) any record date
relating to such Change of Control, (ii) any stockholders' meeting called to
approve such transaction, or (iii) the closing of such transaction, and shall
also notify such holders in writing of the final approval of such transaction.
The first of such notices shall describe the material terms and conditions of
the impending transaction, and the Corporation shall thereafter give such
holders prompt notice of any material changes. The transaction shall in no event
take place sooner than twenty-five (25) days after the Corporation has given the
first notice provided for herein or sooner than ten (10) days after the
Corporation has given notice of any material changes provided for herein;
provided, however, that such periods may be shortened upon the written consent
of the holders of two-thirds of the voting power of the Series A Preferred Stock
entitled to such notice or similar right to receive notice.

        5. REDEMPTION.

               (a) At any time on or after January 14, 2005, upon the written

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request of the holders of a majority of the shares of Series A Preferred Stock
(which request shall specify (i) a Redemption Date not less than thirty (30) or
more than ninety (90) days from the date of such request and (ii) the number of
shares of Series A Preferred Stock to be redeemed, which number shall not exceed
the Maximum Amount applicable to each requesting holder less the number of
shares of Series A Preferred Stock, if any, previously redeemed from such holder
pursuant to this paragraph 5(a)), the Corporation shall redeem, on a pro rata
basis, the number of shares of Series A Preferred Stock specified in such
request on the specified Redemption Date at the Redemption Price.

               (b) In the event of a Change of Control, each holder of Series A
Preferred Stock may elect, by written notice to the Corporation specifying the
number of shares of Series A Preferred Stock to be redeemed and the Redemption
Date (which shall not be less than thirty (30) or more than ninety (90) days
from the date of such notice) to have the Corporation redeem all or any part of
the shares of Series A Preferred Stock then held by such holder on the specified
Redemption Date at the Redemption Price.

               (c) Upon the written request of a holder of Series A Preferred
Stock pursuant to, and in accordance with, Section 6.2 of the Securities
Purchase Agreement on or prior to the second anniversary of the Issue Date, the
Corporation shall redeem any or all of such holder's shares of Series A
Preferred Stock not to exceed such holder's Maximum Number on the Redemption
Date at the Redemption Price.

               (d) If the Corporation is not in compliance with the provisions
of the first sentence of paragraph 13 below, each holder of Series A Preferred
Stock may elect, by written notice to the Corporation specifying the number of
shares of Series A Preferred Stock to be redeemed and the Redemption Date (which
shall not be less than thirty (30) or more than ninety (90) days from the date
of such notice) to have the Corporation redeem all or any part of the shares of
Series A Preferred Stock then held by such holder on the specified Redemption
Date at the Redemption Price.

               (e) In the event of a redemption of any shares of Series A
Preferred Stock pursuant to this paragraph 5, the conversion rights set forth in
paragraph 6 below shall terminate as to the shares designated for redemption at
the close of business on the business day preceding the applicable Redemption
Date, except as provided in paragraph 5(f)(iii) below.

               (f) Mechanics of Redemption.

                      (i) Each holder of Series A Preferred Stock tendering
shares for redemption shall surrender to the Corporation at its principal
corporate office, together with the request for redemption, the certificate or
certificates

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representing such shares, duly endorsed, and thereupon the Redemption Price of
such shares shall be paid by the Corporation after receipt of the shares to the
person whose name appears on such certificate or certificates as the owner
thereof and each surrendered certificate shall be cancelled. If less than all of
the shares represented by any such certificate or certificates are redeemed, a
new certificate shall be issued by the Corporation representing the unredeemed
shares.

                      (ii) If the Redemption Price has been timely paid or the
Redemption Price has been escrowed in an arrangement reasonably satisfactory to
the holder, from and after the applicable Redemption Date, all rights of the
holders of such shares surrendered for redemption (except the right to receive
the Redemption Price) shall cease with respect to such shares, and such shares
shall not thereafter be transferred on the books of the Corporation or be deemed
to be outstanding for any purpose whatsoever.

                      (iii) The holders of Series A Preferred Stock who have
tendered shares for redemption shall be entitled to receive the Redemption Price
on or before the applicable Redemption Date, except that in no case shall the
Corporation be required to pay a Redemption Price which in the aggregate would
be in violation of Section 160 of the DGCL. Those funds of the Corporation that
are available hereunder for redemption shall be used to redeem the maximum
number possible of such shares ratably among the holders of such shares to be
redeemed. The tendered shares of Series A Preferred Stock for which the
applicable Redemption Price is not received on or before the applicable
Redemption Date shall be considered not to have been redeemed and shall remain
outstanding and entitled to all the rights and preferences provided herein and
shall be redeemed by the Corporation as soon as permitted pursuant to this
paragraph 5(f)(iii).

               (g) Except as set forth in this paragraph 5, the Corporation
shall not have the right to call or redeem all or any shares of the Series A
Preferred Stock at any time.

        6. CONVERSION. The holders of the Series A Preferred Stock shall have
conversion rights as follows:

               (a) Right to Convert. Each share of Series A Preferred Stock
shall be convertible, at the option of the holder thereof, at any time, at the
office of the Corporation or a transfer agent for the Series A Preferred Stock,
as the case may be, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Issue Price by the Conversion
Price then in effect. Any notice to the Corporation of a holder's exercise of
conversion rights pursuant to this paragraph 6(a) may be made contingent upon
the happening of a redemption pursuant to paragraph 5 above.

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               (b) Mandatory Conversion. Each share of Series A Preferred Stock
shall automatically be converted into such number of shares of Common Stock as
is determined by dividing the Issue Price by the Conversion Price at the time in
effect for such stock, without further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent, (i) at the closing of a bona fide firm
commitment registered public offering of the Corporation's Common Stock for an
aggregate offering price resulting in gross cash proceeds to the Corporation of
not less than twenty-five million dollars ($25,000,000) and at a price per share
of Common Stock of at least $3.30, subject to adjustment for stock splits,
combinations or similar transactions (a "Qualified Public Offering") or (ii)
upon the vote of the holders of at least 66 2/3% of the Series A Preferred
Stock. Except for the purposes of the calculation in the immediately preceding
sentence, in the event of a Qualified Public Offering, the person(s) entitled to
receive the Common Stock issuable upon conversion of Series A Preferred Stock
shall not be deemed to have converted such Series A Preferred Stock until
immediately prior to the closing of such offering.

               (c) Mechanics of Conversion; Fractional Shares; Dividends.

                      (i) Before any holder of Series A Preferred Stock shall be
entitled to convert the same into shares of Common Stock pursuant to paragraph
6(a) (or, in the case of an automatic conversion, to receive a certificate for
such holder's shares of Common Stock outstanding as a result of such
conversion), such holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of a transfer agent
for the Series A Preferred Stock, as the case may be, and shall give written
notice by mail, postage prepaid, to the Corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued.

                      (ii) The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder, or to the nominee
or nominees of such holder, a certificate or certificates for the number of
shares of Common Stock to which such holder shall be entitled. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Series A Preferred Stock to be
converted (or, in the case of an automatic conversion on the date specified in
paragraph 6(b) above), and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of such date.

                      (iii) Upon conversion of only a portion of the number of
shares of Series A Preferred Stock represented by a certificate surrendered for
conversion, the Corporation shall issue and deliver to the holder of such
certifi-

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cate, a new certificate for the number of shares of Series A Preferred Stock not
converted. No fractional shares shall be issued upon conversion of the Series A
Preferred Stock. Whether or not fractional shares are issuable upon such
conversion shall be determined on the basis of the total number of shares of
Series A Preferred Stock the holder is at the time converting into Common Stock
and the number of shares of Common Stock issuable upon such aggregate
conversion. In lieu of fractional shares to which the holder would otherwise be
entitled, the Corporation shall pay such holder a cash amount equal to such
fraction multiplied by the fair market value of a share of the Common Stock, as
reasonably determined in good faith by the Board of Directors.

               (d)    Adjustments to Series A Preferred Stock Conversion Price.

                      (i) Issue of Additional Stock. Upon each issuance or sale
(or deemed issuance or sale) by the Corporation of any Additional Stock (as
defined below) without consideration or for a consideration per share less than
the Conversion Price in effect immediately prior to the issuance of such
Additional Stock, the Conversion Price shall, upon such issue or sale, be
reduced to a price determined by multiplying the Conversion Price in effect
immediately prior to each such issuance or sale by a fraction:

               (x) the numerator of which shall be (A) the number of shares of
Common Stock outstanding (or deemed to be outstanding pursuant to this paragraph
6(d)) immediately prior to such issue or sale, plus (B) the number of shares of
Common Stock that the aggregate consideration received by the Corporation for
the total number of shares of Additional Stock so issued or sold (or deemed
issued or sold) would purchase at the Conversion Price, and

               (y) the denominator of which shall be (A) the number of shares of
Common Stock outstanding (or deemed to be outstanding pursuant to this paragraph
6(d)) immediately prior to such issue or sale, plus (B) the number of shares of
such Additional Stock so issued or sold (or deemed issued or sold).

                      (ii) No Adjustment of Conversion Price. No adjustment of
the Conversion Price shall be made in an amount less than one cent ($.01) per
share; provided that any adjustments which are not required to be made by reason
of this paragraph shall be carried forward and shall be either taken into
account in any subsequent adjustment made prior to three (3) years from the date
of the event giving rise to the adjustment being carried forward, or shall be
made at the end of three (3) years from the date of the event giving rise to the
adjustment being carried forward. No adjustment of the Conversion Price shall
have the effect of increasing the Conversion Price above the Conversion Price at
the time in effect.

                      (iii) Determination of Consideration.

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                             (A) In the case of the issuance or sale (or deemed
issuance or sale) of Additional Stock or Options for cash, the consideration
shall be deemed to be the net amount of cash received by the Corporation after
deducting any discounts, underwriting or similar commissions, compensation or
other expenses allowed, paid or incurred by the Corporation in connection with
the issuance and sale (or deemed issuance or sale) thereof.

                             (B) In the case of the issuance (or deemed issuance
or sale) of Additional Stock or Options for a consideration in whole or in part
other than cash, the consideration other than cash shall be deemed to be the
fair market value thereof as reasonably determined in good faith by the Board of
Directors of the Corporation.

                      (iv) Issue of Securities Deemed Issue of Common Stock. In
the case of the issuance (whether before, on or after the date hereof) of
Options, Convertible Securities or options to purchase or rights to subscribe
for Convertible Securities (which are not excluded from the definition of
Additional Stock), the following provisions shall apply:

                             (A) The aggregate maximum number of shares of
Common Stock deliverable upon exercise of such Options shall be deemed to have
been issued at the time such Options were issued (whether or not such Options
are then exercisable) and for a consideration equal to the consideration
(determined in the manner provided in paragraph 6(d)(iii) above), if any,
received or receivable by the Corporation upon the issuance of such Options plus
the minimum additional aggregate consideration, if any, payable to the
Corporation upon the exercise of all such Options.

                             (B) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange for any such
Convertible Securities or upon the exercise of options for such Convertible
Securities and subsequent conversion or exchange thereof shall be deemed to have
been issued at the time such Convertible Securities or such options were issued
(whether or not such Convertible Securities are then convertible or exchangeable
or such options are then exercisable) and for a consideration equal to the
consideration, if any, received or receivable by the Corporation upon the sale
or issuance of any such Convertible Securities and related options (excluding
any cash received on account of accrued interest or accrued dividends), plus the
minimum additional aggregate consideration, if any, payable to the Corporation
upon the conversion or exchange of such Convertible Securities or the exercise
of any related options (the consideration in each case to be determined in the
manner provided in paragraph 6(d)(iii) above).

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                             (C) In the event of any change in the number of
shares of Common Stock deliverable or any increase in the consideration payable
to the Corporation upon exercise of such Options, or upon conversion of or in
exchange for such Convertible Securities or options for such Convertible
Securities, any Conversion Price obtained with respect to the adjustment which
was made upon the issuance of such Options, Convertible Securities or options
for such Convertible Securities, and any subsequent adjustments based thereon,
shall be recomputed to reflect such change, but no further adjustment shall be
made for the actual issuance of Common Stock or any payment of such
consideration upon the exercise of any such Options or the conversion or
exchange of such Convertible Securities or the exercise of options for such
Convertible Securities.

                             (D) Upon the expiration of any such Options, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such Convertible Securities, any Conversion Price
obtained with respect to the adjustment which was made upon the issuance of such
Options or Convertible Securities or options related to such Convertible
Securities, and any subsequent adjustments based thereon, shall be recomputed to
reflect the issuance of only the number of shares of Common Stock actually
issued upon the exercise of such Options, upon the conversion or exchange of
such Convertible Securities or upon the exercise of the options related to such
Convertible Securities.

                             (E) In the case of any Option or Convertible
Security with respect to which the maximum number of shares of Common Stock
issuable upon exercise or conversion or exchange thereof is not determinable, no
adjustment to the Conversion Price shall be made until such number becomes
determinable.

                      (v) Definition of Additional Stock. "Additional Stock"
shall mean any shares of Common Stock issued (or deemed to have been issued
pursuant to paragraph 6(d)(iv) above) by the Corporation after the Issue Date
other than:

                             (A) Common Stock issued pursuant to a transaction
described in Paragraph 6(d)(vi) below;

                             (B) shares of Common Stock (as constituted on the
date hereof) issuable or issued to employees, officers, directors, or
consultants of the corporation pursuant to a stock purchase, stock option or
restricted stock plan or agreement existing on the Issue Date or thereafter
approved in accordance with Section 2.2(m) of the Amended and Restated
Stockholders Agreement dated as of January 14, 2000 among the Company and the
stockholders party thereto; provided that the purchase price for such shares (or
in the case of options, the exercise price thereof) shall not be less than fair
market value on the date of issuance; and

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                             (C) Common Stock issued or issuable upon conversion
of the Series A Preferred Stock or upon exercise of all or any portion of the
warrants issued before the Issue Date to purchase 2,712,045 shares of Common
Stock.

                      (vi) Stock Splits, Subdivisions and Dividends. In the
event the Corporation shall at any time or from time to time after the Issue
Date, fix a record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of holders of Common
Stock entitled to receive a dividend or other distribution payable in additional
shares of Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Common Stock (hereinafter referred to as "Common Stock Equivalents")
without payment of any consideration by such holder for the additional shares of
Common Stock or the Common Stock Equivalents (including without payment for the
additional shares of Common Stock issuable upon conversion or exercise thereof)
then, as of such record date (or the date of such dividend distribution, split
or subdivision if no record date is fixed), the Conversion Price shall be
appropriately decreased so that the holders of Series A Preferred Stock shall
receive, upon the conversion thereof, the number of shares of Common Stock they
would have received if they had converted their shares of Series A Preferred
Stock into Common Stock immediately prior to the occurrence of such event.

                      (vii) Combinations or Consolidations. In the event that
the number of shares of Common Stock outstanding at any time after the Issue
Date is decreased by a combination, reclassification or consolidation of the
outstanding shares of Common Stock then, on the effective date of such event,
the Conversion Price shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of such series shall
be decreased in proportion to such decrease in the number of outstanding shares.

                      (viii) Other Distributions. In the event that the
Corporation shall declare a distribution on the Common Stock payable in
securities of other persons, evidences of indebtedness issued by the Corporation
or other persons, assets (excluding cash dividends) or options or rights not
referred to in paragraph (d)(iv) above, then, in each such case for the purpose
of this paragraph 6(d)(viii), the holders of the Series A Preferred Stock shall
be entitled to a proportionate share of any such distribution as though they
were the holders of the number of shares of Common Stock of the Corporation into
which their shares of Series A Preferred Stock are convertible as of the record
date fixed for the determination of the holders of Common Stock of the
Corporation entitled to receive such distribution.

                      (ix) Recapitalizations. If at any time or from time to
time there shall be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction provided for
elsewhere in this

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paragraph 6), provision shall be made so that the holders of the Series A
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series A Preferred Stock the number of shares of stock or other securities or
property of the Corporation or otherwise, to which they would have been entitled
to receive if they had converted their shares of Series A Preferred Stock
immediately prior to such recapitalization. In any such case, appropriate
adjustment shall be made in the application of the provisions of this paragraph
6, with respect to the rights of the holders of the Series A Preferred Stock
after the recapitalization to the end that the provisions of this paragraph 6
(including adjustment of the Conversion Price then in effect and the number of
shares issuable upon conversion of the Series A Preferred Stock) shall be
applicable after that event as nearly equivalent as may be practicable.

                      (x) Other Dilutive Events. In case any event shall occur
as to which the provisions of this paragraph 6 are not strictly applicable but
the failure to make any adjustment would not fairly protect the conversion
rights in accordance with the essential intent and principle of the provisions
of such paragraph, then, in each such case, the Corporation shall appoint a firm
of independent certified public accountants of recognized national standing
(which may be the regular auditors of the Corporation), which shall give their
opinion upon the adjustment, if any, on a basis consistent with the essential
intent and principles established in paragraph 6, necessary to preserve, without
dilution, the conversion rights. Upon receipt of such opinion, the Corporation
will promptly mail a copy thereof to the holders of the Series A Preferred Stock
and shall make the adjustments described therein.

                      (xi) No Impairment. The Corporation will not, by amendment
and/or restatement of this Certificate of Designation or its Certificate of
Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
paragraph 6 and in the taking of all such action as may be necessary or
appropriate in order to protect the holders of the Series A Preferred Stock
against impairment of the conversion rights.

                      (xii) Certificate as to Adjustments. Upon the occurrence
of each adjustment or readjustment of the Conversion Price pursuant to this
paragraph 6, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of the Series A Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Series A Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting forth (A) any
such adjustment and readjustment with respect to such series, (B) the Conversion
Price at the time in effect, and (C) the

                                       13
<PAGE>   14

number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of a share of such series.

        7. NOTICES OF RECORD DATE. In the event of any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Corporation shall
mail to each holder of Series A Preferred Stock, at least twenty (20) days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.

        8. NOTICES. Any notice required by the provisions of this Certificate of
Designation to be given to the holders of shares of Series A Preferred Stock
shall be deemed effectively given upon receipt by the party by means of personal
delivery, courier service delivery, electronic mail or five (5) days after
deposit with the United States Post Office, by registered or certified mail,
postage prepaid, and addressed to each holder of record at his address appearing
on the books of the corporation.

        9. VOTING RIGHTS. Expect as otherwise expressly provided herein or
required by law, the holder of each share of Series A Preferred Stock shall have
the right to one vote for each share of Common Stock into which such share could
then be converted (with any fractional share determined on an aggregate
conversion basis being rounded to the nearest whole share), and with respect to
such vote, such holder shall have full voting rights and powers equal to the
voting rights and powers of the holders of Common Stock. The holders of the
Series A Preferred Stock shall be entitled, notwithstanding any provision
hereof, to notice of any stockholders' meeting in accordance with the by-laws of
the Corporation, and to vote on any matter submitted to the stockholders for a
vote. Except as expressly set forth herein or otherwise required by law, the
holders of Series A Preferred Stock and Common Stock shall vote together as a
single class on an as-converted basis.

        10. PROTECTIVE PROVISIONS. So long as any shares of Series A Preferred
Stock are outstanding, the Corporation shall not, without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of not
less than 66 2/3% of the Series A Preferred Stock:

               (a) Authorize, create, designate, determine or issue any Parity
Stock or Senior Stock other than shares of Series A Preferred Stock issued in
satisfaction of deferred interest pursuant to the Supplemental Securities
Agreement.

               (b) Amend, modify or repeal any provision of the Corporation's
Certificate of Incorporation or by-laws in any manner which would alter or
change the

                                       14
<PAGE>   15

rights, preferences, privileges or powers of, or the restrictions provided for
the benefit of, the Series A Preferred Stock.

               (c) Authorize any amendment, modification, waiver or repeal of
any provision of any agreement which grants the holders of the Series A
Preferred Stock any rights, privileges or powers and to which the Corporation is
a party.

               (d) Authorize the merger, consolidation or sale or license of all
or substantially all the assets (including, without limitation, the intellectual
property rights of the Corporation) of the Corporation or of any assets the
disposition or licensing of which would have a material effect on the business
of the Corporation or any subsidiary, or any liquidation, dissolution or winding
up of the Corporation or effect any transaction or series of transactions in
which more than 50% of the voting power of the Corporation is disposed of.

               (e) Authorize (i) the distribution of, or payment of dividends
on, or (ii) the purchase, repurchase, redemption or other acquisition by the
Corporation (or otherwise set aside any sums therefor), of any securities of the
Corporation, or any interest therein, junior to the Series A Preferred Stock.

               (f) Amend the Corporation's Certificate of Incorporation to
increase the aggregate authorized number of shares of Common Stock or Series A
Preferred Stock if the additional shares so authorized are to be sold at a price
below the Issue Price, other than for purposes of Management Incentive Plans.

        11. ADDITIONAL SERIES A PREFERRED PROTECTIVE PROVISIONS. The Corporation
shall not, without first obtaining the approval of each holder of Series A
Preferred Stock affected thereby:

               (a) Amend any applicable Redemption Date.

               (b) Reduce the stated value or liquidation preference or
Redemption Price of the Series A Preferred Stock.

               (c) Change the place or currency of payment of any liquidation
preference or dividend to which a holder of shares of Series A Preferred Stock
is entitled pursuant to this Certificate of Designation.

               (d) Impair the right to institute suit for the enforcement of any
payment on or with respect to any share of Series A Preferred Stock.

               (e) Amend this Certificate of Designation in a manner which would
adversely affect the right to convert any share of Series A Preferred Stock
including, without limitation, any amendment which would adversely affect the

                                       15
<PAGE>   16

calculation of the Issue Price or the Conversion Price.

               (f) Amend this Certificate of Designation to reduce the
percentage of outstanding shares of Series A Preferred Stock required to modify,
amend or repeal the provisions of the Certificate of Designation or grant
waivers of any provision hereof.

        12. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares of
Series A Preferred Stock shall be redeemed or converted pursuant to paragraph 5
or 6 above, the shares so converted or redeemed shall be cancelled and shall not
be issuable by the Corporation, and the Certificate of Incorporation of the
Corporation shall be appropriately amended to effect the corresponding reduction
in the Corporation's authorized capital stock. Notwithstanding the foregoing, no
such amendment shall be required unless the aggregate number of shares converted
or redeemed exceeds 25% of the Corporation's then authorized shares of Series A
Preferred Stock.

        13. RESERVATION OF COMMON STOCK. The Corporation shall at all times on
and after the 15th day following the first meeting of stockholders of the
Corporation occurring on or after the Issue Date reserve and keep available out
of its authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of the Series A Preferred Stock such
number of its shares of Common Stock free from preemptive rights as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
the Series A Preferred Stock. If at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Series A Preferred Stock, in addition to
such other remedies as shall be available to the holders of such Series A
Preferred Stock, the Corporation will take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes, including, without
limitation, engaging in best efforts to obtain the requisite stockholder
approval of any necessary amendment to the Corporation's Certificate of
Incorporation.

        14. COSTS. The Corporation shall pay all documentary, stamp, transfer or
other transactional taxes attributable to the issuance or delivery of shares of
Common Stock upon conversion of any shares of Series A Preferred Stock; provided
that the Corporation shall not be required to pay any taxes which may be payable
in respect of any transfer involved in the issuance or delivery of any
certificate for such shares in a name other than that of the holder of the
shares of Series A Preferred Stock in respect of which such shares are being
issued.

        15. APPROVALS. If any shares of Common Stock to be reserved for the
purpose of conversion of shares of Series A Preferred Stock require registration
with or approval of any governmental authority under any Federal or state law
before such

                                       16
<PAGE>   17

shares may be validly issued or delivered upon conversion, then the Corporation
will in good faith and as expeditiously as possible endeavor to secure such
registration or approval, as the case may be. If, and so long as, any Common
Stock into which the shares of Series A Preferred Stock are then convertible is
listed on any national securities exchange, the Corporation will, if permitted
by the rules of such exchange, list and keep listed on such exchange, upon
official notice of issuance, all shares of such Common Stock issuable upon
conversion.

        16. VALID ISSUANCE. All shares of Common Stock which may be issued upon
conversion of the shares of Series A Preferred Stock will upon issuance by the
Corporation be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issuance thereof, and the
Corporation shall take no action which will cause a contrary result (including
without limitation, any action which would cause the Conversion Price to be less
than the par value, if any, of the Common Stock).

        17. EXCLUSION OF OTHER RIGHTS. Except as may otherwise be required by
law, the shares of Series A Preferred Stock shall not have any preferences or
relative, participating, optional or other special rights, other than those
specifically set forth in this resolution (as such resolution may be amended
from time to time) and in the Corporation's Certificate of Incorporation. The
shares of Series A Preferred Stock shall have no preemptive or subscription
rights.

        18. HEADINGS OF SUBDIVISIONS. The headings of the various subdivisions
hereof are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.

        19. SEVERABILITY OF PROVISIONS. If any right, preference or limitation
of the Series A Preferred Stock set forth in this resolution (as such resolution
may be amended from time to time) is invalid, unlawful or incapable of being
enforced by reason of any rule of law or public policy, all other rights,
preferences and limitations set forth in this resolution (as so amended) which
can be given effect without the invalid, unlawful or unenforceable right,
preference or limitation shall, nevertheless, remain in full force and effect,
and no right, preference or limitation herein set forth shall be deemed
dependent upon any other such right, preference or limitation unless so
expressed herein.

        20. STATUS OF REACQUIRED SHARES. Shares of Series A Preferred Stock
which have been issued and reacquired in any manner shall (upon compliance with
any applicable provisions of the laws of the State of Delaware) have the status
of authorized and unissued shares of Series A Preferred Stock issuable in series
undesignated as to series and may be redesignated and reissued.

                                       17
<PAGE>   18

               FURTHER RESOLVED, that, before the Corporation shall issue any
shares of Series A Preferred Stock, a certificate pursuant to Section 151 of the
DGCL shall be made, executed, acknowledged, filed, and recorded in accordance
with the provisions of Sections 103 and 151 of the DGCL, and the proper officers
of the Corporation be, and they hereby are, authorized and directed to do all
acts and things which may be necessary or proper in their opinion to carry into
effect the purposes and intent of this and the foregoing resolutions.

                                       18
<PAGE>   19

               IN WITNESS WHEREOF, the Corporation has caused this Certifi-cate
of Designation to be signed in its name and on its behalf and attested on this
12th day of January, 2000, by duly authorized officers of this Corporation.

                                    KRAUSE'S FURNITURE, INC.

                                    By: /s/ Robert A. Burton
                                        ----------------------------------------
                                    Name:: Robert A. Burton
                                    Title: Executive Vice President and CFO

ATTEST:

By: /s/ Judith O. Lasker
   --------------------------------
    Name:  Judith O. Lasker
    Title:  Secretary and General Counsel

                                       19<PAGE>   1
                                                                     EXHIBIT 4.7

                          AMENDMENT TO THE SUPPLEMENTAL
                          SECURITIES PURCHASE AGREEMENT

     This agreement is made as of December 14, 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, 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 November 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.

<PAGE>   2

<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           9.0 MM            8.8 MM            7.0 MM

2000              6.6 MM           7.0 MM            8.0 MM            9.0 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>

          (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>
 1998               N/A             N/A               N/A               2.25

 1999               2.75            2.75              3.75              4.85

 2000               4.85            4.5               4.0               3.5

 2001               1.10            1.00              1.00              1.00

 2002               1.00            1.00              1.00              N/A
</TABLE>

                                      -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:

<TABLE>
<CAPTION>
Year                 Q1              Q2                Q3                Q4
----               -----            ----              ----              ----
<S>                <C>              <C>               <C>               <C>
1998               N/A               N/A              N/A               0.85

1999               0.95             0.70              0.75              0.83

2000               1.0              1.05              1.10              1.20

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

             2002(2)                                        $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.

                                      -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:
                                           -------------------------------------
                                           Name:  Robert A. Burton
                                           Title: Executive Vice President
                                                  and Chief Financial Officer

                                        GENERAL ELECTRIC CAPITAL CORPORATION

                                        By:
                                           -------------------------------------
                                           Name:  George L. Hashbarger, Jr.
                                           Title: Department Operations Manager

                                        JAPAN OMNIBUS LTD.

                                        By:
                                           -------------------------------------
                                           Name:
                                           Title:

                                      -4-

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