Document:

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                                                                    EXHIBIT 10.5

                      (CONGRESS FINANCIAL CORP. LETTERHEAD)
                                   May 9, 2001

Krause's Custom Crafted Furniture Corp.
Castro Convertible Corporation
200 North Berry Street
Brea, California 92821

Gentlemen:

        Reference is made to that certain Tenth Amendment to Loan and Security
Agreement dated as of April 10, 2001 among us (the "Tenth Amendment"), which
amended that certain Loan and Security Agreement dated as of January 20, 1995
among us, as previously amended (the "Loan Agreement") subject to the
satisfaction of the conditions precedent set forth in Section 5 of the Tenth
Amendment (capitalized terms used herein without definition shall have the
meanings ascribed to them in the Loan Agreement and the Tenth Amendment). One of
those conditions precedent, namely that we receive copies of the documents
executed by Borrower or Parent in connection with the GECC Loan, together with
an original Intercreditor Agreement duly executed and delivered by GECC with
respect thereto, all in form and substance satisfactory to us, as set forth in
Section 5(e) of the Tenth Amendment (the "GECC Condition"), has not yet been
satisfied. You have requested us to waive the GECC Condition. We further
understand that the maximum aggregate principal sum of the GECC Loan may be
increased from $3,000,000.

        We hereby waive the GECC Condition as a condition precedent to the
effectiveness of the Tenth Amendment, and the Tenth Amendment shall be deemed
effective, subject, however, to the following terms, conditions, modifications
and agreements:

        1. Section 1(a) of the Tenth Amendment, amending the definition of
"Adjusted Net Worth" in Section 1.2 of the Loan Agreement, shall not be
effective unless and until the GECC Condition is satisfied; and upon
satisfaction of the GECC Condition, Section 1(a) of the Tenth Amendment and such
definition shall be deemed modified as necessary to reflect the actual maximum
aggregate principal sum of the GECC Loan.

        2. With respect to Section 1(a) of the Tenth Amendment and Section 9.14
of the Loan Agreement, Borrower shall maintain Adjusted Net Worth as of the last
day of each fiscal month of not less than the amount set forth below for such
fiscal month, provided, that, upon satisfaction of the GECC Condition, each of
the amounts set forth below shall be increased by the actual maximum aggregate
principal sum of the GECC Loan:

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                     ------------------       ---------------
                        Fiscal Month              Amount
                     ------------------       ---------------
                         April 2001             $700,000
                     ------------------       ---------------
                          May 2001             <$100,000>
                     ------------------       ---------------
                          June 2001             $600,000
                     ------------------       ---------------
                          July 2001            <$800,000>
                     ------------------       ---------------
                         August 2001               $0
                     ------------------       ---------------
                       September 2001           $500,000
                     ------------------       ---------------
                        October 2001           <$400,000>
                     ------------------       ---------------
                        November 2001          <$400,000>
                     ------------------       ---------------
                      Each fiscal month
                        thereafter             $1,900,000
                     ------------------       ---------------

        3. The consent to the GECC Loan set forth in Section 3 of the Tenth
Amendment shall not be effective unless and until the GECC Condition is
satisfied.

        This letter agreement shall amend and modify the Tenth Amendment and the
Loan Agreement. To the extent of any inconsistencies between this letter
agreement, on the one hand, and the Tenth Amendment or the Loan Agreement, on
the other hand, this letter agreement shall govern. In all other respects, the
Tenth Amendment and the Loan Agreement shall remain in full force and effect.

<PAGE>   3

                                    Very truly yours,

                                    CONGRESS FINANCIAL CORPORATION (WESTERN)

/s/ Randy Bowman
Accepted and agreed to this
9th day of May 2001:

KRAUSE'S CUSTOM CRAFTED
FURNITURE CORP.,
a California corporation

By:   /s/ Robert A. Burton
    ----------------------------------
Name: Robert A. Burton
      --------------------------------
Title: Exec. V.P., CFO
      --------------------------------

CASTRO CONVERTIBLE CORPORATION,
a New York corporation

By:   /s/ Robert A. Burton
    ----------------------------------
Name: Robert A. Burton
      --------------------------------
Title: Exec. V.P., CFO
      --------------------------------

KRAUSE'S FURNITURE, INC.,
a Delaware corporation

By:   /s/ Robert A. Burton
    ----------------------------------
Name: Robert A. Burton
      --------------------------------
Title: Exec. V.P., CFO
      --------------------------------<PAGE>   1

                                                                EXHIBIT NO. 10.6

                            AMENDMENT TO SUPPLEMENTAL
                          SECURITIES PURCHASE AGREEMENT

This Amendment to Supplemental Securities Purchase Agreement (this "Agreement")
is made as of April 10, 2001 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 "Purchase
Agreement"; capitalized terms not defined herein shall have the meanings set
forth in the Purchase Agreement), which provided for the purchase and sale of
certain Notes and amended and restated the provisions of the Original Agreement
relating to such Notes; and

Whereas, pursuant to the terms of the Notes, the Company is required to make a
principal repayment to GECC and JOL in the amount of $1,000,000 (the "Scheduled
Repayment Amount") on March 31, 2001; and

Whereas, the Company has requested that GECC and JOL waive the requirement that
the Company pay the Scheduled Repayment Amount on March 31, 2001 and adjust the
payment schedule so that no principal repayment shall be required until March
31, 2002; and

Whereas, GECC and JOL are willing to waive such payment on such date, subject to
the terms and conditions contained herein; and

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:

    Section 1. Maturity; Principal and Interest Payments.

               (a)  The maturity date of the Notes is hereby extended until June
                    30, 2004.

               (b)  GECC and JOL hereby waive any Event of Default under the
                    Purchase Agreement which would arise from a failure by the
                    Company to pay the Scheduled Repayment Amount on March 31,
                    2001; provided that the full amount of such unpaid Scheduled
                    Repayment Amount and all other principal from time to time
                    outstanding under the Notes (together with all unpaid
                    interest thereon from time to time outstanding) shall bear
                    interest thereon from and including March 31, 2001 at the
                    rate of 12% per annum computed in the manner provided in the
                    Notes and otherwise in accordance with the terms of the
                    Notes and this Agreement until paid in full.

               (c)  Pursuant to a letter agreement dated May 5, 2000, GECC and
                    JOL agreed that interest on the Notes would be deferred
                    until March 31, 2001 and that such deferred interest could
                    be satisfied by issuance of shares of the Company's Series A
                    Preferred Stock to GECC and JOL. The parties acknowledge and

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                    agree that interest shall accrue on the Notes from and
                    including March 31, 2001, but such amount of accrued
                    interest shall be added to the principal amount of the Notes
                    at the June 30, September 30 and December 31 for 2001.
                    Accrued interest shall be paid in full on each date for
                    which principal payments become due (as set forth in Section
                    1(d) below) or upon any prepayment of principal.
                    Accordingly, on March 31, 2002 an interest payment shall be
                    made of all accrued interest from and including December 31,
                    2001 to March 31, 2002.

               (d)  Each of the Notes and the Purchase Agreement is hereby
                    amended to provide that the payment date for each scheduled
                    payment of principal is as follows:

                  Payment Date           Amount of Principal Due
                  March 31, 2001         0
                  June 30, 2001          0 (accrued interest added to principal)
                  September 30, 2001     0 (accrued interest added to principal)
                  December 31, 2001      0 (accrued interest added to principal)
                  March 31, 2002         $1 million (plus accrued interest)
                  June 30, 2002          $1 million (plus accrued interest)
                  September 30, 2002     $1 million (plus accrued interest)
                  December 31, 2002      $1 million (plus accrued interest)
                  March 31, 2003         $1 million (plus accrued interest)
                  June 30, 2003          $1 million (plus accrued interest)
                  September 30, 2003     $1 million (plus accrued interest)
                  December 31, 2003      $1 million (plus accrued interest)
                  March 31, 2004         $2 million (plus accrued interest)
                  June 30, 2004          Balance (plus accrued interest)

Section 2. Financial Covenants Amendments. Effective as of the date of this
Agreement, Section 6.2 (Financial Covenants) of the Purchase Agreement 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.12

          (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 2001 is the twelve-month period ending 12/23/01 and the
     fiscal quarters of fiscal year 2001 are the quarterly periods ending
     3/25/01, 6/24/01, 9/23/01 and 12/23/01.

(2)  The Company's compliance with all of the financial covenants set forth
     herein shall take into account all of the Company's business, including the
     Company's e-commerce and business-to-business operations and any proceeds
     previously segregated in connection therewith.

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          Year       Q1       Q2       Q3       Q4
          ----      ----     ----     ----     ----

          1998      N/A      N/A      N/A      11.5
          1999      11.5      9.0      8.8      4.0
          2000       9.2      9.2      6.8      2.3
          2001       3.2     (0.1)    (1.7)    (1.7)
          2002      (1.7)    32       35       40
          2003      40       40       45       45
          2004      50       50       N/A      N/A

     ; provided, that for purposes of this covenant, for Q2, Q3 and Q4 of the
     2001 year and for Q1 of the 2002 year, such amounts shall exclude interest
     and fees pursuant to the A/R Line of Credit (defined below), if any;

          (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:

          Year       Q1       Q2       Q3       Q4
          ----      ----     ----     ----     ----

          1998      N/A      N/A      N/A       2.25
          1999       2.75     2.75     3.75     7.5
          2000       3.2      3.7      5.6     13.4
          2001      10.5     35.2     34.7     32.4
          2002      32.5      1.0      1.0      1.0
          2003       1.0      1.0      0.9      0.9
          2004       0.9      0.9      N/A      N/A

     ; provided, that in the event that the Consolidated Net Worth as of the end
     of any fiscal quarter is less than 1 it shall be deemed to be 1; provided,
     that for purposes of this covenant, for Q2, Q3 and Q4 of the 2001 year and
     for Q1 of the 2002 year, such amounts shall exclude interest and fees
     pursuant to the A/R Line of Credit, if any; and provided further that for
     Q2, Q3 and Q4 of the 2001 year, for purposes of this covenant only,
     Consolidated Total Indebtedness shall not include borrowings made pursuant
     to a line of credit of the Company secured by receivables generated in the
     contract manufacturing business for commercial customers (so long as such
     line of credit has customary terms, has a maximum limit of $2 million and
     prior to its execution by the Company has been described in reasonable
     detail in writing to GECC and JOL (the "A/R Line of Credit")).

          (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:

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          Year       Q1       Q2       Q3       Q4
          ----      ----     ----     ----     ----

          1998      N/A      N/A      N/A      0.85
          1999       0.95    0.70     0.75     0.005
          2000       0.65    0.55     0.08     0.5
          2001      (0.04)   0.6      5.90     1.14
          2002       1.16    1.3      1.3      1.5
          2003       1.4     1.4      1.4      1.5
          2004       1.5     1.5      N/A      N/A

     ; provided, that for purposes of this covenant, for Q2, Q3 and Q4 of the
     2001 year and for Q1 of the 2002 year, such amounts shall exclude interest
     and fees pursuant to the A/R Line of Credit, if any;

          (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       $7.6 million
          1999       $10.0 million
          2000       $5.0 million
          2001       $1.5 million
          2002       $3.0 million
          2003       $4.0 million
          2004       $5.0 million

          Any amount not spent in any one fiscal year may be spend in a
     succeeding fiscal year, subject to the Company's annual business plan.

Section 3.  Certain Restrictions.

          (a) The Company hereby agrees that it shall not, for so long as GECC
     is entitled to designate the GECC Designee (whether or not the GECC
     Designee is then serving on the Board) directly or indirectly, and shall
     not permit any of its Subsidiaries (as defined in the Stockholders
     Agreement) to, directly or indirectly, take any of the actions delineated
     in Section 2.2 of the Stockholders Agreement without (i) the prior written
     consent of GECC or (ii) the approval, at a meeting of the Board or a
     committee thereof duly called and held, of the GECC Designee. The Company
     further agrees that any approval of the GECC Designee under the
     Stockholders Agreement or otherwise may alternatively be provided by GECC
     in writing, whether or not the GECC Designee is then serving on the Board.

          (b) The term "Stockholders Agreement" means the Amended and Restated
     Stockholders Agreement by and among Krause's Furniture, Inc. and the
     Stockholders listed on the signature pages thereof, dated as of January 14,
     200 (as amended, and as may be further amended). As used in this Section 3,
     the terms "Board", "GECC Designee" and "Subsidiaries" are used as defined
     in the Stockholders Agreement.

Section 4. Conditions. As consideration for and as conditions to the waiver by
GECC and JOL set forth in Section 1 above and further amendments and covenants
above, the Company shall execute and/or deliver the following documents:

<PAGE>   5

          (c) one or more notes, substantially in the form of the Notes and
     including the terms relating to the Notes set forth in Section 1 above, in
     favor of GECC and JOL, pro rata in accordance with the aggregate
     outstanding principal amount of Notes held by them, in the aggregate
     principal amount of $200,000, which amount shall constitute a deferred fee
     as consideration for the waiver granted in this Agreement (such notes shall
     be issued within 10 business days of the date hereof);

          (d) any new notes or amendments to the Notes necessary to effect the
     terms relating to the Notes set forth in Section 1 above (such notes or
     amendments, together with the notes described in clause (a) above, the
     "2001 Notes"; for purposes of the Purchase Agreement and this Agreement,
     the term "Notes" shall be deemed to include the 2001 Notes) (such notes or
     amendments shall be issued within 10 business days of the date hereof);

          (e) all shareholder and other consents and actions, including without
     limitation the consent of TH Lee.Putnam Internet Partners, L.P. and TH
     Lee.Putnam Internet Parallel Partners, L.P., together with their
     affiliates, necessary to permit the Company to use all of the remaining
     proceeds of the private placement of its Series A Convertible Preferred
     Stock of the Company for general corporate purposes free of any right of
     redemption or other default rights relating thereto, other than the
     limitations set forth in the Purchase Agreement or this Agreement; and

          (f) all other consents, including, without limitation, under the
     Series A Convertible Preferred Stock of the Company or the Senior Credit
     Facility (as defined below), necessary to effect the terms of this
     Agreement.

In accordance with the terms of Section 12.10 of the Purchase Agreement, the
Company will reimburse GECC and JOL for the reasonable fees and expenses of
their counsel in connection with this Agreement.

Section 5. Limitation on Waiver. Except to the extent expressly set forth in
this Agreement, the amendments and waivers set forth herein shall not constitute
a release of, consent to or waiver of any other provision, term or condition of
the Purchase Agreement or the Notes, and all other agreements, documents,
instruments and certificates executed in connection therewith are ratified and
confirmed in all respects and shall remain in full force and effect in
accordance with their respective terms.

Section 6. Representations and Warranties. To induce GECC and JOL to enter into
this Agreement, the Company hereby represents and warrants that (a) immediately
prior to and after giving effect to this Agreement, (i) no violation of the
Purchase Agreement exists or will exist and no Event of Default has occurred or
will have occurred and be continuing thereunder and (ii) no Event of Default has
occurred or will have occurred and be continuing under the terms of the Senior
Credit Facility; (b) this Agreement and the 2001 Notes have been duly executed
and delivered by the Company, such execution and delivery, and the performance
by the Company of this Agreement and the 2001 Notes, have been duly authorized
by all necessary corporate action on the part of the Company, and this Agreement
and the 2001 Notes each constitute valid, legally binding obligations of the
Company, enforceable against the Company in accordance with their respective
terms, and (c) each of the consents and other actions described in clauses (c)
and (d) of Section 4 are and shall at all times after the date of this Agreement
remain in full force with the effect described in such clauses. A breach of any
of the foregoing representations and warranties shall constitute an Event of
Default under the terms of the Purchase Agreement.

<PAGE>   6

The "Senior Credit Facility" means the Loan and Security Agreement dated as of
January 20, 1995 between Congress Financial Corporation (Western) as lender and
Krause's Sofa Factory and Castro Convertible Corporation as borrowers, including
any amendments, refinancings, refundings, replacements or extensions thereof and
including any guaranty thereof.

Section 7. Governing Law; Jurisdiction. The provisions of Section 12.13
(Governing Law; Consent to Jurisdiction) of the Purchase Agreement shall govern
this Agreement as if set forth herein.

Section 8. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.

     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:  EVP and CFO

                                            GENERAL ELECTRIC CAPITAL CORPORATION

                                            By: /s/ Brian P. Keil
                                                --------------------------------
                                            Name:   Brian P. Keil
                                            Title:  Vice President

                                            JAPAN OMNIBUS LTD.

                                            By: /s/ James R. Hodge
                                                --------------------------------
                                            Name:   James R. Hodge
                                            Title:

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