<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 29, 1995
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 of incorporation) (I.R.S. Employer
Identification No.)
5980 Stoneridge Drive, Suite 109, Pleasanton, California 94588
(Address of principal executive offices) (Zip Code)
(510) 460-6201
(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, 1995 the Registrant had 4,081,796 shares of common stock
outstanding.
<PAGE> 2
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated balance sheet 1
- Consolidated statement of operations 2
- Consolidated statement of stockholders' equity 3
- Consolidated statement of cash flows 4
- Notes to consolidated financial statements 5 - 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 9
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
<PAGE> 3
KRAUSE'S FURNITURE, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
October 29, January 29,
1995 1995
-------------- --------------
(In thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,744 $ 1,952
Accounts receivable, net of allowance for
doubtful accounts of $571 and $847 644 959
Refundable income taxes 1,503 920
Inventories 15,359 18,016
Prepaid expenses 1,178 1,450
-------- --------
Total current assets 20,428 23,297
Property, equipment, and
leasehold improvements, net 6,666 6,519
Goodwill, net 16,661 17,425
Leasehold interest, net 2,206 2,485
Other assets 3,484 3,793
-------- --------
$ 49,445 $ 53,519
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 16,428 $ 17,311
Accrued payroll and related expenses 1,618 1,704
Customer deposits 6,410 6,809
Notes payable 18 17
Income taxes payable 575 1,207
-------- --------
Total current liabilities 25,049 27,048
Long-term liabilities:
Secured revolving credit and other notes 4,219 2,181
Deferred gain 341 -
Other liabilities 1,623 1,590
-------- --------
6,183 3,771
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value;
2,000,000 shares authorized, 364,780 and 547,352 shares outstanding
(at stated value) (liquidation preference $22.50 per share) 7,781 10,455
Common stock, $.001 par value; 8,333,333
shares authorized, 4,081,796 and 3,471,411 shares outstanding 12 11
Capital in excess of par value 27,153 24,480
Accumulated deficit (16,733) (12,246)
-------- --------
Total stockholders' equity 18,213 22,700
-------- --------
$ 49,445 $ 53,519
======== ========
</TABLE>
See accompanying notes.
1
<PAGE> 4
KRAUSE'S FURNITURE, INC
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------------- --------------------------------
October 29, October 30, October 29, October 30,
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net furniture sales $31,286 $31,886 $92,465 $87,023
Cost of sales 15,031 15,369 44,620 40,183
------- ------- ------- -------
Gross profit 16,255 16,517 47,845 46,840
------- ------- ------- -------
Selling expenses 14,915 13,837 44,532 39,887
General and administrative 2,385 2,993 8,094 8,237
Amortization of goodwill 255 255 764 765
------- ------- ------- -------
17,555 17,085 53,390 48,889
------- ------- ------- -------
Loss from operations (1,300) (568) (5,545) (2,049)
Equity in earnings of Mr. Coffee - - - 224
Gain on sale of Mr. Coffee stock - 12,115 - 12,115
Interest expense (165) (260) (528) (1,898)
Other income (expense) 70 (83) 259 (73)
------- ------- ------- -------
Income(loss) before income taxes (1,395) 11,204 (5,814) 8,319
Provision (benefit) for income taxes - 1,631 (1,327) 1,631
------- ------- ------- -------
Income (loss) before extraordinary item (1,395) 9,573 (4,487) 6,688
Extraordinary loss - (436) - (436)
------- ------- ------- -------
Net income (loss) ($1,395) $ 9,137 ($4,487) $ 6,252
======= ======= ======= =======
Per share:
Income (loss) before extraordinary item ($0.34) $ 1.77 ($1.15) $ 1.24
Extraordinary loss - (0.08) - (0.08)
------- ------- ------- -------
Net income (loss) ($0.34) $ 1.69 ($1.15) $ 1.16
======= ======= ======= =======
Average number of
common and common
equivalent shares outstanding 4,082 5,392 3,905 5,394
</TABLE>
See accompanying notes.
2
<PAGE> 5
KRAUSE'S FURNITURE, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-------------------------
October 29, October 30,
1995 1994
----------- -----------
(In thousands)
<S> <C> <C>
Convertible Preferred Stock:
Balance at beginning of period $ 10,455 $ 11,856
Conversion of Series B preferred stock (2,674) -
-------- --------
Balance at end of period $ 7,781 $ 11,856
======== ========
Common Stock:
Balance at beginning of period $ 11 $ 10
Conversion of Series B preferred stock 1 -
-------- --------
Balance at end of period $ 12 $ 10
======== ========
Capital in Excess of Par Value:
Balance at beginning of period $ 24,480 $ 23,180
Conversion of Series B preferred stock 2,673 -
Exercise of stock options, excess over par value - 5
Repurchase of common stock - (105)
-------- --------
Balance at end of period $ 27,153 $ 23,080
======== ========
Accumulated Deficit:
Balance at beginning of period ($12,246) ($16,606)
Net income (loss) (4,487) 6,252
-------- --------
Balance at end of period ($16,733) ($10,354)
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 6
KRAUSE'S FURNITURE, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-------------------------
October 29, October 30,
1995 1994
------------- -------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($4,487) $ 6,252
Adjustments to reconcile net income ( loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 1,851 2,572
Equity in earnings of Mr. Coffee - (224)
Gain from sale of Mr. Coffee stock - (12,115)
Write off of deferred financing costs and prepaid interest
in connection with early retirement of debt - 727
Change in assets and liabilities :
Accounts receivable 315 (76)
Refundable income taxes (583) -
Inventories 2,657 (2,166)
Prepaid expenses and other assets 581 (260)
Accounts payable and accrued liabilities (936) 4,952
Customer deposits (399) 479
Deferred gain 341 (760)
Income taxes payable (632) 2,098
------- --------
Net cash provided (used) by operating activities (1,292) 1,479
------- --------
Cash flows from investing activities:
Capital expenditures (955) (942)
Proceeds from sale of Mr. Coffee stock - 23,258
------- --------
Net cash provided (used) by investing activities (955) 22,316
------- --------
Cash flows from financing activities:
Net borrowings (payments) under revolving credit 2,039 (18,690)
and other notes
Proceeds from exercise of stock options - 5
Purchase of common stock - (55)
------- --------
Net cash provided (used) by financing activities 2,039 (18,740)
------- --------
Net increase (decrease) in cash and cash equivalents (208) 5,055
Cash and cash equivalents at beginning of period 1,952 3,025
------- --------
Cash and cash equivalents at end of period $ 1,744 $ 8,080
======= ========
Supplemental disclosures of cash flow information-
Cash paid during the period for:
Interest $ 248 $ 803
Income taxes 200 -
Noncash investing and financing activities-
Conversion of preferred stock 2,674 1,401
Note receivable reduction in exchange for
common stock - 50
</TABLE>
See accompanying notes.
4
<PAGE> 7
KRAUSE'S FURNITURE, INC
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying consolidated financial statements of Krause's
Furniture, Inc. (the "Company") and its wholly owned subsidiary, Krause's Sofa
Factory ("KSF"), have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission and reflect all 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.
In April 1995 the Company changed its fiscal year to a 52/53 week
fiscal year ending on the last Sunday in January. This report is for the
unaudited third fiscal 1995 quarter ended October 29, 1995. Unaudited
operating and cash flow information has been presented for the comparable 1994
period.
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 December 31, 1994. The
results of operations for the thirteen weeks ended October 29, 1995 are not
necessarily indicative of results to be expected in future periods.
2. Cash and cash equivalents includes U. S. Treasury bills with
maturities of less than 90 days carried at amortized cost, which approximates
market. These securities are classified as held-to-maturity in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115. The Company
has no securities classified as available-for-sale under SFAS No. 115.
3. Inventories are carried at the lower of cost or market using the
first-in, first-out method and are comprised of the following:
<TABLE>
<CAPTION>
October 29, January 29,
1995 1995
------------- ------------
<S> <C> <C>
Finished goods $13,024,000 $13,161,000
Work-in-process 259,000 479,000
Raw materials 2,076,000 4,376,000
----------- -----------
$15,359,000 $18,016,000
----------- -----------
</TABLE>
5
<PAGE> 8
4. Long-term notes payable at October 29, 1995 consist of $4,152,000 of
secured revolving credit notes and $67,000 of other notes. The secured
revolving credit notes were issued under a two-year revolving credit
arrangement entered into with a financial institution in January 1995. The
credit agreement provides for revolving loans of up to $10 million based on the
value of inventories. As of October 29, 1995, borrowing under the revolving
credit was limited to approximately $6.7 million as defined in the agreement.
Substantially all of KSF's assets are pledged as collateral for the loans which
are guaranteed by the Company. Interest on the loans is payable monthly at the
rate of 1.5% in excess of the prime rate.
5. On June 1, 1995 all of the Company's Series B preferred stock was
converted into 1,190,000 shares of common stock. This conversion resulted in a
transfer of $2,674,000 from convertible preferred stock to common stock
($1,000) and capital in excess of par value ($2,673,000).
6. On August 1, 1995 the Company effected a one-for-three reverse split
of its outstanding common stock. All share and per share data presented in
this report have been restated to reflect the reverse split.
7. Income (loss) per share amounts for 1995 were computed based on the
weighted average number of common shares outstanding since common stock
equivalents were antidilutive. Per share amounts for 1994 were computed based
on the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares arise from dilutive stock options and
warrants and convertibility of preferred stock into common stock.
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS
RESULTS OF OPERATIONS
Results for the thirteen weeks and thirty-nine weeks ended October 29,
1995 reflect a continuing industry-wide softness in retail sales as well as
the costs associated with the Company's efforts to reengineer its business.
Soft consumer demand caused retail inventories to become inflated
throughout the industry and resulted in heavy promotional price discounting at
the retail level. Krause's made-to-order strategy minimized the inventory
impact on the Company, but did not insulate it from the sales softness and
competitive promotional pricing pressures. Substantially higher levels of
discounting versus last year adversely impacted margins in 1995.
In addition the Company has undertaken an aggressive program to
improve customer service and perceptions, increase operating efficiencies,
reduce cycle times, reduce inventory levels and reduce overhead. While
management expects this "reengineering" effort to increase sales, improve
operating margins and increase cash flow, the costs of this program adversely
impacted 1995 results by approximately $1 million. Early positive indications
of this year's reengineering effort can be seen in the reduction in general and
administrative expenses (excluding employee termination costs), reduced levels
of inventories and improving factory efficiencies, which resulted in a positive
comparable gross margin percentage for the third quarter.
Thirteen Weeks Ended October 29, 1995 Compared to Thirteen Weeks Ended October
30, 1994
Net furniture sales for the third fiscal quarter 1995 were
$31,286,000, which was a decrease of approximately 1.9% from net sales in the
comparable period of 1994. The 1995 third quarter sales decrease was
primarily attributable to a 10.7% decrease in same-store sales compared to
1994, partially offset by sales from five additional new stores.
Gross margin was 52.0% of net sales in the third quarter 1995 compared
to 51.8% in 1994. The slightly higher gross margins reversed this year's
negative comparable trend and resulted primarily from changes in product mix
and improved factory efficiencies.
Selling expenses were $14,915,000 in the third quarter 1995 and
$13,837,000 in the third quarter 1994. The increase in total selling expenses
was principally because of variable selling expenses attributable to higher
sales incentives and operating costs associated with five additional showrooms
opened this year. Selling expenses as a percentage of sales increased to 47.7%
in the third quarter 1995 from 43.4% in the comparable period last year. This
was primarily the result of additional sales incentives for the sales force.
General and administrative expenses, exclusive of employee
termination costs of $124,000 in the third quarter 1995, decreased as a
percentage of sales to 7.2% from 9.4%. Exclusive of employee termination
costs, general and administrative expenses were lower in the 1995 period by
$732,000, principally a result of the Company's reengineering efforts.
7
<PAGE> 10
Interest expense decreased by $95,000 in the third quarter 1995
compared to the third quarter 1994 principally due to less debt outstanding in
1995.
In August 1994 the Company sold all of its common stock holdings in
Mr. Coffee, inc. This sale resulted in a pretax gain of $12,115,000.
Thirty-Nine Weeks Ended October 29, 1995 Compared to Thirty-Nine Weeks
Ended October 30, 1994
Net furniture sales for the first thirty-nine weeks of 1995 were
$92,465,000 compared to $87,023,000 for the same period in 1994. The sales
increase was due principally to sales from seven additional stores in 1995,
offset by a same-store sales decrease of 3.0%.
Gross margin was 51.7% of net sales in the 1995 period compared to
53.8% in the 1994 period. Lower gross margins in 1995 resulted from extensive
promotional pricing and a change in product mix.
Selling expenses were $44,532,000, an increase of approximately 11.6%
from the same period last year. Selling expenses were 48.2% of net furniture
sales in 1995 compared to 45.8% in the 1994 period. Selling expenses increased
primarily because of the same reasons explained in the quarterly comparison
above.
General and administrative expenses decreased by $143,000 due
principally to general cost reductions offset by employee termination expenses
of $699,000. General and administrative expenses, exclusive of employee
termination expenses, were 8.0% and 9.5% of net furniture sales in the 1995
and 1994 periods.
Interest expense decreased by $1,370,000 in the 1995 period due to
significantly less debt outstanding. In August and September 1994 the Company
paid off approximately $18.7 million of debt with proceeds from the sale of its
investment in Mr. Coffee.
The Company's investment in Mr. Coffee, inc. was accounted for by the
equity method which resulted in equity in earnings of $224,000 in the
thirty-nine weeks ended October 30, 1994. The Company sold its investment in
Mr. Coffee in August 1994.
Income tax benefits of $1,327,000 represents refundable income taxes
available from the carryback of 1995 losses. There were no carryback tax
benefits recorded in the third quarter 1995 and none are available in future
periods. The provisions for income taxes in the 1994 periods were computed by
applying the estimated annualized effective tax rate to income before income
taxes. This rate reflects the benefit of utilization of net operating loss
carryforwards for federal and state tax purposes, as well as a reduction of the
valuation allowance for deferred tax assets.
8
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
As of October 29, 1995, the Company had $1,744,000 in cash and cash
equivalents compared to $1,952,000 as of January 29, 1995.
Cash Flow - Thirty-Nine Weeks Ended October 29, 1995
Cash and cash equivalents decreased by $208,000 during the period.
Operating activities used net cash of $1,292,000 principally from a $2,636,000
cash loss from operations and a decrease in accounts payable and other
liabilities of $1,626,000, offset by decreases in inventories of $2,657,000 and
other assets of $313,000. Investing activities were capital expenditures of
$955,000 principally for costs of construction of a showroom in Dallas and for
additions to leasehold improvements of other new showrooms. The Dallas
showroom was sold for approximately $1 million cash in May 1995 and leased
back. This sale and leaseback resulted in a $386,000 deferred profit to be
amortized over the term of the lease. Financing activities included $2,052,000
of net borrowings under a revolving credit agreement (see Note 4).
Cash Flow - Thirty-Nine Weeks Ended October 30, 1994
Cash and cash equivalents increased by $5,055,000 during the period.
Operating activities provided net cash of $1,479,000, principally from an
increase in accounts payable and other liabilities of $6,769,000 offset by a
cash loss from operations of $2,788,000 and an increase in inventories of
$2,166,000. Investing activities during the period were capital expenditures
of $942,000, principally for additions to leasehold improvements of retail
showrooms. Financing activities during the period included $18,690,000
payments on notes and purchase of common stock of $55,000.
Outlook
The Company's cash, expected cash flow from operations and credit line
are considered adequate to meet short-term cash requirements for operations and
capital expenditures. As of October 29, 1995 there were no significant
long-term capital expenditure commitments.
Management believes that the reengineering program described above
will continue to produce improved results. These improvements should buffer any
short-term continuation of the softness in retail sales.
In order to support working capital requirements, sustain growth and
reduce liabilities, the Company may raise additional equity or debt in the
future. Management has no knowledge of any trends or events that are likely to
substantially increase or decrease liquidity needs in the near future other
than as noted above or for acquisitions and expansion of the business that the
Company may undertake.
9
<PAGE> 12
Item 6. Exhibits and Reports on Form 8-K filed during the quarter
ended October 29, 1995
None.
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 11, 1995
------------------------
Robert G. Sharpe
Executive Vice President
Date: December 11, 1995
------------------------
D. Panah
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-28-1996
<PERIOD-START> JUL-31-1995
<PERIOD-END> OCT-29-1995
<CASH> 1,744
<SECURITIES> 0
<RECEIVABLES> 1,215
<ALLOWANCES> 571
<INVENTORY> 15,359
<CURRENT-ASSETS> 20,428
<PP&E> 12,826
<DEPRECIATION> 6,160
<TOTAL-ASSETS> 49,445
<CURRENT-LIABILITIES> 25,049
<BONDS> 0
<COMMON> 12
0
7,781
<OTHER-SE> 10,420
<TOTAL-LIABILITY-AND-EQUITY> 49,445
<SALES> 31,286
<TOTAL-REVENUES> 31,286
<CGS> 15,031
<TOTAL-COSTS> 15,031
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 39
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> (1,395)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,395)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,395)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
