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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 April 30, 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.
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(Exact name of registrant as specified in its charter)
Delaware 77-0310773
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
5980 Stoneridge Drive, Suite 109, Pleasanton, California 94588
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(Address of principal executive offices) (Zip Code)
(510) 460-6201
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(Registrant's telephone number, including area code)
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(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 June 1, 1995 the Registrant had 12,244,953 shares of common stock
outstanding.
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INDEX
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated balance sheet 1
- Consolidated statement of operations 2
- Consolidated statement of cash flows 3
- Notes to consolidated financial statements 4 - 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6 - 7
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 9
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<TABLE>
<CAPTION>
KRAUSE'S FURNITURE INC
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CONSOLIDATED BALANCE SHEET
ASSETS
April 30, January 29,
1995 1995
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(In thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,407 $ 1,952
Accounts receivable, net of allowance for
doubtful accounts of $616 and $847 981 959
Inventories 18,227 18,016
Deferred income taxes 920 920
Prepaid expenses 1,343 1,450
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Total current assets 23,878 23,297
Property, equipment, and
leasehold improvements, net 7,056 6,519
Goodwill, net 17,171 17,425
Leasehold interest, net 2,392 2,485
Other assets 3,626 3,793
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$54,123 $53,519
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<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $17,511 $17,311
Accrued payroll and related expenses 1,456 1,704
Customer deposits 5,938 6,809
Notes payable 15 17
Income taxes payable 1,007 1,207
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Total current liabilities 25,927 27,048
Long-term liabilities:
Secured revolving credit and other notes 4,888 2,181
Other liabilities 1,599 1,590
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6,487 3,771
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value;
2,000,000 shares authorized, 483,780 outstanding
(at stated value) (liquidation preference $22.50 per share) 10,455 10,455
Common stock, $.001 par value; 25,000,000
shares authorized, 11,054,953 shares outstanding 11 11
Capital in excess of par value 24,480 24,480
Accumulated deficit (13,237) (12,246)
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Total stockholders' equity 21,709 22,700
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$54,123 $53,519
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</TABLE>
See accompanying notes.
1
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KRAUSE'S FURNITURE, INC.
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CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended
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April 30, May 1,
1995 1994
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<S> <C> <C>
Net furniture sales $32,251 $27,770
Cost of sales 15,113 12,162
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Gross profit 17,138 15,608
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Operating expenses:
Selling expenses 14,730 12,749
General and administrative 3,379 2,862
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18,109 15,611
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Loss from operations (971) (3)
Equity in earnings of Mr. Coffee - 171
Interest expense (171) (787)
Other income 151 11
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Loss before income taxes (991) (608)
Provision for income taxes - -
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Net loss ($991) ($608)
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Net loss per share ($0.09) ($0.06)
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Average number of common
shares outstanding 11,055 10,469
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</TABLE>
See accompanying notes.
2
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<TABLE>
<CAPTION>
KRAUSE'S FURNITURE, INC.
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CONSOLIDATED STATEMENT OF CASH FLOWS
Quarter Ended,
April 30, May 1,
1995 1994
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(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($991) ($608)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation and amortization 600 862
Equity in earnings of Mr. Coffee - (170)
Change in assets and liabilities :
Accounts receivable (22) (76)
Inventories (211) (923)
Prepaid expenses and other assets 274 -
Accounts payable and accrued liabilities (39) 1,531
Customer deposits (871) (261)
Income taxes payable (200) -
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Net cash provided (used) by operating activities (1,460) 355
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Cash flows from investing activities:
Capital expenditures (790) (203)
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Net cash used by investing activities (790) (203)
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Cash flows from financing activities:
Net borrowings under revolving credit 2,712 -
Principal payments on other debt (7) (104)
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Net cash provided (used) by financing activities 2,705 (104)
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Net increase in cash and cash equivalents 455 48
Cash and cash equivalents at beginning of period 1,952 3,025
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Cash and cash equivalents at end of period $2,407 $3,073
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Supplemental disclosures of cash flow information-
Cash paid during the period for:
Interest $ 138 $ 361
Income taxes 200 -
Noncash investing and financing activities-
None
- -
</TABLE>
See accompanying notes.
3
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KRAUSE'S FURNITURE, INC
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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 first fiscal 1995 quarter (13 weeks) ended April 30, 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 quarter ended April 30, 1995 are not necessarily
indicative of results to be expected in future periods.
2. Cash and cash equivalents at April 30, 1995 includes U.S. Treasury
bills with maturities of less than 90 days and which as carried at amortized
cost, which approximates market. These securities are classified as
held-to-maturity in accordance with Statement of Financial Accounting Standard
(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 at April 30,
1995:
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Finished goods $13,434,000
Work-in-process 334,000
Raw materials 4,459,000
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$18,227,000
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4
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4. Long-term notes payable at April 30, 1995 consist of $4,805,000 of
secured revolving credit notes and $83,000 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 April 30, 1995, borrowing under the revolving
credit is limited to approximately $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. KSF is required to maintain certain
financial covenants for working capital and stockholder's equity. In addition
the credit agreement provided for a closing fee of $100,000 and a monthly
facility fee of $2,500.
5. On June 1, 1995 all of the Company's Series B preferred stock was
converted into 1,190,000 shares of common stock. These conversions resulted in
a transfer of $2,677,000 from convertible preferred stock to common stock
($1,000) and capital in excess of par value ($2,676,000).
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended April 30, 1995 Compared to Quarter Ended May 1, 1994
Results for the quarter reflect both an industry-wide softness in
retail sales and the initial costs associated with the Company's efforts to
re-engineer 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. Higher levels of discounting versus
last year adversely impacted margins by approximately three percentage points.
Net furniture sales for the first fiscal quarter 1995 were $32,251,000
which was an increase of approximately 16.1% from net sales in the comparable
first quarter of 1994. The sales increase was primarily attributable to sales
from new stores and an 8% increase in same-store sales in the first quarter
1995 compared to the first quarter 1994.
Gross margin was 53.1% of net sales in the first quarter 1995 compared
to 56.2% in the first quarter 1994. The lower gross margins resulted from
more product promotions (price discounts) and from higher freight costs
associated with proportionately higher sales in the East. Margins were also
negatively impacted by an increase in raw material costs, primarily foams,
fiber and metal components.
Selling expenses as a percentage of sales decreased to 45.7% in the
first quarter 1995 from 45.9% in the comparable period last year. Selling
expenses were $14,730,000 in the first quarter 1995 and $12,749,000 in the
first quarter 1994. The increase in total selling expenses was principally
because of variable selling expenses attributable to higher sales, increased
occupancy costs, payroll and operating expenses associated with five additional
showrooms open this year. Advertising expenses also increased this year due to
media cost inflation and the increased number of showrooms.
6
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General and administrative expenses increased by $517,000 to
$3,379,000 in the first quarter 1995 from the first quarter last year. As a
percentage of sales, general administrative expenses, exclusive of employee
termination costs of $415,000 in the first quarter 1995, decreased to 9.2% from
10.3%. General administrative expenses were higher in the 1995 period
principally because of higher personnel costs and the previously mentioned
employee termination expenses.
Interest expense decreased by $616,000 in the first quarter 1995
compared to the first quarter 1994 due principally to significantly less debt
outstanding in 1995.
The Company's investment in Mr. Coffee, inc. was accounted for by the
equity method which resulted in equity in earnings of $170,000 in the first
quarter 1994. The Company sold its investment in Mr. Coffee in August 1994.
As a result of the above factors, net loss was $991,000 in the
quarter ended April 30, 1995 compared to a loss of $608,000 in the first
quarter 1994. Net loss per share in the first quarter 1995 was $.09 based on
11,054,953 average shares outstanding. In the comparable 1994 quarter the net
loss per share was $.06 on 10,469,036 average shares outstanding.
No tax benefits are available for 1995 or 1994 operating losses.
7
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LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 1995, the Company had $2,407,000 in cash and cash
equivalents compared to $1,952,000 as of January 29, 1995.
Cash Flow - Thirteen Weeks Ended April 30, 1995
Cash and cash equivalents increased by $455,000 during the period.
Operating activities used net cash of $1,460,000 principally from a $391,000
cash loss from operations, an increase in inventories of $211,000 and a
decrease in current liabilities of $1,110,000, offset by an increase in prepaid
expenses and other assets of $274,000. Investing activities were capital
expenditures of $790,000 principally for costs of construction of a showroom in
Dallas and for additions to leasehold improvements of 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 $.4 million deferred profit
to be amortized over the term of the lease. Financing activities included
$2,712,000 of net borrowings under a revolving credit agreement (see Note 3).
Cash Flow - Thirteen Weeks Ended May 1, 1994
Cash and cash equivalents increased by $48,000 during the period.
Operating activities provided net cash of $355,000, principally from an
increase in accounts payable and other liabilities of $1,270,000 offset by an
increase in inventories of $923,000. Investing activities during the period
were capital expenditures of $203,000, principally for additions to leasehold
improvements of retail showrooms. Financing activities during the period were
$104,000 of payments on short-term notes.
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 April 30, 1995 there were no significant long-term
capital expenditure commitments. The Company has a deficiency in working
capital of approximately $2.0 million.
The industry-wide softness in sales which began early this year has
continued into May and early June. The Company's same-store sales in May 1995
were approximately 12.1% below comparable store sales in May last year.
Industry analysts expect a continuation of sales softness through the summer
with possible improvements later this year.
Management believes that the reengineering program described above
will begin to produce improved results in the thrd and fourth fiscal quarters
this year. 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.
8
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K filed during the quarter
ended April 30, 1995
On April 25, 1995, the Registrant filed a Current Report dated April
12, 1995 on Form 8-K. This report under Item 8. - Change in Fiscal Year
described a change in Registrant's fiscal year from the calendar year to a
52/53 week retail fiscal year ending on the last Sunday in January.
On May 1, 1995, the Registrant filed a Current Report dated April 28,
1995 on Form 8-K. This report described under Item 5 - Other Events certain
changes in executive management of Registrant.
On June 2, 1995, the Registrant filed a Current Report dated June 1,
1995 on Form 8-K. This report described under Item 5 - Other Events sales
information for the quarter ended April 30, 1995 and for the month of May 1995.
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: June 14, 1995 /s/ Robert G. Sharpe
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Robert G. Sharpe
Executive Vice President
Date: June 14, 1995 /s/ Mark J. Gill
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Mark J. Gill
Chief Financial Officer
9
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Exhibit Index
Ex. 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-28-1996
<PERIOD-START> JAN-30-1995
<PERIOD-END> APR-30-1995
<CASH> 2,407
<SECURITIES> 0
<RECEIVABLES> 1,597
<ALLOWANCES> 616
<INVENTORY> 18,227
<CURRENT-ASSETS> 23,878
<PP&E> 12,815
<DEPRECIATION> 5,759
<TOTAL-ASSETS> 54,123
<CURRENT-LIABILITIES> 25,927
<BONDS> 0
<COMMON> 11
0
10,455
<OTHER-SE> 11,243
<TOTAL-LIABILITY-AND-EQUITY> 54,123
<SALES> 32,251
<TOTAL-REVENUES> 32,251
<CGS> 15,113
<TOTAL-COSTS> 15,113
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 171
<INCOME-PRETAX> (991)
<INCOME-TAX> 0
<INCOME-CONTINUING> (991)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (991)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
