<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 July 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.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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 September 1, 1995 the Registrant had 4,081,652 shares of common stock
outstanding.
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INDEX
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<CAPTION>
PAGE
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<S> <C>
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
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KRAUSE'S FURNITURE, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
July 30, January 29,
1995 1995
---------------- ----------------
(In thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,733 $ 1,952
Accounts receivable, net of allowance for doubtful accounts
of $532 and $847 931 959
Inventories 16,738 18,016
Deferred income taxes 920 920
Prepaid expenses 1,214 1,450
-------- --------
Total current assets 21,536 23,297
Property, equipment, and leasehold improvements, net 6,754 6,519
Goodwill, net 16,916 17,425
Leasehold interest, net 2,299 2,485
Income tax refund 1,327 --
Other assets 3,559 3,793
-------- --------
$ 52,391 $ 53,519
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 15,724 $ 17,311
Accrued payroll and related expenses 1,607 1,704
Customer deposits 6,642 6,809
Notes payable 18 17
Income taxes payable 1,007 1,207
-------- --------
Total current liabilities 24,998 27,048
Long-term liabilities:
Secured revolving credit and other notes 5,869 2,181
Deferred gain 345 --
Other liabilities 1,571 1,590
-------- --------
7,785 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,
4,081,652 and 3,471,411 shares outstanding 12 11
Capital in excess of par value 27,153 24,480
Accumulated deficit (15,338) (12,246)
-------- --------
Total stockholders' equity 19,608 22,700
-------- --------
$ 52,391 $ 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 Twenty-Six Weeks Ended
--------------------------- -------------------------
July 30, July 31, July 30, July 31,
1995 1994 1995 1994
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net furniture sales $ 28,928 $ 27,367 $ 61,179 $ 55,137
Cost of sales 14,476 12,652 29,589 24,814
-------- -------- -------- --------
Gross profit 14,452 14,715 31,590 30,323
-------- -------- -------- --------
Operating expenses:
Selling expenses 14,872 13,301 29,602 26,050
General and administrative 2,854 2,892 6,233 5,754
-------- -------- -------- --------
17,726 16,193 35,835 31,804
-------- -------- -------- --------
Loss from operations (3,274) (1,478) (4,245) (1,481)
Equity in earnings of Mr. Coffee -- 53 -- 224
Interest expense (192) (851) (363) (1,638)
Other income 38 (1) 189 10
-------- -------- -------- --------
Income before income taxes (3,428) (2,277) (4,419) (2,885)
Income tax benefit 1,327 -- 1,327 --
-------- -------- -------- --------
Net loss $ (2,101) $ (2,277) $ (3,092) $ (2,885)
======== ======== ======== ========
Net loss per share $ (0.53) $ (0.66) $ (0.81) $ (0.83)
======== ======== ======== ========
Average number of common
shares outstanding 3,949 3,471 3,817 3,477
======== ======== ======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 5
KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
July 30, July 31,
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 Stock 2,673 --
Repurchase of common stock -- (105)
-------- --------
Balance at end of period $ 27,153 $ 23,075
======== ========
Accumulated Deficit:
Balance at beginning of period $(12,246) $(16,606)
Net loss (3,092) (2,885)
-------- --------
Balance at end of period $(15,338) $(19,491)
======== ========
</TABLE>
See accompanying notes.
3
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KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
July 30, July 31,
1995 1994
-------- --------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,092) $(2,885)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities
Depreciation and amortization 1,216 1,697
Equity in earnings of Mr. Coffee -- (224)
Income tax benefit (1,327) --
Change in assets and liabilities:
Accounts receivable 28 261
Inventories 1,278 (1,794)
Prepaid expenses and other assets 470 56
Accounts payable and accrued liabilities (1,703) 2,169
Customer deposits (167) 862
Deferred gain 345 --
Income taxes payable (200) --
------- -------
Net cash provided (used) by operating activities (3,152) 142
------- -------
Cash flows from investing activities:
Capital expenditures (756) (139)
------- -------
Net cash used by investing activities (756) (139)
------- -------
Cash flows from financing activities:
Net borrowings under revolving credit 3,702 --
Principal payments on other debt (13) (268)
Purchase of common stock and warrants -- (55)
------- -------
Net cash provided (used) by financing activities 3,689 (323)
------- -------
Net decrease in cash and cash equivalents (219) (320)
Cash and cash equivalents at beginning of period 1,952 3,025
------- -------
Cash and cash equivalents at end of period $ 1,733 $ 2,705
======= =======
Supplemental disclosures of cash flow information-
Cash paid during the period for:
Interest $ 248 $ 764
Income taxes 200 --
Noncash investing and financing activities-
Conversion of preferred stock 2,674 --
Note receivable reduction in exchange for
common stock -- 50
</TABLE>
See accompanying notes.
4
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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 second fiscal 1995 quarter ended July 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 thirteen weeks ended July 30, 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 and which are 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:
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<CAPTION>
July 30, July 31,
1995 1994
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<S> <C> <C>
Finished goods $12,938,000 $13,161,000
Work-in-process 339,000 479,000
Raw materials 3,461,000 4,376,000
----------- -----------
$16,738,000 $18,016,000
=========== ===========
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5
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4. Long-term notes payable at July 30, 1995 consist of $5,795,000 of secured
revolving credit notes and $74,000 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
July 30, 1995, borrowing under the revolving credit was 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.
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.
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS
RESULTS OF OPERATIONS
Results for the thirteen weeks and twenty-six weeks ended July 30, 1995
reflect a continuing industry-wide softness in retail sales and 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 $800,000.
Thirteen Weeks Ended July 30, 1995 Compared to Thirteen Weeks Ended July 31,
1994
Net furniture sales for the second fiscal quarter 1995 were
$28,928,000, which was an increase of approximately 5.7% from net sales in the
comparable period of 1994. The 1995 sales increase was primarily attributable to
sales from five additional new stores which more than offset a 5.2% decrease in
same-store sales compared to 1994.
Gross margin was 50.0% of net sales in the second quarter 1995 compared
to 53.8% in 1994. The lower gross margins resulted from higher product
promotions (price discounts), a change in product mix and higher freight costs
associated with proportionately higher sales in the East.
Selling expenses were $14,872,000 in the second quarter 1995 and
$13,301,000 in the second quarter 1994. The increase in total selling expenses
was principally because of variable selling expenses attributable to higher
sales and operating costs associated with five additional showrooms open this
year. Selling expenses as a percentage of sales increased to 51.4% in the second
quarter 1995 from 48.6% in the comparable period last year. This was primarily
the result of increased sales incentives for the sales force.
General and administrative expenses, exclusive of employee termination
costs of $160,000 in the second quarter 1995, decreased as a percentage of sales
to 9.3% from 10.6%. Exclusive of employee termination costs, general and
administrative expenses were lower in the 1995 period by $198,000, reflecting
the Company's ongoing cost reduction efforts.
Interest expense decreased by $659,000 in the second quarter 1995
compared to the second 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 $53,000 in the second
quarter 1994. The Company sold its investment in Mr. Coffee in August 1994.
As a result of the above factors, net loss was $2,101,000 in the
thirteen weeks ended July 30, 1995 compared to a loss of $2,277,000 in 1994. Net
loss per share in the second quarter 1995 was $.53 based on 3,949,000 average
shares outstanding. In the comparable 1994 period the net loss per share was
$.66 on 3,471,000 average shares outstanding. Average shares outstanding for the
periods were adjusted to reflect a one-for-three reverse stock split effective
August 1, 1995.
The Company recorded $1,327,000 of income tax benefits in the quarter
ended July 30, 1995. This represents a refund of 1994 federal taxes paid from
the carryback of 1995 losses.
7
<PAGE> 10
Twenty-Six Weeks Ended July 30, 1995 Compared to Twenty-Six Weeks Ended July 31,
1994
Net furniture sales for the first twenty-six weeks of 1995 were
$61,179,000 compared to $55,137,000 for the same period in of 1994. The sales
increase was due principally to a same-store sales increase of 1.4% and to
sales from seven additional stores in 1995. Early positive indications of this
year's reengineering efforts can be seen in the reduction in general and
administrative expenses (excluding employee termination costs), reduced levels
of inventories and positive same-store sales (shipments) despite negative
same-store bookings (orders).
Gross margin was 51.6% of net sales in the 1995 period to 55.0% in the
1994 period. Lower gross margins in 1995 resulted from extensive promotional
pricing and unfavorable product mix.
Selling expenses were $29,602,000 an increase of approximately 13.6%
from the same period last year. Selling expenses were 48.4% of net furniture
sales in 1995 compared to 47.2% in the 1994 period. Selling expenses increased
primarily because of the same reasons explained in the quarterly comparison
above.
General and administrative expenses increased by $479,000 due
principally to employee termination expenses of $575,000, offset by general cost
reductions. General and administrative expenses, exclusive of employee
termination expenses, were 9.2% and 10.4% of net furniture sales in the 1995 and
1994 periods
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 twenty-six
weeks ended July 31, 1994. The Company sold its investment in Mr. Coffee in
August 1994.
8
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LIQUIDITY AND CAPITAL RESOURCES
As of July 30, 1995, the Company had $1,733,000 in cash and cash
equivalents compared to $1,952,000 as of January 29, 1995.
Cash Flow - Twenty-Six Weeks Ended July 30, 1995
Cash and cash equivalents decreased by $219,000 during the period.
Operating activities used net cash of $3,152,000 principally from a $3,203,000
cash loss from operations and a decrease in accounts payable and other
liabilities of $1,725,000, offset by decreases in inventories of $1,278,000 and
other assets of $498,000. Investing activities were capital expenditures of
$756,000 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 $3,702,000 of net
borrowings under a revolving credit agreement (see Note 4).
Cash Flow - Twenty-Six Weeks Ended July 31, 1994
Cash and cash equivalents decreased by $320,000 during the period.
Operating activities provided net cash of $142,000, principally from an increase
in accounts payable and other liabilities of $3,031,000 offset by a cash loss
from operations of $1,412,000 and an increase in inventories of $1,794,000.
Investing activities during the period were capital expenditures of $139,000,
principally for additions to leasehold improvements of retail showrooms.
Financing activities during the period were $268,000 of payments on short-term
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 July 30, 1995 there were no significant long-term
capital expenditure commitments.
Management believes that the reengineering program described above will
continue to produce improved results in the third and fourth 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.
9
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders
The Company held its Annual Meeting of Stockholders on June 20, 1995.
At the meeting the stockholders;
(i) elected eight directors (Jean R. Perrette, Thomas M. DeLitto, Gary
S. Vandeweghe, Kamal G. Abdelnour, Bernadette Castro, J. Richard Cordsen,
Michael W. Gibbons and Isaac Robert Souede), all of whom were incumbent
directors, to serve until the next annual meeting.
(ii) approved the selection of Ernst & Young LLP to serve as
independent auditors to examine the Company's financial statements for the
fiscal year ending January 28, 1996. There were 10,163,610 affirmative votes and
30,629 negative votes with respect to this matter.
Item 6. Exhibits and Reports on Form 8-K filed during the quarter
ended July 30, 1995
On July 25, 1995, the Registrant filed a Current Report dated June 29,
1995 on Form 8-K This report described under Item 5 - Other Events approval of a
stock repurchase plan and a one-for-three reverse stock split.
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: September 13, 1995 /s/ Robert G. Sharpe
------------------------
Robert G. Sharpe
Executive Vice President
Date: September 13, 1995 /s/ D. Panah
------------------------
D. Panah
Chief Financial Officer
10
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EXHIBIT INDEX
<TABLE>
<S> <C>
Ex. 27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-28-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> JUL-30-1995
<CASH> 1,733
<SECURITIES> 0
<RECEIVABLES> 1,463
<ALLOWANCES> 532
<INVENTORY> 16,738
<CURRENT-ASSETS> 21,536
<PP&E> 12,781
<DEPRECIATION> 6,027
<TOTAL-ASSETS> 52,391
<CURRENT-LIABILITIES> 24,998
<BONDS> 0
<COMMON> 12
0
7,781
<OTHER-SE> 11,815
<TOTAL-LIABILITY-AND-EQUITY> 52,391
<SALES> 28,928
<TOTAL-REVENUES> 28,928
<CGS> 14,476
<TOTAL-COSTS> 14,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (84)
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> (3,428)
<INCOME-TAX> (1,327)
<INCOME-CONTINUING> (2,101)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,101)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
</TABLE>
