<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 November 2, 1997
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 (I.R.S. Employer
of incorporation) Identification No.)
200 North Berry Street, Brea, California 92821-3903
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(714) 990-3100
- --------------------------------------------------------------------------------
(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 15, 1997 the Registrant had 19,020,539 shares of common stock
outstanding.
INDEX
1
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<TABLE>
<CAPTION>
Page
----
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
- Consolidated balance sheet 3
- Consolidated statement of operations (unaudited) 4
- Consolidated statement of cash flows (unaudited) 5
- Notes to consolidated financial statements (unaudited) 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 14
PART II OTHER INFORMATION
Items 1 - 5 Not Applicable
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
<PAGE> 3
KRAUSE'S FURNITURE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
November 2, February 2,
1997 1997
------------ -----------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 250 $ 1,227
Accounts receivable, net of allowance of $194 for doubtful
accounts ($327 at February 2, 1997) 780 1,120
Inventories 16,499 14,013
Prepaid expenses 552 1,193
------- -------
Total current assets 18,081 17,553
Property, equipment, and leasehold improvements, net 7,085 6,389
Goodwill, net 14,621 15,386
Leasehold interests, net 1,269 1,504
Other assets 2,428 2,255
------- -------
$43,484 $43,087
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,820 $ 7,506
Accrued payroll and related expenses 1,469 1,468
Other accrued liabilities 3,719 5,099
Customer deposits 5,213 5,621
Notes payable 41 41
------- -------
Total current liabilities 19,262 19,735
Long-term liabilities:
Notes payable 11,073 6,306
Other 2,137 1,503
------- -------
Total long-term liabilities 13,210 7,809
Commitments and contingencies - -
Stockholders' equity:
Convertible preferred stock, $.001 par value; 666,667
authorized, no shares outstanding - -
Common stock, $.001 par value; 35,000,000 shares authorized,
19,020,539 shares outstanding 19 19
Capital in excess of par value 50,952 49,874
Accumulated deficit (39,959) (34,350)
------- -------
Total stockholders' equity 11,012 15,543
------- -------
$43,484 $43,087
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------- ----------------------------
November 2, October 27, November 2, October 27,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $30,159 $26,865 $85,569 $ 82,738
Cost of sales 14,560 12,781 41,840 42,364
------- ------- ------- --------
Gross profit 15,599 14,084 43,729 40,374
Operating expenses:
Selling 13,698 14,081 40,558 43,556
General and administrative 2,191 2,084 6,780 7,852
Amortization of goodwill 255 255 765 765
------- ------- ------- --------
16,144 16,420 48,103 52,173
------- ------- ------- --------
Loss from operations (545) (2,336) (4,374) (11,799)
Interest expense (467) (296) (1,177) (782)
Other income (expense) (35) 111 (58) 207
------- ------- ------- --------
Net loss $(1,047) $(2,521) $(5,609) $(12,374)
======= ======= ======= ========
Net loss per share $ (.06) $ (0.24) $ (.30) $ (1.62)
======= ======= ======= ========
Number of shares used in computing
loss per share 19,021 10,556 19,021 7,661
======= ======= ======= ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
----------------------------
November 2, October 27,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,609) $(12,374)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 1,802 1,853
Other non-cash charges 786 -
Change in assets and liabilities:
Accounts receivable 340 51
Income tax refund receivable - 1,467
Inventories (2,486) 2,006
Prepaid expenses and other assets 424 (291)
Accounts payable and other liabilities 653 (643)
Customer deposits (408) (650)
------- --------
Net cash used by operating activities (4,498) (8,581)
------- --------
Cash flows from investing activities:
Capital expenditures (1,498) (563)
------- --------
Net cash used by investing activities (1,498) (563)
------- --------
Cash flows from financing activities:
Proceeds from long-term borrowings 102,005 97,050
Principal payments on long-term borrowings (99,986) (101,072)
Proceeds from issuance of subordinated note 3,000 5,000
Proceeds from issuance of notes - 2,950
Net proceeds from issuance of common stock - 10,221
------- --------
Net cash provided by financing activities 5,019 14,149
------- --------
Net increase (decrease) in cash (977) 5,005
Cash and cash equivalents at beginning of period 1,227 1,336
------- --------
Cash and cash equivalents at end of period $ 250 $ 6,341
======= ========
Supplemental disclosures of cash flow information -
Cash paid during the period for interest $ 373 $ 431
Noncash investing and financing activities-
Preferred stock converted into common stock - 7,523
Exchange of notes payable and related accrued interest
for common stock - 3,066
Issuance of common stock purchase warrant 925 1,400
</TABLE>
See accompanying notes.
5
<PAGE> 6
KRAUSE'S FURNITURE, INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The accompanying consolidated financial statements of Krause's
Furniture, Inc. (the "Company") and its wholly owned subsidiaries, including the
Company's principal subsidiary, Krause's Custom Crafted Furniture Corp.,
formerly Krause's Sofa Factory, ("Krause's"), have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission and reflect all
normal recurring 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.
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 February 2, 1997. The
results of operations for the thirteen and thirty-nine weeks ended November 2,
1997 are not necessarily indicative of results to be expected in future periods.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
periods. Actual results could differ from those estimates.
2. The Company has reported losses from operations in each of the past five
years and for the thirty-nine weeks ended November 2, 1997 due to inefficiencies
within its operations and due to an industry-wide softness in retail sales. As a
result of such losses, the Company had an accumulated deficit of $39,959,000 and
a working capital deficiency of $1,181,000 at November 2, 1997. The Company
expects to incur operating losses in fiscal year 1997.
On August 26, 1996 and September 10, 1996, the Company completed
transactions with investors in which the Company received cash proceeds of
$15,669,000 from financings through issuances of $10,669,000 of common stock, at
$1 per share, and a $5,000,000 subordinated note with a warrant to purchase
1,400,000 shares of common stock at $.001 per share. In addition, $950,000 of
convertible notes and $2,000,000 of demand notes (issued between May 13, 1996
and July 2, 1996 to related parties) together with accrued interest of $116,251
were exchanged for 3,066,251 shares of common stock and outstanding Series A
preferred stock was converted into 1,176,950 shares of common stock. Also the
Company's revolving credit agreement was amended to extend the expiration date,
reduce the interest rate and provide for an increase in borrowing availability.
The Company's management, which underwent a substantial restructuring
after the 1996 financing described above, has developed a strategic plan for the
business which provides, among other things, for remodeling showrooms to provide
a more appealing setting for customers, opening new showrooms in existing
markets, increasing product prices to competitive levels, reducing promotional
discounting, reconfiguring selling commissions, remerchandising, refocusing
advertising, improving the manufacturing process and reducing expenses through
6
<PAGE> 7
budgetary controls. Many of these plans were implemented since the latter part
of fiscal 1996 and are expected to contribute significantly to reducing losses
and, ultimately, returning the Company to profitability; however, there can be
no assurance that the Company will achieve profitability. Management believes
that the Company has sufficient sources of financing to continue operations
throughout fiscal 1997. However, the Company's long-term success is dependent
upon management's ability to successfully execute its strategic plan and,
ultimately, to achieve sustained profitable operations (see Note 4 for
discussion of 1997 financing).
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>
November 2, February 2,
1997 1997
----------- -----------
(in thousands)
<S> <C> <C>
Finished goods $12,190 $10,693
Work in progress 211 254
Raw materials 4,098 3,066
------- -------
$16,499 $14,013
======= =======
</TABLE>
4. Notes payable consists of the following:
<TABLE>
<CAPTION>
November 2, February 2,
1997 1997
----------- -----------
(in thousands)
<S> <C> <C>
Secured revolving credit notes $ 4,094 $ 1,999
Subordinated note payable to shareholder due 2002 5,501 5,133
Unamortized debt discount, net of
accumulated amortization of $381 ($137
at February 2, 1997) (1,019) (1,263)
Subordinated notes payable to shareholders due 2003 3,000 -
Unamortized debt discount, net of (865) -
accumulated amortization of $60
Other notes 403 478
------- -------
11,114 6,347
Less current portion 41 41
------- -------
$11,073 $ 6,306
======= =======
</TABLE>
The secured revolving credit notes were issued under a revolving credit
agreement between Krause's and a financial institution (the "financial
institution") that expires in January 2000. The credit agreement, which was most
recently amended December 11, 1997, provides for revolving loans of up to $10
million based on the value of inventories. As of November 2, 1997, borrowing
under the revolving credit facility was limited to approximately $7.7 million,
as defined in the agreement. Substantially all of Krause'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 1.0% in excess of the prime rate (8.50%
at November 2, 1997).
On August 14, 1997, the Company concluded a Supplemental Securities
Purchase Agreement (the "Agreement") among the Company, General Electric Capital
Corporation
7
<PAGE> 8
("GECC") and Japan Omnibus Ltd. ("JOL"), a company formerly known as Edson
Investments Inc. Under the Agreement, the Company sold 9.5% subordinated notes
in an aggregate principal amount of $3,000,000 to GECC and JOL, which notes are
payable semi-annually on a straight-line basis over three years beginning
February 2000, and issued to GECC and JOL warrants to purchase an aggregate of
740,000 shares of common stock of the Company at a purchase price of $1.25 per
share. The fair value of the warrant of $925,000 has been reflected in the
consolidated financial statements as a discount on the subordinated notes and an
increase in capital in excess of par value. This discount is being amortized to
interest expense using the effective interest method over the term of the
subordinated notes. The Company also issued to GECC and JOL a warrant to
purchase an aggregate amount of up to 1,000,000 shares of the Company's common
stock at a price of $0.01 per share which warrant may be completely or partially
cancelled depending on the economic performance of the Company in fiscal 1999.
Also, under the Agreement, the Company, at its option and subject to the
attainment of certain financial covenants, may draw on a standby credit facility
with GECC and JOL by selling additional 9.5% subordinated notes in an aggregate
principal amount of up to $3,500,000; such standby credit facility is available
from January 2, 1998 to February 28, 2000. If the Company elects to draw down on
the credit available from GECC and JOL by issuing notes, the Agreement provides
that the Company shall issue to GECC and JOL warrants to purchase an aggregate
of up to 560,000 additional shares of the common stock of the Company at a
purchase price of $1.25 per share.
In conjunction with the financing described above, the Company issued to
GECC a new 9.5% Subordinated Note due August 31, 2002 (the "Replacement Note")
in the principal amount of $5,501,091, to replace the Company's 10% Subordinated
Pay-In-Kind Note (the "Original Note") due August 31, 2001, in principal amount
of $5,000,000, and certain additional notes in aggregate principal amount of
$501,091 reflecting accrued interest. The Original Note has been issued with a
warrant to purchase 1,400,000 shares of common stock at $.001 per share at any
time through August 31, 2006. The fair value of the warrant of $1,400,000 has
been reflected in the consolidated financial statements as a discount on the
subordinated note and an increase in capital in excess of par value. This
discount is being amortized to interest expense using the effective interest
method over the term of the subordinated note. The Replacement Note is payable
semiannually, on a straight-line basis over three years beginning February 2000
whereas the Pay-In-Kind Note was payable semiannually, on a straight-line basis
over three years beginning February 1999.
Pursuant to the terms of the revolving credit agreement and the
subordinated notes, the Company and Krause's are required to maintain certain
financial ratios and minimum levels of tangible net worth and working capital.
In addition, the Company and Krause's are restricted from entering into certain
transactions or making certain payments and dividend distributions without the
prior consent of the lenders. As of November 2, 1997, Krause's was not in
compliance with two of the covenants contained in the revolving credit agreement
and may not be in compliance with a financial covenant at the end of its current
fiscal year. On December 11, 1997, the financial institution waived the
non-compliance as it relates to the November 2, 1997 reporting period.
5. Net loss per share amounts were computed based on the weighted average
number of common shares outstanding during the periods reported. Common
equivalent shares are not included in the computation since such share
equivalents are antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the
8
<PAGE> 9
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. Equity instruments, such as options and warrants are excluded
if antidilutive in the calculation of diluted earnings per share. Since the
effect of stock options is already excluded in the computation of net loss per
share, the adoption of Statement 128 will not result in any change in the loss
per share amounts reported for the quarter or thirty-nine weeks ended November
2, 1997 or October 27, 1996.
6. Effective in fiscal 1998, the Company will be required to adopt
Statements of Financial Accounting Standards (SFAS) No. 129 "Capital Structure",
SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information". The impact of adoption
of these pronouncements is not expected to be material to the Company's
financial position or results of operations.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q and particularly the Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in this report
contain forward-looking statements within the meaning of the Private Securities
Reform Act of 1995. These statements can be identified by the use of
forward-looking terminology such as "may", "will", "expect", "anticipate",
"continue", "estimate", or the negative of these terms or other comparable
terminology. Various factors noted in this Form 10-Q and in filings recently
made by the Company with the Securities and Exchange Commission, including the
Company's Form 10-K and a Registration Statement on Form S-1, constitute
cautionary statements that identify risks and uncertainties that could cause
actual results to differ materially from those contained in the forward-looking
statements.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere herein.
The Company has reported losses from operations in each of the past five
years and for the thirty-nine weeks ended November 2, 1997 due to inefficiencies
within its operations and due to an industry-wide softness in retail sales. As a
result of such losses, the Company had an accumulated deficit of $39,959,000 and
a working capital deficiency of $1,181,000 at November 2, 1997. The Company
expects to incur operating losses in fiscal year 1997.
The Company's management, which underwent a substantial restructuring
after the 1996 financings, has developed a strategic plan for the business which
provides, among other things, for remodeling showrooms to provide a more
appealing setting for customers, adding new showrooms in existing markets,
increasing product prices to competitive levels, reducing promotional
discounting, reconfiguring selling commissions, remerchandising, refocusing
advertising, improving the manufacturing processes and reducing expenses through
budgetary controls. Many of these plans were implemented since the latter part
of fiscal 1996 and are expected to contribute significantly to reducing losses
and ultimately returning the Company to profitability; however, there can be no
assurance that the Company will achieve profitability.
Management believes that the Company has sufficient sources of financing
to continue operations. However, the Company's long-term success is dependent
upon management's ability to successfully execute its strategic plan and,
ultimately, to achieve sustained profitable operations.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
As of November 2, 1997, the Company had $250,000 in cash and cash
equivalents and borrowing capacity under its revolving credit agreement of $3.6
million. In recent periods the Company has drawn on its capital resources to
cover operating deficits. Recently, the Company has also drawn on its capital
resources to finance the remodeling and expansion of its showrooms. As the
Company intensifies its remodeling and expansion program and promotes its new
image, it expects to continue to need these resources.
Cash flow activity for the thirty-nine weeks ended November 2, 1997 and
October 27, 1996 is presented in the Consolidated Statement of Cash Flows.
Cash Flow - Thirty-nine Weeks Ended November 2, 1997
During the thirty-nine weeks ended November 2, 1997, cash and cash
equivalents decreased by $977,000. Operating activities used net cash of
$4,498,000, principally from a cash loss from operations of $3,021,000, an
increase in inventories of $2,486,000 and a decrease in customer deposits of
$408,000 partially offset by decreases in prepaid expenses and other assets of
$424,000 and accounts receivable of $340,000 and an increase in Accounts Payable
and Other Liabilities of $653,000. Investing activities during the period
included capital expenditures of $1,498,000 nearly all of which was used to
remodel certain retail showrooms. Financing activities during the period
consisted principally of net borrowings of $2,095,000 under the Company's
revolving credit facility and $3,000,000 borrowed pursuant to a Supplemental
Securities Purchase Agreement concluded on August 14, 1997.
During the thirty-nine weeks ended November 2, 1997, capital spending
totaled $1,498,000, compared to $563,000 during the same period of fiscal 1996.
Management plans to continue its program of remodeling and upgrading showrooms
as well as to add new showrooms in existing markets; the Company expects to
incur costs of approximately $3,200,000 related to this program over fiscal
1997. Such capital expenditures are expected to be funded by internally
generated cash and borrowings under the Company's revolving credit facility. The
Company is not contractually committed to any significant capital expenditures
and could slow the program if it experiences liquidity shortages.
Cash Flow - Thirty-nine Weeks Ended October 27, 1996
Cash and cash equivalents increased by $5,005,000 during the period.
Operating activities used net cash of $8,581,000, principally from a cash loss
from operations of $10,521,000 and decreases in accounts payable and other
liabilities of $1,293,000 offset by a decrease in inventories of $2,006,000 and
collection of an income tax refund receivable of $1,467,000. Investing
activities during the period included capital expenditures of $563,000
principally for additions to leasehold improvements at certain retail showrooms.
Financing activities during the period were comprised principally of proceeds
from issuances of common stock of $10,221,000, proceeds from issuances of
$2,950,000 of convertible and demand notes and issuance of a subordinated note
of $5,000,000, offset by net payments of $3,975,000 under the Company's
revolving credit facility.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of net sales
to certain items included in the Consolidated Statement of Operations:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------- ---------------------------
November 2, October 27, November 2, October 27,
1997 1996 1997 1996
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 48.3 47.6 48.9 51.2
----- ----- ----- -----
Gross profit 51.7 52.4 51.1 48.8
Operating expenses:
Selling 45.4 52.4 47.4 52.7
General and administrative 7.3 7.8 7.9 9.5
Amortization of goodwill 0.8 0.9 0.9 0.9
----- ----- ----- -----
53.5 61.1 56.2 63.1
----- ----- ----- -----
Loss from operations (1.8) (8.7) (5.1) (14.3)
Interest expense (1.6) (1.1) (1.4) (0.9)
Other income (expense) (0.1) .4 (0.1) 0.3
----- ----- ----- -----
Net loss (3.5%) 9.4%) (6.6%) (14.9%)
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Store (Showroom) Data Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------------- ---------------------------
November 2, October 27, November 2, October 27,
1997 1996 1997 1996
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Stores open at beginning of period 80 83 82 83
Stores opened during period 1 1 1 1
Stores closed during period - 1 2 1
----- ----- ----- -----
Stores open at end of period 81 83 81 83
===== ===== ===== =====
Average sales per showroom (1) 375 324 1,063 997
Comparable store sales increase (decrease)(2) 13.5% (13.7%) 4.3% (9.9%)
</TABLE>
(1) Based upon the weighted average number of stores open during the period
indicated.
(2) Comparable store sales are calculated by excluding the net sales of any
store for any month of the period if the store was not open during the
same month of the prior period. Also, a store opened at anytime during
the month is deemed to have been open for the entire month.
12
<PAGE> 13
Thirteen Weeks Ended November 2, 1997 Compared to Thirteen Weeks Ended
October 27, 1996
Net Sales. Net sales for the thirteen weeks ended November 2, 1997 were
$30,159,000 which represented an increase of $3,294,000 or 12.3% over the
comparable period of fiscal 1996. The sales increase was primarily attributable
to an increase in same-store sales of 13.5% partially offset by a decrease
attributable to the operation of two fewer stores in the 1997 period. Sales for
the thirteen weeks ended October 27, 1996 were adversely impacted by a shortage
of raw materials, resulting from insufficient cash, prior to the August,
September 1996 financings, to purchase such raw materials which were required
for production and shipments.
Gross Profit. Gross profit was 51.7% of net sales for the thirteen weeks
ended November 2, 1997 and was 52.4% of sales for the comparable period of
fiscal 1996. The decrease in gross profit, as a percentage of sales, resulted
primarily from higher freight and labor costs in the 1997 period as compared
with the 1996 period.
Selling Expenses. Selling expenses were $13,698,000 or 45.4% of net
sales for the thirteen weeks ended November 2, 1997 and were $14,081,000 or
52.4% of net sales for the comparable period of fiscal 1996. The decrease of
$383,000 in selling expenses was primarily due to a decrease of $295,000 in
variable selling payroll, resulting from a new commission structure.
General and Administrative Expenses. General and administrative expenses
for the thirteen weeks ended November 2, 1997 increased by $107,000 from the
comparable period of fiscal 1996 primarily as a result of higher payroll related
costs offset, in part, by lower professional fees, contract labor costs and
computer rental and maintenance costs.
Interest Expense. Interest expense for the thirteen weeks ended November
2, 1997 increased by $171,000 over the comparable period of fiscal 1996 due to
higher average debt outstanding.
Income Taxes. The Company paid no income taxes and no tax benefits were
provided for the thirteen weeks ended November 2, 1997 and for the thirteen
weeks ended October 27, 1996.
Net Loss. As a result of the above factors, the net loss was $1,047,000
for the thirteen weeks ended November 2, 1997 as compared to a net loss of
$2,521,000 for the comparable period of fiscal 1996. Net loss per share for the
thirteen weeks ended November 2, 1997 was $.06 based on 19,021,000 shares
outstanding. For the comparable 1996 period the net loss per share was $.24
based on 10,556,000 average shares outstanding. The per share loss for the
thirteen weeks ended November 2, 1997, as compared to the comparable period of
fiscal 1996, decreased 75%, although the net loss decreased only 58%. This
anomaly is due to the increase in weighted average number of common shares
outstanding from 10,556,000 in the thirteen weeks ended October 27, 1996 to
19,021,000 in the thirteen weeks ended November 2, 1997, attributable to the
issuance of 14,912,000 shares of the Company's common stock in connection with
the refinancing that took place in August and September of fiscal 1996.
13
<PAGE> 14
Thirty-nine Weeks Ended November 2, 1997 Compared to Thirty-nine Weeks Ended
October 27, 1996
Net Sales. Net sales for the thirty-nine weeks ended November 2, 1997
were $85,569,000 versus $82,738,000 for the comparable period of fiscal 1996, an
increase of $2,831,000 or 3.4%. The sales increase was primarily attributable to
an increase in same-store sales of 4.3% partially offset by a decrease
attributable to the operation of two fewer stores in the 1997 period. Sales for
the thirty-nine weeks ended October 27, 1996 were adversely impacted by a
shortage of raw materials, resulting from insufficient cash, prior to the
August, September 1996 financings, to purchase such raw materials which were
required for production and shipments.
Gross Profit. Gross profit was 51.1% of net sales for the thirty-nine
weeks ended November 2, 1997 and was 48.8% of net sales in the comparable period
of fiscal 1996. The increase in gross profit resulted primarily from increased
product prices and reduced promotional discounting.
Selling Expenses. Selling expenses were $40,558,000 or 47.4% of net
sales for the thirty-nine weeks ended November 2, 1997 and were $43,556,000 or
52.7% of net sales in the comparable period of fiscal 1996. The decrease of
$2,998,000 in selling expenses was primarily due to a decrease of $1,630,000 in
variable selling payroll, resulting from a new commission structure, and
decreases of $1,589,000 and $325,000 in store non-payroll expenses and delivery
expenses, respectively, resulting primarily from tighter cost controls offset,
in part, by increased advertising costs of $824,000.
General and Administrative Expenses. General and administrative expenses
for the thirty-nine weeks ended November 2, 1997 decreased by $1,072,000
compared with the comparable period of fiscal 1996 primarily as a result of
lower professional fees, contract labor costs and computer rental and
maintenance costs offset in part by higher payroll related costs.
Interest Expense. Interest expense for the thirty-nine weeks ended
November 2, 1997 increased by $395,000 over the comparable period of fiscal 1996
due to higher average debt outstanding.
Income Taxes. The Company paid no income taxes and no tax benefits were
provided for either of the thirty-nine week periods of fiscal 1997 or 1996.
Net Loss. As a result of the above factors, the net loss was $5,609,000
for the thirty-nine weeks ended November 2, 1997 as compared to a net loss of
$12,374,000 for the comparable period of fiscal 1996. Net loss per share in the
1997 period was $.30 based on 19,021,000 shares outstanding. In the comparable
1996 period the net loss per share was $1.62 based on 7,661,000 average shares
outstanding.
14
<PAGE> 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K filed during the quarter
ended November 2, 1997
(a) Exhibits
4.1(e) Fifth Amendment to Loan and Security Agreement, dated as of
December 11, 1997 by and between Congress Financial
Corporation (Western) and Krause's Custom Crafted Furniture
and Castro Convertible Corporation.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On September 25, 1997, the Registrant filed a current report
dated September 19, 1997 on Form 8-K. This report described,
under Item 4 - Changes in Registrant's Independent Public
Accountant, provides details of the Company's decision to change
Independent Public Accountants.
On December 3, 1997, the Registrant filed a current report dated
November 28, 1997 on Form 8-K. This report described, under Item
5 - Other Events, describes the Company's intention to file a
Form S-1 Registration Statement.
15
<PAGE> 16
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 17, 1997 /s/ PHILIP M. HAWLEY
----------------- --------------------------------------------------
Philip M. Hawley
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: December 17, 1997 /s/ ROBERT A. BURTON
----------------- --------------------------------------------------
Robert A. Burton
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
4.1(e) Fifth Amendment to Loan and Security Agreement,
dated as of December 11, 1997 by and between
Congress Financial Corporation (Western) and
Krause's Custom Crafted Furniture and Castro
Convertible Corporation.
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 4.1E
FIFTH AMENDMENT TO LOAN AND
SECURITY AGREEMENT
THIS FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment"),
dated as of December 11, 1997, is entered into by and between CONGRESS
FINANCIAL CORPORATION (WESTERN), a California corporation ("Lender"), with a
place of business at 225 South Lake Avenue, Suite 1000, Pasadena, California
91101 and KRAUSE'S CUSTOM CRAFTED FURNITURE CORP., a California corporation
(formerly known as Krause's Sofa Factory), and its wholly owned subsidiary,
CASTRO CONVERTIBLE CORPORATION, a New York corporation (jointly and severally,
"Borrower"), with its chief executive office located at 200 N. Berry Street,
Brea, California 92821.
RECITALS
A. Borrower and Lender have previously entered into that certain
Loan and Security Agreement dated as of January 20, 1995, as amended by that
certain First Amendment to Loan and Security Agreement dated as of May 10,
1996, that certain Second Amendment to Loan and Security Agreement dated as of
August 26, 1996, that certain Third Amendment to Loan and Security Agreement
dated as of November 25, 1996 and that certain Fourth Amendment to Loan and
Security Agreement dated as of August 14, 1997 (collectively, the "Loan
Agreement"), pursuant to which Lender has made certain loans and financial
accommodations available to Borrower. Terms used herein without definition
shall have the meanings ascribed to them in the Loan Agreement.
B. Borrower has informed Lender that on September 29, 1997, it
changed Krause's name from "Krause's Sofa Factory" to "Krause's Custom Crafted
Furniture Corp." and in connection therewith, Borrower has requested that
Lender (a) waive its default under the Loan Agreement as a result of Borrower's
failure to provide prior notice of the change of Krause's name and (b) amend
the Loan Agreement and other Financing Agreements to reflect such name change.
C. Borrower has further requested that Lender waive the financial
covenant default pertaining to EBITDA for the fiscal quarter ending October
1997.
D. Lender is willing to waive such defaults and further amend the
Loan Agreement under the terms and conditions set forth in this Amendment.
Borrower is entering into this Amendment with the understanding and agreement
that none of Lender's rights or remedies as set forth in the Loan Agreement is
being waived or modified by the terms of this Amendment.
1
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Amendment to Loan Agreement.
(a) The definition of "Borrower" set forth in the introductory
paragraph of the Loan Agreement is hereby amended in its entirety as
follows:
"Krause's Custom Crafted Furniture Corp., a California corporation,
and its wholly owned subsidiary, Castro Convertible Corporation, a New
York corporation"
(b) The definition of "Krause's" set forth in Section 1.23 is hereby
amended in its entirety as follows:
"1.23 'Krause's' shall mean Krause's Custom Crafted Furniture
Corp., a California corporation."
2. Amendment to other Financing Agreements. Each reference in the other
Financing Agreements to "Krause's Sofa Factory" is hereby amended to read
"Krause's Custom Crafted Furniture Corp."
3. Waiver by Lender of Compliance with Covenants in the Loan Agreement.
Borrower hereby acknowledges that (a) it has failed to provide prior notice to
Lender of the change in Krause's name as required by Section 9.1 of the Loan
Agreement and (b) as of the end of the fiscal quarter ended October 1997, it was
not in compliance with the financial covenant relating to EBITDA set forth in
Section 9.15 of the Loan Agreement, and that such failure and non-compliance
constitute Events of Default under the Loan Agreement. Lender hereby waives
compliance by Borrower with (a) the covenant set forth in Section 9.1 of the
Loan Agreement through the date hereof and (b) the financial covenant set forth
in Section 9.15 of the Loan Agreement through the end of the fiscal quarter
ended October 1997, and shall not exercise its rights and remedies under the
Loan Agreement or applicable law in respect of such Events of Default; provided,
however, that Lender shall be free to exercise all of its rights and remedies
under the Loan Agreement in the event of Borrower's violation or breach after
the date hereof of Section 9.1 of the Loan Agreement or of Borrower's
non-compliance after the end of the fiscal quarter ended October 1997 with
Section 9.15 of the Loan Agreement. The foregoing waiver is not a continuing
waiver, and Lender does not by this waiver amend the terms and provisions of the
Loan Agreement. Upon the occurrence of any Event of Default after the date
hereof, or in the event that Lender learns of any Event of Default which
occurred prior to the date hereof (other than a breach of the covenant set forth
in Section 9.1 of the Loan Agreement or of the financial covenant set forth in
Section 9.15 of the Loan Agreement for the fiscal quarter ended October 1997).
Lender shall be free to exercise any and all of its various rights and remedies
under the Loan Agreement.
2
<PAGE> 3
4. Effectiveness of this Amendment. Lender must have received the
following items, in form and substance acceptable to Lender, or evidence of the
occurrence thereof, before this Amendment is effective and before Lender is
required to extend any credit to Borrower as provided for by this Amendment.
The date on which all of the following conditions have been satisfied is the
"Closing Date".
(a) Amendment. This Amendment fully executed in a sufficient
number of counterparts for distribution to Lender and Borrower.
(b) Authorizations. Evidence that the execution, delivery and
performance by Borrower and each guarantor or subordinating creditor
of this Amendment and any instrument or agreement required under this
Amendment have been duly authorized.
(c) Representations and Warranties. The Representations and
Warranties set forth in the Loan Agreement must be true and correct.
(d) UCC Amendments. Lender shall have received Uniform
Commercial Code Financing Statements executed by Krause's amending
each of the Financing Statements previously filed by Lender against
Krause's to reflect Krause's name change.
(e) Other Required Documentation. All other documents and legal
matters in connection with the transactions contemplated by this
Amendment shall have been delivered or executed or recorded and shall
be in form and substance satisfactory to Lender.
(f) Payment of Modification and Waiver Fee. Lender shall have
received from Borrower a modification and waiver fee of Three Thousand
Dollars ($3,000), which fee shall be fully earned as of and payable on
the date hereof.
5. Choice of Law. The validity of this Amendment, its
construction, interpretation and enforcement, and the rights of the parties
hereunder, shall be determined under, governed by, and construed in accordance
with the laws of the State of California governing contracts wholly to be
performed in that State.
6. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties on separate counterparts, each of which
when so executed and delivered, shall be deemed an original, and all of which,
when taken together, shall constitute but one and the same instrument.
7. Due Execution. The execution, delivery and performance of this
Amendment are within the powers of the Borrower, have been duly authorized by
all necessary corporate action, have received all necessary governmental
approval, if any, and do not contravene any law or any contractual restrictions
binding on Borrower.
3
<PAGE> 4
8. Otherwise Not Affected. In the event of any conflict or inconsistency
between the Loan Agreement and the provisions of this Amendment, the provisions
of this Amendment shall govern. Except to the extent set forth herein, the Loan
Agreement shall remain in full force and effect.
9. Ratification. Borrower hereby restates, ratifies and reaffirms each
and every term and condition set forth in the Loan Agreement, as amended
hereby, and the Financing Agreements effective as of the date hereof.
10. Estoppel. To induce Lender to enter into this Amendment and to
continue to make advances to Borrower under the Loan Agreement, Borrower hereby
acknowledges and agrees that, after giving effect to this Amendment, as of the
date hereof, there exists no Event of Default and no right of offset, defense,
counterclaim or objection in favor of Borrower as against Lender with respect
to the Obligations.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the day and year first above written.
KRAUSE'S CUSTOM CRAFTED
FURNITURE CORP.,
a California corporation
By: /s/ ROBERT A. BURTON
------------------------------
Name: Robert A. Burton
----------------------------
Title: Senior Vice President, CFO
---------------------------
CASTRO CONVERTIBLE
CORPORATION,
a New York corporation
By: /s/ ROBERT A. BURTON
------------------------------
Name: Robert A. Burton
----------------------------
Title: Senior Vice President, CFO
---------------------------
CONGRESS FINANCIAL
CORPORATION (WESTERN),
a California corporation
By: /s/ RANDY J. BOWNAN
------------------------------
Name: Randy J. Bownan
----------------------------
Title: Senior Vice President
---------------------------
4
<PAGE> 5
ACKNOWLEDGMENT
The undersigned Krause Furniture, Inc., a Delaware corporation ("KFI"),
parent of Krause's Custom Crafted Furniture Corp. ("Krause's"), in
consideration of Congress Financial Corporation (Western) ("Congress") continued
extension of credit to Krause's and Castro Convertible Corporation, hereby
consents to the foregoing Fifth Amendment to Loan and Security Agreement and
acknowledges and confirms that its Guarantee dated November 25, 1996 (the
"Guarantee") in favor of Congress remains in full force and effect. Although
Congress has informed KFI of the matters set forth above, and KFI has
acknowledged same. KFI understands and agrees that Congress has no duty under
the Loan Agreement as defined above, the Guarantee or any other agreement with
KFI to so notify us or to seek such an acknowledgment, and nothing contained
herein is intended to or shall create such a duty as to any advances or
transaction hereafter.
Dated: December 11, 1997 KRAUSE'S FURNITURE, INC.
a Delaware corporation
By: /s/ ROBERT A. BURTON
--------------------------
Name: Robert A. Burton
-------------------------
Title: Senior Vice President, CFO
-----------------------------
5
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