<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 September 24, 2000
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 October 26, 2000 the Registrant had 23,303,729 shares of Common Stock
outstanding.
<PAGE> 2
INDEX
Page
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated balance sheet (unaudited) 3
- Consolidated statement of operations (unaudited) 4
- Consolidated statement of cash flows (unaudited) 5
- Notes to consolidated financial statements (unaudited) 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 15
Item 3. Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security-Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
<PAGE> 3
PART I, ITEM 1
KRAUSE'S FURNITURE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 24, December 26,
2000 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,295 $ 80
Accounts receivable, net of allowance of $316 for
doubtful accounts ($197 at December 26, 1999) 2,152 569
Inventories 24,765 25,289
Prepaid expenses 1,583 656
-------- --------
Total current assets 35,795 26,594
Property, equipment, and leasehold improvements, net 18,050 15,592
Goodwill, net 11,647 12,412
Leasehold interests, net 542 700
Other assets 2,495 2,463
-------- --------
$ 68,529 $ 57,761
======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 10,892 $ 14,610
Accrued payroll and related expenses 2,310 2,086
Other accrued liabilities 4,507 6,054
Customer deposits 8,163 4,949
Notes payable 2,524 491
-------- --------
Total current liabilities 28,396 28,190
-------- --------
Long-term liabilities:
Notes payable 21,397 23,346
Other 2,019 1,960
-------- --------
Total long-term liabilities 23,416 25,306
-------- --------
Commitments and contingencies
Mandatorily redeemable preferred stock, $.001 par value,
450,000 designated, 377,577 shares outstanding; redemption
value $50 per share 18,600 --
Stockholders' equity (deficit):
Convertible preferred stock, $.001 par value; 2,666,667
shares authorized, 450,000 designated; 377,577 shares
outstanding -- --
Common stock, $.001 par value; 100,000,000 shares
authorized, 23,283,276 shares outstanding
(22,050,328 at December 26, 1999) 23 22
Capital in excess of par value 65,507 60,642
Accumulated deficit (67,413) (56,399)
-------- --------
Total stockholders' equity (deficit) (1,883) 4,265
-------- --------
$ 68,529 $ 57,761
======== ========
</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
---------------------------------- ----------------------------------
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 37,509 $ 34,719 $ 111,825 $ 104,483
Cost of sales 16,949 16,094 50,622 47,803
-------- -------- --------- --------
Gross profit 20,560 18,625 61,203 56,680
Operating expenses:
Selling 18,603 17,690 56,904 52,057
General and administrative 2,971 2,734 9,394 7,988
Amortization of goodwill 255 255 765 765
-------- -------- --------- --------
21,829 20,679 67,063 60,810
-------- -------- --------- --------
Loss from operations (1,269) (2,054) (5,860) (4,130)
Interest expense (974) (898) (2,589) (2,329)
Other income 26 12 26 34
-------- -------- --------- --------
Net loss $ (2,217) $ (2,940) $ (8,423) $ (6,425)
======== ======== ========= ========
Basic and diluted loss per share $ (.10) $ (.13) $ (.49) $ (.29)
======== ======== ========= ========
Number of shares used in computing
loss per share 22,828 22,009 22,322 21,992
======== ======== ========= ========
</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
--------------------------------
September 24, September 26,
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,423) $ (6,425)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 2,602 2,484
Other non-cash charges 1,938 1,031
Change in assets and liabilities
Accounts receivable (1,583) (24)
Inventories 524 (3,906)
Prepaid expenses and other assets (37) (232)
Accounts payable and other liabilities (4,982) 2,855
Customer deposits 3,214 3,020
--------- ---------
Net cash used by operating activities (6,747) (1,197)
--------- ---------
Cash flows from investing activities:
Capital expenditures (4,205) (3,404)
--------- ---------
Net cash used by investing activities (4,205) (3,404)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term borrowings 136,065 121,984
Principal payments on long-term borrowings (136,598) (117,383)
Net proceeds from issuance of mandatorily redeemable
preferred stock 18,700 --
--------- ---------
Net cash provided by financing activities 18,167 4,601
--------- ---------
Net increase in cash 7,215 --
Cash and cash equivalents at beginning of period 80 80
--------- ---------
Cash and cash equivalents at end of period $ 7,295 $ 80
========= =========
Supplemental disclosures of cash flow information -
Cash paid during the period for interest $ 1,192 $ 1,586
Issuance of mandatorily redeemable preferred stock
to pre-pay interest on subordinated debt 2,175 --
Conversion of mandatorily redeemable preferred stock
to Common Stock 1,356 --
</TABLE>
See accompanying notes.
5
<PAGE> 6
KRAUSE'S FURNITURE, INC
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation.
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. ("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.
In January 2000, the Company changed its fiscal year from the Sunday
closest to January 31 to the Sunday closest to December 25. This report is for
the unaudited third fiscal 2000 quarter ended September 24, 2000. Unaudited
operating and cash flow information has been presented for the comparable 1999
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 26, 1999. The
results of operations for the thirteen and thirty-nine weeks ended September 24,
2000 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. Inventories
Inventories are carried at the lower of cost or market using the first-in,
first-out method and are comprised of the following:
September 24, December 26,
2000 1999
------------- -------------
(in thousands)
Manufactured finished goods $ 8,467 $ 7,991
Finished goods purchased from others 11,317 10,370
Work in progress 336 180
Raw materials 4,645 6,748
------- -------
$24,765 $25,289
======= =======
6
<PAGE> 7
3. Notes Payable
Notes payable consists of the following:
September 24, December 26,
2000 1999
------------- ------------
(in thousands)
Secured revolving credit notes $ 12,414 $ 12,655
Subordinated notes payable to shareholders 12,001 12,001
Unamortized debt discount, net of
accumulated amortization of $2,737
($2,120 at December 26, 1999) (1,538) (2,155)
Other notes 1,044 1,336
-------- --------
23,921 23,837
Less current portion 2,524 491
-------- --------
$ 21,397 $ 23,346
======== ========
The secured revolving credit notes were issued under a revolving credit
agreement, which was most recently amended November 7, 2000, (the "Revolving
Credit Facility") between Krause's and a financial institution that expires
March 2002. The Revolving Credit Facility provides for revolving loans of up to
$15 million, based on the value of eligible inventories. Available borrowing
capacity under the terms of the Revolving Credit Facility at September 24, 2000
was $1,730,000. Substantially all of Krause's assets are pledged as collateral
for the loan that is guaranteed by the Company. Interest on the loan is payable
monthly at a margin ranging from .5% to 1.0% in excess of the prime rate (9.50%
at September 24, 2000) which margin varies depending on the Company's
performance.
Pursuant to the terms of the agreements related to the subordinated notes
and the Revolving Credit Facility, 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 September 24,
2000, the Company and Krause's were in compliance with the terms and conditions
of the subordinated notes but were out of compliance with certain terms and
conditions of the Revolving Credit Facility. Subsequent to September 24, 2000,
the Company received a waiver of such non-compliance and an amendment to a
future covenants from the financial institution that issued the Revolving Credit
Facility. It is possible the Company may not be in compliance with its loan
covenant in the fourth quarter of fiscal 2000; however, management believes,
based upon its historical experience, that it will be able to obtain waivers and
or amendments to the covenants.
4. Net Loss Per Share
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. There were no differences between basic and
diluted loss per share. A deemed dividend related to a favorable conversion
feature of the Company's Series A Convertible Preferred Stock has been deducted
from the net loss to arrive at loss available to common shareholders.
7
<PAGE> 8
The following is a reconciliation of the Company's net loss and weighted
average shares outstanding for the purpose of calculating basic and diluted loss
per share for all periods:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------ ------------------------------
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Net Loss $ (2,217) $ (2,940) $ (8,423) $ (6,425)
Less: deemed preferred
stock dividend -- -- 2,591 --
-------- -------- -------- --------
Loss available to
common stockholders $ (2,217) $ (2,940) $(11,014) $ (6,425)
======== ======== ======== ========
Weighted average shares
outstanding 22,828 22,009 22,322 21,992
======== ======== ======== ========
Basic and diluted loss per share $ (0.10) $ (0.13) $ (0.49) $ (0.29)
======== ======== ======== ========
</TABLE>
5. Mandatorily Redeemable Preferred Stock
On January 14 and 19, 2000, the Company completed a private placement of
380,000 shares of Series A Convertible Preferred Stock at a price of $50.00 per
share. Proceeds from the private placement totaled $18,700,000 after deducting
legal fees and related expenses. Pursuant to the terms of a Securities Purchase
Agreement between the Company and the purchasers of the Series A Convertible
Preferred Stock, the Company and the purchasers agreed that $10 million of the
proceeds would be used to launch the Company's business to business and
e-Commerce activities, including commerce related to transactions on the
internet, and that the balance of the proceeds would be used to pay down debt,
to fund the opening of new showrooms, and for general corporate purposes. On
July 17, 2000, the requisite holders of the Series A Convertible Preferred Stock
consented to reduce by $2.5 million the amount to be used to launch the
Company's business to business and e-Commerce activities. Subject to certain
conditions, the Company has agreed to invest the first $2.5 million from
extraordinary transactions (as defined in the consent) back into the Company's
business to business and e-Commerce activities.
On May 5, 2000, the Company issued 24,702 shares of Series A Convertible
Preferred Stock at a price of $50.00 per share in lieu of cash interest on its
subordinated notes covering the thirteen-month period from March 1, 2000 through
March 31, 2001. These shares were valued at $2,175,000 based on the market value
on May 5, 2000 of the underlying Common Stock. The Company recorded this value
as prepaid interest, recorded the stated value of these shares, $1,235,000, as
mandatorily redeemable preferred stock, and the difference of $940,000 as
capital in excess of par value. It will amortize the prepaid interest using the
straight-line method over the related period which ends on March 31, 2001
Each share of Series A Convertible Preferred Stock is convertible into
approximately 45.45 shares of Common Stock at any time at the option of the
holder; has voting rights equal to approximately 45.45 shares of Common Stock;
has certain redemption features; and does not pay a dividend. Conversion is
mandatory upon the occurrence of a qualified public offering, as defined. In the
event of a voluntary or involuntary liquidation, the holders of the Series A
Convertible Preferred Stock have, as to any distribution of assets, a preference
to the holders of Common Stock in an amount aggregating $18,879,000 at September
24, 2000 or $50.00 per outstanding share. Holders of the Series A Convertible
Preferred Stock may not request redemption prior to January, 2005, except in the
event of a change in control of the Company or a default, prior to January,
2002. Under the Securities Purchase Agreement an event of default includes the
Company's failure to receive approval of the Board of Directors of its
e-Commerce business plan and its failure to use $7.5 million of proceeds from
the private placement for its e-Commerce business plan. The redemption price of
the Series A Convertible Preferred Stock is equal to $50.00 per share. The
Company has no right to call or redeem any shares of the Series A Convertible
Preferred Stock.
During the thirty-nine weeks ended September 24, 2000, holders of 27,125
shares of Series A Convertible Preferred Stock converted their shares into
1,232,948 shares of Common Stock of the Company.
6. Operations
The Company has reported losses from operations for more than five years
and had an accumulated deficit of $67,413,000 on September 24, 2000. Under the
terms of the agreement related to the Company's subordinated notes, as well as
under the terms of its revolving credit agreement with Congress Financial
(Western), the Company is required to maintain certain financial covenants and
is prohibited from incurring additional indebtedness from third parties. From
time to time, the Company's financial condition or financial performance has
fallen out of compliance with some of these covenants, and the Company has
obtained amendments or waivers of any resulting default from its lenders. The
Company may continue to have a need to seek waivers in the future, and its
lenders may refuse to grant them at that time.
Management is pursuing programs to improve its liquidity, including the
introduction of new product lines and marketing strategies to increase cash
flow, increased emphasis on institutional sales, the sale of certain assets and
cost-cutting initiatives. Management is confident that these new programs, or if
necessary the use of cash presently allocated to e-Commerce uses or a
restructuring of the Company's subordinated debt, along with projected cash
flow, available cash on hand and available borrowing capacity will be sufficient
to fund the Company's requirements for working capital, capital expenditures
(currently estimated to be approximately $2,000,000 in the next twelve months)
and debt repayments ($2,524,000 in the next twelve months).
8
<PAGE> 9
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements within the meaning of the Private
Securities Reform Act of 1995. These statements include those related to the
Company's plans for sales through e-Commerce and business-to-business channels;
management's strategy of opening new stores, remodeling existing stores and
improving the Company's marketing approach; management's programs to increase
cash flow and liquidity and those related to management's expectation that the
Company will achieve profitability. They also include statements throughout the
report using such forward-looking terminology as "may," "will," "expect,"
"anticipate," "continue," "estimate," or the negative of these terms or other
comparable terminology. These statements involve risks and uncertainties which
may cause results to differ materially from those set forth in these statements.
Among other things,
o e-Commerce and business-to-business sales are new businesses for the
Company and there is no history of success;
o demand for and acceptance of the Company's products could decrease;
o the retail environment could deteriorate;
o the ability of the Company to execute its future operating strategies
remains unproven;
o the Company's planned marketing and promotional campaigns may not be
successful;
o developer delays, weather and other conditions could slow the opening
of new stores; and
o competition from existing and new competitors could increase.
These risks and the other economic, competitive and other factors noted
elsewhere 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-3, which became effective on May 23, 2000,
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash needs are for funding capital expenditures to
open new showrooms and remodel existing showrooms; for manufacturing samples of
upholstered furniture for display in its new and existing showrooms as well as
to purchase merchandise from other manufacturers that complements the
upholstered furniture manufactured and displayed by the Company; for funding
capital expenditures related to the improvement and maintenance of its
management information systems; to fund the development and deployment of the
Company's business to business and e-Commerce strategy; and to pay interest on
its debt. Beginning on March 31, 2001 and quarterly
9
<PAGE> 10
thereafter, the Company will also require cash to make the scheduled principal
payments on its subordinated notes. The cash required for funding production and
fulfillment of customer orders is typically provided by the Company's customers
from a deposit made at the time an order is placed.
In recent periods, the Company has incurred additional debt and raised
equity capital to cover operating deficits and to finance its strategies. As
more fully described in Note 5 to the Consolidated Financial Statements, on
January 14 and 19, 2000, the Company completed a private placement of 380,000
shares of Series A Convertible Preferred Stock, net proceeds from which totaled
$18,700,000; of this amount, $7,500,000 is earmarked for the development and
implementation of the Company's business to business and e-Commerce initiatives.
On May 5, 2000, the Company and the holders of its subordinated notes exercised
their respective options to eliminate cash interest on the subordinated notes
for the period March 1, 2000 through March 31, 2001 in exchange for issuance of
24,702 shares of Series A Convertible Preferred Stock.
The Company has reported losses from operations for more than five years
and had an accumulated deficit of $67,413,000 on September 24, 2000. Under the
terms of the agreement related to the Company's subordinated notes, as well as
under the terms of its revolving credit agreement with Congress Financial
(Western), the Company is required to maintain certain financial covenants and
is prohibited from incurring additional indebtedness from third parties. From
time to time, the Company's financial condition or financial performance has
fallen out of compliance with some of these covenants, and the Company has
obtained amendments or waivers of any resulting default from its lenders. The
Company may continue to have a need to seek waivers in the future, and its
lenders may refuse to grant them at that time.
Management is pursuing programs to improve its liquidity, including the
introduction of new product lines and marketing strategies to increase cash
flow, increased emphasis on institutional sales, the sale of certain assets and
cost-cutting initiatives. Management is confident that these new programs, or if
necessary the use of cash presently allocated to e-Commerce uses or a
restructuring of the Company's subordinated debt, along with projected cash
flow, available cash on hand and available borrowing capacity will be sufficient
to fund the Company's requirements for working capital, capital expenditures
(currently estimated to be approximately $2,000,000 in the next twelve months)
and debt repayments ($2,524,000 in the next twelve months).
As of September 24, 2000, the Company had cash and cash equivalents of
$7,295,000, $7,118,000 of which is earmarked for business to business and
e-Commerce initiatives, and unused borrowing capacity under its revolving credit
agreement of approximately $1,730,000. Cash flow activity for the thirty-nine
weeks ended September 24, 2000 and September 26, 1999 is presented in the
Consolidated Statement of Cash flows.
Cash Flow - Thirty-nine weeks ended September 24, 2000
During the thirty-nine weeks ended September 24, 2000, cash and cash
equivalents increased by $7,215,000. Operating activities used net cash of
$6,747,000, principally from a cash loss from operations of $3,883,000; a
decrease in accounts payable and other liabilities of $4,982,000, and increases
in accounts receivable of $1,583,000 and prepaid expenses and other assets of
$37,000, all of which were offset in part by increased customer deposits of
$3,214,000 and a decrease in inventories of $524,000. Investing activities
during the period included capital expenditures of $4,205,000 which was used
primarily to open twelve new showrooms, to fund capital requirements of the
ongoing upgrade of the management information systems infrastructure, and to
remodel two stores. Financing activities during the period consisted principally
of net proceeds of $18,700,000 from the sale of 380,000 shares of Series A
Convertible Preferred Stock, net payments of $241,000 on the Company's
10
<PAGE> 11
Revolving Credit Facility and $292,000 of principal payments on other
indebtedness. Non-cash financing activities included the issuance of 24,702
shares of Series A Convertible Preferred Stock valued at $2,175,000 in payment
of interest on subordinated notes for the period from March 1, 2000 through
March 31, 2001.
Cash Flow - Thirty-nine weeks ended September 26, 1999
Cash and cash equivalents at September 26, 1999 remained unchanged. During
the thirty-nine weeks ended September 26, 1999, operating activities used net
cash of $1,197,000, principally from a cash loss from operations of $2,910,000
and increases in inventories, prepaid expenses and accounts receivable of
$3,906,000, $232,000 and $24,000, respectively, all of which were partially
offset by increases in customer deposits, and accounts payable and other
liabilities of $3,020,000 and $2,855,000, respectively. Investing and financing
activities during the period included capital expenditures of $3,404,000 and net
borrowings of $4,601,000 primarily from 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
---------------------------- ----------------------------
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 45.2 46.4 45.3 45.8
----- ----- ----- -----
Gross profit 54.8 53.6 54.7 54.2
Operating expenses:
Selling 49.6 51.0 50.9 49.8
General and administrative 7.9 7.9 8.4 7.6
Amortization of goodwill 0.7 0.7 0.7 0.7
----- ----- ----- -----
58.2 59.6 60.0 58.1
----- ----- ----- -----
Loss from operations (3.4) (6.0) (5.3) (3.9)
Interest expense (2.6) (2.6) (2.3) (2.2)
Other income (expense) .1 -- -- --
----- ----- ----- -----
Net loss (5.9)% (8.6)% (7.6)% (6.1)%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------------ ------------------------------
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Stores open at beginning of period 96 89 91 85
Stores opened during period 4 4 12 11
Stores closed during period 1 3 4 6
----- ---- ------- ------
Stores open at end of period 99 90 99 90
===== ==== ======= ======
Average sales per showroom(1) $ 384 $391 $ 1,169 $1,172
Comparable store sales increase (decrease)(2) (2.4)% 4.9% (1.6)% 7.1%
</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 any time during the month
is deemed to have been open for the entire month.
12
<PAGE> 13
Thirteen weeks ended September 24, 2000 compared to thirteen weeks ended
September 26, 1999
Net Sales. Net sales for the thirteen weeks ended September 24, 2000
were $37,509,000 compared to $34,719,000 for the comparable period of fiscal
1999. The overall $2,790,000 increase in net sales was composed of a $5,103,000
increase from new stores and $119,000 of sales from the CastroContract division
offset in part by a $797,000 or 2.4% decrease in same store sales and a
$1,635,000 decrease from closed stores.
Gross Profit. Gross profit was 54.8% of net sales in the thirteen weeks
ended September 24, 2000, as compared to 53.6% of net sales for the comparable
period of fiscal 1999. The increase in gross profit was primarily the result of
greater efficiencies in manufacturing operations..
Selling Expenses. Selling expenses were $18,603,000 or 49.6% of sales in
the thirteen weeks ended September 24, 2000 compared to $17,690,000 or 51.0% of
sales in the same period last year. The increase of $913,000 in selling expenses
was primarily due to higher occupancy costs related to new store openings. The
reduction in selling expenses as a percentage of sales resulted primarily from
expense reductions put in place at the beginning of the quarter.
General and Administrative Expenses. General and administrative expenses
increased by $237,000 but remained constant as a percentage of sales at 7.9% for
the quarter ended September 24, 2000 as compared to the quarter ended September
26, 1999. Approximately $99,000 of the total increase is related to expenses of
the e-Commerce initiative, with the balance of the increase consisting primarily
of costs incurred in connection with the Company's management information
systems conversion.
Interest Expense. Interest expense, including amortization of debt
discounts and deferred financing costs, net of interest income, for the quarter
ended September 24, 2000 increased by $76,000 over the same period in the prior
fiscal year. Interest expense increased due to higher average outstanding
revolving debt, higher interest rates as well as higher interest expense on the
subordinated notes as more fully described in Note 5 to the Consolidated
Financial Statements. Partially offsetting these increases was interest earned
on invested funds. Interest expense consists of the following:
Thirteen Weeks Ended
-----------------------------
September 24, September 26,
2000 1999
------------- -------------
(in thousands)
Interest expense on debt $ 911 $705
Amortization of debt discounts and
deferred financing costs 220 193
------ ----
1,131 898
Interest income 157 --
------ ----
Interest expense, net $ 974 $898
====== ====
Income Taxes. The Company paid no income taxes and no income tax benefit
was recorded for either the third quarter of fiscal 2000 or fiscal 1999 due to
uncertainties regarding the realization of deferred tax assets available.
13
<PAGE> 14
Net Loss. As a result of the above factors, the net loss was $2,217,000
for the quarter ended September 24, 2000 as compared to a loss of $2,940,000 in
the same period of the prior fiscal year. Net loss per share in the 2000 quarter
was $0.10 versus a loss of $0.13 in the same period of fiscal 1999.
Thirty-nine weeks ended September 24, 2000 compared to thirty-nine weeks ended
September 26, 1999
Net Sales. Net sales for the thirty-nine weeks ended September 24, 2000
were $111,825,000 compared to $104,483,000 for the comparable period of fiscal
1999, representing an increase of $7,342,000 or 7.0%. The overall $7,342,000
increase in net sales is attributable to a $14,703,000 increase from new stores,
and $578,000 of sales of the CastroContract division offset in part by a
decrease of $ 6,378,000 from closed stores and a $1,561,000 or 1.6% decrease in
same-store sales.
Gross Profit. Gross profit was 54.7% of net sales in the thirty-nine
weeks ended September 24, 2000, as compared to 54.2% of net sales for the
comparable period of fiscal 1999. The increase in the gross profit rate was
primarily the result of greater efficiencies in manufacturing operations.
Selling Expenses. Selling expenses were $56,904,000 or 50.9% of sales in
the thirty-nine weeks ended September 24, 2000 compared to $52,057,000 or 49.8%
of sales in the same period last year. Selling expenses increased primarily due
to higher variable expenses related to increased sales volume, higher occupancy
costs related to new store openings, higher advertising costs as a result of
increased use of color circulars, and higher delivery expenses that are
transitional in nature and related to the Company's strategic decision to
increase its use of outsourcing. These increases were offset in part by expense
reductions put in place at the beginning of the third quarter of fiscal 2000.
General and Administrative Expenses. General and administrative expenses
increased by $1,406,000 and as a percentage of sales rose from 7.6% for the
thirty-nine weeks ended September 26, 1999 to 8.4% for the thirty-nine weeks
ended September 24, 2000. Approximately $620,000 of the total increase is
related to expenses of the e-Commerce initiative, consisting primarily of
strategy consulting costs and costs incurred in connection with the Company's
management information systems conversion. The remainder of the increase is
primarily a result of higher payroll costs.
Interest Expense. Interest expense, including amortization of debt
discounts and deferred financing costs, net of interest income, for the
thirty-nine weeks ended September 24, 2000 increased by $260,000 over the same
period in the prior fiscal year. Interest expense increased due to higher
average outstanding revolving debt and related increases in interest rates as
well as higher interest expense on the subordinated notes as more fully
described in Note 5 to the Consolidated Financial Statements. Partially
offsetting these increases was interest earned on invested funds.
14
<PAGE> 15
Interest expense consists of the following:
Thirty-nine Weeks Ended
-------------------------------
September 24, September 26,
2000 1999
------------- -------------
(in thousands)
Interest expense on debt $2,362 $1,586
Amortization of debt discounts and
deferred financing costs 635 743
------ ------
2,997 2,329
Interest income 408 --
------ ------
Interest expense, net $2,589 $2,329
====== ======
Income Taxes. The Company paid no income taxes and no income tax benefit
was recorded for either the thirty-nine weeks ended September 24, 2000 or fiscal
1999 due to uncertainties regarding the realization of deferred tax assets
available.
Net Loss. As a result of the above factors, the net loss was $8,423,000
for the thirty-nine weeks ended September 24, 2000 as compared to a loss of
$6,425,000 in the same period of the prior fiscal year. Net loss per share in
the 2000 period was $0.49 versus a loss of $0.29 in the same period of fiscal
1999. The year-to-date 2000 loss per share for the thirty-nine weeks ended
September 24, 2000 reflects a one-time $2,591,000 (or $0.12 per share) deemed
dividend to holders of the Company's Series A Convertible Preferred Stock.
Recent Accounting Pronouncements
During the second quarter of fiscal year 2000, Emerging Issues Task
Force (EITF) No. 00-10 "Accounting for Shipping and Handling Fees and Costs" was
issued. EITF No. 00-10 governs the accounting treatment and classification of
the Company's delivery revenues and certain of its delivery expenses and will be
adopted by the Company in the fourth quarter of the current fiscal year. The
adoption of this EITF will only affect the classification of revenues from
deliveries to its customers and certain delivery expenses related to shipping
and handling of the Company's product and will not affect the Company's net
income (loss).
15
<PAGE> 16
PART I, ITEM 3
Market Risk Exposure
There were no material changes in items affecting market risk. Refer to
the Company's Annual Report on Form 10-K for the year ended December 26, 1999
for more detail.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 in the Company's Annual Report on Form 10-K
for the fiscal year ended December 26, 1999. There has been no material
change.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security-Holders
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K filed during the quarter ended
September 24, 2000
10.1 Waiver of Default and Consent to Amendment of Business Plans,
between the Company, TH Lee.Putnam Internet Partners, L.P., TH
Lee.Putnam Internet Parallel Partners, L.P. and GE Capital Equity
Investments, dated as of July 17, 2000.
10.2 Agreement between the Company, General Electric Capital
Corporation and Japan Omnibus Ltd. Dated August 9, 2000.
10.3 Waiver of Supplemental Purchase Agreement by General Electric
Capital Corporation and Japan Omnibus Ltd. dated October 20, 2000.
27.1 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
None.
16
<PAGE> 17
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: November 8, 2000 /s/ Philip M. Hawley
------------------------------------
Philip M. Hawley
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: November 8, 2000 /s/ Robert A. Burton
------------------------------------
Robert A. Burton
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Waiver of Default and Consent to Amendment of Business Plans, between
the Company, TH Lee.Putnam Internet Partners, L.P., TH Lee.Putnam
Internet Parallel Partners, L.P. and GE Capital Equity Investments,
dated as of July 17, 2000.
10.2 Agreement between the Company, General Electric Capital Corporation
and Japan Omnibus Ltd. Dated August 9, 2000.
10.3 Waiver of Supplemental Purchase Agreement by General Electric Capital
Corporation and Japan Omnibus Ltd. dated October 20, 2000.
27.1 Financial Data Schedule (EDGAR version only)
