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 April 28, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ________________________
Commission file number: 0-17868
KRAUSE'S FURNITURE, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0310773
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
200 North Berry Street, Brea, California 92621
(Address of principal executive offices) (Zip Code)
(714) 990-3100
(Registrant's telephone number, including area code)
5980 Stoneridge Drive, Suite 109, Pleasanton, California 94588
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
As of June 1, 1996 the Registrant had 4,120,810 shares of common stock
outstanding.
2
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated balance sheets 1
- Consolidated statement of operations (unaudited) 2
- Consolidated statement of cash flows (unaudited) 3
- Notes to consolidated financial statements (unaudited) 4 - 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
3
KRAUSE'S FURNITURE, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
April 28, January 28,
1996 1996
--------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,256 $ 1,336
Accounts receivable, net of allowance for
doubtful accounts of $306 ($291 at January 28, 1996) 717 786
Income tax refund receivable -- 1,467
Inventories 14,463 14,627
Prepaid expenses 241 386
-------- --------
Total current assets 17,677 18,602
Property, equipment, and leasehold improvements, net 6,670 6,738
Goodwill, net 16,151 16,406
Leasehold interests, net 1,747 1,830
Other assets 3,298 3,290
-------- --------
$ 45,543 $ 46,866
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 18,845 $ 16,176
Accrued payroll and related expenses 1,806 1,696
Customer deposits 6,407 7,014
Notes payable 5,550 19
Income taxes payable 582 575
-------- --------
Total current liabilities 33,190 25,480
Long-term liabilities:
Notes payable 65 5,584
Other liabilities 1,940 1,817
-------- --------
Total long-term liabilities 2,005 7,401
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value;
666,667 shares authorized, 117,694 shares outstanding
at stated value (liquidation preference $67.50 per share) 7,523 7,523
Common stock, $.001 par value; 8,333,333 shares authorized,
4,120,810 shares outstanding 4 4
Capital in excess of par value 27,419 27,419
Accumulated deficit (24,598) (20,961)
-------- --------
Total stockholders' equity 10,348 13,985
-------- --------
$ 45,543 $ 46,866
======== ========
See accompanying notes.
1
4
KRAUSE'S FURNITURE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Thirteen Weeks Ended
-------------------------
April 28, April 30,
1996 1995
--------- --------
Net furniture sales $29,637 $32,251
Cost of sales 15,723 15,113
------- -------
Gross profit 13,914 17,138
Selling expenses 14,469 14,730
General and administrative expenses 2,696 3,124
Amortization of goodwill 255 255
------- -------
17,420 18,109
------- -------
Loss from operations (3,506) (971)
Interest expense (182) (171)
Other income (expense) 51 151
------- -------
Net loss $(3,637) $ (991)
======= =======
Net loss per share $ (0.88) $ (0.27)
======= =======
Average number of common
shares outstanding 4,121 3,685
See accompanying notes.
2
5
KRAUSE'S FURNITURE, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(In thousands)
Thirteen Weeks Ended
April 28, April 30,
1996 1995
------- --------
Cash flows from operating activities:
Net loss ($3,637) ($ 991)
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation and amortization 742 804
Change in assets and liabilities :
Accounts receivable 69 (22)
Income tax refund receivable 1,467 --
Inventories 164 (211)
Prepaid expenses and other assets 20 70
Accounts payable and accrued liabilities 2,909 (239)
Customer deposits (607) (871)
------- -------
Net cash provided (used) by operating activities 1,127 (1,460)
------- -------
Cash flows from investing activities:
Capital expenditures (219) (790)
------- -------
Net cash used by investing activities (219) (790)
------- -------
Cash flows from financing activities:
Net borrowings under revolving credit 17 2,712
Principal payments on other debt (5) (7)
------- -------
Net cash provided by financing activities 12 2,705
------- -------
Net increase in cash and cash equivalents 920 455
Cash and cash equivalents at beginning of period 1,336 1,952
------- -------
Cash and cash equivalents at end of period $ 2,256 $ 2,407
======= =======
Supplemental disclosures of cash flow information-
Cash paid during the period for:
Interest $ 163 $ 138
Income taxes -- 200
See accompanying notes.
3
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 Sofa Factory ("Krause's"), 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.
On August 1, 1995 the Company effected a one-for-three reverse split of
its common stock and preferred stock. Share and per share data for the thirteen
weeks ended April 30, 1995 have been restated to reflect the reverse split.
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 January 28, 1996. The
results of operations for the thirteen weeks ended April 28, 1996 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. On May 10, 1996, the Company's revolving credit agreement (Note 4) was
amended to extend the expiration date of the agreement to January 1998, provide
for additional borrowing availability and revise certain covenants and other
conditions. As a result of recurring operating losses, Krause's currently does
not comply with the revised technical covenants requiring maintenance of certain
levels of working capital and stockholders' equity. As a result of the covenant
violations, the lender may declare the entire amount of such indebtedness due
and payable immediately. Accordingly, the amount outstanding under the revolving
credit agreement has been reclassified and reflected as a current liability in
the accompanying April 28, 1996 consolidated balance sheet.
4
7
During fiscal 1995 and the first quarter of fiscal 1996 the Company
incurred operating losses of $9,388,000 and $3,506,000, respectively, and as of
April 28, 1996 the Company has a working capital deficiency of $15,513,000 and
an accumulated deficit of $24,598,000. Management has identified certain
initiatives and taken steps to return to profitability. Principal planned
strategic objectives and initiatives include downsizing showroom square footage
to reduce occupancy expenses, upgrading and remodeling showrooms to provide a
more appealing setting for customers, remerchandising, refocusing and reducing
advertising expenditures, improving manufacturing processes, and reducing
corporate expenses. Some of these initiatives can be undertaken presently while
others will require capital expenditures and, therefore, additional financing.
To provide necessary financing for current operations as well as to
begin to obtain necessary funding for the capital expenditures contemplated by
management's strategic initiatives, the Company, in June 1996, obtained
$2,950,000 from issuances of notes to certain stockholders and to affiliates of
certain stockholders (Note 4). Substantial operating losses are expected to
continue at least through the second quarter of the current fiscal year. The
Company will need to obtain additional financing to continue to fund these
expected operating losses and to implement all of the strategic objectives and
initiatives contemplated by the strategic plan. Should required additional
financing not be obtained, there is substantial doubt as to the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the classification of liabilities
that might result should the Company be unable to continue as a going concern.
3. Inventories are carried at the lower of cost or market using the first-in,
first-out method and are comprised of the following:
April 28, 1996 January 28, 1996
-------------- ----------------
Finished goods $11,476,000 $12,345,000
Work-in-process 441,000 297,000
Raw materials 2,546,000 1,985,000
------------ -----------
$14,463,000 $14,627,000
=========== ===========
4. Notes payable consists of the following:
April 28, 1996 January 28, 1996
-------------- ----------------
Secured revolving credit notes $5,532,000 $5,515,000
Other notes 83,000 88,000
---------- ----------
5,615,000 5,603,000
Less current portion 5,550,000 19,000
---------- ----------
$ 65,000 $5,584,000
========== ==========
5
8
The secured revolving credit notes were issued under a revolving credit
facility with a financial institution that expires in January 1998. Borrowings
under the revolving credit facility are based on the value of eligible
inventory, as defined, and as of April 28, 1996 were limited to approximately
$6.5 million. Interest on the loans is payable monthly at the rate of 1.5% in
excess of the prime rate (8.25% at April 28, 1996). Substantially all of
Krause's assets are pledged as collateral for the notes.
Since April 28, 1996 the Company received proceeds from related parties
in connection with the issuances of convertible notes of $950,000 and a 20%
demand promissory note of $2,000,000. The convertible notes will mature in three
years and bear interest at 10% for the first year and will be convertible into
common stock after the first anniversary of the notes at a conversion price
ranging from $.80 to $4 per share depending on the market price of the Company's
common stock during a defined period prior to the date of conversion.
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.
6
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS
RESULTS OF OPERATIONS
Thirteen Weeks Ended April 28, 1996 Compared to Thirteen Weeks Ended April 30,
1995
Net furniture sales for the first fiscal quarter 1996 were $29,637,000
which was a decrease of approximately 8.1% from net sales in the comparable
first quarter of 1995. The sales decrease was primarily attributable to a 10.2%
decrease in same-store sales in the first quarter 1996 compared to the first
quarter 1995. Such decrease was the result, among other things, of an
industry-wide softness in retail sales, the fact that Krause's operated five
fewer stores in the 1996 quarter and the sale of a higher level of clearance
merchandise in the 1996 period.
Gross margin was 46.9% of net sales in the first quarter 1996 compared
to 53.1% in the first quarter 1995. The lower gross margins resulted primarily
from higher product promotions (price discounts), changes in product mix and the
sale of a higher level of clearance merchandise in the 1996 period.
Selling expenses as a percentage of sales were 48.8% in the first
quarter 1996 compared to 45.7% in the same period last year. Selling expenses
were $14,469,000 in the first quarter 1996 and $14,730,000 in the first quarter
1995. The decrease in total selling expenses was principally because of variable
selling expenses attributable to lower sales, reduced occupancy expenses from
fewer stores operating in 1996 and lower advertising costs, offset by higher
delivery expenses and sales payroll incentives.
General administrative expenses, exclusive of employee termination
costs of $164,000 in the first quarter 1996 and $415,000 in first quarter 1995,
decreased by $177,000 as a result of the Company's continuing expense reduction
plan.
As a result of the above factors, net loss was $3,637,000 in the first
quarter ended April 28, 1996 compared to a loss of $991,000 in the first quarter
ended April 30, 1995. Net loss per share in the 1996 quarter was $.88 based on
4,121,000 average shares outstanding. In the comparable 1995 quarter the net
loss per share was $.27 based on 3,685,000 average shares outstanding.
No tax benefits were available for first quarter 1996 or 1995 operating
losses.
7
10
LIQUIDITY AND CAPITAL RESOURCES
As of April 28, 1996, the Company had $2,256,000 in cash and cash
equivalents compared to $1,336,000 as of January 28, 1996.
Cash Flow - Thirteen Weeks Ended April 28, 1996
Cash and cash equivalents increased by $920,000 during the period.
Operating activities provided net cash of $1,127,000, principally from an
increase in accounts payable and other liabilities of $2,302,000 and collections
of income tax receivables of $1,467,000, offset by a cash loss from operations
of $2,895,000. Investing activities during the period were capital expenditures
of $219,000, principally for additions to leasehold improvements at retail
showrooms. Financing activities during the period were net borrowings of $17,000
under the Company's revolving credit facility offset by $5,000 of payments on
short-term notes.
Cash Flow - Thirteen Weeks Ended April 30, 1995
Cash and cash equivalents increased by $455,000 during the period.
Operating activities used net cash of $1,460,000, principally from a $187,000
cash loss from operations, an increase in inventories of $211,000 and a decrease
in current liabilities of $1,110,000, offset by an increase in prepaid expenses
and other assets of $70,000. Investing activities were capital expenditures of
$790,000, principally for costs of construction of a showroom in Dallas and for
additions to leasehold improvements of new showrooms. The Dallas showroom was
sold for approximately $1 million cash in May 1995 and leased back. This sale
and leaseback resulted in a $386,000 deferred profit to be amortized over the
term of the lease. Financing activities included $2,712,000 of net borrowings
under a revolving credit agreement.
Outlook
On May 10, 1996 Krause's revolving credit agreement was amended to
extend the credit agreement to January 1998, provide for additional borrowing
availability and revise certain covenants and conditions. Krause's currently
does not comply with the revised technical covenants requiring maintenance of
certain levels of working capital and stockholder's equity. As a result of the
covenant violations, the lender may declare the entire amount of such
indebtedness due and payable immediately. Accordingly, the amount outstanding
under the revolving credit agreement has been reclassified and reflected a
current liability in the April 28, 1996 consolidated balance sheet included
elsewhere herein.
8
11
During fiscal 1995 and the first quarter of fiscal 1996 the Company
incurred operating losses of $9,388,000 and $3,506,000, respectively, and as of
April 28, 1996 the Company had a working capital deficiency of $15,513,000 and
an accumulated deficit of $24,598,000. Management has identified certain
initiatives and taken steps to return to profitability. Principal planned
strategic objectives and initiatives include downsizing showroom square footage
to reduce occupancy expenses, upgrading and remodeling showrooms to provide a
more appealing setting for customers, remerchandising, refocusing and reducing
advertising expenditures, improving manufacturing processes, and reducing
corporate expenses. Some of these initiatives can be undertaken presently while
others will require capital expenditures and, therefore, additional financing.
The Company has no significant long-term capital expenditure requirements.
To provide necessary financing for current operations as well as to
begin to obtain necessary funding for the capital expenditures contemplated by
management's strategic initiatives, in June 1996 the Company obtained $2,950,000
of funding from issuance of notes, described in Note 4 of the notes to
consolidated financial statements, to certain stockholders and to affiliates of
certain stockholders.
Substantial operating losses are expected to continue at least through
the second quarter 1996. The Company will need to obtain additional financing to
fund the expected operating losses and to implement all of the strategic
objectives and initiative contemplated by the strategic plan. Should required
additional financing not be obtained, there is substantial doubt as to the
Company's ability to continue as a going concern.
Management is continuing to seek additional debt or equity financing;
however, there are no agreements for additional financing currently, and no
assurances can be given that additional financing will be available on terms
acceptable to the Company or at all.
9
12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K filed during the quarter ended April
28, 1996
(a) Exhibits
4.1 Demand Promissory Note dated May 21, 1996
4.2 Form of Convertible Promissory Note
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the
quarter covered by this report.
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: July 18, 1996 /s/ Stephen P. Anderson
------------------------
Stephen P. Anderson
President
Date: July 18, 1996 /s/ Robert G. Sharpe
------------------------
Robert G. Sharpe
Executive Vice President
and Treasurer
10