##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 for the quarterly period ended April 29, 2006
 o
    
    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 0-50187
 KUHLMAN COMPANY, INC.
  Nevada
    
    86-0883289(State or other jurisdiction of incorporation or
organization)
    
    (IRS Employer Identification No.)701 North Third Street, Suite B-1,Minneapolis, Minnesota
    
    55401(Address of Principal Executive Offices)
    
    (Zip Code)
 (612) 338-5752
  þ o
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##### Table of Contents



TABLE OF CONTENTS
 PagePART I Financial InformationItem 1 Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of January 28, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the four weeks ended January 28, 2006 and January 29, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the four weeks ended January 28, 2006 and January 29, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements at January 28, 2006 and January 29, 2005.
    
    
    6Condensed Consolidated Balance Sheets as of April 29, 2006 and January 28, 2006
    
    
    15Condensed Consolidated Statements of Operations for the thirteen weeks ended April 29, 2006 and April 30, 2005
    
    
    16Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended April 29, 2006 and April 30, 2005
    
    
    17Notes to Condensed Consolidated Financial Statements at April 29, 2006 and April 30, 2005
    
    
    18Item 2 Managements Discussion and Analysis or Plan of Operation
    
    
    27Item 3 Controls and Procedures
    
    
    33PART II Other InformationItem 1 Legal Proceedings
    
    
    35Item 6 Exhibits
    
    
    35CertificationsRule 13a-14(a)/15d-14(a) Certification of Principal Executive OfficerRule 13a-14(a)/15d-14(a) Certification of Principal Accounting OfficerSection 1350 Certification of Chief Executive OfficerSection 1350 Certification of Principal Accounting OfficerCertification of Principal Executive OfficerCertification of Principal Accounting OfficerSection 1350 CertificationSection 1350 Certification
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Kuhlman Company, Inc.
 
 Condensed Consolidated Balance Sheets
 (UNAUDITED)
 January 28, 2006
    
    
    December 31, 2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,604,075
    
    
    $
    339,672Accounts receivable  net of allowance for doubtful accounts of $2,000
and $2,000, respectively
    
    
    66,800
    
    
    
    75,143Inventories
    
    
    5,157,023
    
    
    
    5,649,538Prepaid expenses
    
    
    409,044
    
    
    
    249,903Lease deposits, current portion
    
    
    33,000
    
    
    
    33,000Other current assets
    
    
    94,732
    
    
    
    99,430Total current assets
    
    
    9,364,674
    
    
    
    6,446,686Furniture, fixtures and leasehold improvements
    
    
    2,690,575
    
    
    
    2,627,068Less accumulated depreciation and amortization
    
    
    (337,856
    )
    
    
    (315,707
    )Furniture, fixtures and leasehold improvements  net
    
    
    2,352,719
    
    
    
    2,311,361Other assets  Lease deposits, net of current portion
    
    
    319,256
    
    
    
    314,527Total assets
    
    $
    12,036,649
    
    
    $
    9,072,574Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    3,808,790
    
    
    $
    4,179,794Accrued liabilities
    
    
    522,840
    
    
    
    599,144Notes payable
    
    
    462,757
    
    
    
    475,434Total current liabilities
    
    
    4,794,387
    
    
    
    5,254,372Deferred rent
    
    
    310,750
    
    
    
    276,504Total liabilities
    
    
    5,105,137
    
    
    
    5,530,876Stockholders equity:Common Stock ($.001 par value: 50,000,000 shares authorized; 21,197,374
and 15,976,959 shares,
respectively, issued and
outstanding ) and Preferred Stock
($.001 par value; 22,000,000 shares
authorized; 3,741,528 and 6,566,784
shares, respectively, issued and
outstanding)
    
    
    24,939
    
    
    
    22,545Additional paid-in capital
    
    
    18,614,537
    
    
    
    14,226,120Accumulated deficit
    
    
    (11,707,964
    )
    
    
    (10,706,967
    )Total stockholders equity
    
    
    6,931,512
    
    
    
    3,541,698Total liabilities and stockholders equity
    
    $
    12,036,649
    
    
    $
    9,072,574
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Kuhlman Company, Inc.
 
 Condensed Consolidated Statements of Operations
 For the Four Weeks Ended January 28, 2006 and January 29, 2005
 (UNAUDITED)
 For the Four Weeks EndedJanuary 28, 2006
    
    
    January 29, 2005Sales
    
    $
    767,085
    
    
    $
    326,876Cost of sales
    
    
    674,611
    
    
    
    154,906Gross profit
    
    
    92,474
    
    
    
    171,970General, administrative and store operating expenses
    
    
    1,036,254
    
    
    
    414,970Depreciation and amortization
    
    
    44,049
    
    
    
    14,934Loss from operations
    
    
    (987,829
    )
    
    
    (257,934
    )Interest expense, net
    
    
    13,168
    
    
    
    6,975Net loss
    
    $
    (1,000,997
    )
    
    $
    (264,909
    )Basic and diluted loss per share
    
    $
    (0.04
    )
    
    $
    (0.03
    )Weighted average number of shares outstanding  basic and diluted.
    
    
    23,197,126
    
    
    
    10,013,228
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Kuhlman Company, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 For the Four Weeks Ended January 28 2006 and January 29, 2005
 (UNAUDITED)
 For the Four Weeks EndedJanuary 28, 2006
    
    
    January 29, 2005Cash flows from operating activities:Net loss
    
    $
    (1,000,997
    )
    
    $
    (264,909
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    44,049
    
    
    
    14,934Loss on disposal of property and equipment
    
    
    5,868(Increase) decrease in:Accounts receivable, net
    
    
    8,343
    
    
    
    (41,970
    )Inventories
    
    
    492,515
    
    
    
    (180,105
    )Prepaid expenses
    
    
    (159,141
    )
    
    
    4,919Due from officer
    
    
    
    
    
    
    7,731Lease deposits
    
    
    (4,729
    )
    
    
    (2,500
    )Other current assets
    
    
    4,699
    
    
    
    35,217Increase (decrease) in:Accounts payable
    
    
    (371,004
    )
    
    
    (58,553
    )Accrued expenses
    
    
    (76,306
    )
    
    
    191,414Deferred rent
    
    
    34,246
    
    
    
    0Net cash used in operating activities:
    
    
    (1,022,457
    )
    
    
    (293,822
    )Cash flows used in investing activities, purchase of property and equipment
    
    
    (91,275
    )
    
    
    (17,465
    )Cash flows from financing activities:Net proceeds from issuance of stock
    
    
    4,378,250
    
    
    
    699Net proceeds from exercise of warrants
    
    
    12,562Payments on notes payable
    
    
    (12,677
    )
    
    
    (182
    )Net cash provided by financing activities
    
    
    4,378,135
    
    
    
    517Increase (decrease) in cash
    
    
    3,264,403
    
    
    
    (310,770
    )Cash beginning of period
    
    
    339,672
    
    
    
    518,919Cash end of period
    
    $
    3,604,075
    
    
    $
    208,149
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KUHLMAN COMPANY, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 January 28, 2006 and January 29, 2005
 (UNAUDITED)
 A.
    
    Summary of Significant Accounting PoliciesChange in Fiscal Year EndThe Company has elected to change its fiscal year end from the Saturday closest to December
31 to the Saturday closest to January 31. We are presenting the unaudited condensed
consolidated financial statements for the four weeks ended January 28, 2006 and January 29,
2005. We will present the audited financial statements for the four weeks ended January 28,
2006, with the Form 10-KSB for the period ended February 3, 2007.Basis of PresentationThe accompanying unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim
financial statements and the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
They do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements.
Operating results for the four weeks ended January 28, 2006 and January 29, 2005, are not
necessarily indicative of the results that may be expected for the fiscal year ending
February 3, 2007. The balance sheet at December 31, 2005, has been derived from the audited
financial statements at that date, but does not include all of the information and notes
required by generally accepted accounting principles for complete financial statements.
Certain information and note disclosures normally included in the Companys annual financial
statements have been condensed or omitted. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto included in the
Companys Form 10-KSB, filed with the Securities and Exchange Commission on March 31, 2006.
The Form 10-KSB provides additional financial information which in turn contains a more
comprehensive description of the Companys businesses and operations.In the opinion of management, the financial statements reflect all adjustments (which
include only normal recurring adjustments) necessary for a fair presentation of the
financial position, results of operations, and cash flows for the periods presented.Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect certain 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 expenses during the reporting period. Actual results could differ from those
estimates. The financial statements are presented on the accrual basis.Change in Capitalization and Change in Reporting EntityKuhlman Company, Inc. was previously known as SK2, Inc.
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On June 10, 2005, SK2, Inc. merged with Gaming Venture Corp., U.S.A., a Nevada corporation
(sometimes referred to as GVUS), and its wholly owned Delaware subsidiary, GV Acquisition
Co. (GV Acquisition). Immediately prior to the merger, GVUS changed its name to Kuhlman
Company, Inc. Pursuant to the terms of the Merger Agreement (Merger), GV Acquisition
merged with and into SK2, Inc., with SK2, Inc.remaining as the surviving
corporation and a wholly owned subsidiary of Kuhlman Company, Inc. In the Merger, and in
exchange for all of their shares of common stock in SK2, Inc., SK2, Inc. stockholders
received a number of shares of Series A Preferred Stock, such that they held a majority of
the outstanding shares of capital stock of Kuhlman Company, Inc. For accounting purposes
this was accounted for as a reverse acquisition of a public shell and was reflected as a
recapitalization of SK2, Inc., the operating company. The Company amended its articles of
incorporation to increase the total number of shares authorized for issuance to 50,000,000
shares of common stock and 22,000,000 shares of Preferred Stock, and effected a reverse
stock split on a 1-for-5 basis on outstanding common shares. Each share of Series A
Preferred Stock will automatically convert into one share of Company common stock upon the
earlier of the effectiveness of a registration statement under the Securities Act covering
the conversion of the Series A Preferred Stock into Company common stock, or the expiration
of the one-year period following the Merger. The Preferred Stock has no liquidation
preference or senior rights typically associated with a preferred stock, other than voting
rights on an as-if-converted basis.For 2005, the financial statements reflect the activity as though Kuhlman Company, Inc. was
the 100% owner of SK2, Inc. and SK2, Inc. was the 100% owner of A3, LLC.Principles of Consolidation:The consolidated financial statements include the accounts of Kuhlman Company, Inc. and its
wholly owned subsidiaries SK2, Inc. and A3, LLC. These financial statements are presented
on a consolidated basis. Significant inter-company accounts and transactions have been
eliminated.Cash ConcentrationsBank balances exceeded federally insured levels as of January 28, 2006 and January 29, 2005.
Generally, these balances may be redeemed upon demand and therefore bear minimal risk.Accounts Receivable, credit risk and allowance for doubtful accountsIn addition to its retailing operations, the Company generates revenue by providing product
design and contract manufacturing for department store retailers seeking to augment their
in-house expertise, which results in trade receivables. The Company reviews customers
credit history before extending unsecured credit and may establish an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers and other
information.The Company does not accrue interest on past due accounts receivable. Unless specific
arrangements have been made, accounts receivable over 30 days are considered past due. The
Company writes off accounts receivable when they are deemed uncollectible. Accounts
receivable are shown net of an allowance for doubtful accounts of $2,000 at January 28, 2006
and December 31, 2005, respectively. Due to uncertainties in the collection process,
however, it is at least reasonably possible that managements estimate will change during
the next year.
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Valuation of InventoriesOur inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method. The Companys success is largely dependent upon its
ability to forecast the tastes of its customers and to provide merchandise that satisfies
customer demand in a timely manner. The Companys failure to anticipate, identify, or react
appropriately to changes in fashion trends could lead to excess inventories and markdowns.
Sudden or continuing changes in the Companys product markets could directly impact our
gross profit performance and may cause variability in gross profit results from reporting
period to reporting period.Provisions to reduce inventories to the lower of cost or market are made based on a review
of excess and obsolete inventories through an examination of historical inventory
consumption, current market demands and shifting market trends. Significant assumptions with
respect to market trends and customer product acceptance are utilized to formulate our
provision methods. Sudden or continuing downward changes in the Companys product markets
may cause us to record additional inventory revaluation charges in future periods. As of
January 28, 2006 and December 31, 2005, the Companys provision for inventory write-off was
$623,553 and $600,784 respectively.The Companys ending inventory was made up of the following components:
 January 28, 2006
    
    
    December 31, 2005Finished goods
    
    $
    5,294,728
    
    
    $
    5,945,368Raw materials
    
    
    485,848
    
    
    
    304,954Inventory allowance
    
    
    (623,553
    )
    
    
    (600,784
    )Total inventories
    
    $
    5,157,023
    
    
    $
    5,649,538
 Revenue RecognitionRetail revenue is recognized at the time of register receipt. The Company accrues for
estimated returns in accordance with Statement of Financial Accounting Standards, (SFAS) No.
48, Revenue Recognition When Right of Return Exists, based on historical return levels.
For private label sales, revenue is recognized upon transfer of title at time of shipment as
long as there was evidence of an arrangement, the price was fixed or determinable, and
collectibility was probable.Income TaxesDifferences between accounting rules and tax laws cause differences between the basis of
certain assets and liabilities for financial reporting purposes and tax purposes. The tax
effects of these differences, to the extent they are temporary, are recorded as deferred tax
assets and liabilities under Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Temporary differences relate primarily to: allowances for
doubtful accounts; inventory valuation allowances; accumulated depreciation; and accrued
expenses not currently deductible. No income tax expense is recorded in the statement of
operations since the Company has fully reserved for all tax benefits relating to net
operating loss carryforwards at this time, and will continue to assess its tax situation on
a going forward basis.
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Segment ReportingA business segment is a distinguishable component of an enterprise that is engaged in
providing an individual product or service or a group of related products or services and
that is subject to risks and returns that are different from those of other business
segments. The Companys segments have similar economic characteristics and are similar in
the nature of the products sold, type of customers and methods used to distribute the
Companys products. Management believes that the Company meets the criteria for aggregating
its operating segments into a single reporting segment.Stock-Based CompensationOn December 15, 2004, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004) (SFAS 123(R)), Share-Based Payment, which is a revision of SFAS No.
123, Accounting for Stock-Based Compensation.SFAS 123(R) supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No.
95, Statement of Cash Flows. Generally, SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values determined at the date of grant. On April 14, 2005,
the Securities and Exchange Commission adopted a new rule that amended the compliance dates
for SFAS 123(R). The Company adopted SFAS 123(R) using the modified prospective method
effective January 1, 2006.In all periods prior to January 1, 2006, the Company accounted for stock-based compensation
awards to employees using the intrinsic value method prescribed by APB Opinion No. 25 and,
as such, generally recognized no compensation cost for employee stock options. The Company
did recognize $249,200 in stock based compensation expense in the fourth quarter of 2005 as
a result of accelerated vesting of stock options with a fair market value greater than the
exercise price at the time of the acceleration. Accordingly, the adoption of SFAS 123(R)s
fair value method affects the Companys results of operations, although it does not affect
the Companys overall financial position. If the Company had been accounting for stock
based compensation under SFAS 123(R) during the four weeks ended January 29, 2005, there
would have been no impact on the Companys financial results as there were no stock options
outstanding at that time.During the four weeks ended January 28, 2006, there was no impact on the results of
operations as there were no unvested options outstanding during the period.Earnings per ShareBasic and diluted loss per share is computed by dividing net loss by the weighted average
number of common and preferred shares outstanding during the period. Diluted loss per share
is computed the same as the basic loss per share due to the continuing operating loss which
makes the impact of stock options and warrants anti-dilutive. Preferred shares are included
in the calculation along with common shares since the preferred shares are similar to common
shares and are currently convertible into one share of common stock each as a result of the
Companys filing of its Registration Statement on Form SB-2. In addition, all outstanding
preferred shares will automatically convert into common shares on the one-year anniversary
of the Merger (i.e., June 10, 2006).
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For the Four Weeks
    
    
    For the Four WeeksEnded
    
    
    EndedJanuary 28, 2006
    
    
    January 29, 2005Net loss
    
    $
    (1,000,997
    )
    
    $
    (264,909
    )Weighted average shares outstanding
    
    
    23,197,126
    
    
    
    10,013,228Net loss per share  basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.03
    )
  Reclassifications
   General, administrative, and store operatingCost of sales
    
    expensesMerchandise
    
    Store payroll and benefitsFreight  in
    
    OccupancyFreight  out
    
    Store operatingInventory shrinkage
    
    Design and merchandise payroll and benefits
Other administrative
  Proforma - For the
    
    
    Proforma - For theFour Weeks Ended
    
    
    Four Weeks EndedJanuary 28, 2006
    
    
    January 29, 2005Sales
    
    $
    767,085
    
    
    $
    326,876Cost of sales
    
    
    968,765
    
    
    
    222,206Gross profit
    
    
    (201,680
    )
    
    
    104,670General, administrative,
store operating expenses,
depreciation and
amortization
    
    
    786,149
    
    
    
    362,604Loss from operations
    
    $
    (987,829
    )
    
    $
    (257,934
    )
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B. Notes Payable
 Related Parties
  Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants.
 Estimated risk free interest rate
    
    
    2.69
    %Expected life
    
    5 yearsEstimated volatility
    
    
    60.00
    %Estimated dividends
    
    
    0.00
    %
   Non- related Party
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C. Commitments and Contingencies
 Legal Proceedings
  Leases
  D. Stock Options
    WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicFixed Options
    
    Shares
    
    
    Price
    
    
    Life
    
    
    ValueOutstanding at December 31, 2005
    
    
    557,500
    
    
    $
    1.87
    
    
    9.4 yearsGranted
    
    
    0Exercised
    
    
    0Forfeited
    
    
    0Outstanding at January 28, 2006
    
    
    557,500
    
    
    $
    1.87
    
    
    9.4 years
    
    $
    489,925Options exercisable at December 31, 2005
    
    
    557,500
    
    
    $
    1.87
    
    
    9.4 yearsOptions exercisable at January 28, 2006
    
    
    557,500
    
    
    $
    1.87
    
    
    9.4 years
    
    $
    489,925Weighted-average fair value of options
granted during the quarter
    
    $
    0
 12




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E. Equity Financing
    F. Subsequent Events
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Kuhlman Company, Inc.
 
 Condensed Consolidated Balance Sheets
 (UNAUDITED)
 April 29, 2006
    
    
    January 28, 2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    893,105
    
    
    $
    3,604,075Accounts receivable  net of allowance for doubtful accounts of $0
and $2,000 respectively
    
    
    12,740
    
    
    
    66,800Inventories
    
    
    5,284,963
    
    
    
    5,157,023Prepaid expenses
    
    
    414,966
    
    
    
    409,044Lease deposits, current portion
    
    
    33,000
    
    
    
    33,000Other current assets
    
    
    94,818
    
    
    
    94,732Total current assets
    
    
    6,733,592
    
    
    
    9,364,674Furniture, fixtures and leasehold improvements
    
    
    3,006,867
    
    
    
    2,690,575Less accumulated depreciation and amortization
    
    
    (471,690
    )
    
    
    (337,856
    )Furniture, fixtures and leasehold improvements  net
    
    
    2,535,177
    
    
    
    2,352,719Other assets  lease deposits, net of current portion
    
    
    319,256
    
    
    
    319,256Total assets
    
    $
    9,588,025
    
    
    $
    12,036,649Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    2,153,998
    
    
    $
    3,808,790Accrued expenses
    
    
    453,039
    
    
    
    522,840Notes payable
    
    
    127,369
    
    
    
    462,757Total current liabilities
    
    
    2,734,406
    
    
    
    4,794,387Deferred rent
    
    
    359,415
    
    
    
    310,750Total liabilities
    
    
    3,093,821
    
    
    
    5,105,137Stockholders equity:Common Stock ($.001 par value: 50,000,000 shares authorized; 23,701,401
and 21,197,374 shares,
respectively, issued and
outstanding ) and Preferred
Stock ($.001 pay value;
22,000,000 shares authorized;
2,462,501 and 3,741,528 shares,
respectively, issued and
outstanding)
    
    
    26,164
    
    
    
    24,939Additional paid-in capital
    
    
    22,437,142
    
    
    
    18,614,537Accumulated deficit
    
    
    (15,969,102
    )
    
    
    (11,707,964
    )Total stockholders equity
    
    
    6,494,204
    
    
    
    6,931,512Total liabilities and stockholders equity
    
    $
    9,588,025
    
    
    $
    12,036,649
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Kuhlman Company, Inc.
 
 Condensed Consolidated
Statements of Operations
 For the Thirteen Weeks Ended April 29, 2006 and April 30, 2005
 (UNAUDITED)
 For the Thirteen Weeks EndedApril 29, 2006
    
    
    April 30, 2005Sales
    
    $
    2,580,545
    
    
    $
    1,427,545Cost of sales
    
    
    1,779,110
    
    
    
    730,887Gross profit
    
    
    801,435
    
    
    
    696,658General, administrative and store operating expenses
    
    
    4,939,330
    
    
    
    1,541,662Depreciation and amortization
    
    
    133,834
    
    
    
    47,981Loss from operations
    
    
    (4,271,729
    )
    
    
    (892,985
    )Interest income (expense), net
    
    
    10,591
    
    
    
    (19,283
    )Net loss
    
    $
    (4,261,138
    )
    
    $
    (912,268
    )Basic and diluted loss per share
    
    $
    (0.17
    )
    
    $
    (0.08
    )Weighted average number of shares outstanding  basic and diluted.
    
    
    25,736,156
    
    
    
    11,616,867
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Kuhlman Company, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 For the Thirteen Weeks Ended April 29, 2006 and April 30, 2005
 (UNAUDITED)
 For the Thirteen Weeks EndedApril 29, 2006
    
    
    April 30, 2005Cash flows from operating activities:Net loss
    
    $
    (4,261,138
    )
    
    $
    (912,268
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock based compensation
    
    
    1,304,930Depreciation and amortization
    
    
    133,834
    
    
    
    47,981(Increase) decrease in:Accounts receivable, net
    
    
    54,060
    
    
    
    49,760Inventories
    
    
    (127,940
    )
    
    
    (602,720
    )Prepaid expenses
    
    
    (5,922
    )
    
    
    (9,920
    )Other current assets
    
    
    (87
    )
    
    
    Lease deposits
    
    
    
    
    
    
    (21,008
    )Increase (decrease) in:Accounts payable
    
    
    (1,654,792
    )
    
    
    165,834Accrued expenses
    
    
    (69,800
    )
    
    
    (263,656
    )Deferred rent
    
    
    48,665Net cash used in operating activities
    
    
    (4,578,190
    )
    
    
    (1,545,997
    )Cash flows used in investing activities, purchase of property and equipment
    
    
    (316,292
    )
    
    
    (212,540
    )Cash flows from financing activities:Net proceeds from issuance of stock
    
    
    2,518,900
    
    
    
    1,771,148Payments on notes payable
    
    
    (335,388
    )
    
    
    (75,000
    )Net cash provided by financing activities
    
    
    2,183,512
    
    
    
    1,696,148Decrease in cash
    
    
    (2,710,970
    )
    
    
    (62,389
    )Cash beginning of period
    
    
    3,604,075
    
    
    
    208,148Cash end of period
    
    $
    893,105
    
    
    $
    145,759Supplemental disclosure of non-cash financing activities:Common stock and options issued to employees
    
    $
    1,304,930
    
    
    $
    
  17




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##### Table of Contents



KUHLMAN COMPANY, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 April 29, 2006 and April 30, 2005
 (UNAUDITED)
 A. Summary of Significant Accounting Policies
 Change in Fiscal Year End
  Basis of Presentation
   Use of Estimates
  18




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##### Table of Contents



Change in Capitalization and Change in Reporting Entity
  
  Cash Concentrations
  Accounts Receivable, credit risk and allowance for doubtful accounts
   Valuation of Inventories
  19




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##### Table of Contents



April 29, 2006
    
    
    January 28, 2006Finished goods
    
    $
    5,178,311
    
    
    $
    5,294,728Raw materials
    
    
    653,188
    
    
    
    485,848Inventory allowance
    
    
    (546,536
    )
    
    
    (623,553
    )Total inventories
    
    $
    5,284,963
    
    
    $
    5,157,023
 Revenue Recognition
  Income Taxes
  Segment Reporting
  20




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##### Table of Contents



Stock-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation. Accounting for Stock Issued to Employees Statement of Cash Flows
   Earnings per Share
  21




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##### Table of Contents



The Thirteen Weeks
    
    
    The Thirteen WeeksEnded April 29, 2006
    
    
    Ended April 30, 2005Net loss
    
    $
    (4,261,138
    )
    
    $
    (912,268
    )Weighted average shares outstanding
    
    
    25,736,156
    
    
    
    11,616,867Net loss per share  basic and diluted
    
    $
    (0.17
    )
    
    $
    (0.08
    )
  Reclassifications
   Cost of sales
    

General, Administrative, and Store Operating ExpensesMerchandise
    
    Store payroll and benefitsFreight  in
    
    OccupancyFreight  out
    
    Store operatingInventory shrinkage
    
    Design and merchandise payroll and benefits
Other administrative
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##### Table of Contents



The following illustrates the results of operations had we not made this change.
 Proforma - For the
    
    
    Proforma - For theThirteen Weeks Ended
    
    
    Thirteen Weeks EndedApril 29, 2006
    
    
    April 30, 2005Sales
    
    $
    2,580,545
    
    
    $
    1,427,545Cost of sales
    
    
    2,736,363
    
    
    
    1,012,863Gross profit
    
    
    (155,818
    )
    
    
    414,682General,
administrative,
store operating
expenses,
depreciation and
amortization
    
    
    4,115,911
    
    
    
    1,307,667Loss from operations
    
    $
    (4,271,729
    )
    
    $
    (892,985
    )
 B.
    
    Notes PayableRelated PartiesThe Company is a party to a credit agreement with Opportunity Finance LLC, an entity
controlled by Jon Sabes, one of the Companys directors. Effective March 22, 2004, Kuhlman
Company LLC entered into a Credit Agreement with Opportunity Finance, LLC (Opportunity)
for a revolving line of credit up to $750,000 available through March 31, 2006. The line is
available for inventory purchases and working capital and is secured by all assets of the
Company. In 2004, Opportunity had advanced $750,000 to Kuhlman Company LLC pursuant to a
promissory note which was due and payable in full on December 31, 2005, with installments of
principal, plus interest at the rate of 1% for each 30-day period from the date of each
advance, payable on the last business day of each calendar quarter. The Company had
originally issued a warrant exercisable through March 22, 2009, to Opportunity to purchase
30% of Kuhlman Company, LLC for the total warrant exercise price of $250,000. However, that
agreement was amended at the date Kuhlman Company, LLC converted from an LLC to a
corporation. At that time, Opportunitys warrant was amended to provide for the purchase of
3,100,000 shares of common stock for the same total warrant exercise price of $250,000, or
$0.0806 per share.The Company accounted for the borrowing and issuance of warrants in accordance with APB
Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants.The proceeds of $750,000 were allocated based upon the relative fair market
values of the debt ($637,202) and warrants ($112,798). The portion of the proceeds allocated
to warrants of $112,798 was accounted for as additional paid-in-capital. Assumptions used
to calculate the fair value of warrants issued using the Black Scholes model are as follows:
 Estimated risk free interest rate
    
    
    2.69
    %Expected life
    
    5 yearsEstimated volatility
    
    
    60.00
    %Estimated dividends
    
    
    0.00
    %
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##### Table of Contents



The Credit Agreement provided that until March 22, 2006, Opportunity had a right of first
refusal on financing for the Company, including any equipment leasing or debt financing of
any kind and any equity investment. The Credit Agreement provided that a change of control,
as defined, is an event of default under the Credit Agreement which could result in
acceleration of maturity of all outstanding debt. As of December 31, 2005, the Company owed
$450,000 in principal and $13,800 in interest to Opportunity Finance. Opportunity Finance
had agreed to extend the expiration date of the note to June 30, 2006. The balance of this
loan was paid off on March 15, 2006.On March 23, 2005, the Company entered into a Credit Agreement with Scott and Susan Kuhlman,
the Companys Chairman, and the Companys Director of Business Development, respectively.
Under the agreement, the Company borrowed $350,000 at an interest rate of 12%. The
principal was repaid June 25, 2005. The interest was repaid on November 7, 2005.Non- related PartyThe Company entered into a Credit Agreement with Cananwill, Inc. on June 8, 2005. Under the
Credit Agreement, the Company borrowed $111,999 at 7.5% interest. The loan called for nine
equal monthly installments of $12,836. This loan was paid in full on February 10, 2006.
The loan was secured by any sums payable under certain insurance policies.On March 2, 2006, Opportunity Finance subordinated its security interest in the business
assets of the Company to Venture Bank. The Company also obtained a $1.0 million line of
revolving credit from Venture Bank, based in Minneapolis, MN. This working capital line
carries a rate at prime plus 1% and is secured by all of the Companys business assets. The
line is subject to the following covenants: Borrowing on the line of credit may not exceed
25% of the value of the Companys inventory and the Company must maintain $6,000,000 in
equity. As of April 29, 2006, the Company has not borrowed any funds under this agreement.The Company entered into a Credit Agreement with AICCO, Inc. on March 31, 2006. Under the
Credit Agreement the Company borrowed $127,369 at 7.34% interest. The loan calls for 11
monthly payments of $12,011. The balance as of April 29, 2006, was $127,369.C.
    
    Commitments and ContingenciesLegal ProceedingsThe Company is not currently involved in any legal proceedings.LeasesDuring the thirteen weeks ended April 29, 2006, the Company did not enter into any
additional lease agreements for retail space. The base rent expense for all leases has been
computed on a straight-line basis. Most of the leases require the Company to pay base rent,
contingent rent based on sales, real estate taxes and common area expenses.
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##### Table of Contents



D.
    
    Stock OptionsThe board of directors and shareholders of SK2, Inc. adopted the SK2, Inc. Stock Option Plan
for directors, employees and consultants in May 2005 (the Stock Option Plan). The Stock
Option Plan was assumed by the Company upon the Merger. Currently, an aggregate of 1,500,000
shares of our common stock are reserved for issuance under the Stock Option Plan. The plan
is administered by the compensation committee of the board of directors, which has the
discretion to determine the number and purchase price of shares subject to stock options,
the term of each option, and the time or times during its term when each option becomes
exercisable.In March of 2006, the board voted to expand the number of shares available in the Companys
stock option plan to 3,500,000 shares. The action is subject to the approval of the
stockholders in May 2006.On March 15, 2006, the Company granted options for 450,000 shares to employees. The options
have a life of 10 years and a vesting period of 3 years.A summary of the status of the Companys stock options as of April 29, 2006, is presented
below:
 WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicFixed Options
    
    Shares
    
    
    Price
    
    
    Life
    
    
    ValueOutstanding at January 28, 2006
    
    
    557,500
    
    
    $
    1.87
    
    
    9.1 yearsGranted
    
    
    450,000
    
    
    
    2.49
    
    
    9.9 yearsExercised
    
    
    0Forfeited
    
    
    0Outstanding at April 29, 2006
    
    
    1,007,500
    
    
    $
    2.15
    
    
    9.5 years
    
    $
    Options exercisable at January 28, 2006
    
    
    557,500
    
    
    $
    1.87
    
    
    9.1 yearsOptions exercisable at April 29, 2006
    
    
    557,500
    
    
    $
    1.87
    
    
    9.1 years
    
    $
    Weighted-average fair value of options
granted during the quarter
    
    $
    1.77
 The aggregate intrinsic value in the table above represents the total pretax intrinsic
value (the difference between the closing price of the Companys stock on April 29, 2006 and
the exercise price, multiplied by the number of in-the-money options) that would have been
received by the option holders had all option holders exercised their options on April 29,
2006. The intrinsic value as of April 29, 2006 was $0 because the market price of the stock
was less than the exercise price of the options. As of April 29, 2006, there was
approximately $763,600 of total unrecognized compensation cost related to unvested
share-based compensation arrangements, of which $199,200 is expected to be recognized during
the remainder of the fiscal year ended February 3, 2007, $256,600 in the fiscal year ended
February 2, 2008, $256,600 in the fiscal year ended January 31, 2009 and $33,200 in the
fiscal year ended January 30, 2010.
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##### Table of Contents



E.
    
    Equity FinancingOn June 23, 2005, the Company closed on the sale in a private placement of 1,085,956 shares
of Preferred Stock for an aggregate purchase price of $2,092,209. A second closing was held
on July 14, 2005, when the Company closed on a private placement of 3,455,267 shares of
Preferred Stock for an aggregate purchase price of $6,392,244. The Company relied on the
exemption from federal registration under Section 4(2) of the Securities Act, and/or Rule
506 promulgated hereunder. The Company relied on this exemption and/or the safe harbor rule
thereunder based on the fact that (i) all of the investors were accredited investors and
either alone or through a purchaser representative, had knowledge and experience in finance
and business matters such that each was capable of evaluating the risks of the investment,
and (ii) the Company has obtained subscription agreements from the investors indicating that
the investors are purchasing for investment purposes only.The offers and sales of the Preferred Stock made on June 23, 2005 and July 14, 2005 were not
registered under the Securities Act at the time, however, on October 11, 2005 the Company
filed a Registration Statement on Form SB-2 with the Securities and Exchange Commission
pursuant to which the common shares underlying the Preferred Stock were registered for
resale.In January of 2006, the Company closed on the sale of 1,950,000 shares of common stock at
$2.25 per share. The purchasers also received warrants to purchase 20% of the number of
shares that they purchased with an exercise price of $2.75 per share. Net proceeds of this
transaction were $4,378,250.In March of 2006, the Company closed on the sale of 1,125,000 shares of common stock at
$2.25 per share. The purchasers also received warrants to purchase 20% of the number of
shares that they purchased with an exercise price of $2.75 per share. Net proceeds from
this transaction were $2,518,900.F.
    
    Subsequent EventsIn May 2006, the Companys stockholders voted to approve the increase in the number of
shares available in the stock option plan to 3,500,000 shares.In May 2006, the Company granted options for an additional 200,000
shares to employees.On June 8, 2006, the Company entered into a finance agreement with Cananwill, Inc. Under
this agreement the Company borrowed $69,725 at 9.11% interest. The loan calls for 11 equal
payments of $6,631 per month.On
June 12, 2006 (the first business day following the one-year
anniversary of the merger transaction involving the Company and SK2,
Inc.), all shares of outstanding Series A Preferred Stock became
subject to automatic conversion into shares of common stock on a
one-for-one basis, pursuant to the terms of the Series A Preferred
Stock Certificate of Designation. On June 19, 2006, the Company
instructed its transfer agent to issue shares of common stock upon
conversion of the then-outstanding Series A Preferred Stock, in the
aggregate amount of 2,197,501 shares.
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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Overview:
      
    
    Exiting under-performing stores.
    
    Expand and re-fixture those stores that are performing to increase productivity.
    
    Continue to counter source products for increased product margins.
    
    Improve existing retail productivity by establishing clear performance goals and
objectives and providing related compensation incentives.
 27




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##### Table of Contents



Results of Operations:
 Revenue
   
 Gross Profit
  28




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29




---



##### Table of Contents



General, Administrative and Store Operating Costs
     Net Loss
  Liquidity and Capital Resources:
 Cash
   30




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##### Table of Contents



Inventory
   January
    
    February
    
    March
    
    AprilDecember 2005
    
    2006
    
    2006
    
    2006
    
    2006Regular Stores
    
    
    3,760,075
    
    
    
    3,707,037
    
    
    
    3,321,347
    
    
    
    2,734,547
    
    
    
    2,875,634Outlet Stores
    
    
    799,276
    
    
    
    653,380
    
    
    
    810,473
    
    
    
    841,787
    
    
    
    1,442,871Warehouse
    
    
    1,386,018
    
    
    
    934,310
    
    
    
    718,972
    
    
    
    1,291,784
    
    
    
    859,806Raw Materials
    
    
    304,953
    
    
    
    485,849
    
    
    
    317,546
    
    
    
    172,144
    
    
    
    653,188Valuation Allowance
    
    
    (600,784
    )
    
    
    (623,553
    )
    
    
    (623,553
    )
    
    
    (571,465
    )
    
    
    (546,536
    )Total
    
    
    5,649,538
    
    
    
    5,157,023
    
    
    
    4,544,785
    
    
    
    4,468,797
    
    
    
    5,284,963
  31




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##### Table of Contents



Safe Harbor Statement:
  
    
    Our continued growth depends on our ability to open and operate stores on a profitable
basis and on managements ability to manage our expansion. Our recent and planned expansion
includes the opening of stores in both existing and new geographic markets. Opening stores
in new markets has presented, and may continue to present, competitive and merchandising
challenges that are different from those faced by us in our existing geographic markets.
    
    Our planned expansion is dependent upon a number of factors, including our ability to
locate and obtain favorable store sites, negotiate acceptable lease terms, obtain adequate
merchandise supply and hire and train qualified management and employees. Factors beyond
our control may also affect our ability to expand, including general economic and business
conditions affecting consumer spending.
    
    Our continued growth will place an increasing strain on our resources, and we could
experience difficulties relating to a variety of operational matters, including hiring,
training and managing an increasing number of employees, obtaining sufficient quantities of
merchandise from vendors, obtaining sufficient material and contract manufacturers to
produce our products, expanding our distribution facility and enhancing our financial and
operating systems. There can be no assurance that we will be able to manage our growth
effectively. Any failure to manage growth could have a material adverse effect on our
business, financial conditions and results of operations.
    
    Our business is seasonal by nature, with the third and fourth quarters accounting for
the largest percentage of annual net sales. It is therefore important that we successfully
execute our business plan and operate our business during that time. Outside of the holiday
season, monthly sales generally do not fluctuate widely within each store given our one
price strategy. Nonetheless, our quarterly results of operations in the future may
fluctuate significantly as a result of a variety of factors, including the timing of store
openings, the amount of revenue contributed by new stores, changes in the mix of products
sold, overstocking or under-stocking of merchandise, the timing and level of markdowns, the
timing of store closings, expansions and relocations, competitive factors and general
economic conditions.
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##### Table of Contents




    
    Substantially all of our merchandise is manufactured and sourced outside the United
States, principally in Italy and Turkey. As a result, our operations are subject to the
risks generally associated with doing business abroad, such as foreign government
regulations, political instability, regulations relating to imports, the imposition of
duties, taxes and other charges on imports, significant fluctuations in the value of the
dollar against foreign currencies or restrictions on the transfer of funds.
    
    We have experienced delays in receipt of merchandise due to import regulations. The
inability of a contract manufacturer to ship orders in a timely manner or the inability of
us to receive orders in a timely manner could cause us to fail to meet the merchandise
requirements of its stores for those items, which could result in lost sales and
dissatisfied customers. Any significant interruption in our foreign sourcing would have a
material adverse effect on our business, financial condition and results of operations.
 Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
   
 ITEM 3. CONTROLS AND PROCEDURES
  33




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 6. EXHIBITS
  Exhibit No.
    
    Description31.1
    
    Rule 13a-14(a)/15d-14(a) certification of principal executive officer31.2
    
    Rule 13a  14(a)/15d-14(a) certification of principal accounting officer32.1
    
    Section 1350 certification of chief executive officer32.2
    
    Section 1350 certification of principal accounting officer
 
 SIGNATURES
  KUHLMAN COMPANY, INC.Date:  June18, 2006
    By:
    /s/ Luis PadillaTitle:
    Chief Executive Officer Date:  June 18, 2006
    By:
    /s/ Jon GangelhoffTitle:
    Chief Financial Officer(Principal Accounting Officer) 35