UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended May 25, 2002
or
THE SECURITIES EXCHANGE ACT OF 1934
[ ]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 1-9681
JENNIFER CONVERTIBLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2824646
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
419 Crossways Park Drive, Woodbury, New York 11797
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516) 496-1900
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.
Yes X No
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of the issuer's common
stock as of July 15, 2002: 5,704,058
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index
Part I - Financial Information
Item I - Financial Statements
Consolidated Balance Sheets at May 25, 2002 (Unaudited)
and August 25, 2001.................................. 2
Comparative Consolidated Statements of Operations
(Unaudited) for the thirteen weeks and thirty-nine weeks
ended May 25, 2002 and February 24, 2001.............. 3
Comparative Consolidated Statements of Cash Flows
(Unaudited) for the thirty-nine weeks ended
May 25, 2002 and May 26, 2001......................... 4
Notes to Unaudited Consolidated Financial Statements.. 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 11
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk...................................... 15
Part II - Other Information................................ 16
Signatures ................................................ 17
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except for share
data)
ASSETS May 25, (Restated
2002 See Note 3)
(Unaudited) August 25,
2001
Current assets:
Cash and cash equivalents $14,098 $11,155
Accounts receivable 392 757
Merchandise inventories 13,652 12,660
Due from private company,
net of reserves of $4,767 and $4,811 at
May 25, 2002 and August 25, 2001,
respectively 3,405 3,225
Deferred tax asset 1,099 624
Prepaid expenses and other current assets 656 557
Total current assets 33,302 28,978
Store fixtures, equipment and leasehold
improvements, at cost, net 4,377 5,013
Deferred lease costs and other
intangibles, net 227 329
Goodwill, at cost, net 1,796 1,796
Other assets (primarily security deposits) 641 658
$40,343 $36,774
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Accounts payable, trade $15,067 $16,920
Customer deposits 9,464 8,693
Accrued expenses and other current
liabilities 4,963 5,109
Deferred income from service contracts 7,404 2,121
(Notes 3 and 8)
Total current liabilities 36,898 32,843
Deferred rent and allowances 4,435 4,836
Total liabilities 41,333 37,679
Commitments and contingencies
Capital Deficiency
Preferred stock, par value $.01 per
share, authorized 1,000,000 shares
Series A convertible preferred - 10,000
shares issued and outstanding
(liquidation preference $5,000)
Series B convertible preferred - 26,664
shares issued and outstanding
(liquidation preference $133)
Common stock, par value $.01 per share,
authorized 10,000,000 shares,
5,704,058 shares issued and
outstanding at May 25, 2002 and
August 25, 2001 57 57
Additional paid in capital 27,482 27,482
Accumulated (deficit) (28,529) (28,444)
( 990) ( 905)
$40,343 $36,774
See notes to the consolidated financial statements.
2
JENNIFER CONVERTIBLES INC. AND
SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
(Unaudited)
Thirteen Thirty-nine
weeks ended weeks ended
May 25 May 26 May 25 May 26
2002 2001 2002 2001
Revenue:
Net sales $35,589 $31,863 $100,360 $96,994
Revenue from service contracts 715 1,398 1,540 4,220
36,304 33,261 101,900 101,214
Cost of sales, including store
occupancy, warehousing, delivery
and service costs 24,385 22,893 70,076 67,907
Selling, general and administrative
expenses 10,142 9,697 30,651 30,836
Depreciation and amortization 412 460 1,240 1,376
34,939 33,050 101,967 100,119
Operating income (loss) 1,365 211 (67) 1,095
Interest income 45 68 141 382
Interest expense 2 13 9 70
Income before income taxes 1,408 266 65 1,407
Income taxes 122 24 150 114
Net income/(loss) $1,286 $242 $(85) $1,293
Basic income per common share $0.23 $0.04 $(0.01) $0.23
Diluted income per common share $0.18 $0.03 $(0.01) $0.18
Weighted average common shares
outstanding basic income per
share 5,704,058 5,704,058 5,704,058 5,704,058
Effect of potential common share
issuance:
Stock options 148,917 - - 73,727
Convertible preferred stock 1,443,165 1,443,165 - 1,443,165
Weighted average common shares
outstanding diluted income per
share 7,296,140 7,147,223 5,704,058 7,220,950
See notes to the consolidated financial statements.
3
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Thirty-nine weeks ended
May 25, May 26,
2002 2001
Cash flows from operating activities:
Net income ($85) $1,293
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,240 1,376
Loss on disposal of equipment 24 0
Deferred taxes (475) 0
Recovery of amounts due from Private
Company (44) 0
Deferred rent (401) (110)
Deferred income 5,283 0
Changes in operating assets and
liabilities:
Merchandise inventories (992) (921)
Prepaid expenses and other current assets (99) (158)
Accounts receivable 365 43
Due from Private Company (136) (368)
Deferred lease costs and other 0 (20)
intangibles
Other assets, net 17 (5)
Accounts payable trade (1,853) (564)
Customer deposits 771 1,414
Accrued expenses and other payables (146) (412)
Net cash provided by operating activities 3,469 1,568
Cash flows from investing activities:
Capital expenditures (526) (1,015)
Proceeds from commercial paper 0 3,025
Net cash (used in) provided by investing
activities (526) 2,010
Cash flows from financing activities:
Payment of note payable 0 (239)
Net cash (used in) financing activities 0 (239)
Net increase in cash and cash equivalents 2,943 3,339
Cash and cash equivalents at beginning of
period 11,155 6,384
Cash and cash equivalents at end of period $14,098 $9,723
Supplemental disclosure of cash flow
information:
Income taxes paid $659 $973
Interest paid $9 $70
See notes to consolidated financial statements.
4
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 25, 2002
(In thousands except for share amount)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Jennifer Convertibles, Inc. and subsidiaries (the "Company") and
certain licensees have been prepared in accordance with accounting
principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-
Q and Article 10 of Regulation S-X. Accordingly, 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. In the opinion of management,
all adjustments (consisting of normal recurring accruals plus other
adjustments referred to in Note 3) considered necessary for a fair
presentation have been included. The operating results for the
thirteen and thirty-nine week periods ended May 25, 2002 are not
necessarily indicative of the results that may be expected for the
year ending August 31, 2002.
The balance sheet at August 25, 2001 has been derived from the
audited financial statements at that date as restated (see Note 3)
but does not include all of the information and footnotes required
by accounting principles generally accepted in the United States of
America for complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-KA for the year ended August 25, 2001.
NOTE 2: MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost (determined
on the first-in, first-out method) or market and are physically
located, as follows:
5/25/02 8/25/01
Showrooms $ 6,445 $ 6,077
Warehouses 7,207 6,583
$13,652 $12,660
Vendor discounts and allowances in respect to merchandise purchased
by the Company are included as a reduction of inventory and cost of
sales.
5
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 25, 2002
(In thousands except for share amount)
NOTE 3: RESTATEMENT
As a result of a review of the Company's previously filed Annual
Report on Form 10-K for the year ended August 25, 2001 by the
staff of the Securities and Exchange Commission, the Company is
restating its financial statements as previously reported to
reflect adjustments described in the following two paragraphs.
The Company, in connection with the sale of its merchandise, sold
separately priced fabric and leather protection plans for the
life of the merchandise on behalf of a subsidiary of the Private
Company and retained a portion of the revenue with the balance
being remitted to the Private Company. As the subsidiary of the
Private Company assumed all performance obligations and risk of
any loss under the plans, the Company recognized the retained
revenue at the time of sale to the customer. As part of the
Interim Operating Agreement entered into with the Private Company
(see Note 6), effective for transactions subsequent to May 26,
2001, although the protection plans continue to be issued by a
subsidiary of the Private Company, the Company agreed with the
Private Company to service the claims and assume the
responsibility and risk of loss for all claims filed subsequent
thereto, including claims relating to sales made prior to May 26,
2001 and claims related to sales made by the Private Company
subsequent to May 26, 2001. As a result of such assumption and
related obligation to service claims, the Company has restated
its financial statements to defer revenue from sale of the
protection plans subsequent to May 26, 2001 previously recognized
and amortize such revenue into income in proportion to the costs
expected to be incurred in performing services under the plans
(see Note 8). Related provisions for future claims were reversed
and actual costs incurred in performing services under the plans
were charged to expense in the period incurred. In addition
incentive compensation expense was adjusted to reflect the impact
of such adjustments on the results of operations.
The financial statements for the year ended August 25, 2001 were
also restated to reduce the tax provision for state income taxes
related to prior years and charge operations for such prior years
with the related income taxes.
6
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 25, 2002
(In thousands except for share amount)
The effect of such restatements follow:
Year Ended Thirteen Weeks Twenty-Six Thirty Thirteen
Ended Weeks Ended Nine Weeks
Weeks Ended
Ended
August 25, November February February May 26, May 26,
2001 24, 2001 23, 2002 23, 2002 2001 2001
Net income
previously reported $4,086 $1,058 $277 $1,336 $854 $111
Restatements:
Deferral of revenues
(net of amortization)
and related claims
expense adjustment, *(1,954) (1,718) (1,417) (3,135) 0 0
Incentive Compensation * 98 86 71 157 0 0
Provision for state
income taxes 122 152 127 279 0 0
Prior year tax adjustment 397 0 0 0 439 131
Net income (loss) as
restated $2,749 $(422) $(942) $(1,363) $1,293 $242
Basic net income
(loss) per share
Previously reported $0.72 $0.19 $0.05 $0.23 $0.15 $0.02
Effect of restatements
As restated $0.48 ($0.07) $(0.17) $(0.24) $0.23 $0.04
Diluted net income (loss)
per share
Previously reported $0.57 $0.15 $0.04 $0.19 $0.12 $0.02
Effect of statements
As restated $0.38 ($0.70) $(0.17) $(0.24) $0.18 $0.03
In addition to the above, certain reclassifications have been
made to revenues and expenses for the thirteen and thirty-nine
week periods ended May 26, 2001 to conform to the current year's
presentation which had no effect on net income previously
reported.
* Represents an increase in the accumulated deficit as of August 25, 2001.
NOTE 4: REVENUE RECOGNITION
Sales are recognized upon delivery of the merchandise to the
customer. A minimum deposit of 50% is typically required upon
placing a non-financed sales order. The Company also finances
sales and sells financed receivables on a non-recourse basis to a
finance company. The Company does not retain any interests in or
service the sold receivables. The selling price of the receivables
represents the amount due from the customer less a fee. Fees paid
to the finance company are included in selling, general and
administrative expenses.
The Company also derives revenues from the sale of service
contracts related to lifetime protection plans. See Notes 3 and 8
related to revenue recognition.
7
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 25, 2002
(In thousands except for share amount)
NOTE 5: GOODWILL
Goodwill consists of the excess of cost of the Company's
investments in certain subsidiaries over the fair value of net
assets acquired.
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accountants Standard (SFAS) No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires
that upon adoption, amortization of goodwill will cease and
instead, the carrying value of goodwill will be evaluated for
impairment on at least an annual basis. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001;
however, the Company has elected to adopt this standard as of the
beginning of its fiscal year ending August 31, 2002. Application
of the non amortization provision would have resulted in an
increase in net income of $44 ($0.01 per diluted share) for the
thirteen weeks ended May 26, 2001, and $131 ($0.02 per diluted
share) for the thirty-nine weeks ended May 26, 2001. The Company
has performed the first of the required impairment tests and has
determined that there is no impairment of the Company's goodwill.
NOTE 6: CONTINGENCIES
The Derivative Litigation
Beginning in December 1994, a series of six actions were
commenced as derivative actions on the Company's behalf against
certain present and former officers and directors of the Company,
the Private Company and others.
The complaints in each of these actions assert various acts of
wrongdoing by the defendants, as well as claims of breach of
fiduciary duty by the Company's present and former officers and
directors, The Company had entered into settlement agreements as
to the derivative litigation subject, in the case of certain of
such agreements, to court approval of such settlement by a
certain date. Such court approval was not obtained by such date,
and in July 1998, the Private Company exercised its option to
withdraw from the settlement.
On July 6, 2001, the Private Company and the Company entered into
a series of agreements designed to settle the derivative action
among the Private Company, certain of our current and former
officers and directors and former accounting firms and the
Company. Effectiveness of the agreements is subject to certain
conditions, including court approval and receipt by the Company
of a fairness opinion or appraisal. The Company also entered
into an Interim Operating Agreement designed to implement certain
of the provisions of the settlement agreement prior to court
8
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 25, 2002
(In thousands except for share amount)
approval. However, there can be no assurance that the court will
approve the settlement or that a settlement will occur on the
terms as described in the Company's Annual Report on Form 10-K
for the year ended August 25, 2001.
Other Litigation
In December 2001, the State of New Jersey sued the Company,
accusing the Company of false advertising and accused us of
actions giving rise to customer complaints. All 18 Jennifer
Convertibles stores in New Jersey, which includes one Private
Company store, are defendants in the suit. On January 3, 2002,
the Company and the State of New Jersey reached an agreement to
settle the suit for a total of $200, which covers fines,
penalties, legal and administrative costs. The Company is
awaiting settlement documents from the State of New Jersey. The
Company has paid $125 and accrued $75 for this litigation as of
May 25, 2002.
NOTE 7: TRANSACTIONS WITH THE PRIVATE COMPANY
Included in the Consolidated Statements of Operations are the
following amounts charged by and to the Private Company. Also see
Note 3 for service contract transaction with the Private Company.
Thirteen weeks ended Thirty-nine weeks ended
May 25, May 26, May 25, May 26,
2002 2001 2002 2001
Net Sales:
Royalty income $29 $33 $87 $103
Warehouse income,
net 141 0 422 0
Home delivery income 266 238 711 719
Shuttle freight 233 203 628 637
$669 $474 $1,848 $1,459
Cost of Sales:
Warehouse expenses $0 $1,348 $0 $3,338
Selling, General and
Administrative Expenses:
Advertising allowance,
net (377) (234) (1,132) (1,118)
Royalty expense 100 200 300 200
($61) $(250) ($600) ($1,150)
9
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 25, 2002
(In thousands except for share amount)
NOTE 8: SUBSEQUENT EVENT
The Company has amended its warehouse agreement with the Private
Company whereby, effective June 23, 2002, the Private Company
will become the sole obligor on all lifetime fabric and leather
protection plans sold by the Company or the Private Company on
and after such date through August 28, 2004 and assume all
performance obligations and risk of loss thereunder and the
Company will have no obligation with respect to such plans. The
Private Company will receive a monthly payment of $50, subject to
an adjustment payable by the Company 11 months after the month of
sale based on the volume of sales of the plans. The Company would
keep any remaining revenue from the sale thereof. In addition,
for a payment of $400 (payable $50 per month beginning 3 months
after the date of the agreement) to be made by the Company, the
Private Company will also assume responsibility to service and
pay any claims related to sales made by the Company or the
Private Company prior to June 23, 2002. Accordingly, the Company
will have no obligations for any claims filed after June 23,
2002. As a result thereof, in the fourth quarter of its fiscal
year ending August 31, 2002, the Company will reverse into income
the remaining balance of deferred revenue related to the fabric
protection plans (see Note 3) together with the remaining balance
of the liability for warranty costs related to sales made prior
to May 27, 2001, reduced by the $400, payment to be made to the
Private Company.
10
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 25, 2002
(In thousands except for share amount)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Information
Except for historical information contained herein, this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements within
the meaning of the U. S. Private Securities Litigation Reform Act
of 1995, as amended. These statements involve known and unknown
risks and uncertainties that may cause our actual results or
outcome to be materially different from any future results,
performance or achievements expressed or implied by such forward
looking statements. Factors that might cause such differences
include, but are not limited to the risk factors set forth under
the caption "Risk Factors" in our Annual Report on Form 10-K for
the fiscal year ended August 25, 2001. In addition to
statements, which explicitly describe such risks and
uncertainties, investors are urged to consider statements labeled
with the terms "believes," "belief," "expects," "intends,"
"plans" or "anticipates" to be uncertain and forward-looking.
Results of Operations
As described in Note 3 to the consolidated financial statements,
the Company has revised its method of revenue recognition with
respect to fabric protection and restated its operating results
for the fourth quarter of the year ended August 25, 2001 and the
first and second quarters for the fiscal year ending August 31,
2002. The revised method also results in $5,282 and $1,940 less
revenue recognized in our thirty-nine and thirteen week periods ended
May 25, 2002 as compared with the amounts that would have been recognized
under the prior method of revenue recognition.
Net sales includes merchandise sales of $34,920 and $31,389 and income
from the Private Company of $669 and $474 for the thirteen week period
ended May 25, 2002 and May 26, 2001, respectively. Net sales of merchandise
increased 11.3% in the thirteen week period ended May 25, 2002, up
$3,531, from the thirteen week period ended May 26, 2001. Revenue from
service contacts decreased 48.9% in the thirteen week period ended May 25,
2002 to $715, down $683 from the thirteen week period ended May 26, 2001
due to the change in method referred to above.
Net sales includes merchandise sales of $98,512 and $95,536 and income
from the Private Company of $1,848 and $1,459 for the thirty-nine week
period ended May 25, 2002 and May 26, 2001, respectively. Net sales of
merchandise increased 3.1% in the thirty-nine week period ended May 25,
2002, up $2,976, from the thirty-nine week period ended May 26, 2001.
Revenue from service contracts decreased 63.5% in the thirty-nine week
period ended May 25, 2002 to $1,540, down $4,220 from the thirty-nine week
period ended May 26, 2001 due to the change in method referred to above.
We have opened seven new stores since the thirty-nine week period
ended May 26, 2001 which has resulted in additional sales.
However, beginning May 27, 2001 we changed the method under which
we recognize income from the sale of fabric protection (and
11
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 25, 2002
(In thousands except for share amount)
associated warranties). Before May 26, 2001, the private company
was responsible for all fabric protection warranty claims, and
all fabric protection revenue was recognized when the sale was
delivered. After May 26, 2001, as a result of the execution of
the Interim Operating Agreement, we became responsible for all
fabric protection claims and revenue from the sale of fabric
protection is recognized over the estimated service period. The
effect is that fabric protection revenue which we would have
recognized as revenue immediately is treated as deferred income
on our balance sheet and, except for the amendment to the
agreement with the Private Company referred to in the following
paragraph, would be recognized in proportion to the costs
expected to be incurred in performing services under the plan.
As this accounting treatment was an unintended by product of the
Interim Operating Agreement, we have entered into an amendment of
such agreement with the private company pursuant to which, for a
payment of $400 payable in eight installments of $50, the private
company will be responsible for any fabric protection claims made
after June 23, 2002 as to previously sold merchandise and, for
$50 per month subject to adjustment based on the level of fabric
protection sales, will be responsible for fabric protection
claims made with respect to all merchandise sold between June 23,
2002 and August 28, 2004. Accordingly, we will recognize the
$7,404 of deferred revenue at May 25, 2001 as revenue in the fourth
quarter of fiscal 2002.
Cost of sales as a percentage of revenue was 67.2% for the
thirteen week period ended May 25, 2002 as compared to 68.8% for
the thirteen week period ended May 26, 2001. Warehouse costs have
decreased as a result of entering into an Interim Operating
Agreement with the private company in July 2001, under which we
became responsible for operating the warehouse system.
Accordingly, we save the cost of the warehousing fee net of the
related costs of operating the warehouse.
Cost of sales as a percentage of revenue was 68.8% for the
thirty-nine week period ended May 25, 2002 as compared to 67.1%
for the thirty-nine week period ended May 26, 2001. As described
above, warehouse costs have decreased as a result of entering
into an Interim Operating Agreement. However, store occupancy
costs have increased as a percentage of sales.
Selling, general and administrative expenses as a percentage of
revenue was 27.9% for the thirteen week period ended May 25,
2002 as compared to 29.2% for the thirteen week period ended May
26, 2001. Even though we did not advertise substantially less,
our advertising costs decreased by $138 (a 4% reduction from the
prior year cost) as we have been able to obtain more favorable
advertising rates. However, we incurred an increase in other
costs, such as the royalty and additional advertising
contribution reduction as described in sections (c) and (d)
below, insurance costs and costs associated with our private
label card business.
12
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 25, 2002
(In thousands except for share amount)
Selling, general and administrative expenses as a percentage of
revenue was 30.1% for the thirty-nine week period ended May 25,
2002 as compared to 30.5% for the thirty-nine week period ended
May 26, 2001. Even though we did not advertise substantially
less, our advertising costs decreased by $1,326 (a 11% reduction
from the prior year cost) as we have been able to obtain more
favorable advertising rates. However, we incurred an increase in
other costs, as indicated in the discussion of the thirteen week
period above.
Selling, general and administrative expenses were impacted as a
result of the following provisions of the Interim Operating
Agreement:
(a) the private company contributed $126 per month to
advertising. Prior to the Interim Operating Agreement, the
private company was contributing $150 per month to advertising.
(b) the private company has reduced from the amount contributed
to advertising an additional $11 for the thirteen weeks and $27
or the thirty-nine weeks ended May 25, 2002 which represents 1%
of our sales in New York (other than sales of leather furniture
and sales from six stores in New York which we have owned for
many years). The maximum amount by which the contribution can be
reduced is $80 per year.
(c) we paid the private company a royalty of $100 for the
thirteen weeks and $300 for the thirty-nine weeks ended May 25,
2002. This fee is $400 annually and gives us the right to open an
unlimited number of stores in New York and also covers the stores
recently opened in New York.
(d) Subject to certain exceptions, if the private company's sales
for the eight month period commencing January 1, 2002, are less
than $17,718 we will pay the private company (or reduce the
advertising payment they owe us) an amount equal to 50% of the
amount by which their sales are below $17,718 provided that the
amount of such payment or reduction in the eight month period,
plus any payments of the 10-15% with respect to sales shortfalls
will not exceed $1,800 in the aggregate. We anticipate that the
private company's sales for the eight months ending August 31,
2002 will be below $17,718. Therefore, we have accrued
additional advertising contribution reductions of $205 for the
quarter and $342 for the nine months ended May 25, 2002.
Net income for the thirteen weeks ended May 25, 2002 was $1,286
compared to $242 for the thirteen week period ended May 26, 2001.
The principal reason for the increase is an increase in net sales
partially offset by the change in the fabric protection revenue
recognition method as described above.
Net loss for the thirty-nine week period ended May 25, 2002 was
$85 compared to a net income of $1,293 for the thirty-nine week
period ended May 26, 2001. The principal reason for the decrease
is a change in how we recognize revenue from the sale of fabric
protection as described above.
13
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 25, 2002
(In thousands except for share amount)
Liquidity and Capital Resources
At May 25, 2002, we had a working capital deficiency of $3,720
compared to a deficiency of $3,989 at August 25, 2001 and had
available cash and cash equivalents of $14,098 compared to
$11,155 at August 25, 2001. The working capital deficiency is
primarily due to the deferral of fabric protection revenue. As a
result of our amendment of the Interim Operating Agreement, the
$7,404 of fabric protection revenue which is deferred should be
recorded as earned in the fourth quarter of the fiscal year ending
August 31, 2002.
We continue to fund the operations of certain of our limited
partnership licensees whose results are included in our
consolidated financial statements, some of which continue to
generate operating losses. Any such losses have been consolidated
in our consolidated financial statements. It is our intention to
continue to fund these operations in the future and, if the new
settlement agreements referred to in our Annual Report on Form 10-
K for the year ended August 25, 2001 are approved, we will
acquire 100% of such limited partnerships. Our receivables from
the private company and the unconsolidated licensees had been
substantially reserved for in prior years and continue to be
reserved. There can be no assurance that the total reserved
amount of such receivables of $4,767 as of May 25, 2002 will be
collected.
Starting in 1995, we entered into agreements with the private
company that permit us to offset our current monthly obligations
to each other up to $1,000. Amounts in excess of $1,000 are paid
in cash. Based on the payment terms of these offset agreements,
current obligations of the private company and the unconsolidated
licensees as of May 25, 2002 have been paid. Additionally, as
part of such agreements, the private company in November 1995
agreed to assume certain liabilities owed to us by the
unconsolidated licensees.
In March 1996, we executed a Credit and Security Agreement with
our principal supplier, Klaussner Furniture Industries, Inc.,
which extended the payment terms for merchandise shipped from 60
days to 81 days. Since February 1999, we have not exceeded these
81-day payment terms. As of May 25, 2002, there were no amounts
owed to Klaussner which were over these extended terms. On
December 11, 1997, the Credit and Security Agreement was modified
to include a late fee of .67% per month for invoices we pay
beyond the normal 60-day terms. This provision became effective
commencing in January 1998. As part of the Credit and Security
Agreement, we granted to Klaussner a security interest in all of
our assets including the collateral assignment of our leasehold
interests, our trademarks and a licensee agreement to operate our
business in the event of our default.
14
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 25, 2002
(In thousands except for share amount)
We opened five stores, relocated one store and had no store
closings during the thirty-nine weeks ended May 25, 2002. We
spent $526 for capital expenditures during the thirty-nine week
period and we anticipate capital expenditures approximating $200
during the balance of fiscal 2002 to support the opening of new
stores. As previously disclosed, Klaussner has agreed to lend us
up to $150 per new store for up to 10 new stores. To date, we
have not borrowed pursuant to such arrangement and we currently
intend to fund any expansion with internally generated capital.
Unless the U.S. economy worsens, we anticipate generating
positive operating cash flow for the year ending August 31, 2002.
In the opinion of management, this positive cash flow will be
adequate to fund operations during the current and next fiscal
year.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk.
Not applicable.
15
JENNIFER CONVERTIBLES, INC.
PART II
OTHER INFORMATION
ITEMS 1. LEGAL PROCEEDINGS
In December 2001, the state of New Jersey sued us, accusing us of
false advertising and accused us of actions giving rise to
customer complaints. All 18 Jennifer Convertibles stores in New
Jersey are defendants in the suit. On January 3, 2002, we and
the State of New Jersey reached an agreement to settle the suit
for a total of $200,000, which covers fines, penalties, legal and
administrative costs. We are awaiting settlement documents from
the State of New Jersey. We have paid $125 and accrued $75 for
this litigation as of May 25, 2002.
ITEMS 2. through 5. NOT APPLICABLE.
ITEM 6. (a) Exhibits
10.47 Amendment No. 1 to Management Agreement
and License
10.48 Amendment No. 1 to Warehouse Agreement
(b) Reports on Form 8-K
None
16
JENNIFER CONVERTIBLES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JENNIFER CONVERTIBLES, INC.
July 15, 2002 By: /s/ Harley J. Greenfield
Harley J. Greenfield, Chairman of
the Board and Chief Executive Officer
July 15, 2002 By: /s/ Rami Abada
Rami, Abada, Chief Financial Officer
17
Exhibit 10.47
AMENDMENT NO. 1 TO
MANAGEMENT AGREEMENT AND LICENSE
This Amendment No. 1 to Management Agreement and License is
made as of the 30 day of April, 2002 by and among JARA
ENTERPRISES, INC., a New York corporation ("Jara"), FRED LOVE,
the sole stockholder of Jara (the "Shareholder"), JENNIFER
CONVERTIBLES, INC., a Delaware Corporation ("JCI") and JENNIFER
ACQUISITION CORP., a Delaware Corporation ("JAC"), a wholly owned
subsidiary of JCI.
RECITALS:
A Reference is made to that certain Management Agreement
and License, executed as of July 6, 2001 between Jara, the
Stockholder, JCI and JAC (the "Agreement").
A. The parties to the Agreement desire to amend the Agreement
as set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS
Section 1.01 Section 1.11 of the Agreement is hereby
amended by deleting the third sentence thereof and by
substituting the following in its place:
"In addition to any other amounts payable,
for the period from January 1, 2002 through
August 31, 2002 (the "Initial Period"),
Jara's share of advertising costs shall be
reduced (such reduction and all reductions
referred to in the next sentence for twelve
(12) month periods are hereinafter referred
to as "Additional Reductions") for such eight
month period by an amount equal to $0.50
multiplied by the amount, if any, by which
Jara's Net Delivered Sales for such period
are less than $17,718,000; provided, that in
no event shall such Additional Reduction,
together with amounts paid pursuant to
Section 2.1(c) during such period exceed an
aggregate of $1,800,000 (any such excess
shall be eliminated and shall not be carried
over). Thereafter, for the twelve (12) month
period commencing on September 1, 2002 and
for each twelve (12) month period thereafter,
Jara's share of advertising costs shall be
reduced by an amount equal to $0.50
multiplied by the amount, if any, by which
Jara's Net Delivered Sales for such twelve
(12) month period are less than $27,640,000;
provided, that in no event shall such
Additional Reduction, together with amounts
paid pursuant to Section 2.1(c) during such
period exceed an aggregate of $2,700,000 (any
such excess shall be eliminated and shall not
be carried over).
Section 1.02 Section 2.1(c) of the Agreement is hereby
amended and restated in its entirety to provide as follows:
(c) For the Initial Period, JCI will pay to
Jara an amount equal to 10% of the amount by
which the Jara Stores Net Delivered Sales are
less than $17,718,000, provided however, that
if the Jara Net Delivered Sales for such
eighth (8) month period is $16,667,000 or
less than JCI will pay to Jara an amount
equal to 15% (in lieu of the 10% referred to
above) of the amount by which the Jara Stores
Net Delivered Sales are less than
$17,718,000. Notwithstanding the foregoing,
in no event shall the total of the Additional
Reduction for such Initial Period and amounts
payable pursuant to this Section 2.1(c) for
such Initial Period exceed $1,800,000 (any
such excess shall be eliminated and shall not
be carried over to other periods).
Thereafter, for the twelve (12) month period
commencing September 1, 2002, and for each
twelve (12) month period thereafter, JCI will
pay to Jara an amount equal to 10% of the
amount by which the Jara Stores Net Delivered
Sales for such twelve (12) month period are
less than $27,640,000, provided however, that
if, the Jara Net Delivered Sales for any such
period are $26,000,000 or less, then JCI will
pay to Jara an amount equal to 15% (in lieu
of the 10% referred to above) of the amount
by which the Jara Stores Net Delivered Sales
for any such period are less than
$27,640,000. Notwithstanding the foregoing,
in no event shall the total of the Additional
Reduction for any twelve (12) month period
and amounts payable pursuant to this Section
2.1(c) for such period exceed $2,700,000 (any
such excess shall be eliminated and shall not
be carried over to other periods).
ARTICLE II
MISCELLANEOUS
Section 2.01 This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
Section 2.02 This Amendment may be executed in one or more
counterparts, each of which shall constitute an original, and all
of which, taken together, shall be deemed to constitute one and
the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their duly authorized officers
as of the day and year above written.
JARA ENTERPRISES, INC.
By: /s/ Fred J. Love______________
Name: Fred J. Love
Title: President
JENNIFER ACQUISITION CORP.
By: /s/ Harley J. Greenfield_________
Name: Harley J. Greenfield
Title: Chief Executive
Officer
JENNIFER CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield________
Name: Harley J. Greenfield
Title: Chief Executive
Officer
By: /s/ Fred J. Love_______________
FRED LOVE
Exhibit 10.48
AMENDMENT NO. 1 TO
WAREHOUSE AGREEMENT
This Amendment No. 1 to the Warehouse Agreement is made
of as of June 23, 2002 by and among JENNIFER CONVERTIBLES,
INC., a Delaware corporation ("JCI"), JENNIFER WAREHOUSING,
INC., a Delaware corporation and a wholly-owned subsidiary
of JCI ("New Warehousing"), and JARA ENTERPRISES, INC., a
New York corporation ("Jara").
RECITALS:
A. Reference is made to that certain Warehouse Agreement,
executed as of July 6, 2001 between JCI, New Warehousing and
Jara (the "Agreement").
B. The parties to the Agreement desire to amend the
Agreement as set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
AMENDMENT
Section 1.01. All capitalized terms unless otherwise
defined herein, shall have their defined meaning from the
Agreement.
Section 1.02 Section 5 of the Agreement is amended by
deleting sub-section (a) and substituting the following in
its place:
(a)(i) JCI will pay Jara $400,000 in eight equal monthly
payments of $50,000 each with the first such payment being
due and payable on September 16, 2002 with each subsequent
payment being due and payable on the 16th day of each
calendar month thereafter until paid in full. In return for
such payment, Jara will be responsible for the cost of all
fabric protection or breach of warranty claims
("collectively, Fabric Protection Claims") made after June
23, 2002 relating to sales of Merchandise made by both JCI
owed and licensed stores ("JCI Stores") and Jara Stores
prior to June 23, 2002. Jara will not be obligated to refund
to JCI any amounts previously paid to Jara by JCI for claims
relating to sales made before June 23, 2002.
(ii) Jara will be responsible for all Fabric Protection
Claims made after June 23, 2002 with respect to sales of
Merchandise by Jara Stores after June 23, 2002 and prior to
August 28, 2004 (or August 27, 2005, if extended as provided
in subparagraph (a)(v) below) whether or not the claim is
made on or after August 28, 2004 (or August 27, 2005, if
extended). The warranty agreement given to the purchaser of
the fabric protection and warranty plan will clearly
identify that Jara, or a subsidiary of Jara, will be solely
responsible for performance under the fabric protection and
warranty plan.
(iii) In addition, Jara will be responsible for all
Fabric Protection Claims made after June 23, 2002 with
respect to sales of Merchandise by JCI Stores after June 23,
2002 and before August 28, 2004 (or August 27, 2005, if
extended), whether or not the claim is made on or after
August 28, 2004 (or August 27, 2005, if extended). The
warranty agreement given to the purchaser of the fabric
protection and warranty plan will clearly identify that
Jara, or a subsidiary of Jara, will be solely responsible
for performance under the fabric protection and warranty
plan. In return for such services, in addition to amounts
payable pursuant to subparagraph (a)(i) above, JCI will pay
to Jara $50,000 per month with the monthly fee payable 85
days after the end of the month. Such monthly payment was
determined based upon JCI's sales for its fiscal year ended
August 25, 2001. The parties hereto agree that the $600,000
to be paid to Jara with respect to JCI's fiscal years ending
August 30, 2003 and August 28, 2004 (and August 27, 2005, if
extended) shall be adjusted on an annual basis) upwards or
downwards, by $50,000 for each $1,000,000 by which JCI's
revenues from the sale of fabric protection and related
warranties from all customers including Jara exceed, or are
less than, $10,000,000, as shown in JCI's Annual Report on
Form 10-K for such fiscal year. Any adjustment made
pursuant to the preceding sentence (with respect to any
fiscal year) shall be due and payable by JCI or Jara, as the
case may be, 85 days after the end of the month in which the
JCI's 10-K (for such fiscal year) is filed with the
Securities Exchange Commission.
(iv) To the extent JCI incurs any direct costs related to
fabric protection or the related warranties, such as costs
of fabric protection liquid or outside parts and labor, Jara
will reimburse JCI for such costs. Such reimbursements will
be paid 85 days after the end of the month in which the
costs are incurred.
(v) JCI shall have the option to extend the provisions of
subparagraphs (a)(ii) and (a)(iii) above to be applicable
during JCI's fiscal year ending August 27, 2005 by
delivering to Jara not later than August 28, 2004. After
August 28, 2004, subject to a extension to August 27, 2005
at the option of JCI, unless the provisions of subparagraphs
(ii) and (iii) above are extended by mutual agreement of the
parties, JCI will be responsible for any Fabric Protection
Claims rendered in connection with sales of Merchandise by
Jara Stores or JCI Stores after August 28, 2004 (or August
27, 2005, if JCI exercises the above-referenced to option).
JCI may bill Jara for parts and outside labor and other
actual out-of-pocket costs (excluding fabric protection
claims) arising out of or relating to sales of Merchandise
by Jara Stores and Jara shall promptly pay such bills
provided that JCI properly documents such bills. For a
period of six months following the payment of any such
bills, Jara shall be permitted to audit such bills.
Notwithstanding anything to the contrary herein, JCI will be
entitled to subcontract its responsibility under this
subparagraph (v) to a third party who agrees in writing to
assume JCI's obligations under this subparagraph (v).
ARTICLE II
Section 2.01 This Amendment shall be governed by and
construed in accordance with the laws of the State of New
York,
Section 2.02 This Amendment may be executed in one more
counterparts, each of which shall constitute an original,
and all of which, taken together, shall be deemed to
constitute on and the same agreement.
Section 2.03 The amendments to the Agreement made hereby
shall be deemed to be effective, as of June 23, 2002, and
all references to the "Warehousing Agreement" in the Interim
Operating Agreement between JCI and Jara dated as of July 6,
2001, shall be deemed to be references to the Agreement, as
amended hereby.
Section 2.04 Except as amended hereby, the Agreement will
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized
officers as of the day and year above written.
JENNIFER CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
Name: Harley J. Greenfield
Title: Chief Executive Officer
JENNIFER WAREHOUSING, INC.
By: /s/ Harley J. Greenfield
Name: Harley J. Greenfield
Title: Chief Executive Officer
JARA ENTERPRISES, INC.
By: /s/ Fred J. Love
Name: Fred J. Love
Title: President