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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
OR
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the Transition Period from ______ to ______
For the fiscal year ended Commission File number 1-9681
August 31, 2002
JENNIFER CONVERTIBLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2824646
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)
419 Crossways Park Drive
Woodbury, New York 11797
(Address of principal
executive office)
Registrant's telephone number, including area code (516) 496-1900
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
The aggregate market value of the common stock held by non-
affiliates as of December 11, 2002 was $14,272,793.
The number of shares outstanding of common stock, as of December 11,
2002 was 5,704,058.
PART I
Item 1. Business.
Unless otherwise set forth herein, when we use the term `we' or any
derivation thereof, we mean Jennifer Convertibles Inc., a Delaware
corporation, and its direct or indirect subsidiaries.
Business Overview
We are the owner and licensor of the largest group of sofabed
specialty retail stores and leather specialty retail stores in the
United States, with stores located throughout the Eastern seaboard, in
the Midwest, on the West Coast and in the Southwest. As of August 31,
2002, our stores include 179 Jennifer Convertibles stores and 17
Jennifer Leather stores. Of these 196 stores, we owned 120 and
licensed 76, including 25 owned or operated by a related private
company and three owned by other third parties which are operated by
the private company.
Jennifer Convertibles stores specialize in the retail sale of a
complete line of sofabeds. Additionally, we sell sofas and companion
pieces, such as loveseats, chairs and recliners, in both fabric and
leather, designed and priced to appeal to a broad range of consumers.
The sofabeds and companion pieces are made by several manufacturers
and range from high-end merchandise to relatively inexpensive models.
We are the largest dealer of Sealy sofabeds in the United States.
Jennifer Leather stores specialize in the retail sale of leather
living room furniture. We display merchandise in attractively
decorated settings designed to show the merchandise, as it would
appear in the customer's home. In order to generate sales, our
licensees and we rely on the attractive image of the stores,
competitive pricing, prompt delivery and extensive advertising.
We believe that the image presented by our stores is an important
factor in our overall marketing strategy. Accordingly, stores are
designed to display our merchandise in attractive settings. All of
our stores are of a similar clearly defined style, are designed as
showrooms for the merchandise and are carpeted, well lighted and well
maintained. Inventories for delivery are maintained in separate
warehouses. We display a variety of sofabeds and companion pieces at
each Jennifer Convertibles retail location with cocktail tables and
other accessories. In contrast to certain of our competitors that
primarily target particular segments of the market, we attempt to
attract customers covering the broadest socioeconomic range of the
market and, accordingly, offer a complete line of sofabeds made by a
number of manufacturers in a variety of styles at prices currently
ranging from approximately $299 to $2,200. The Jennifer Leather
stores similarly offer a complete line of leather living room
furniture in a variety of styles and colors at prices currently
ranging from approximately $599 to $5,000. We also generally feature
attractive price incentives to promote the purchase of merchandise.
In addition to offering merchandise by brand name manufacturers, we
offer merchandise at our Jennifer Convertibles and Jennifer Leather
stores under the private label "Bellissimo Collection" brand name for
leather merchandise.
Although each style of sofabed, loveseat, sofa, chair and recliner
is generally displayed at Jennifer Convertibles stores in one color of
fabric, samples of the other available colors and fabrics or leathers
are available on selected merchandise. Up to 2,000 different colors
and fabrics are available for an additional charge. To maximize the
use of our real estate and to offer customers greater selection and
value, we, as is common in the mattress industry, sell various sizes
of sofabeds with various sizes of mattresses but display only one size
of sofabed at our stores. We also offer leather furniture in a number
of different grades of leather and colors. We generate additional
revenue by selling tables and offering related services, such as
lifetime fabric protection.
A related private company, "the private company", operates 28
Jennifer Convertibles stores, 25 of which it owns and three of which
it licenses or manages. We do not own or collect any royalties from
the 25 private company owned stores, all of which are located in New York.
However, the private company operates these stores in substantially
the same way as we operate our stores and we are currently managing
certain aspects of such stores. The private company is owned by Fred
Love, through a trust of which Jerry Silverman is the trustee, an
individual who is currently one of our principal stockholders and was
formerly one of our directors. Mr. Love is also the brother-in-law of
Harley J. Greenfield, our Chairman of the Board, Chief Executive
Officer, director and principal stockholder. See "Notes to
Consolidated Financial Statements Footnote - Related Party
Transactions" and "Certain Relationships and Related Transactions."
Merchandise ordered from inventory is generally available to be
delivered within two weeks. Customers who place special orders for
items, colors or fabrics not in inventory must generally wait four to
six weeks for delivery, except for Italian leather merchandise which
may take up to 20 weeks. We believe that our ability to offer quick
delivery of merchandise represents a significant competitive
advantage.
Operations
Generally, our stores are open seven days per week. They are
typically staffed by a manager, one full-time salesperson and in some
cases, one or more part-time salespersons, as dictated by the sales
volume and customer traffic of each particular store. In some cases,
where sales volume and customer traffic so warrant, stores may be
staffed with one to three additional full-time salespersons. Our
licensed stores are substantially the same in appearance and operation
as our other stores.
Our licensees and we have district managers throughout the United
States. The district managers supervise store management and monitor
stores within their assigned district to ensure compliance with
operating procedures. District managers report to and coordinate
operations in their district with our executive management.
An inventory of approximately 70% of the items displayed in the
stores, in the colors and fabrics displayed, is usually stocked at the
private company's warehouse facilities, which are described below.
Our licensees and we typically, except in the case of financed sales,
require a minimum cash, check or credit card deposit of 50% of the
purchase price when a sales order is given, with the balance, if any,
payable in cash or by bank check, certified or official, upon delivery
of the merchandise. The balance of the purchase price is collected by
the independent trucker making the delivery.
Marketing
We advertise in newspapers, radio and on television in an attempt
to saturate our marketplaces. Our approach to advertising requires us
to establish a number of stores in each area we enter. This
concentration of stores enables area-advertising expenses to be spread
over a larger revenue base and to increase the prominence of the local
advertising program.
We create advertising campaigns for use by our stores, which also
may be used by the private company stores. The private company bears
a share of advertisement costs in New York. However, we also
advertise independently of the private company outside of the New York
metropolitan area. We are entitled to reimbursement from most of our
licensees, which are responsible for their respective costs of
advertising; however, the approach and format of such advertising is
usually substantially the same for our licensees and us. We also have
the right to approve the content of all licensee advertising. See
"Certain Relationships and Related Transactions."
In order to further understand our markets, we carefully monitor
our sales and obtain other information reflecting trends in the
furniture industry and changes in customer preferences. We also
review industry publications, attend trade shows and maintain close
contact with our suppliers to aid in identifying trends and changes in
the industry.
Leasing Strategy and Current Locations
Obtaining attractive, high-traffic favorable store locations is
critical to the success of our stores. We select sites and negotiate
leases on behalf of our licensees. The site selection process
involves numerous steps, beginning with the identification of
territories capable of sustaining a number of stores sufficient to
enable such stores to enjoy significant economies of scale,
particularly in advertising, management and distribution. Significant
factors in choosing a territory include market demographics and the
availability of newspapers and other advertising media to efficiently
provide an advertising umbrella in the new territory.
Once a territory is selected, we pick the specific locations within
such territory. Although a real estate broker typically screens sites
within a territory and engages in preliminary lease negotiations, we
are responsible for approval of each location. The leased locations
are generally in close proximity to heavily populated areas, shopping
malls, and other competing retail operations which are on or near
major highways or major thoroughfares, are easily accessible by car or
other forms of transportation and provide convenient parking.
The locations currently leased by our licensees and us range in
size from 1,900 square feet to a little over 8,000 square feet. We
anticipate that stores opened in the future will range from
approximately 2,000 square feet to 4,000 square feet. Stores may be
freestanding or part of a strip shopping center.
In fiscal 2002, we opened eight new stores. We did not close any
stores in fiscal 2002 although we will selectively close stores where
the economics so dictate. We plan to open additional stores when
attractive opportunities present themselves. We anticipate opening
approximately 10 to 15 additional stores and not closing any stores
during fiscal 2003.
2
Sources of Supply
We currently purchase merchandise for our stores, the stores of our
licensees and for the private company, from a variety of domestic
manufacturers generally on 60 to 90 day terms. We also purchase from
overseas manufacturers on varying terms. Our purchasing power
combined with the purchasing power of our licensees and of the private
company enables us to receive the right, in some instances, to
exclusively market certain products, fabrics and styles. See "Certain
Relationships and Related Transactions."
Our principal supplier of sofabeds is Klaussner Furniture
Industries, Inc., which also manufactures furniture under the Sealy
brand name. Sealy brand name sofabeds are our largest selling brand
name item and we believe Sealy brand name mattresses are the largest
selling mattresses in the world and have the highest consumer brand
awareness. We are the largest sofabed specialty retailer and the
largest Sealy sofabed dealer in the United States. Klaussner operates
retail stores, which compete with Jennifer Convertibles stores.
During the fiscal year ended August 31, 2002, we purchased
approximately 67% of our merchandise from Klaussner. Leather
furniture is purchased primarily from Klaussner, Nicoletti, Natale,
Chateau Dax and Ashley. The loss of Klaussner as a supplier could
have a material adverse effect on our operations and on our financial
well being. In March 1996, as part of a series of transactions with
Klaussner, we, among other things, granted Klaussner a security
interest in substantially all of our assets in exchange for improved
credit terms under a credit and security agreement with Klaussner. As
a result of our financial performance, such security interest should
be released in fiscal 2003. In addition, in December 1997, Klaussner
purchased $5,000,000 of our convertible preferred stock. In fiscal
2000, 2001, and 2002, Klaussner gave us certain vendor credits for
repairs. In addition, in December 1999, Klaussner agreed to loan us
$150,000 per store to fund the addition of up to 10 new stores, which
as of August 31, 2002, we have not drawn on. Any such loans are
subject to acceleration if we do not purchase at least 50% of our
upholstered furniture by dollar volume from Klaussner. See "Certain
Relationships and Related Transactions" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a
more detailed description of these transactions, Klaussner's
$5,000,000 investment and other transactions with Klaussner.
Licensing Arrangements
The stores we license include certain limited partnership licensees
whose accounts are included in our consolidated financial statements,
which we refer to in this report as our "LP's". If the proposed
settlement of our derivative litigation becomes effective, we will, as
part of the settlement, acquire the limited partnership interests in
the LP's and they will become our wholly owned subsidiaries. For a
description of the proposed settlement see "Certain Relationships and
Related Transactions". Our arrangements with our licensees typically
involve providing the licensee with a license bearing a royalty of 5%
of sales to use the name Jennifer Convertibles. Our existing
licensing arrangements are not uniform and vary from licensee to
licensee. Generally, however, we either manage the licensed stores
or, if the licensee is a partnership, have a subsidiary act as general
partner of such partnership, in each case, for 1% of the licensee's
profits. The arrangements generally have a term ranging between 10
and 20 years and may include options on the licensee's part to extend
the license for additional periods. These arrangements may also
involve the grant of exclusivity as to defined territories. In some
cases, we also have an option to purchase the licensee or the licensed
stores for a price based on an established formula or valuation
method. Investors in certain licensees have, in certain
circumstances, including a change of control in our ownership, the
right to put their investments to us for a price based upon an
established formula or valuation method. We purchase merchandise for
the licensees and provide other services to them.
Warehousing and Related Services
We currently utilize the warehousing and distribution facilities
leased by the private company, consisting of a warehouse facility in
North Carolina, and satellite warehouse facilities in New Jersey and
California. These warehouse facilities service our owned and licensed
stores and the private company's stores. Pursuant to the proposed
settlement agreement with the private company, we will acquire the
warehouse assets and provide purchasing services to the private
company. Pursuant to an Interim Operating Agreement, we are operating
in many respects, including warehousing, as if the settlement
agreements were in effect.
Prior to the execution of the Interim Operating Agreement, we paid
the private company a monthly warehouse fee equal to 5% of the retail
selling price of all merchandise delivered from the warehouse
facilities to customers of our owned stores, except for stores opened
subsequent to July 1, 1999, which are not charged the 5% fee. Such
fee included 5% of the retail selling price of any related services
such as fabric protection, provided in connection with such
merchandise. In addition, the private company separately contracted
with our licensees to provide warehousing and handling services for
3
licensed stores for a fee equal to 5% of the retail price of
merchandise delivered to the licensees' customers and on other terms
substantially similar to those set forth under the warehousing
agreement.
Also prior to July 2001, the private company provided to us a
number of other services, including fabric protection and warranty
services. In addition to the fee for warehousing, we paid the private
company a portion approximately one-third of fabric protection
revenues from our customers, except for such revenues from customers
of stores opened subsequent to July 1, 1999, of which we retained
100%.
In July 2001, the private company entered into a series of
agreements with us designed to settle the derivative action among the
private company, certain of our current and former officers, directors
and former accounting firms and us. Effectiveness of the agreements is
subject to certain conditions, including court approval. We also entered
into an Interim Operating Agreement designed to implement certain of the
provisions of the settlement agreement prior to court approval.
The material terms of the settlement agreements as it relates to
warehousing and related services are as follows:
Pursuant to a Warehouse Transition Agreement, the private company
will transfer to us the assets related to the warehouse system
currently operated by the private company and we will become
responsible for the leases and other costs of operating the warehouse.
Pursuant to computer hardware and software agreements, we will also
assume control of, and responsibility for, the computer system used in
the operations of the warehouse systems and stores while permitting
the private company access to necessary services. Pursuant to a
Warehousing Agreement, we will be obligated to provide warehouse
services to the private company of substantially the type and quality
it provided to us. During the first five years of the agreement, we
will receive a fee of 2.5% on the net sales price of goods sold by the
private company up to $27,640,000 of sales and 5% on net sales over
$27,640,000. After five years, we will receive a fee of 7.5% of all
net sales by the private company. In addition, during the full term
of the agreement, we will receive a fee for fabric protection and
warranty services at the rate we were being charged, subject to
increase for documented cost increases. We are also obligated to pay
the private company specified amounts based on decreases in its sales
levels. Pursuant to the Interim Operating Agreement, the parties are
operating as if the above mentioned settlement agreements were in
effect as of May 27, 2001. See "Certain Relationships and Related
Transactions" for a more complete description of the proposed
settlement and the Interim Operating Agreement.
Trademarks
The trademarks, Jennifer Convertibles, Jennifer Leather, Jennifer
House, With a Jennifer Sofabed, There's Always a Place to Stay, Jenni-
Pedic, Elegant Living, Jennifer's Worryfree Guarantee, Jennifer Living
Rooms, Bellissimo Collection, Jennifer Sofas, and Jennifer Leather,
are registered with the U.S. Patent and Trademark Office and are now
owned by us. The private company, as licensee, was granted a
perpetual royalty-free license to use and sublicense these proprietary
marks (other than the ones related to Jennifer Leather) in the State
of New York, subject to certain exceptions, including nine stores
currently owned by us and operating in New York and two more which the
private company agreed we may open on a royalty-free basis. Pursuant
to the Interim Operating Agreement, we now have the right to open an
unlimited number of stores in New York for a royalty of $400,000 per
year. See "Certain Relationships and Related Transactions."
Employees
As of August 31, 2002, we employed 462 people, including three
executive officers. We train personnel to meet our expansion needs by
having our most effective managers and salespersons train others and
evaluate their progress and potential for us. We believe that our
employee relations are satisfactory. None of our employees are
represented by a collective bargaining unit. We have never
experienced a strike or other material labor dispute.
Competition
We compete with other furniture specialty stores, major department
stores, individual furniture stores and regional furniture chains,
some of which have been established for a long time in the same
geographic areas as our stores (or areas where we or our licensees may
open stores). We believe that the principal areas of competition with
respect to our business are store image, price, delivery time,
selection and service. We believe that we compete effectively with
such retailers because our stores offer a broader assortment of
convertible sofabeds and leather upholstery than most of our
competitors and, as a result of volume purchasing, we are able to
offer our merchandise at attractive prices. We also advertise more
extensively than many of our competitors and offer quick delivery on
most of our items.
4
Item 2. Properties.
We maintain our executive offices in Woodbury, New York pursuant to
a lease, which expires in the year 2005.
As of August 31, 2002, the LP's and we lease all of our store
locations pursuant to leases, which expire between 2002 and 2016.
During fiscal 2003, 20 leases will expire, although we, as the lessee,
have the option to renew 11 of such leases. We anticipate remaining
in most, if not all, of these locations, subject, in the case of the
nine leases that expire, to negotiating acceptable renewals with the
landlord. The leases are usually for a base term of at least five
years. For additional information concerning the leases, see Note 11
of "Notes to Consolidated Financial Statements."
Item 3. Legal Proceedings.
The Derivative Litigation
Beginning in December 1994, a series of six actions were commenced
as derivative actions on our behalf, against Harley J. Greenfield,
Fred J. Love, Edward B. Seidner, Bernard Wincig, Michael J. Colnes,
Michael Rosen, Al Ferarra, William M. Apfelbaum, Glenn S. Meyers,
Lawrence R. Haut, the private company, Jerome I. Silverman, Jerome I.
Silverman Company, Selig Zises and BDO Seidman & Co.(1) in: (a) the
United States District Court for the Eastern District of New York,
entitled Philip E. Orbanes v. Harley J. Greenfield, et al., Case No.
CV 94-5694 (DRH) and Meyer Okun and David Semel v. Al Ferrara, et al.,
Case No. CV 95-0080 (DRH); Meyer Okun Defined Benefit Pension Plan, et
al. v. Bdo Seidman & Co., Case No. CV 95-1407 (DRH); and Meyer Okun
Defined Benefit Pension Plan v. Jerome I. Silverman Company, et. al.,
Case No. CV 95-3162 (DRH); (b) the Court of Chancery for the County of
New Castle in the State of Delaware, entitled Massini v. Harley
Greenfield, et. al., Civil Action No. 13936 (WBC); and (c) the Supreme
Court of the State of New York, County of New York, entitled Meyer
Okun Defined Benefit Pension Plan v. Harley J. Greenfield, et. al.,
Index No. 95-110290.
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 our present and former officers and directors, including but
not limited to claims relating to the matters described in our
December 2, 1994 press release.
As described in prior filings, we had entered into settlement
agreements in connection with the derivative litigation, and in the
case of certain of such agreements, we agreed 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.
As described under the heading "Certain Relationships and Related
Transactions", on July 6, 2001, the private company and we entered
into a series of agreements designed to settle the derivative action
among the private company, certain of our current and former officers,
directors and former accounting firms and us. Effectiveness of
the agreements is subject to certain conditions, including court
approval. We also entered into an Interim Operating Agreement
designed to implement certain of the provisions of the settlement
agreement prior to court approval. However, there can be no assurance
that the court will approve the settlement or that a settlement will
occur on the terms described under such heading.
Other Litigation
In December 2001, the State of New Jersey sued us, accusing us of
false advertising and 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 State of New Jersey and we reached an agreement to settle
the suit for a total of $200,000, which covers fines, penalties, legal
and administrative costs. We received a notice from the State of New
Jersey on October 31, 2002 that judgment has been satisfied.
1 Each of these individuals and entities is named as a defendant in
at least one action.
5
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters.
The principal market for our common stock during the two fiscal
years ended August 25, 2001 and August 31, 2002 was the Over the Counter
Bulletin Board. The following table sets forth, for the fiscal
periods indicated, the high and low sales prices of our common stock
on the Bulletin Board. Such quotations reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily
represent actual transactions.
High Low
Fiscal Year 2001:
1st Quarter $2.50 $2.13
2nd Quarter 3.00 1.88
3rd Quarter 2.19 1.90
4th Quarter 2.20 1.80
High Low
Fiscal Year 2002:
1st Quarter $2.30 $1.70
2nd Quarter 2.85 2.10
3rd Quarter 2.65 2.40
4th Quarter 4.60 2.10
As of December 11, 2002, there were approximately 204 holders of
record and approximately 1,510 beneficial owners of our common stock.
On December 11, 2002, the closing bid and asked prices of the common
stock as reported on the Over the Counter Bulletin Board were $5.20
and $5.40, respectively.
Dividend Policy
We have never paid a dividend on our common stock and we do not
anticipate paying dividends on the common stock at the present time.
We currently intend to retain earnings, if any, for use in our
business. There can be no assurance that we will ever pay dividends
on our common stock. Our dividend policy with respect to the common
stock is within the discretion of the Board of Directors and its
policy with respect to dividends in the future will depend on numerous
factors, including our earnings, financial requirements and general
business conditions.
6
Item 6. Selected Financial Data
The following table presents certain selected financial data for Jennifer
Convertibles, Inc. and subsidiaries
(in thousands, except share data)
Operations Data: Year Year Year Year Year
Ended Ended Ended Ended Ended
8/31/2002 8/25/2001 8/26/2000 8/28/1999 8/29/1998
Revenue $151,183 $136,642 $133,701 $114,919 $109,335
Cost of sales, including
store occupancy,
warehousing, delivery
and fabric protection 96,459 92,686 88,087 76,855 71,462
Selling, general and
administrative expenses 42,962 39,963 38,615 35,688 35,872
Depreciation and
amortization 1,660 1,854 1,691 1,668 1,727
141,081 134,503 128,393 114,211 109,061
Operating income 10,102 2,139 5,308 708 274
Interest income 210 466 358 171 108
Interest expense 14 84 82 106 172
Income before income
taxes 10,298 2,521 5,584 773 210
Income taxes (693) (227) 709 537 299
Net income (loss) $10,991 $2,748 $4,875 $236 ($89)
Basic income (loss) per
share $1.93 $0.48 $0.85 $0.04 ($0.02)
Diluted income (loss) per
share $1.50 $0.38 $0.68 $0.03 ($0.02)
Weighted average common
shares outstanding
basic income (loss) per
share 5,704,058 5,704,058 5,704,058 5,701,559 5,700,725
Effect of potential common
shares issuances:
Stock options 177,868 51,378 63,300 22,077 -
Convertible preferred
stock 1,443,164 1,443,164 1,443,164 1,430,722 -
Weighted average common
shares outstanding
diluted income (loss)
per share 7,325,090 7,198,600 7,210,522 7,154,358 5,700,725
Cash Dividends - - - - -
Store data: 8/31/2002 8/25/2001 8/26/2000 8/28/1999 8/29/1998
Company-owned stores open
at the end of period 120 112 102 84 82
Consolidated licensed
stores open at the end
of period 48 48 46 62 62
Licensed stores not
consolidated open at
end of period 3 3 3 9 11
Total stores open at end
of period 171 163 151 155 155
Balance Sheet Date: 8/31/2002 8/25/2001 8/26/2000 8/28/1999 8/29/1998
Working capital
(deficiency) $7,062 ($3,939) ($6,842) ($11,073) ($11,468)
Total assets 43,625 36,774 30,992 26,145 24,099
Long-term obligations 0 0 0 63 49
Total liabilities 33,539 37,679 34,645 34,673 32,905
Stockholders' equity
(Capital deficiency) 10,086 (905) (3,653) (8,528) (8,806)
Stockholders' equity
(Capital deficiency)
per shares $1.77 ($0.16) ($0.64) ($1.50) ($1.54)
7
ITEM 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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 outcomes 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 risk factors, including those under the caption "Risk Factors"
herein, such as uncertainty as to the outcome of the litigation
concerning us, factors affecting the furniture industry generally,
such as the competitive and market environment, and matters which may
affect our suppliers or the private company. 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.
Overview
We are the owner and licensor of sofabed specialty retail stores
that specialize in the sale of a complete line of sofabeds and
companion pieces such as loveseats, chairs and recliners. We also
have specialty retail stores that specialize in the sale of leather
furniture. In addition, we have stores that sell both fabric and
leather furniture.
In July 2001, we entered into proposed settlement agreements and an
Interim Operating Agreement with the private company, which
significantly affects the way we operate with the private company. As
described in Note 3 to the consolidated financial statements, as a
result of certain of the provisions of the Interim Operating
Agreement, we have revised our method of revenue recognition with
respect to fabric protection and restated our operating results for
the fiscal year ended August 25, 2001. The revised method results in
$2,121,000 less revenue recognized in the fiscal year ended August 25, 2001
as compared with the amounts that were recognized under the prior
method of revenue recognition. As a result of an amendment to our
Interim Operating Agreement during fiscal 2002, all of such revenue
was recognized in fiscal 2002.
Results of Operations
Fiscal year ended August 31, 2002 compared to fiscal year ended August
25, 2001:
Net sales includes merchandise sales of $137,209,000 and
$130,184,000 and income from a related - private company that operates
28 Jennifer convertibles stores, the private company, of $2,628,000
and $2,075,000 for the fiscal years ended August 31, 2002 and August
25, 2001, respectively. Net sales of merchandise increased 5.4%, by
$7,025,000, for the fiscal year ended August 31, 2002. Sales have
been positively impacted as a result of opening eight stores during
the fiscal year ended August 31, 2002, as well as by an aggressive
merchandise financing program.
Revenue from service contracts increased 158.9% to $11,346,000 for
the fiscal year ended August 31, 2002, as compared to $4,383,000 for the
fiscal year ended August 25, 2001. Beginning May 27, 2001, we changed
the method under which we recognize income from the sale of fabric
protection (and associated warranties). Before May 26, 2001, the
private company was responsible for all fabric protection warranty
claims, and all fabric protection revenue was recognized at the time
of sale to the customer. 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 began to be recognized over the estimated service period.
The effect was that fabric protection revenue, which we would have
previously recognized as revenue, was immediately 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 have been recognized in proportion to the costs
expected to be incurred in performing services under the plan.
As this accounting treatment was an unintended result 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
$400,000, payable in eight installments of $50,000, the private company
will be responsible for fabric protection claims made after June 23,
2002, as to previously sold merchandise and, for $50,000 per month,
subject to adjustment based on the annual volume of sales of the
fabric protection plans, the private company will be responsible for
fabric protection claims made with respect to all merchandise sold
between June 23, 2002 and August 28, 2004, subject to an extension at
our option through August 27, 2005. Accordingly, all of the $2,121,000
of deferred revenue as of August 25, 2001, together with deferred
revenue resulting from sales after such date through June 23, 2002,
was recognized as revenue during the year ended August 31, 2002.
Substantially all of such deferred revenue was recognized in the
fourth quarter. In addition to the effect of the deferred revenue
reversal, service contract revenue for 2001 was reduced by $1,515,000
for fabric protection fees paid to the private company prior to the
inception of the Interim Operating Agreement, whereas in 2002, revenue
8
from service contracts includes $103,000 received from the private
company, which is net of $500,000 to be paid to the private company in
connection with the Amendment referred to above.
Cost of sales increased to $96,459,000 for the fiscal year ended
August 31, 2002, from $92,686,000 for the fiscal year ended August 25,
2001. Cost of sales as a percentage of revenue was 63.8% in fiscal
2002, which decreased 4.0% from 67.8% in the prior year. The decrease
is attributable to an increase in revenue from service contracts,
including the recognition of $2,121,000 of fabric protection revenue,
which was deferred in 2001. Revenue from service contracts has a very
high gross margin. Included in cost of sales in 2001 are charges from
the private company for warehouse expenses in the amount of
$3,338,000 in 2001. There were no such charges in 2002.
Under the Interim Operating Agreement, which went into effect May
27, 2001, we are no longer charged for warehousing fees by the private
company, but instead provide such services and charge such fees to the
private company. Warehousing fees charged to the private company
(included in net sales) amounted to $673,000 in fiscal 2002. We also
bear the expenses of operating the warehouse system. Such expenses
amounted $4,248,000 in fiscal 2002.
Selling, general and administrative expenses were $42,962,000
(28.4% as a percentage of revenue) for the fiscal year ended August
31, 2002, as compared to $39,963,000 (29.2% as a percentage of
revenue) for the fiscal year ended August 25, 2001, a decrease of 0.8%
as a percentage of revenue. The most significant reasons for the
increase in selling, general and administrative expenses are as
follows:
(a) $1,861,000 increase in compensation to officers and sales
staff based on our sales and overall financial performance
for fiscal 2002.
(b) $919,000 increase in costs associated with our private
label card business.
(c) $217,000 increase in insurance premiums.
(d) We paid the private company a royalty of $400,000 for the
fiscal year ended August 31, 2002, as compared to $300,000
for the year ended August 25, 2001. This $400,000 annual
royalty commenced on May 27, 2001, 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.
Our net receivables from the private company ($7,950,000) decreased
in the aggregate by $86,000 as of August 31, 2002, compared to the
prior year end. In connection with the uncertainty of collectibility
and the relationship with the private company and us, we account
monthly for transactions on an offset basis. If the result of the
offset is a receivable due from them, then such net amount will be
generally recognized to the extent that cash is received from the
private company prior to the issuance of our financial statements. We
have fully reserved uncollected amounts, which totaled $4,754,000 as
of August 31, 2002 and 4,811,000 as of August 25, 2001. The
collectibility of these amounts is uncertain.
Interest income decreased by $256,000 to $210,000 for the fiscal
year ended August 31, 2002, as compared to $466,000 the prior year.
The decrease is due to lower returns on investments.
We reported income tax benefits of $693,000 and $227,000 in 2002
and 2001, respectively. These benefits result primarily from
decreases in the valuation allowance on our deferred tax asset, net of
current tax expense.
Net income in the fiscal years ended August 31, 2002 and August 25,
2001 was $10,991,000 and $2,748,000, respectively, amounting to an
increase of income of $8,243,000 in fiscal 2002. The principle reason
for the increase is (1) increased sales resulting from financing
programs and (2) selling more service contracts and (3) the $2,121,000
of deferred revenue as of August 25, 2001, which was recognized as
revenue in the year ended August 31, 2002.
Fiscal year ended August 25, 2001 compared to fiscal year ended August
26, 2000:
Net sales increased by 3.4% to $132,259,000 for the fiscal year
ended August 25, 2001, as compared to $127,865,000 for the fiscal year
ended August 26, 2000. Revenue from service contracts decreased 25%
to $4,383,000 for the year ended August 25, 2001 as compared to
$5,836,000 for the year ended August 26, 2000. Such decrease was
attributable to the changes, beginning May 27, 2001, in the method
under which we recognize revenue from the sale of fabric protection
(and associated warranties), which resulted in the deferral of
$2,121,000 of revenue received subsequent thereto through August 25,
2001. See the second and third paragraphs above under "Fiscal year
ended August 31, 2002, compared to fiscal year ended August 25, 2001"
for an explanation of the changes.
9
Cost of sales increased to $92,686,000 for the fiscal year ended
August 25, 2001, from $88,087,000 for the fiscal year ended August 26,
2000. Cost of sales as a percentage of revenue was 67.8% in fiscal
2001, which increased 1.9% from 65.9% in the prior year. The increase
in percentage of revenue is primarily attributable to occupancy costs
increasing as a percentage of revenue and the deferral of $2,121,000
of fabric protection revenue in 2001. Included in cost of sales are
charges from the private company for warehouse expenses of $3,338,000
and freight of $0, compared with $4,112,000 and $1,282,000,
respectively, in the previous year. We had been paying the private
company for freight charges based on quoted freight rates for
arranging delivery of our merchandise up until April 2000 at which
time we assumed responsibility for freight.
Under the Interim Operating Agreement, which went into effect on
May 27, 2001, we are no longer charged for warehousing fees and fabric
protection by the private company, but instead provide such service
and charge such fees to the private company. We also bear the
expenses of operating the warehouse system.
Selling, general and administrative expenses were $39,963,000
(29.2% as a percentage of revenue) for the fiscal year ended August
25, 2001, as compared to $38,615,000 (28.9% as a percentage of
revenue) for the fiscal year ended August 26, 2000, an increase of
0.3% as a percentage of revenue. The most significant reason for the
increase in selling, general and administrative expenses as a
percentage of revenue was the increase in costs, such as the royalty
and additional advertising contribution reduction as described in
subsections (a) and (b) below.
(a) The private company contributed $125,750 per month to
advertising. Prior to the Interim Operating
Agreement, the private company was contributing $150,000 per month
to advertising.
(b) We paid the private company a royalty of $300,000 for the year
ended August 25, 2001. This annual $400,000 fee gives us the right
to open an unlimited number of stores in New York and also covers
the stores recently opened in New York.
Our receivables from the private company ($8,036,000) increased in
the aggregate by $1,716,000 as of August 25, 2001 compared to the
prior year-end. In connection with the uncertainty of collectibility
and the relationship between the private company and us, we account
monthly for transactions on an offset basis. If the result of the
offset is a receivable due from them, then such net amount will be
generally recognized to the extent that cash is received from the
private company prior to the issuance of our financial statements. We
have fully reserved uncollected amounts, which totaled $4,811,000 as
of August 25, 2001 and 4,826,000 as of August 26, 2000. The
collectibility of these amounts is uncertain.
Interest income increased by $108,000 to $466,000 for the fiscal
year ended August 25, 2001, as compared to $358,000 in the prior year.
The increase is due to more available cash to invest and higher
returns on investments.
We had a tax benefit of $227,000 and incurred tax expense of
$709,000 in the fiscal years ended August 25, 2001 and August 26,
2000, respectively. The tax benefit in 2001 was due to a $500,000
reduction in the valuation allowance on our deferred tax asset, offset
by current state tax expenses. We had previously fully reserved the
deferred tax asset, which is comprised principally of net operating
loss carryforwards and expenses deducted for financial reporting
purposes which are not yet deductible for tax purposes. Based on
operating profits during fiscal 2001 and anticipated future taxable
income, we reduced the valuation allowance in 2001.
Net income in the fiscal years ended August 25, 2001 and August 26,
2000 was $2,748,000 and $4,875,000, respectively, amounting to a
decrease of income of $2,127,000 in fiscal 2001. The principle reason
for the decrease was the change in how we recognized revenue from the
sale of fabric protection plans.
Liquidity and Capital Resources
As of August 31, 2002, we had an aggregate working capital of
$7,062,000 compared to a working capital deficiency of $3,939,000 as
of August 25, 2001, and had available cash and cash equivalents of
$15,973,000 compared to cash and cash equivalents of $11,155,000 as of
August 25, 2001. The increase in cash and cash equivalents results from
$5,585,000 of net cash provided from operating activities, partially
offset by $767,000 in capital expenditures. Unless the U.S. economy
continues to worsen, we anticipate continued positive operating cash
flow through the end of fiscal 2003.
We continue to fund the operations of certain of our limited
partnership licensees, some of which continue to generate operating
losses. Any such losses have been included in our consolidated
financial statements. It is our intention to continue to fund these
operations in the future and, if the settlement agreements referred to
below are approved, we will acquire 100% of such limited partnerships.
10
Starting in 1995, the private company entered into offset
agreements with us that permit us to offset our current monthly
obligations to each other up to $1,000,000. Amounts in excess of
$1,000,000 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 August 31, 2002, have been subsequently
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. Our
receivables from the private company and the unconsolidated licensees,
which arose in fiscal 1996 and prior years, had been reserved for.
In March 1996, we executed a Credit and Security Agreement with our
principal supplier, Klaussner, 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 August 31, 2002,
there were no amounts owed to Klaussner, that exceeded these extended
payment 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. See "Certain Relationships and
Related Transactions". As part of the Credit and Security Agreement,
we granted a security interest in all of our assets including the
collateral assignment of our leasehold interests, our trademarks and a
license agreement to operate our business in the event of default. We
expect, as result of our positive financial performance, that such
security interest will be released in fiscal 2003.
In fiscal 2002, we opened eight new stores. We have not closed a
store in the last three fiscal years.
For the fiscal years ended August 31, 2002 and August 25, 2001, we
spent $767,000 and $1,362,000, respectively, in capital expenditures.
We currently anticipate capital expenditures of approximately
$1,000,000 during fiscal 2003 to support the opening of new stores
during the next fiscal year. Although we anticipate funding such
expansion internally, a portion of our store opening costs could be
funded by Klaussner pursuant to an agreement, entered into as of
December 1999, pursuant to which Klaussner agreed, subject to certain
conditions, to lend us $150,000 per new store for up to 10 new stores.
Each loan will be evidenced by a three year note, bearing interest at
the LIBOR rate plus 3%. The notes are subject to acceleration under
certain circumstances, including closing of the stores funded by the
loan or if we do not purchase at least 50% of our upholstered
furniture by dollar volume from Klaussner. In addition, Klaussner
will be entitled to a premium on the cost of furniture that we
purchased from it for sale to customers of the stores funded by
Klaussner.
The proposed settlement agreements and the Interim Operating
Agreement we entered into with the private company impacts our
liquidity, capital resources and operations in a number of ways,
including:
. In return for providing warehousing services to the stores owned by
the private company, the private company will pay us (i) through May
2006, a fee for all fabric protection and warranty services sold in
their stores plus 2.5% of their yearly net sales for net sales up to
an aggregate of $27,640,000 and 5.0% of their yearly net sales for net
sales in excess of $27,640,000, and (ii) during each 12 month period
after May 2006, until we either buy the private company or until
December 31, 2049, a fee for all fabric protection and warranty
services sold in their stores plus 7.5% of their yearly net sales.
. We will obtain the right to open an unlimited number of stores in
the state of New York for a royalty of $400,000 per year (which
includes stores already opened).
. The private company is obligated to pay us $125,750 per month for
advertising. This represents a decrease from the $150,000 per month
to which we were previously entitled. In addition, if private company
sales are less than $27,640,000, we must reimburse the private company
$0.50 for every dollar of sales under $27,640,000, subject to the
$2,700,000 cap described in the paragraph below.
. Because we may negatively impact the private company's sales by
opening additional stores of our own within the state of New York and
because we will be managing the private company's stores, we have
agreed to pay the private company 10% of the amount by which their
yearly net sales for any 12 month period is below $27,640,000,
provided that if their yearly net sales fall below $26,000,000, we
will pay the private company 15% of such shortfall amount, provided
further that such amounts, together with amounts we may pay for
advertising if the private company's sales drop below $27,640,000,
shall not, in the aggregate, exceed $2,700,000 in any 12 month period.
Messrs. Greenfield and Seidner, each an officer, director and
principal stockholder of our company, have agreed to be responsible
for up to an aggregate of $300,000 of amounts due under these
provisions in each year.
11
. In settlement of certain disputes for amounts due us from the
private company, the private company will execute several notes to us
in the aggregate principal amount of $2,600,000, plus amounts owed as
of the closing date for purchasing and other services ($1,992,403 as
of May 26, 2001).
. The effect of the new agreements with the private company,
including our assumption of the warehousing responsibilities, improved
our operations by $1,190,000 for fiscal 2002. There is no assurance
that the agreement will improve our future operating results to the
extent we estimate or at all.
For a more detailed discussion of the proposed settlement agreement
and the Interim Operating Agreement, see "Certain Relationships and
Related Transactions."
Contractual Obligations
The following table sets forth our future contractual obligations
in total, for each of the next five years and thereafter, as of August
31, 2002. Such obligations include the retail store leases, the lease
for the executive office, written employment contracts for two of our
executive officers, and agreements to pay the private company
royalties.
(Dollars in thousands) 2003 2004 2005 2006 2007 There- Total
after
Operating leases for
retail stores
and executive office(1) $16,193 $14,420 $10,298 $8,028 $6,757 $9,421 $75,117
Royalty payments to the
private company (2) 400 - - - - - 400
Employment contracts 900 900 900 - - - 2,700
Fabric protection fees to
the private company 400 - - - - - 400
Total contractual
obligations (3) $17,893 $15,320 $11,198 $8,028 $6,757 $9,421 $78,617
(1) While we pay the private company, pursuant to the Interim
Operating Agreement, the cost of the warehouse leases, such leases are
not contractual obligations for which we are directly liable. The
approximate amount that we pay the private company for the leases
is $950,000 per year (see note 2 below).
(2) Continued payment of the royalty and other obligations may be
based on the approval of the proposed settlement agreement.
(3) The table does not include a commitment to pay the private
company a maximum of $2.7 million in shortfall payments and
certain other amounts that are not currently determinable,
such as warehousing fees.
Recently issued accounting standards
Goodwill consists of the excess of cost of our investments in certain
subsidiaries over the fair value of net assets acquired. Prior to the
adoption of SFAS 142, (see below), effective as of the beginning of fiscal 2002,
impairment was assessed based on undiscounted cash flows of the
related stores, and goodwill was being amortized over periods of 10 to
40 years from the acquisition date using the straight-line method.
Accumulated amortization as of August 25, 2001 amounted to $476.
In July 2001, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards (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 elected to
adopt this standard as of the beginning of our fiscal year ended
August 31, 2002. During fiscal 2002, we performed the required
impairment tests and determined that there is no impairment of our
goodwill.
Net income and related per share amounts adjusted to exclude
amortization of goodwill are as follows:
12
2002 2001 2000
Reported net income $10,991 $2,748 $4,875
Goodwill amortization 0 174 116
Adjusted net income $10,991 $2,922 $4,991
Basic income per share:
Reported net income $1.93 $0.48 $0.85
Goodwill amortization 0.00 0.03 0.02
Adjusted net income $1.93 $0.51 $0.87
Diluted income per share:
Reported net income $1.50 $0.38 $0.68
Goodwill amortization 0.00 0.02 0.02
Adjusted net income $1.50 $0.40 $0.70
Significant Accounting Policies
Effective June 23, 2002, the Company amended the warehouse
agreement with the private company whereby the private company has
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 (subject to an extension until August 27,
2005 at the option of the Company) and assume all performance
obligations and risk of loss thereunder and we will have no
obligation with respect to such plans. The private company will
receive a monthly payment of $50, payable by the Company 85 days after
the end of the month, subject to an adjustment based on the volume of
annual sales of the plans. We retain any remaining revenue
from the sales of the plans. In addition, for a payment of $400
(payable $50 per month beginning three months after the date of the
agreement) to be made by us, the private company will also
assume responsibility to service and pay any claims related to sales
made by us or the private company prior to June 23, 2002.
Accordingly, we will have no obligations for any claims filed
after June 23, 2002. As a result thereof, in the fourth quarter of
its fiscal year ended August 31, 2002, we reversed into
income $7,404 representing the remaining balance of deferred revenue
related to the fabric protection plans (see Note 3) together with $167
representing 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.
The receivable from the private company as of August 31, 2002
represents current charges aggregating $3,696, principally for
merchandise transfers, warehousing services and advertising costs,
which are payable within 85 days of the end of the month in which the
transactions originate. Such amount has been fully paid subsequent to
the balance sheet date. In addition to the above, the receivables
from the private company include $4,754, representing unpaid amounts
from fiscal 1996 and prior years, which are in dispute and have been
fully reserved for in the accompanying financial statements. As
explained in Note 4 in Notes to Consolidated Financial Statements, as
part of a proposed settlement, the disputed balance will be settled by
the private company executing two notes to us in the aggregate principal
amount of $2,400 payable over a three to five year period. We intend to
maintain a reserve for the full amount of the notes and record income
as collections are received.
The arrangement with respect to the transfer of merchandise between
the private company, which operates retail stores operating under the
Jennifer Convertibles name, and us arises from the private company's
desire to avail itself of our economic leverage in purchasing
merchandise for its Jennifer Convertibles stores. The purchasing
agreement provides that the we will purchase merchandise on behalf of
ourselves and the private company and bill the private company at cost
as invoiced by the vendor and pass through to the private company the
benefit of volume related discounts received from the vendor. We do
not believe it likely that the private company, if purchasing directly
from vendors, would get the same favorable volume related pricing that
we receive. In effect, we are accommodating the private company,
which is a related party. The merchandise transfers are not reflected
in our consolidated statements of operations and do not impact our
earnings.
13
Inflation
There was no significant impact on our operations as a result of
inflation during the three fiscal years ended August 25, 2000, August
26, 2001 and August 31, 2002.
14
RISK FACTORS
Cautionary Statements Regarding Forward-Looking Statements.
This annual report contains certain forward-looking statements
based on current expectations that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of many factors,
including the risk factors set forth below and elsewhere in this
report. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our business
operations. If any of these risks actually occur, our business,
financial condition and operating results could be materially
adversely affected. The cautionary statements made in this Annual
Report on Form 10-K should be read as being applicable to all forward-
looking statements wherever they appear in this Annual Report on Form
10-K.
There is no assurance we will continue to operate profitably.
We achieved net income of $10,991,000, $2,748,000 and $4,875,000 in
the fiscal years ended August 31, 2002, August 25, 2001 and August 26,
2000, respectively. The furniture business is cyclical and we may be
unable to continue operating profitably, either due to a change in
such cycle, losses from new stores, changes in consumer preferences or
demographics or unknown risks and uncertainties that may cause us to
incur losses from operations. Our profit decreased in fiscal 2001 due
to a change in how we recognize revenue from the sale of fabric
protection and the worsening U.S. economy.
The outcome of pending litigation is uncertain and may entail
significant expense.
As described under "Legal Proceedings", we are currently involved
in certain derivative litigation. We have spent a substantial amount
on legal fees and other expenses in connection with such litigation.
Although we have entered into proposed settlement agreements,
effectiveness of such agreements is subject to court approval and
other conditions and there can be no assurance such conditions will be
met.
We may be liable for up to $2,700,000 per year of "short-fall"
payments to the private company.
As part of our proposed settlement with the private company, we
obtained the right to open an unlimited number of stores in New York
for a royalty of $400,000 per year. Because we will be managing the
private company's stores and because we may negatively impact the
private company's sales by opening stores in its territory, we agreed
to pay the private company up to $2,700,000 per year if its sales drop
below specified levels. The provisions of the proposed settlement are
currently in effect as a result of the Interim Operating Agreement.
For fiscal 2002, there was no"shortfall".
Our company could suffer from potential conflict of interest.
Potential conflicts of interest exist since two of our principal
stockholders, directors and officers, Harley J. Greenfield, our
Chairman of the Board and Chief Executive Officer, and Edward B.
Seidner, a director and our Executive Vice President, are owed over
$10 million by the private company, which owns, controls or licenses
the private company stores. Accordingly, such persons derive
substantial economic benefits from the private company. In addition,
Fred Love, the owner of the related private company, of which Jerry
Silverman is the trustee, is Mr. Greenfield's brother-in-law.
Circumstances may arise in which the interest of the private company
stores, of the private company or of Mr. Greenfield and Mr. Seidner
will conflict with our interests, including the negotiations to settle
the litigation described above. There are also numerous
relationships, and have been numerous transactions, between us and the
private company, including an agreement under which we warehouse and
purchase merchandise for the private company, manage its stores and
provide it other services. See "Certain Relationships and Related
Transactions."
We heavily depend on two suppliers.
We purchase a significant percentage of our merchandise from
Klaussner, which also manufactures furniture under the Sealy brand
name. During the fiscal year ended August 31, 2002, we purchased
approximately 67% of our merchandise from Klaussner. Since a large
portion of our revenues have been derived from sales of Klaussner
products, the loss of this supplier could have a material adverse
impact on us until alternative sources of supply are established.
Klaussner is also a principal stockholder and creditor of ours and
owns retail stores that compete with ours. Our obligations to
Klaussner are secured by substantially all of our assets, although we
expect such security interest to be released in fiscal 2003.
Klaussner's position as a significant creditor could potentially
result in a temporary or permanent loss of our principal supply of
merchandise, if, for example, Klaussner halted supply because we
defaulted on or were late in making our payments to Klaussner. See
15
"Certain Relationships and Related Transactions." Also, we purchase a
significant percentage of our merchandise from Natale, our principal
leather supplier. During the fiscal year ended August 31, 2002, we
purchased approximately 28% of our merchandise from Natale.
The cyclical nature of the furniture industry poses risks to us from
prolonged economic downturn.
The furniture industry has been historically cyclical, fluctuating
with general economic cycles. During economic downturns, the
furniture industry tends to experience longer periods of recession and
greater declines than the general economy. We believe that the
industry is significantly influenced by economic conditions generally
and particularly by consumer behavior and confidence, the level of
personal discretionary spending, housing activity, interest rates,
credit availability, demographics and overall consumer confidence.
All of these factors are currently being negatively affected by the
economic downturn and a prolonged economic downturn might have a
material adverse effect on our business.
Competition in the furniture industry could cost us sales and cause us
to reduce prices.
The retail sofabed business is highly competitive and includes
competition from traditional furniture retailers and department stores
as well as numerous discount furniture outlets. Our stores may face
sharp price cutting, as well as imitation and other forms of
competition, and we cannot prevent or restrain others from utilizing a
similar marketing format. Although we are the largest sofabed
specialty retail dealer in the United States, many of our competitors
have considerably greater financial resources.
We may have difficulty obtaining additional financing.
Our ability to expand and support our business may depend upon our
ability to obtain additional financing. We may have difficulty
obtaining debt financing as all of our assets are pledged to Klaussner
as security for the amounts we owe under the Klaussner Credit and
Security Agreement. From time to time, our financial position has
made it difficult for us to secure third party consumer financing.
Inability to offer such financing adversely affects sales.
Harley J. Greenfield and current management are likely to retain
control.
As of November 4, 2002, Harley J. Greenfield, our Chairman of the
Board and Chief Executive Officer and principal stockholder,
beneficially owns approximately 21.0% of our outstanding shares of
common stock. Approximately 51.9% of the outstanding common stock is
beneficially owned by all officers and directors as a group, including
Messrs. Greenfield and Seidner. Since the holders of our common stock
do not have cumulative voting rights, such officers' and directors'
ownership of our common stock will likely enable them to exercise
significant influence in matters such as the election of our directors
and other matters submitted for stockholder approval. Also, the
relationship of such persons to the private company could serve to
perpetuate management's control in light of the private company's
performance of important functions.
Our future success depends heavily on two executives.
Our future success will depend substantially upon the abilities of
Harley J. Greenfield, our Chairman of the Board and Chief Executive
Officer and one of our principal stockholders as well as Rami Abada,
our President, Chief Operating Officer and Chief Financial Officer.
The loss of Mr. Greenfield's and/or Mr. Abada's services could
materially adversely affect our business and our prospects for the
future.
We are not likely to declare dividends.
We have never declared or paid any cash dividends on our common
stock and do not intend to pay any cash dividends in the foreseeable
future. We currently anticipate that we will retain all our earnings
for use in the operation and expansion of our business and, therefore,
do not anticipate that we will pay any cash dividends in the
foreseeable future.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
16
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data
required in this item are set forth on the pages indicated in Item
15(a)(1).
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 10. Our Directors and Executive Officers.
The names and ages of our directors and our executive officers as
of November 25, 2002 are as follows:
Name Age Position(s) with the
Company
Harley J. Greenfield 58 Director, Chairman of the Board and
Chief Executive Officer
Edward G. Bohn 57 Director
Kevin J. Coyle 58 Director
Edward B. Seidner 50 Director and Executive Vice President
Bernard Wincig 71 Director
Rami Abada 43 Director, President, Chief Operating
Officer and Chief Financial Officer
Leslie Falchook 42 Senior Vice President - Administration
Kevin Mattler 44 Senior Vice President - Store Operations
Our directors are elected at the Annual Meeting of stockholders and
hold office until their successors are elected and qualified. Our
officers are appointed by the Board of Directors and serve at the
pleasure of the Board of Directors. We currently have no compensation
or nominating committees.
The Board of Directors held five meetings during the 2002 fiscal
year. None of the directors attended fewer than 75% of the number of
meetings of the Board of Directors or any committee of which he is a
member, held during the period in which he was a director or a
committee member, as applicable.
The Board of Directors has a Stock Option Committee, which, as of
August 31, 2002, consisted of Messrs. Greenfield and Seidner. The
Stock Option Committee had no meetings, during the 2002 fiscal year.
The Stock Option Committee is authorized to administer our stock
option plans.
The Board of Directors has an Audit and Monitoring Committee,
which, during the fiscal year ended August 31, 2002, consisted of
Bernard Wincig, Edward Bohn and Kevin Coyle. During such fiscal year,
the Audit and Monitoring Committee held four meetings. The Audit and
Monitoring Committee is responsible for reviewing the adequacy of the
structure of our financial organization and the implementation of our
financial and accounting policies. In addition, the Audit and
Monitoring Committee reviews the results of the audit performed by our
outside auditors before the Annual Report to Stockholders is
published. This committee also monitors transactions between the
private company and us.
Audit Committee Financial Experts
Our board of directors has determined that Kevin Coyle and Edward
Bohn, two of our directors, qualify as "financial experts" as defined
by the SEC in Instruction 1 to proposed Item 309 of Regulation S-K,
which is set forth in SEC Release No. 34-46701, dated October 22,
2002. Both Messrs. Coyle and Bohn are "independent", as that term
is used in Section 10A(m)(3) of the Exchange Act.
Set forth below is a biographical description of each of our
directors and executive officers as of November 15, 2002.
17
Harley J. Greenfield
Mr. Greenfield has been our Chairman of the Board and Chief
Executive Officer since August 1986 and was our President from August
1986 until December 1997. Mr. Greenfield has been engaged for more
than 30 years in the furniture wholesale and retail business and was
one of the co-founders of the private company, which established the
Jennifer Convertibles concept in 1975. Mr. Greenfield is a member of
the New York Home Furnishings Association.
Edward G. Bohn
Mr. Bohn has been a member of our Board of Directors since February
1995. Mr. Bohn was appointed Chief Financial Officer in March 2001,
of Nova Corp., which constructs and manages the construction of data
centers serving the telecommunications (Internet) industry both
domestically and internationally, after having been a Director and
Consultant since December 1999. He has been a Director of Nuwave
Technology, Inc., which owns and markets video enhancement technology,
since July 1995. Since September 1994, he has operated as an
independent consultant in financial and operational matters. From
January 1983 to March 1994, Mr. Bohn was employed in various
capacities by Emerson Radio, including from March 1993 to March 1994,
as Senior Vice President-Special Projects; and from March 1991 to
March 1993, as Chief Financial Officer and Treasurer/Vice President of
Finance. Prior to March 1991, he was Vice President of Finance and
Treasurer.
Prior to Emerson, Mr. Bohn held positions as an Officer and
Assistant Controller of Jersey Central Power and Light, was
Coordinator of Internal Auditing for the GPU System, controller of a
multi million dollar food manufacturing company, and held various
positions in a public accounting firm. Mr. Bohn has a B.S. from
Fairleigh Dickinson University and is a member of New Jersey State
Society of C.P.A.'s.
Kevin J. Coyle
Mr. Coyle was appointed as a member of our Board of Directors in
February 1995. Mr. Coyle has been a certified public accountant
specializing in litigation support since 1972. , Since January 2000,
Mr. Coyle has been serving as the Chief Financial Officer of
FreshDirect of New York, Inc., a company organized to sell perishable
food products directly to consumers over the Internet. Mr. Coyle
graduated from Queens College with a BS in accounting and is a member
of the American Institute of Certified Public Accountants and the New
York State Society of Certified Public Accountants.
Edward B. Seidner
Mr. Seidner became a member of our Board of Directors in August
1986 and an Executive Vice President in September 1994. From 1977
until November 1994, Mr. Seidner was an officer and a director of the
private company. Mr. Seidner has been engaged for more than 25 years
in the furniture wholesale and retail business. Mr. Seidner is a
member of the New York Home Furnishings Association.
Bernard Wincig
Mr. Wincig became a member of our Board of Directors in September
1986. Mr. Wincig has been an attorney in private practice since 1962.
Mr. Wincig received his Juris Doctor degree from Brooklyn Law School.
Rami Abada
Mr. Abada became our President and a member of our Board of
Directors on December 2, 1997, has been our Chief Operating Officer
since April 12, 1994 and became the Chief Financial Officer on
September 10, 1999. Mr. Abada was our Executive Vice President from
April 12, 1994 to December 2, 1997. Prior to joining us, Mr. Abada
had been employed by the private company since 1982. Mr. Abada is
also a director of CCA Industries, Inc., a public company engaged in
the manufacture and distribution of health and beauty aid products.
Leslie Falchook
Mr. Falchook has been one of our Vice Presidents since September
1986. Mr. Falchook is primarily involved with our internal
operations. Prior to joining us, Mr. Falchook had been employed by
the private company since 1982.
18
Kevin Mattler
Mr. Mattler became our Vice President - Store Operations on April
12, 1994 and has been with us since 1988. Mr. Mattler is involved
with, and supervises, the operation of our stores and, during his
tenure with us; Mr. Mattler has been involved in all facets of our
operations. Prior to joining us, Mr. Mattler had been employed by the
private company since 1982.
Certain of our directors and former officers are defendants in the
litigation described under "Legal Proceedings" above. See also
"Certain Relationships and Related Transactions."
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth compensation paid for the fiscal
years ended August 31, 2002, August 25, 2001 and August 26, 2000, or
such shorter period as such employees were employed by us, to those
persons who were either (a) the chief executive officer as of August
31, 2002 or (b) one of our four other most highly compensated
executive officers or executive employees as of August 31, 2002 whose
total annual salary and other compensation exceeded $100,000
(collectively with the Chief Executive Officer, the "Named Executive
Officers").
Annual Compensation Long-term compensation
Awards Payouts
Securities
Name and Year Salary Bonus Other Restricted Underlying
principal annual Stock options/ LTIP All other
position compensation Awards SARs pay-outs compensation
($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Harley J. 2002 425,000(1) - 335,650(1)(2) - - - 0(1)
Greenfield, 2001 414,400 - 127,234 - 300,000(4) - 0
Chairman of 2000 385,000 50,000 200,714 - 297,047 - 0
the Board
and Chief
Executive
Officer
Rami Abada, 2002 429,400(3) - 335,650(3)(2) - - - 0(3)
President, 2001 414,400 - 127,234 - 150,000(5) - 0
Chief 2000 254,000 50,000 200,714 - 300,000 - 0
Operating
Officer and
Interim
Chief
Financial
Officer
Edward B. 2002 300,000 - - - - - 0
Seidner, 2001 240,000 - - - 100,000(6) - 0
Executive 2000 240,000 - - - - - 0
Vice
President
Kevin 2002 131,000 - 21,530 - - - 0
Mattler, 2001 131,000 - 15,000 - - - 0
Senior Vice 2000 131,000 - - - - - 0
President-
Store
Operations
Leslie 2002 116,000 - - - - - 0
Falchook 2001 116,000 - - - - - 0
Senior Vice 2000 116,000 - - - - - 0
President-
Administration
(1)On August 15, 1999, we entered into a five year renewable
employment agreement with Mr. Greenfield under which Mr. Greenfield
is entitled to a base salary of $400,000, subject to certain cost-
of-living increases, and incentive bonuses based on our earnings
before interest, taxes, depreciation and amortization ("EBITDA")
and revenues. We are providing Mr. Greenfield, at our own expense,
with a split-dollar life insurance policy for his benefit with a
face amount equal to $6,000,000. The premium was $111,000 for the
fiscal year ended August 31, 2002. We are entitled upon death or
termination of the policies to the lesser of cash value of the
policies or the sum of the cash value equal to the sum of our
contributions.
(2)Such amount was accrued with respect to fiscal 2002, but not yet
paid.
19
(3)On August 15, 1999, we entered into a five year renewable
employment agreement with Mr. Abada under which Mr. Abada is
entitled to a base salary of $400,000 for the first three years and
$500,000 thereafter, subject to certain cost-of-living increases,
incentive bonuses based on EBITDA and revenues, and stock options
to purchase 300,000 shares of our common stock at $3.51 per share
which were granted to Mr. Abada in August of 1999. We are
providing Mr. Abada, at our own expense, with a split-dollar life
insurance policy for his benefit with a face amount equal to
$3,000,000. The premium was $32,000 for the fiscal year ended
August 31, 2002. We are entitled upon death or termination of the
policies to the lesser of cash value of the policies or the sum of
the cash value equal to the sum of our contributions.
(4)On January 12, 2001, Mr. Greenfield was granted options to
purchase 300,000 shares of our common stock at $3.52 per share.
(5)On January 12, 2001, Mr. Abada was granted options to purchase
150,000 shares of our common stock at $3.52 per share.
(6)On January 12, 2001, Mr. Seidner was granted options to purchase
100,000 shares of our common stock at $3.52 per share.
Director Compensation
Non-employee directors currently receive a fee of $10,000 per year,
plus $500 per meeting attended which fees amounted to an aggregate of
$21,000 in fiscal 2002. Directors are reimbursed for out-of-pocket
expenses incurred in connection with their services as such.
Stock Option Plans
We have Incentive and Non-Qualified Stock Option Plans, pursuant to
which, as of August 31, 2002, options to purchase an aggregate of
783,047 shares of our common stock were outstanding and under which
options to purchase an aggregate of 66,953 shares of common stock were
available for grant. In addition, options granted outside of these
plans to purchase an additional 1,361,230 shares of common stock were
outstanding as of August 31, 2002. These plans are administered by a
Stock Option Committee consisting of two persons appointed by the
Board of Directors. Options outside of the Plans are administered by
the full Board of Directors. As of August 31, 2002, this committee
consisted of Harley Greenfield and Edward B. Seidner. The committee
has full and final authority (a) to determine the persons to be
granted options, (b) to determine the number of shares subject to each
option and whether or not options shall be incentive stock options or
non-qualified stock options, (c) to determine the exercise price per
share of the options which, in the case of incentive stock options,
may not be less per share than 100% of the fair market value per share
of the common stock on the date the option is granted or, in the case
of a stockholder owning more than 10% of our capital stock, not less
per share than 110% of the fair market value per share of the common
stock on the date the option is granted, (d) to determine the time or
times when each option shall be granted and become exercisable and (e)
to make all other determinations deemed necessary or advisable in the
administration of the plans. In determining persons who are to
receive options and the number of shares to be covered by each option,
the Stock Option Committee considers the person's position,
responsibilities, service, accomplishments, present and future value
to us, the anticipated length of his future service and other relevant
factors. Members of this committee are not eligible to receive
options under these plans or otherwise during the period of time they
serve on the committee and for one year prior thereto, but may receive
options after their term on the committee is over. Officers and
directors, other than members of the committee, may receive options
under these plans. The exercise price of all options granted under or
outside of these plans equaled or exceeded the market value of the
underlying shares on the date of grant.
Option grants in last fiscal year
None.
20
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
August 31, 2002 (%) August 31,2002 ($)(1)
Shares Value
Acquired on Realized ($) Exercisable Unexercisable
Name Exercise($) Shares % Shares % Exercisable Unexercisable
Harley J. N/A N/A 298,032 18.5% 200,000 37.5% $424,359 $299,178
Greenfield(2)(3)(9)
Rami N/A N/A 550,000 34.1% 100,000 18.7% 579,000 58,000
Abada(3)(5)(6)(7)(10)
Edward B. N/A N/A 33,333 2.1% 66,667 12.5% 19,333 38,667
Seidner(3)(11)
Leslie N/A N/A 50,000 3.1% 0 0.0% 105,000 0
Falchook(3)(4)
Kevin Mattler(3)(8) N/A N/A 50,000 3.1% 0 0.0% 105,000 0
(1) Amount reflects the market value of the underlying shares of our
common stock as reported on the Bulletin Board on August 31, 2002,
a bid price of $4.10, less the exercise price of each option.
(2) Includes 297,047 options granted on August 10, 2000 at an
exercise price of $ 2.25 per share.
(3) All options were granted at an exercise price at least equal to
the market value of the underlying common stock on the date of
grant.
(4) Includes 50,000 options granted on May 6, 1997 to Mr. Falchook
at an exercise price of $2.00 per share in exchange for the
cancellation of 20,000 options granted on January 25, 1993 to
Mr. Falchook at an exercise price of $13.125 per share.
(5) Includes 100,000 options granted on May 6, 1997 to Mr. Abada at
an exercise price of $2.00 per share.
(6) Includes 100,000 options granted on December 3, 1997 to
Mr. Abada at an exercise price of $2.44 per share.
(7) Includes 300,000 options granted on August 15, 1999 to Mr. Abada
at an exercise price of $3.51 per share.
(8) Includes 50,000 options granted on May 6, 1997 to Mr. Mattler at
an exercise price of $2.00 per share.
(9) Includes 300,000 options granted on January 12, 2001 to
Mr. Greenfield at an exercise price of $3.52 per share.
(10) Includes 150,000 options granted on January 12, 2001 to
Mr. Abada at an exercise price of $3.52 per share.
(11) Includes 100,000 options granted on January 12, 2001 to
Mr. Seidner at an exercise price of $3.52 per share.
21
COMPARISON OF 5 YEAR COMULATIVE TOTAL RETURN*
AMONG JENNIFER CONVERTIBLES, INC., THE NASDAQ
STOCK MARKET (U.S.) INDEX AND A PEER GROUP
GRAPH
JENNIFER CONVERTIBLES, INC.
22
Transaction Closing Beginning Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** No. Of Per Share Paid Reinvested Shares Return
Shares***
31-Aug-97 Year End 2.500 40.00 40.000 100.00
31-Aug-98 Year End 1.813 40.00 40.000 72.50
31-Aug-99 Year End 2.109 40.00 40.000 84.38
31-Aug-00 Year End 2.375 40.00 40.000 95.00
31-Aug-01 Year End 1.985 40.00 40.000 79.40
31-Aug-02 End 4.100 40.00 40.000 164.00
- ------------------
* Specified ending dates or ex-dividends dates.
** All Closing Prices and Dividends are adjusted for stock splits and
stock dividends.
*** `Begin Shares' based on $100 investment.
Cumulative Total Return
8/97 8/98 8/99 8/00 8/01 8/02
JENNIFER CONVERTIBLES, INC. 100.00 72.50 84.38 95.00 79.40 164.00
CONVERTIBLES, INC.
NASDAQ STOCK MARKET (U.S.) 100.00 94.49 244.89 268.23 114.72 84.15
PEER GROUP 100.00 102.21 104.98 91.57 131.63 132.81
JENNIFER CONVERTIBLES INC.
23
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth, as of November 15, 2002,
information regarding the beneficial ownership of our common stock by
(a) each person who is known to us to be the owner of more than five
percent of our common stock, (b) each of our directors, (c) each of
the executive employees whose total annual salary and other
compensation for fiscal year 2002 exceeded $100,000, and (d) all
directors and executive officers and executive employees as a group.
Information as to David A. Belford and the Pacchia, Grossman, Shaked,
Wexford Group, Hans J. Klaussner and Klaussner is based on Schedules
13D filed by such persons or group and information as to M. Shanken
Communications, Inc. is based on a Schedule 13G filed by such entity:
Name and Address of Amounts and Percent of
Beneficial Owner Nature of Class
Beneficial
Ownership (1)
Harley J. Greenfield(2) 1,196,321(2)(3) 21.0%
Edward B. Seidner(2) 763,047(2)(4) 13.4
Fred J. Love(2) 585,662(2)(5)(6) 10.3
Jara Enterprises, Inc. (the 293,579(6) 5.1
private company)(2)
David A. Belford(7) 394,000(7) 6.9
Pacchia, Grossman, Shaked, 482,100(8) 8.5
Wexford Group(8)
M. Shanken Communications, Inc.(9) 322,000(9) 5.6
Bernard Wincig(10) 165,239(10) 2.9
Edward G. Bohn(11) 46,166(11) 0.8
Kevin J. Coyle(11) 52,916(11) 0.9
Leslie Falchook(12) 77,600(12) 1.4
Rami Abada(2)(13) 603,001(13) 10.6
Kevin Mattler(14) 50,000(14) 0.9
Hans J. Klaussner and Klaussner 1,430,700(15) 20.0
Furniture Industries, Inc.(15)
All directors and executive 2,959,290(2)(3)(4) 51.9
officers and executive employees (10)(11)(12)(13)
as a group (eight (8) persons) (14)
- ----------------------------
(1) All of such shares are owned directly with sole voting and
investment power, unless otherwise noted below.
(2) The address of Messrs. Greenfield, Abada and Seidner is c/o
Jennifer Convertibles, Inc., 419 Crossways Park Drive, Woodbury,
New York 11797. The address of Fred J. Love and the private
company is One Ames Court, Plainview, New York 11803.
Mr. Greenfield and Mr. Love are brothers-in-law.
(3) Includes (a) 292,831 shares underlying options granted to
Mr. Greenfield by Mr. Love and the private company, over which
Mr. Greenfield has no voting power but has shared dispositive
power, as such shares may not be disposed of without his consent
and (b) 300,000 shares of common stock underlying options to
acquire convertible preferred stock granted to Mr. Greenfield by
Klaussner, and (c) 99,016 shares of our common stock underlying
options which are currently exercisable options, but does not
include 498,031 shares of our common stock underlying options which
are not currently exercisable. See "Executive Compensation"
(4) Includes 292,831 shares underlying the options granted to
Mr. Seidner by Mr. Love and the private company, over which
Mr. Seidner has no voting power but has shared dispositive power,
as such shares may not be disposed of without his consent. Does
not include 66,667 shares of our common stock underlying options
which are not currently exercisable.
(5) Includes 293,579 shares of common stock owned by the private
company, over which Mr. Love has sole voting and dispositive power,
which, together with 292,083 shares owned directly by Mr. Love, are
subject to the options granted to Mr. Greenfield by Mr. Love and
the options granted to Mr. Seidner by Mr. Love and the private
company, and which may not be disposed of without the consent of
the relevant optionee.
(6) All of such shares are beneficially owned by Mr. Love, the sole
stockholder of the private company. Includes shares of our common
stock owned by three of the private company's wholly-owned
subsidiaries. Mr. Love has sole voting and shared dispositive
power over such shares, as such shares are subject to the options
granted by him to Mr. Greenfield and Mr. Seidner and may not be
disposed of without the consent of the relevant optionee. The
private company's address is One Ames Court, Plainview, New York
11803.
(7) The address of David A. Belford is 2097 S. Hamilton Road, Suite
200, Columbus, Ohio 43232.
(8) Represents the shares of our common stock owned by a group which
was formed to object to the prior proposed settlement of the
derivative litigation referred to in "Legal Proceedings." The group
24
consists of the following persons and entities, each of which has the
sole and shared power to vote and dispose, and total beneficial
ownership, of the shares of common stock set forth opposite such
persons' or entity's name: (1) Anthony J. Pacchia - sole 11,000,
shared 20,700, total 31,700; (2) F&Co., Inc. as Custodian for Pacchia
under IRA Account - sole 16,000, shared 15,700, total 31,700; (3)
Anthony J. Pacchia, P.C., (Money Purchase) fbo Pacchia - sole 2,500,
shared 29,200, total 31,700; (4) Sandra Pacchia Custodian for Lee
Pacchia - sole 1,100, shared 30,600, total 31,700; (5) Sandra Pacchia
Custodian for Tom Pacchia - sole 1,100, shared 30,600, total 31,700;
(6) Anthony T. Pacchia and Gloria Pacchia - sole 1,000, shared 15,000,
total 16,000; (7) Anthony T. Pacchia, IRA Rollover - sole 15,000,
shared 1,000, total 16,000; (8) Kenneth S. Grossman, Trustee, Profit
Sharing Plan DLJSC - Custodian fbo Kenneth S. Grossman - sole 96,400,
shared 3,500, total 99,900; (9) Kenneth S. Grossman - 3,500 sole,
96,400 shared, total 99,900; (10) IRA fbo Patricia Berger, DLJSC as
custodian - sole 3,500, shared 0, total 3,500, (11) Ellen Grossman,
Custodian for Andrew Grossman UGMA/ NY - sole 5,000, shared 0, total
5,000; (12) IRA fbo Howard Berger, DLJSC as custodian - sole 3,500,
shared 0, total 3,500; (13) IRA fbo Jill Berger, DLJSC as custodian,
Rollover Account - sole 3,500, shared 0, total 3,500; (14) IRA fbo
Herbert Berger, DLJSC as custodian - sole 5,000, shared 0, total
5,000; (15) Marilyn Levy - sole 5,000, shared 0, total 5,000; (16)
Ellen Grossman, Custodian for Joshua Grossman UGMA/NY - sole 5,000,
shared 0, total 5,000; (17) Amir Shaked - sole 37,700, shared 1,300,
total 39,000; (18) IRA fbo Amir Shaked - sole 1,300, shared 37,700,
total 39,000; (19) Wexford Special Situations 1996, L.P. - sole 0,
shared 142,783, total 142,783; (20) Wexford Special Situations 1996
Institutional L.P. - sole 0, shared 25,764, total 25,764; (21) Wexford
Special Situations 1996 Limited - sole 0, shared 7,859, total 7,859;
(22) Wexford-Euris Special Situations 1996, L.P. - sole 0, shared
36,094, total 36,094; (23) Wexford Management LLC - sole 0, shared
212,500, total 212,500; (24) IRA fbo Zachery Goldwyn - sole 52,500,
shared 0, total 52,500. The address for group members (a) 1-5 is 602
Orchard Street, Cranford, New Jersey 07106, (b) 6 and 7 is 31 Center
Board Drive, Bayville, New Jersey 08721, (c) 8-9, 11, 16, 17 and 18 is
620 Fifth Avenue, 7th Floor, New York, New York 10020, (d) 10 and 14
is 31 Wisconsin Avenue, N. Massapequa, New York 11578, (e) 12 and 13
is 58 Alpine Way, Dix Hills, New York 11746, (f) 15 is 155 East 76th
Street, New York, New York 10022, (g) 19-21 and 23-24 is 411 West
Putnam Avenue, Greenwich, Connecticut 06830, and (h) 22 is c/o
Hemisphere Fund Managers Ltd., Harbour Centre, Georgetown, Grand
Cayman Islands, B.W.I.
(9) The address of M. Shanken Communications, Inc. is 387 Park
Avenue South, New York, New York 10022.
(10) Includes 8,800 shares of our common stock owned by Mr. Wincig's
wife and 45,666 shares of our common stock underlying exercisable
options. Does not include 8,334 shares of our common stock
underlying options which have not yet vested.
(11) Includes, as to each individual, 66,667 shares of our common
stock underlying exercisable options, but does not include 33,333
shares of our common stock underlying options which are not
currently exercisable.
(12) Includes 50,000 shares of our common stock underlying options
which are currently exercisable options.
(13) Includes 550,000 shares of our common stock underlying options
which are currently exercisable options, but does not include
100,000 shares of our common stock underlying options which are not
currently exercisable.
(14) Includes 50,000 shares of our common stock underlying
exercisable options.
(15) Represents 1,424,500 shares underlying convertible preferred
stock issued to Klaussner in connection with Klaussner's $5,000,000
investment. Includes 300,000 shares of common stock subject to
options to acquire preferred stock granted to Mr. Greenfield by
Klaussner subsequent to November 30, 1999. See "Certain
Relationships and Related Transactions." Based on information
contained in the Schedule 13D filed by Klaussner and its owner,
Hans J. Klaussner, Mr. Klaussner is the sole stockholder of the
parent of Klaussner and, accordingly, may be deemed the beneficial
owner of the shares owned by Klaussner. Does not include 18,730
shares of our common stock underlying options which are not
currently exercisable. The principal address of Klaussner is 405
Lewallen Street, Asheboro, North Carolina 27203. Hans J.
Klaussner's address is 7614 Gegenbach, Germany.
The preceding information is based on our review of reports filed
by our directors, executive officers and 10% shareholders on Forms 3,
4 and 5 pursuant to Section 16 of the Securities Exchange Act of 1934,
and all such reports were filed on a timely basis during fiscal year
2002.
25
Equity Compensation Plan Information
The following table provides information about shares of our
common stock that may be issued upon the exercise of options under all
of our existing compensation plans as of August 31, 2002.
Number of securities
remaining available for
future issuace under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding)
of outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan category (a) (b) (c)
Equity compensation 783,047 $ 2.21 566,953
plans approved
by security holders (1)
Equity compensation 1,361,230 $ 3.29 -
plans not approved by
security holders (2)
Total 2,144,277 $ 2.81 566,953
(1) Reflects aggregate options outstanding and available for grant
under our Incentive and Non-Qualified Stock Option Plans.
(2) Reflects aggregate options outstanding outside our Incentive and
Non-Qualified Stock Option Plans that were issued pursuant to
individual stock option agreements.
Item 13. Certain Relationships and Related Transactions.
Until November 1994, Harley J. Greenfield, Fred J. Love and Edward
B. Seidner, each owned 33- 1/3% of the private company, which,
together with its subsidiaries, owns or licenses the private company
stores. In November of 1994, Messrs. Greenfield and Seidner sold
their interests in the private company for long-term notes and options
to purchase the shares of our common stock that were owned by
Mr. Love and the private company. As a result of such sale, Mr. Love
now beneficially owns 100% of the private company. The private
company is responsible for the warehousing for our stores, and the private
company stores, and leases and operates the warehouse facilities for such
stores. Until December 31, 1993, the private company was also responsible
for purchasing and certain advertising and promotional activities for our
owned stores, our licensed stores and the private company stores. Effective
January 1, 1994, we assumed the responsibility for purchasing and advertising
for our stores. The private company is responsible for a share of
all advertising production costs and costs of publication of
promotional material within the New York area. Until October 28,
1993, a corporation of which Messrs. Greenfield, Seidner and Love each
owned 33-1/3%, owned the trademarks "Jennifer Convertibles" and "With
a Jennifer Sofabed, There's Always a Place to Stay." On October 28,
1993, these trademarks were assigned to us from such corporation for
nominal consideration, and we agreed to license such trademarks to the
private company in New York, as described below. Mr. Love is, and
until November 1994, Mr. Seidner was, an executive officer and
director of the private company.
As noted above, in November 1994, Mr. Greenfield and Mr. Seidner
sold their interests in the private company in exchange for long-term
promissory notes from the private company and options to purchase
shares of our common stock that were owned by the private company and
Mr. Love. These notes are due in December 2023. Only interest was
payable on the notes until December 1, 2001 and, thereafter, principal
is payable on a monthly basis through the maturity date. The
aggregate principal amount of the notes is $10,273,204, of which
$5,136,602 is owed to Mr. Greenfield and $5,136,602 is owed to
Mr. Seidner. The notes bear interest at a rate of 7.5% per annum,
although a portion of such interest was deferred for a period of time.
During the fiscal year ended August 31, 2002, Mr. Greenfield and
Mr. Seidner each received approximately $330,000 interest on their
26
promissory notes from the private company. The notes are secured by a
security interest in the private company's personal property. Mr.
Love's personal guaranty of the notes was released by Messrs.
Greenfield and Seidner in connection with the tentative settlement of
the litigation between the private company and us. The options owned
by Mr. Greenfield and Mr. Seidner to purchase the Jennifer
Convertibles common stock owned by Mr. Love and the private company
referred to above are exercisable at a price of $15.00 per share until
they expire on November 7, 2004, for an aggregate of 585,662 shares of
such common stock, of which 292,831 options are owned by
Mr. Greenfield and 292,831 by Mr. Seidner. In addition,
Mr. Greenfield and Mr. Seidner each owe significant amounts to the
private company.
In July 2001, the private company and we 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 us. Effectiveness of the agreements is
subject to certain conditions, including court approval. We also
entered into an Interim Operating Agreement designed to implement
certain of the provisions of the settlement agreement prior to court
approval.
The material terms of the settlement agreements are as follows:
Pursuant to a Warehouse Transition Agreement, the private company
will transfer to us the assets related to the warehouse system
currently operated by the private company and we will assume
responsibility for the leases and other costs of operating the
warehouse. Pursuant to computer hardware and software agreements, we
will also assume control of and responsibility for, the computer
system used in the operations of the warehouse systems and stores
while providing the private company with access to necessary services.
Pursuant to a Warehousing Agreement, we will be obligated to provide
warehouse services to the private company of substantially the type
and quality that the private company formerly provided to us. During
the first five years of the agreement, we will receive a fee of 2.5%
on the net sales price of goods sold by the private company up to
$27,640,000 in sales, and 5% on net sales over $27,640,000. After
five years, we will receive a fee of 7.5% of all net sales by the
private company. In addition, during the full term of the agreement,
we will receive a fee for fabric protection and warranty services at
the rate we were being charged, subject to documented cost increases.
Pursuant to a Purchasing Agreement, we will continue to purchase
merchandise for ourselves and the private company on substantially the
same terms as our current terms, except that the private company will
have 85 days to pay the amounts due.
We will also receive, for no cost, the limited partnership
interests in limited partnerships currently operating 48 stores. We
currently own the general partnership interest in such limited
partnerships. The operations of these stores are currently included
in our consolidated financial statements. Accordingly, this will not
materially impact our financial statements. However, after the
settlement, we will wholly own the partnerships operating the stores.
Under a Management Agreement and License, we will be responsible
for managing the sales of the private company's stores so that the
stores will be substantially the same as our own stores, provided the
private company is not obligated to spend more than $25,000 per store
or $100,000 in any 12-month period on maintenance and improvements to
its stores. If the private company's sales exceed $27,640,000 in a
year, we will receive a management fee of 48% of the excess in the
first two years, and thereafter, 10% of excess up to $29,640,000, and
48% of any excess over $29,640,000. We will also have the right to
open an unlimited number of stores in New York and will pay a royalty
of $400,000 per year, which will also cover the stores recently opened
in New York. We intend to open stores aggressively in New York.
Because we may negatively impact the private company's sales by
opening additional stores of our own within the state of New York and
because we will be managing the private company's stores, we agreed to
pay the private company 10% of the amount by which their yearly net
sales for any 12 month period are below $27,640,000, provided that if
their yearly net sales fall below $26,000,000, we will pay the private
company 15% of such shortfall amount, provided further that such
amounts together with amounts we may pay for advertising if the
private company's sales drop below $27,640,000 shall not, in the
aggregate, exceed $2,700,000 in any 12 month period. Messrs.
Greenfield and Seidner, each an officer, director and principal
stockholder of our company, have agreed to be responsible for up to an
aggregate of $300,000 of amounts due under these provisions in each
year.
The private company has the right to close stores and, if it does,
we have the right to purchase them for the cost of the related
inventory (typically, approximately $50,000) and, subject to obtaining
any necessary landlord's consent, continue the operations of the
stores for our own account. The closing of stores by the private
company does not affect our obligation to pay the private company for
shortfalls in its sales.
The private company shall contribute $125,750 per month to
advertising, provided that such amount shall be reduced by the lesser
27
of $80,000 or 1% of our sales in New York (other than sales of leather
furniture and sales from six stores in New York that we have owned for
many years). In addition, subject to certain exceptions, if the
private company's sales in any 12 month period commencing as of
January 1, 2002, are less than $27,640,000, we will pay the private
company (or reduce the advertising payment they owe us) by an amount
equal to 50% of the amount by which their sales are below $27,640,000
provided that the amount of such reduction in any 12-month period,
plus any payments of the 10-15% with respect to sales shortfalls as
described above, will not exceed $2,700,000 in the aggregate.
The Management Agreement and License expire in 2049 and may be
terminated by an arbitrator for material breach. The Management
Agreement also terminates upon purchase by us of the private company's
stores pursuant to the Option Agreement described below. If
terminated for a reason other than a purchase, we would be obligated
not to sell furniture other than leather furniture in New York, except
in certain counties, and, accordingly, would have to either sell our
Jennifer Convertibles stores to the private company, close them or
convert them to Jennifer Leather stores. In addition, in case of such
termination, we would have to make up certain shortfalls, if any, in
the private company's sales in cash or by delivery of stores in New
York that meet certain sales volume requirements.
In settlement of certain disputes for amounts due us from the
private company, the private company will execute three notes to us in
the aggregate principal amount of $2,600,000, plus amounts owed at the
closing date for purchasing and other services, including a
note in the principal amount of $200,000, which is due over three
years and bears interest at 6% per annum, a note in the principal
amount of $1,400,000, which is due over five years and bears interest
at 6% per annum, and a note for the remaining principal amount, which
is due, with respect to the amount in excess of $1 million, if any,
within ninety days, and with respect to the balance, if any, over five
years without interest.
Pursuant to an Option Agreement, we will receive the option to the
purchase the assets relating to private company's stores for a period
of 10 years beginning on the tenth anniversary of entering into the
Definitive Agreements at a purchase price starting at $8,125,000, plus
the assumption of approximately $5,000,000 in principal of notes due
to Messrs. Greenfield and Seidner, and decreasing over the term of the
option. If we exercise the Option Agreement, the private company will
enter into an Asset Purchase Agreement in the form attached to the
Option Agreement.
Under an Interim Operating Agreement, we will operate in most
respects as if a closing under the agreements summarized above had
occurred, except that the private company will not transfer the
warehouse assets, computer system or limited partnership interests.
However, we will operate the warehouse system and manage the private
company stores as if the closing had occurred and we will be able to
continue to open stores in New York as if such closing had occurred.
If, for any reason, the court fails to approve the settlement and
there is no appeal, the Interim Operating Agreement will terminate.
In such case, everything would go back to the way it was before such
agreement was signed, except that we would have a license to continue
to operate the stores we open in New York for a royalty of $400,000
per year plus 5% of net sales in New York, except for sales of leather
furniture and from certain of the older New York stores owned by us.
Under the Interim Operating Agreement, we paid $200,000 as a one-
time royalty fee for opening four additional stores in New York, which
was accounted for in fiscal year 2001.
The main impact of the Interim Operating Agreement is that we
receive the benefits of operating the warehouse system, net of the
related costs. We no longer have to pay the private company amounts
for warehousing and fabric protection. We also generate additional
revenues from services to the private company. However, offset
against these savings are the expenses of operating the warehouse,
including estimated annual rent of $1,000,000, as well as other
operating expenses, including personnel. Based on our current
estimates of the other expenses of operating the warehouse and the
estimated amounts payable by us to the private company pursuant to the
settlement agreement, we expect that the agreement will improve our
operating results by an estimated $700,000 each year. For fiscal 2002,
the effect was $1,254,000. There is no assurance that the agreement
will improve our future operating results to the extent we estimate or
at all.
In addition, we will be able to open additional stores in New York,
will manage the private company's stores and will be subject to the
possibility of having to make payments, for periods commencing after
January 2002, in respect of any shortfall in the private company's
sales.
One other consequence of operating under the Interim Operating
Agreement is that the private company now has 85 days to pay for
merchandise purchased by us for the private company's account. The
extended payment terms slow our cash flow from the private company
and, based on purchases by the private company, in fiscal 2002, the
adverse impact on cash flow was approximately $1.5 million, compared
to the amount of cash we would have received from the private company
under the prior payment terms of 30 days from invoice.
28
A monitoring committee will be set up to review, on an on-going
basis, the relationships between the private company and us in order
to avoid potential conflicts of interest between us. The monitoring
committee will consist of two persons, Kenneth Grossman, one of the
parties objecting to the original settlement between the private
company and us, and Edward Bohn, a current member of our board, each
of whom will be paid $50,000 per year for their services. The
monitoring committee will remain in effect for five years after the
approval of the settlement by the court.
As of August 31, 2002, the private company owed to us $3,296,000
for current charges for fiscal 2002, which have since been fully paid.
Amounts owed by the private company to us as of August 31, 2002, which
consist of unpaid amounts from fiscal 1996 and prior years totaling
$4,754,000, are reserved in the accompanying consolidated financial
statements due to uncertain collectibility. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Prior to the agreements signed in July 2001, the following
agreements were in effect:
Pursuant to a license agreement between the private company and us,
the private company had the perpetual, royalty-free right to use,
sublicense and franchise the use of the trademarks "Jennifer
Convertiblesr," with "Jennifer Sofabeds, There's Always a Place to
Stayr" in the state of New York. The license is exclusive in that
territory, and subject to certain exceptions, including nine stores
operated by us in New York on a royalty-free basis and up to two
additional stores that the private company has agreed may be opened in
New York on a royalty-free basis.
As set forth in "Business-Warehousing and Related Services," the
private company provided certain warehouse facilities and related
services, including arranging for goods to be delivered to such
facilities and to customers pursuant to a warehousing agreement
between the private company and us. The private company also provided
fabric protection services, including a lifetime warranty, to our
customers and our licensees.
By agreement dated November 1, 1995, the private company and we
agreed as to certain amounts owed to each other, as of August 26,
1995, as well as amounts owed by certain of our consolidated licensees
other than Southeastern Florida Holding Corp., which we refer to as
the "Private Licensees." In addition, the private company agreed to
assume the obligations of the Private Licensees referred to above and
to offset the amounts owed to us by the private company against the
amounts owed to the private company by us. Pursuant to the Offset
Agreement dated March 1, 1996, we agreed to continue to offset, on a
monthly basis, amounts owed by the private company and the Private
Licensees to us for purchasing, advertising, and other services and
matters against amounts owed by us to the private company for warehousing
services, fabric protection, freight and other services and matters.
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 result was that fabric protection revenue that we would
have recognized as revenue immediately was treated as deferred income
on our balance sheet and, if not for the amendment to the agreement
with the private company referred to in the following paragraph, would
have been recognized in proportion to the costs expected to be
incurred in performing services under the plan.
As this accounting treatment was an unintended result 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
$400,000 payable in eight installments of $50,000, the private company
will be responsible for fabric protection claims made after June 23,
2002 for previously sold merchandise and, for $50,000 per month,
subject to adjustment based on the annual volume of sales of the
fabric protection plans, and will be responsible for fabric protection
claims made with respect to all merchandise sold between June 23, 2002
and August 28, 2004, subject to an extension of the term at our option
through August 27, 2005. Accordingly, we recognized the $2,121,000 of
deferred revenue as of May 25, 2001 as revenue in fiscal 2002.
Additional Matters
Rami Abada, our President, Chief Operating Officer and Chief
Financial Officer, owned two corporations each owned a licensed
Jennifer Convertibles store. On March 23, 2000, Mr. Abada sold these
two stores to the private company for the sum of $300,000. As of
August 31, 2002, he has received $242,000 and is owed $58,000 from the
private company.
From time to time, the private company and we use the services of
Wincig & Wincig, a law firm of which Bernard Wincig, one of our
directors and stockholders, is a partner. Mr. Wincig and his firm
received approximately $156,000 of legal fees from the LP's and us and
an aggregate of approximately $15,000 from the private company during
the fiscal year ended August 31, 2002.
29
In fiscal 2002, Klaussner gave us $1,447,000 of allowances for a
repair program.
Item 14. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Our
principal executive officer and principal financial officer, after
evaluating the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c))
on September 23, 2002, have concluded that, based on such evaluation,
our disclosure controls and procedures were adequate and effective to
ensure that material information relating us, including our
consolidated subsidiaries, was made known to them by others within
those entities, particularly during the period in which this Annual
Report on Form 10-K was being prepared.
(b) Changes in Internal Controls. There were no significant
changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation, nor were there any significant deficiencies or material
weaknesses in our internal controls. Accordingly, no corrective
actions were required or undertaken.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) Financial Statements.
The financial statements required by this item are submitted in a
separate section beginning on Page F-1 of this report.
(2) Financial Statement Schedules
Schedules have been omitted because of the absence of conditions
under which they are required or because the required information
is included in the financial statements or notes thereto.
30
(3) Exhibits.
3.1 Certificate of Incorporation, incorporated herein by
reference to Exhibit 3.1 to our Registration Statement -
File Nos. 33-22214 and 33-10800.
3.2 Certificate of Designations, Preferences and Rights of
Series A Preferred Stock, incorporated herein by reference
to Exhibit 3.2 to our Annual Report on Form 10-K for the
year ended August 30, 1997.
3.3 Certificate of Designations, Preferences and Rights of
Series B Preferred Stock, incorporated herein by reference
to Exhibit 3.3 to our Annual Report on Form 10-K for the
year ended August 29, 1998.
3.4 By-Laws, incorporated herein by reference to Exhibit 3.2
to our Annual Report on Form 10-K for the year ended
August 26, 1995.
10.1 Incentive and Non-Qualified Stock Option Plan,
incorporated herein by reference to Exhibit 10.4 to the
Registration Statement.
10.2 Amended and Restated 1991 Incentive and Non-Qualified
Stock Option Plan incorporated herein by reference to
Exhibit 10.29 to the Registration Statement on Form S-2.
10.3 Warehousing Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jennifer
Warehousing, Inc., incorporated herein by reference to our
Quarterly Report on Form 10-Q for the quarterly period
ending February 26, 1994.
10.4 Purchasing Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jara Enterprises,
Inc., incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ending
February 26, 1994.
10.5 Advertising Agreement, dated as of December 31, 1993,
between Jennifer Convertibles, Inc. and Jara Enterprises,
Inc., incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ending
February 26, 1994.
10.6 Amendment No. 1 to Warehousing Agreement, dated as of May
28, 1994, amending the Warehousing Agreement referred to
in 10.3 and the related Rebate Note, incorporated herein
by reference to Exhibit 10.34 to our Annual Report on Form
10- K for the fiscal year ended August 27, 1994.
10.7 Amendment No. 1 to Purchasing Agreement, dated as of May
28, 1994, amending the Purchasing Agreement referred to in
10.4., incorporated herein by reference to Exhibit 10.35
to our Annual Report on Form 10-K for the fiscal year
ended August 27, 1994.
10.8 License Agreement, dated as of October 28, 1993, among
Jennifer Licensing Corp. and Jara Enterprises, Inc.,
incorporated herein by reference to Exhibit 2 to our
Current Report on Form 8-K dated November 30, 1993.
10.9 Agreement, dated as of May 19, 1995, among Jennifer
Convertibles, Inc., Jennifer Purchasing Corp., Jara
Enterprises, Inc. and the licensees signatory thereto,
incorporated herein by reference to Exhibit 10.38 to our
Annual Report on Form 10- K for the fiscal year ended
August 26, 1995.
10.10 Agreement, dated as of November 1, 1995, among Jennifer
Convertibles, Inc., Jennifer Purchasing Corp., Jara
Enterprises, Inc. and the licensees signatory thereto,
incorporated herein by reference to Exhibit 10.39 to our
Annual Report on Form 10- K for fiscal year ended August
26, 1995.
10.11 Form of Note, dated November 1994, made by Jara
Enterprises, Inc. to Harley J. Greenfield and Edward B.
Seidner, incorporated herein by reference to Exhibit 10.43
to our Annual Report on Form 10-K for the fiscal year
ended August 26, 1995.
10.12 Form of Option, dated November 7, 1994 to purchase common
stock from Fred Love, Jara Enterprises, Inc. and certain
subsidiaries to Harley J. Greenfield and Fred Love,
incorporated herein by reference to Exhibit 10.44 to our
Annual Report on Form 10-K for the fiscal year ended
August 26, 1995.
10.13 Form of Subordination Agreement, dated as of August 9,
1996, by Harley J. Greenfield and Edward B. Seidner,
incorporated herein by reference to Exhibit 10.45 to our
Annual Report on Form 10-K for the fiscal year ended
August 26, 1995.
31
(3) Exhibits.
10.14 Credit and Security Agreement, dated as of March 1, 1996,
among Klaussner Furniture Industries, Inc., Jennifer
Convertibles, Inc. and the other signatories thereto,
incorporated herein by reference to Exhibit 4 to our
Current Report on Form 8-K dated March 18, 1996.
10.15 1997 Stock Option Plan, incorporated herein by reference
to Exhibit 10.29 to our Annual Report on Form 10-K for the
fiscal year ended August 31, 1997.
10.16 Stock Purchase Agreement, dated December 11, 1997, between
Klaussner and Jennifer Convertibles, Inc., incorporated
herein by reference to Exhibit 10.30 to our Annual Report
on Form 10-K for fiscal year ended August 30, 1997.
10.17 Registration Rights Agreement, dated December 11, 1997,
between Klaussner and Jennifer Convertibles, Inc.,
incorporated herein by reference to Exhibit 10.31 to our
Annual Report on Form 10-K for fiscal year ended August
30, 1997.
10.18 Waiver and Modification Agreement, dated December 11,
1997, among Klaussner and related entities and Jennifer
Purchasing Corp., Jennifer Convertibles, Inc., Jennifer
Licensing Corp., and Jennifer L.P. III, incorporated
herein by reference to Exhibit 10.32 to our Annual Report
on Form 10-K for the fiscal year ended August 30, 1997.
10.19 L.P. and Option Purchase and Termination Agreement, dated
as of August 20, 1999, among Jennifer Convertibles, Inc.,
Jennifer Chicago Ltd., an Illinois corporation and a
wholly-owned subsidiary of Jennifer Convertibles, Inc.,
Jenco Partners, L.P., a limited partnership, which is the
sole limited partner of Jennifer Chicago, L.P., a Delaware
Limited partnership, JCI Consultant, L.P., a limited
partnership which owned certain options to purchase
capital stock of Jennifer Convertibles, Inc., Selig Zises,
a principal of Jenco Partners, L.P. and JCI Consultant,
L.P., Jay Zises, Jara Enterprises, Inc., Fred J. Love,
and, Harley J. Greenfield and Edward B. Seidner,
incorporated herein by reference to our Current Report on
Form 8-K dated August 20, 1999 and filed September 3, 1999
reporting on an Item 5 event.
10.20 General Release, made as of August 20, 1999, by JCI
Consultant, L.P., Jenco Partners L.P., Jay Zises and Selig
Zises for the benefit of Jennifer Convertibles, Inc.,
Jennifer Chicago Ltd., Jara Enterprises, Inc., Harley J.
Greenfield, Fred J. Love and Edward B. Seidner,
incorporated herein by reference to our Current Report on
Form 8-K dated August 20, 1999 and filed September 3, 1999
reporting on an Item 5 event.
10.21 General Release, made as of August 20, 1999, by Jennifer
Convertibles, Inc., Jennifer Chicago Ltd., Jara
Enterprises, Inc., Harley J. Greenfield, Fred J. Love an
Edward B. Seidner for the benefit of JCI Consultant, L.P.,
Jenco Partners L.P., Jay Zises and Selig Zises,
incorporated herein by reference to our Current Report on
Form 8-K dated August 20, 1999 and filed September 3, 1999
reporting on an Item 5 event.
10.22 Note, dated as of September 1, 1999, in the principal
amount of $447, 000 to the order of Jenco Partners, L.P.
from Jennifer Convertibles, Inc., incorporated herein by
reference to our Current Report on Form 8-K dated August
20, 1999 and filed September 3, 1999 reporting on an Item
5 event.
10.23 Employment Agreement, dated as of August 15, 1999, between
Harley J. Greenfield and Jennifer Convertibles, Inc.
incorporated herein by reference to our Annual Report on
Form 10-K for the fiscal year ended August 28, 1999.
10.24 Employment Agreement, dated as of August 15, 1999, between
Rami Abada and Jennifer Convertibles, Inc., as amended
incorporated herein by reference to our Annual Report on
Form 10-K for the fiscal year ended August 28, 1999.
10.25 Agreement, dated as of September 1, 1999, between Jennifer
Convertibles, Inc. and Jara Enterprises, Inc. incorporated
herein by reference to our Annual Report on Form 10-K for
the fiscal year ended August 28, 1999.
10.26 Agreement, dated as of September 1, 1999 between Jennifer
Convertibles, Inc. and Jara Enterprises, Inc. incorporated
herein by reference to our Annual Report on Form 10-K for
the fiscal year ended August 28, 1999.
32
(3) Exhibits.
10.27 Loan Agreement dated as of December 8, 1999, between
Jennifer Convertibles, Inc. and Klaussner Furniture
Industries, Inc. incorporated herein by reference to our
Annual Report on Form 10-K for the fiscal year ended
August 28, 1999.
10.28 Stock Option Agreement dated as of December 8, 1999,
between Harley J. Greenfield and Klaussner Furniture
Industries, Inc. incorporated herein by reference to our
Annual Report on Form 10-K for the fiscal year ended
August 28, 1999.
10.29 Registration Rights Agreement, dated as of December 10,
1999, by Jennifer Convertibles, Inc. in favor of Harley J.
Greenfield in connection with the Stock Option Agreement,
dated as of December 8, 1999 incorporated herein by
reference to our Annual Report on Form 10-K for the fiscal
year ended August 28, 1999.
10.30 Interim Operating Agreement dated as of July 6, 2001 by
and between Jennifer Convertibles, Inc., a Delaware
corporation ("JCI") and Jara Enterprises, Inc. ("Jara")
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended May 26, 2001.
10.31 Omnibus Agreement dated as of July 6, 2001 by and between
JCI and Jara incorporated herein by reference to our
Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.
10.32 Clarkstown Term Note in the amount of $54,525 made as of
May 26, 2001 by Jara in favor of JCI incorporated herein
by reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.33 Rudzin-Bronx Term Note in the amount of $43,496 made as of
May 26, 2001 by Jara in favor of JCI incorporated herein
by reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.34 Elmhurst Term Note in the amount of $5,234 made as of May
26, 2001 by Jara in favor of JCI incorporated herein by
reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.35 Warehousing Transition Agreement dated as of July 6, 2001
by and among JCI, Jennifer Warehousing, Inc., a New York
corporation ("JWI"), Jennifer Convertibles, Inc., a New
York corporation ("JCI-NY") and Jennifer-CA Warehouse,
Inc. ("JCA") incorporated herein by reference to our
Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.
10.36 Warehousing Agreement dated as of July 6, 2001 by and
among JCI, Jennifer Warehousing, Inc., a Delaware
corporation and a wholly owned subsidiary of JCI ("New
Warehousing") and Jara incorporated herein by reference to
our Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.
10.37 Hardware Lease dated as of July 6, 2001 by and between JCI
and Jara incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ended May 26,
2001.
10.38 Software License Agreement dated as of July 6, 2001 by and
among JCI and Jara incorporated herein by reference to our
Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.
10.39 Management Agreement and License dated as of July 6, 2001
by and among Jara, JCI, Jennifer Acquisition Corp. ("JAC")
and Fred Love (with respect to Sections 3.3 and 4.2 only)
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended May 26, 2001.
10.40 Purchasing Agreement dated as of July 6, 2001 by and
between JCI and Jara incorporated herein by reference to
our Quarterly Report on Form 10-Q for the quarterly period
ended May 26, 2001.
10.41 Option Agreement dated as of July 6, 2001 by and among
Jara, Fred J. Love and JCI incorporated herein by
reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.42 L.P. Purchase Agreement dated as of July 6, 2001 by and
among JCI, Jennifer Management III, Ltd., Jennifer
Management IV Corp. and Jennifer Management V Ltd., and
Jara incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ended May 26,
2001.
33
(3) Exhibits.
10.43 Indemnification Agreement dated as of July 6, 2001 by and
among JCI and, with respect to Sections 11, 12 and 14
only: JWI; JCI-NY; JCA; and Jara incorporated herein by
reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.44 Side Letter re: Fairness Opinion dated as of July 6, 2001
by and between JCI and Jara incorporated herein by
reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 26, 2001.
10.45 Agreement dated as of July 6, 2001 by and between Harley
J. Greenfield, Edward B. Seidner and JCI incorporated
herein by reference to our Quarterly Report on Form 10-Q
for the quarterly period ended May 26, 2001.
10.46 Audit Committee Charter incorporated herein by reference
to our Quarterly Report on Form 10-Q for the quarterly
period ended February 23, 2002.
10.47 Amendment No. 1 to Management Agreement and License herein
by reference to our Quarterly Report on Form 10-Q for the
quarterly period ended May 25, 2002.
10.48 Amendment No. 1 to Warehouse Agreement herein by reference
to our Quarterly Report on Form 10-Q for the quarterly
period ended May 25, 2002.
21.1 Subsidiaries, incorporated herein by reference to Exhibit
22.1 to our Annual Report on Form 10-K for fiscal year
ended August 27, 1994.
23.1 Consent of Eisner LLP.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See (a) (3) above.
(d) Financial Statement Schedules.
See (a)(2) above.
34
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.
By: /s/ Harley J. Greenfield
Name: Harley J. Greenfield
Title: Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated below.
NAME POSITION DATE
/s/ Harley J. Greenfield Chairman of the Board December 13, 2002
Harley J. Greenfield and Chief Executive
Officer (Principal
Executive Officer)
/s/ Edward B. Seidner Director December 13, 2002
Edward B. Seidner
/s/ Bernard Wincig Director December 13, 2002
Bernard Wincig
/s/ Edward Bohn Director December 13, 2002
Edward Bohn
/s/ Kevin J. Coyle Director December 13, 2002
Kevin J. Coyle
/s/ Rami Abada President, Director, December 13, 2002
Rami Abada Chief Operating Officer
And Chief Financial
Officer
I, Harley J. Greenfield, certify that
1. I have reviewed this annual report on Form 10-K of Jennifer
Convertibles, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present,
in all material respects, the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.
Date: December13, 2002
/s/ Harley J. Greenfield
Harley J. Greenfield
Chief Executive Officer
I, Rami Abada, certify that
1. I have reviewed this annual report on Form 10-K of Jennifer
Convertibles, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present,
in all material respects, the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.
Date: December 13, 2002
/s/ Rami Abada
Rami Abada
Chief Operating Officer & Chief
Operating Officer
I, Harley J. Greenfield, certify that:
1. I have reviewed this annual report on Form 10-K of Jennifer
Convertibles, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
December 13, 2002 By: /s/ Harley J. Greenfield
Harley J. Greenfield, Chief Executive Officer
I, Rami Abada, certify that:
1. I have reviewed this annual report on Form 10-K of Jennifer
Convertibles, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
December 13, 2002 By: /s/ Rami Abada
Rami Abada, Chief Financial Officer
and Chief Operating Officer
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (No. 333-101024) of
Jennifer Convertibles, Inc. of our report dated November 6,
2002 with respect to the consolidated financial statements of
Jennifer Convertibles, Inc. and subsidiaries included in this
Annual Report (Form 10-K) for the fiscal year ended August 31,
2002.
Eisner LLP
New York, New York
December 12, 2002
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index to Financial Statements
Independent Auditors' Report.......................................F1
Consolidated Balance Sheets at August 31, 2002 and
August 25, 2001..................................................F2
Consolidated Statements of Operations for the years ended
August 31, 2002, August 25, 2001 and August 26, 2000.............F3
Consolidated Statements of Stockholders' Equity (Capital
Deficiency) for the years ended August 31, 2002, August 25,
2001, and August 26, 2000........................................F4
Consolidated Statements of Cash Flows for the years ended
August 31, 2002, August 25, 2001 and August 26, 2000.............F5
Notes to Consolidated Financial Statements.........................F6
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Jennifer Convertibles, Inc.
Woodbury, New York
We have audited the accompanying consolidated balance sheets
of Jennifer Convertibles, Inc. and subsidiaries as of
August 31, 2002 and August 25, 2001, and the related
consolidated statements of operations, stockholders' equity
(capital deficiency) and cash flows for each of the three
years in the period ended August 31, 2002. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Jennifer Convertibles, Inc.
and subsidiaries as of August 31, 2002 and August 25, 2001,
and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
August 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
Eisner LLP (formerly Richard A. Eisner & Company, LLP)
New York, New York
November 6, 2002
F-1
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except for share data)
ASSETS
(SEE NOTE 6) Restated-Note 3
August 31, 2002 August 25, 2001
Current assets:
Cash and cash equivalents $15,973 $11,155
Accounts receivable 475 757
Merchandise inventories 13,348 12,660
Due from Private Company, net
of reserves of $4,754 and $4,811
at August 31, 2002 and August 25,
2001, respectively 3,696 3,225
Deferred tax asset 1,950 624
Prepaid expenses and other current
assets 801 483
Total current assets 36,243 28,904
Store fixtures, equipment and
leasehold improvements
at cost, net 4,231 5,013
Deferred lease costs and other
intangibles, net 195 329
Goodwill, at cost, net 1,796 1,796
Deferred tax asset 412
Other assets (primarily security
deposits) 748 732
$43,625 $36,774
LIABILITIES AND STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable, trade $14,037 $16,920
Customer deposits 7,689 8,693
Accrued expenses and other current
liabilities 6,955 5,109
Due to Private Company 500 -
Deferred income from service
contracts (Notes 3 and 8) - 2,121
Total current liabilities 29,181 32,843
Deferred rent and allowances 4,358 4,836
Total liabilities 33,539 37,679
Commitments and contingencies (Notes
11 and 12)
Stockholders' Equity (Capital Deficiency):
Preferred stock, par value $.01 per share
Authorized 1,000,000 shares
Series A Convertible Preferred-
10,000 shares issued
and outstanding at August 31,
2002 and August 25, 2001
(liquidation preference $5,000)
Series B Convertible Preferred-
26,664 shares issued
and outstanding at August 31,
2002 and August 25, 2001
(liquidation preference $133)
Common stock, par value $.01 per share
Authorized 10,000,000 shares;
issued and outstanding 5,704,058
shares at August 31, 2002
and August 25, 2001 57 57
Additional paid-in capital 27,482 27,482
Accumulated (deficit) (17,453) (28,444)
10,086 (905)
$43,625 $36,774
See Notes to Consolidated Financial Statements.
F-2
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
Restated - Note 3
Year Year Year
ended ended ended
August August August
31, 2002 25, 2001 26, 2000
(53 weeks) (52 weeks) (52 weeks)
Revenue:
Net sales $139,837 $132,259 $127,865
Revenue from service
contracts 11,346 4,383 5,836
151,183 136,642 133,701
Cost of sales, including store
occupancy, warehousing, delivery
and service costs 96,459 92,686 88,087
Selling, general and
administrative expenses 42,962 39,963 38,615
Depreciation and amortization 1,660 1,854 1,691
141,081 134,503 128,393
Operating income 10,102 2,139 5,308
Interest income 210 466 358
Interest expense (14) (84) (82)
Income before income taxes 10,298 2,521 5,584
Income tax (benefit) expense (693) (227) 709
Net income $10,991 $2,748 $4,875
Basic income per common share $1.93 $0.48 $0.85
Diluted income per common share $1.50 $0.38 $0.68
Weighted average common shares
outstanding basic
income per share 5,704,058 5,704,058 5,704,058
Effect of potential common
share issuance:
Stock options 177,868 51,378 63,300
Convertible preferred stock 1,443,164 1,443,164 1,443,164
Weighted average common shares
outstanding diluted
income per share 7,325,090 7,198,600 7,210,522
See Notes to the Consolidated Financial Statements.
F-3
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Capital Deficiency)
Years Ended August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands,except share data)
Restated - Note 3
Preferred stock Preferred stock Additional
Series A Series B Common Stock paid-in Accumulated
Shares Par Value Shares Par Value Shares Par Value capital (deficit) Totals
Balances at August 28, 1999 10,000 0 26,664 0 5,704,058 $57 $27,482 ($36,067) ($8,528)
Net income 4,875 4,875
Balances at August 26, 2000 10,000 0 26,664 0 5,704,058 57 27,482 (31,192) (3,653)
Net income 2,748 2,748
Balances at August 25, 2001 10,000 0 26,664 0 5,704,058 57 27,482 (28,444) (905)
Net income 10,991 10,991
Balances at August 31, 2002 10,000 0 26,664 0 5,704,058 $57 $27,482 ($17,453) $10,086
See Notes to Consolidated Financial Statements.
F-4
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Restated - Note 3
Year Year Year
Ended Ended Ended
August August August
31, 2002 25, 2001 26, 2000
(53 weeks) (52 weeks) (52 weeks)
Cash flows from operating activities:
Net income $10,991 $2,748 $4,875
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 1,660 1,854 1,691
Loss on disposal of equipment 24 - -
Provision for warranty costs 76 50 46
Provision for fabric protection
costs (273) 273 -
(Income) loss from store
closings - (80) 10
Deferred rent (478) (222) (186)
Deferred tax benefit (1,737) (624) -
(Recovery of) provision for
losses on amounts due
from Private Company (58) (15) 107
Deferred income (2,121) 2,121 -
Changes in operating assets and
liabilities (net of
effect from purchase of
licensee):
Merchandise inventories (688) (1,596) (1,224)
Prepaid expenses and other
current assets (318) (107) 150
Accounts receivable 282 (429) (212)
Due from Private Company (414) (1,716) (312)
Other assets, net (16) (64) 139
Accounts payable trade (2,882) 1,884 -
Customer deposits (1,004) (262) (171)
Accrued expenses and other
current liabilities 2,041 (489) 255
Due to Private Company 500 -
Net cash provided by operating
activities 5,585 3,326 5,168
Cash flows from investing
activities:
Capital expenditures (767) (1,362) (1,130)
Deferred lease costs and other
intangibles - 21 (232)
Payments of amounts payable
under acquisition agreement - (239) (461)
Acquisition of Southeastern
Florida Holding Company, net of
$20 cash received - - (780)
Proceeds from (purchase of)
commercial paper - 3,025 (3,025)
Net cash (used in) provided by
investing activities (767) 1,445 (5,628)
Cash flows from financing
activities:
Payments of obligations under
capital leases - - (63)
Net cash (used in) financing
activities - - (63)
Net increase (decrease) in cash
and cash equivalents 4,818 4,771 (523)
Cash and cash equivalents at
beginning of year 11,155 6,384 6,907
Cash and cash equivalents at end
of year $15,973 $11,155 $6,384
Supplemental disclosure of cash
flow information:
Income taxes paid $699 $1,146 $484
Interest paid $14 $84 $82
See Notes to Consolidated Financial Statements.
F-5
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
(1) Business
Jennifer Convertibles, Inc. and subsidiaries (the
"Company") owns and is the licensor of specialty retail stores
that sell a complete line of sofabeds, as well as sofas and
companion pieces, such as loveseats, chairs and recliners,
and specialty retail stores that sell leather living room
furniture. Such stores are in the United States and are
located throughout the eastern seaboard, in the midwest, on
the west coast and in the southwest. As of August 31, 2002
and August 25, 2001, respectively, 120 and 112 Company-owned
stores operated under the Jennifer Convertibles and Jennifer
Leather names.
The Company licensed stores to limited partnerships
("LP's") of which a subsidiary of Jennifer Convertibles,
Inc.is the general partner. The LP's have had
cumulative losses since inception and the Company has made
advances to fund such losses. The Company has control of
the LP's and, as a result, consolidates the accounts of the
LP's in its financial statements. Included in the Company's
Consolidated Statements of Operations are the losses of the
LP's in excess of the limited partners' capital
contributions. As of August 31, 2002 and August 25, 2001,
respectively, the LP's operated 48 stores under the Jennifer
Convertibles name.
The Company also licenses stores to parties, certain of
which may be deemed affiliates ("Unconsolidated Licensees"),
from which the Company is entitled to a royalty of 5% of
sales. As of August 31, 2002 and August 25, 2001,
respectively, three licensed stores were owned by such
Unconsolidated Licensees and operated by the Private Company
(see below) and the results of their operations are not
included in the consolidated financial statements. In
addition, as of August 31, 2002, the Company received
royalties from two stores owned and operated by the Private
Company.
Also not included in the consolidated financial
statements are the results of operations of 25 stores, 23 of
which are located in New York, one in New Jersey and one in
Maryland, that are owned and operated by a company (the
"Private Company"), which is owned by a principal
stockholder of the Company who is also the brother-in-law of
the Company's Chairman of the Board and Chief Executive
Officer. Until November 1994, the Private Company was owned
by three of the officers/directors/principal stockholders of
the Company. In November 1994, the Private Company redeemed
the stock in the Private Company of two of the principal
stockholders (Harley Greenfield and Edward Seidner) for
notes in the amount of $10,273 which are due in 2023 and are
collateralized by the assets of the Private Company and a
pledge of the remaining stockholder's stock in the Private
Company to secure his personal guarantee of the notes. In
connection with such transaction, Fred Love, the remaining
principal stockholder, granted Messrs. Greenfield and
Seidner options expiring in November 2004 to purchase the
585,662 shares of the Company's Common Stock owned by him
and the Private Company for $15.00 per share.
As more fully discussed in Note 4, the Company, the LP's,
the Private Company and the Unconsolidated Licensees have
had numerous transactions with each other. In July 2001,
the Company and the Private Company entered into a series of
agreements that change significantly the way they operate
with each other and, subject to certain conditions being
satisfied, will result, among other things, in the LP's,
becoming wholly-owned by the Company. Due to the numerous
related party transactions, the results of operations are
not necessarily indicative of what they would be if all
transactions were with independent parties.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the
accounts of Jennifer Convertibles, Inc., its subsidiaries
and the LP's (see Note 1).
Fiscal Year
The Company has adopted a fiscal year ending on the last
Saturday in August, which would be either 52 or 53 weeks
long.
F-6
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
Use of Estimates
The 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 the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Segment Information
The Financial Accounting Standards Board issued the Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosure about
Segments of an Enterprise and Related Information", requires publicly
held companies to report financial and other information
about key revenue-producing segments of the entity for which such
information is available and is utilized by the chief operating decision
maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 permits operating segments to be
aggregated if they have similar economic characteristics,
products, type of customers and methods of distribution.
Accordingly, the Company's specialty furniture stores are
considered to be one reportable operating segment.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid
instruments with maturity of three months or less to be cash
equivalents.
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:
8/31/02 8/25/01
Showrooms $6,553 $6,077
Warehouses 6,795 6,583
$13,348 $12,660
Store Fixtures, Equipment and Leasehold Improvements
Store fixtures and equipment are carried at cost less
accumulated depreciation, which is computed using the
straight-line method over estimated useful lives or, when
applicable, the life of the lease, whichever is shorter.
Betterments and major remodeling costs are capitalized.
Leasehold improvements are capitalized and amortized over
the shorter of their estimated useful lives or the terms of
the respective leases.
Goodwill
Goodwill consists of the excess of cost of the Company's
investments in certain subsidiaries over the fair value of
net assets acquired. Prior to the adoption of SFAS 142,
effective as of the beginning of fiscal 2002, impairment was
assessed based on undiscounted cash flows of the related
stores, and goodwill was being amortized over periods of ten
to forty years from the acquisition date using the straight-
line method. Accumulated amortization at August 25, 2001
amounted to $476.
In July 2001, the Financial Accounting Standards Board
issued the Statement of Financial Accounting Standards
(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 ended August 31, 2002. During fiscal 2002, the
Company has performed the required impairment tests and has
determined that there is no impairment of the Company's
goodwill.
F-7
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
Net income and related per share amounts adjusted to
exclude amortization of goodwill are as follows:
2002 2001 2000
Reported net income $10,991 $2,748 $4,875
Goodwill amortization 0 174 116
Adjusted net income $10,991 $2,922 $4,991
Basic income per share:
Reported net income $1.93 $0.48 $0.85
Goodwill amortization 0.00 0.03 0.02
Adjusted net income $1.93 $0.51 $0.87
Diluted income per share:
Reported net income $1.50 $0.38 $0.68
Goodwill amortization 0.00 0.02 0.02
Adjusted net income $1.50 $0.40 $0.70
Income Taxes
Deferred tax assets and liabilities are determined based
on the estimated future tax effects of temporary differences
between the financial statement and tax bases of assets and
liabilities, as measured by the current enacted tax rates.
Deferred tax expense (benefit) is the result of changes in
the deferred tax asset and liability.
Deferred Lease and Other Intangible Costs
Deferred lease costs, consisting primarily of lease
commissions and payments made to assume existing leases, are
deferred and amortized over the term of the lease.
Deferred Rent and Allowances
Pursuant to certain of the Company's leases, rent expense
charged to operations differs from rent paid because of the
effect of free rent periods and work allowances granted by
the landlord. Rent expense is calculated by allocating
total rental payments, including those attributable to
scheduled rent increases reduced by work allowances granted,
on a straight-line basis, over the respective lease term.
Accordingly, the Company has recorded deferred rent and
allowances of $4,358 and $4,836 at August 31, 2002 and
August 25, 2001, respectively.
Revenue Recognition
Sales and delivery fees paid by customers are recognized
as revenue upon delivery of the merchandise to the customer.
Sales are made on either a non-financed or financed basis
(see Note 5). A minimum deposit of 50% is typically
required upon placing a non-financed sales order with the
balance payable upon delivery.
See Notes 3 and 4 related to revenue recognition from
the sale of service contracts related to lifetime protection
plans.
Warehousing and management fee income from the Private
Company is recognized when earned.
Income Per Share
Basic income per common share is computed by dividing the
net income after reduction for preferred stock dividends of
$9.00 in each of 2002, 2001 and 2000, by the weighted
average number of shares of common stock outstanding during
each period. Diluted income per share reflects the dilutive
effect of the assumed conversion of
F-8
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
Convertible Preferred Stock and the exercise of options.
For the fiscal year ended August 31, 2002, options for
603,333 shares, which are not dilutive, are not included in
the calculation of diluted income per share.
Advertising
The Company advertises in newspapers, on the radio and on
television. Advertising costs are expensed as incurred and
are included in selling, general and administrative expense.
Advertising expense for the years ended August 31, 2002,
August 25, 2001 and August 26, 2000 aggregated $13,955,
$14,084 and $13,163, respectively, net of amounts charged to
the Private Company and Unconsolidated Licensees (see Note 4).
Shipping and Handling Costs
Shipping and handling costs are included in cost of
sales. Delivery fees paid by customers are included in
revenue.
Pre-Opening Costs
Costs incurred in connection with the opening of stores
are expensed as incurred.
Warranties
Estimated warranty costs are expensed in the same period
that sales are recognized. Also see Note 3.
Concentration of Risks
The receivable from the Private Company as of August 31,
2002, represents current charges aggregating $3,696,
principally for merchandise transfers, warehousing services
and advertising costs, which are payable within 85 days of
the end of the month in which the transactions originate.
Such amount has been fully paid subsequent to the balance
sheet date. In addition to the above, the receivables from
the Private Company include $4,754, representing unpaid
amounts from fiscal 1996 and prior years, which are in
dispute and have been fully reserved for in the accompanying
financial statements. As explained in Note 4, as part of a
proposed settlement, the disputed balance will be settled by
the Private Company executing two notes to the Company in
the aggregate principal amount of $2,400 payable over a
three to five year period. The Company intends to maintain
a reserve for the full amount of the notes and record income
as collections are received.
The Company purchased inventory from two suppliers under
normal or extended trade terms amounting to 67% and 28% of
inventory purchases during fiscal 2002, 71% and 18% of
inventory purchases during fiscal 2001, and 77% and 8% of
inventory purchases during fiscal 2000, respectively.
The Company utilizes many local banks as depositories for
cash receipts received at its showrooms. Such funds are
transferred daily to a concentration account maintained at
one commercial bank. As of August 31, 2002 and August 25,
2001, amounts on deposit with this one bank totaled 96% and
95% of total cash, respectively.
Fair Value of Financial Instruments
Financial instruments include accounts receivable,
accounts payable and customer deposits. The carrying amount
of these instruments approximates fair value due to their
short-term nature.
F-9
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
(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 has restated its fiscal 2001 and 2000 financial
statements, as previously reported to reflect the following.
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 risks 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 4a), 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
fiscal 2001 financial statements to defer revenue from sale
of the protection plans subsequent to May 26, 2001 that was
previously recognized and amortize such revenue into income
in proportion to the costs expected to be incurred in
performing services under the plans (see last paragraph of
Note 4a). 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 and
provision for state income taxes were reduced to reflect the
impact of the adjustments on the results of operations.
The financial statements were also restated to reduce
the tax provision for state income taxes related to prior
years charged to income during the years ended August 25,
2001 and August 26, 2000 and charge such prior years with
the related income taxes.
The effect of such restatements follow:
Year Ended Year Ended
August 25, 2001 August 26, 2000
Net income previously reported $4,086 $4,780
Restatements:
Deferral of revenues (net of
amortization) and related
claims expense adjustment (1,954) 0
Incentive compensation 97 0
Provision for state income
taxes 122 0
Prior year tax adjustment * 397 95
Net income as restated $2,748 $4,875
Basic net income per share:
Previously reported $0.72 $0.84
Effect of restatements (0.24) 0.01
As restated $0.48 $0.85
Diluted net income per share:
Previously reported $0.57 $0.66
Effect of restatements (0.19) 0.02
As restated $0.38 $0.68
* Applicable to years prior to fiscal 2000 which increases the accumulated
deficit previously reported as of August 28, 1999 by $492.
F-10
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
In addition to the above, the following reclassifications have been made
which had no effect on net income previously reported:
Selling
General and
Cost of Administrative Other
Revenue Sales Expenses Income
(a) (b)
Increase/(Decrease)
(In thousands)
Year Ended August 25, 2001:
Delivery fees paid by customers 11,079 11,079
Fabric protection fees paid to
Private Company (1,515) (1,515)
Royalty income/expense 134 300 166
Other income, net (8) (8)
9,698 9,564 292 158
Year Ended August 26, 2000:
Delivery fees paid by customers 12,030 12,030
Fabric protection fees paid to
Private Company (2,300) (2,300)
Royalty income/expense 258 (258)
Other income, net (112) (112)
9,988 9,730 (112) (370)
(a) Amounts adjust net sales except for fabric protection fees paid to the
Private Company, which decreases revenue from service contracts.
(b) Includes provision for loss (recovery) of amounts due from the Private
Company and (income) loss from store closings previously shown separately.
Certain August 25, 2001 balance sheet amounts have been reclassified on the
financial statements to conform to current year presentation.
(4) Agreements and Transactions with Private Company
(a) Interim Operating Agreement
In July 2001, the Private Company and the Company entered into
a series of agreements designed to settle the derivative
litigation among the Private Company, certain of the Company's
current and former officers and directors and former accounting
firms and the Company (see Note 11). 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 effective as of May 27, 2001, designed to implement
certain of the provisions of the settlement agreements prior to
court approval. If for any reason the court fails to approve the
settlement and there is no appeal, the Interim Operating
Agreement would terminate. In such case, everything would go
back to the way it was before such agreement was signed except
that the Company would have a license to continue to operate the
stores it opens in New York for a royalty of $400 per year plus
5% of net sales in New York, except for sales of leather
furniture and from certain of the older New York stores owned by
the Company.
F-11
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
The material terms of the settlement agreements are as
follows:
Pursuant to a Warehouse Transition Agreement, the Private
Company will transfer the assets related to the warehouse system
currently operated by the Private Company to the Company and the
Company will become responsible for the leases and other costs of
operating the warehouses. Pursuant to computer hardware and
software agreements, the Company will also assume control of, and
responsibility for, the computer system used in the operations of
the warehouse systems and stores while permitting the Private
Company access to necessary services. Pursuant to a Warehousing
Agreement, the Company will be obligated to provide warehouse
services to the Private Company of substantially the type and
quality it provided to the Company. During each of the first
five years of the agreement, the Company will receive a
warehousing fee of 2.5% on the net sales price of goods sold by
the Private Company up to $27,640 of sales and 5% on net sales
over $27,640. After five years, the Company will receive a
warehousing fee of 7.5% of all net sales by the Private Company.
In addition, during the full term of the agreement, the Company
will receive a fee for fabric protection and warranty services at
the rate the Company was being charged, subject to increase for
documented cost increases. For the fiscal years ended August 31,
2002 and August 25, 2001 charges (included in revenues) to the
Private Company for warehousing fees amounted to $673 and $148,
respectively, and for fabric protection warranty services
amounted to $603 and $7, respectively.
Pursuant to a Purchasing Agreement, the Company will continue
to purchase merchandise for the Company and the Private Company
on substantially the same terms as previously, except that the
Private Company has 85 days to pay amounts due.
The Company will also receive, for no cost, the limited
partnership interests in LPs currently operating 48 stores. The
Company currently owns the general partnership interest in such
LPs. As described in Note 1, the operations of these stores are
currently included in the consolidated financial statements.
The Company has previously granted the Private Company a
perpetual, royalty-free license to use and to sublicense and
franchise the use of trademarks in the State of New York. The
license is exclusive in such territory, subject to certain
exceptions. Under a Management Agreement and License, the
Company will be responsible for managing the sales of the Private
Company's stores so that the stores will be substantially the
same as the Company's own stores, provided the Private Company is
not obligated to spend more than $25 per store or $100 in any 12-
month period on maintenance and improvements to its stores.
Commencing January 1, 2002 if the Private Company's sales exceed
$27,640 in a year, the Company will receive a management fee of
48% of the excess in the first two years, and thereafter, 10% of
such excess up to $29,640 and 48% of any excess over $29,640. The
Company will record management fee income if and when the sales
thresholds are met. During the year ended August 31, 2002, no
management fees were earned. The Company will also have the
right to open an unlimited number of stores in New York in
exchange for a royalty to the Private Company of $400 per year,
which will also cover the stores previously opened in New York.
For the fiscal years ended August 31, 2002 and August 25, 2001,
the Company paid the Private Company a royalty of $400 and $300
(including a one time fee of $200 for opening four additional
stores in New York), respectively.
Because the Company may negatively impact the Private
Company's sales by opening additional stores within the State of
New York and because the Company will be managing the Private
Company's stores, the Company agreed to pay the Private Company
10% of the amount by which their net sales for the period January
1, 2002 through August 31, 2002 and for any 12 month period
commencing September 1, 2002 are below $17,718 and $27,640
respectively, provided that if such sales fall below $16,667 and
$26,000, the Company will pay the Private Company 15% of such
shortfall amount. However, such amounts together with amounts
the Company may pay for advertising if the Private Company's
sales drop below $17,718 and $27,640 as described below, shall
not, in the aggregate, exceed $1,800 for the eight month period
or $2,700 in any 12 month period thereafter. The Company will
accrue any such shortfall payments when its estimate of Private
Company sales indicates that a shortfall is likely to occur. No
such payments were required for the period ended August 31, 2002.
Messrs. Greenfield and Seidner, officers, directors and principal
stockholders of the Company, have agreed to be responsible for up
to an aggregate of $300 of amounts due under these provisions in
each year. Any such amounts received from Messrs. Greenfield and
Seidner would be recorded as a contribution to capital.
F-12
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
The Private Company has the right to close stores and, if it
does, the Company has the right to purchase them for the cost of
the related inventory (typically, approximately $50) and, subject
to obtaining any necessary landlord's consent, continue the
operations of the stores for the Company's own account. The
closing of stores by the Private Company does not affect the
Company's obligation to pay the Private Company for shortfalls in
its sales.
The Private Company is to contribute $126 per month to
advertising (compared with $150 per month previously
contributed), provided that such amount is to be reduced by the
lesser of $80 or 1% of the Company's sales in New York (other
than sales of leather furniture and sales from six stores in New
York which the Company has owned for many years). In addition,
subject to certain exceptions, if the Private Company's sales for
the period from January 1, 2002 through August 31, 2002 and in
any 12 month period commencing September 1, 2002 respectively,
are less than $17,718 and $27,640, the Company will pay the
Private Company (or reduce the advertising payment the Private
Company owes the Company by) an amount equal to 50% of the amount
by which its sales are below such amounts provided that the amount of
such reduction, plus any payments of the 10-15% with respect to sales
shortfalls as described above, will not exceed $1,800 (for the
eight month period) or $2,700 (in any 12 month period) in the
aggregate. For the fiscal years ended August 31, 2002 and August
25, 2001, contributions from the Private Company for advertising
under the Interim Operating Agreement, reducing selling, general
and administrative expenses, amounted to $1,470 and $368,
respectively.
The Management Agreement and License expires in 2049 and may
be terminated by an arbitrator for material breach. The
Management Agreement also terminates upon purchase by the Company
of the Private Company's stores pursuant to the Option Agreement
described below. If terminated for a reason other than a
purchase, the Company would be obligated not to sell furniture
other than leather furniture in New York, except certain counties
and, accordingly, would have to either sell the Company's
Jennifer Convertibles stores to the Private Company, close them
or convert them to Jennifer Leather stores. In addition, in case
of such termination the Company would have to make up certain
shortfalls, if any, in the Private Company sales in cash or by
delivery of stores in New York meeting certain sales volume
requirements.
In settlement of certain disputes as to amounts due from the
Private Company, all of which have been fully reserved, the
Private Company will execute three notes to the Company in the
aggregate principal amount of $2,600, including a note in the
principal amount of $200 due over three years and bearing
interest at 6% per annum, a note in the principal amount of
$1,400 due over five years and bearing interest at 6% per annum,
and a note in the principal amount of $1,000 due over five years
without interest.
Pursuant to an Option Agreement, the Company will receive the
option to purchase the assets relating to Private Company's
stores for a period of 10 years beginning on the tenth
anniversary of entering into the definitive agreements at a
purchase price starting at $8,125, plus the assumption of
approximately $5,000 principal amount of notes due to Messrs.
Greenfield and Seidner, and declining over the term of the
option.
A monitoring committee will be set up to review, on an on-
going basis, the relationships between the Private Company and
the Company in order to avoid potential conflicts of interest
between the parties. The monitoring committee will remain in
effect for five years after the approval of the settlement by the
court.
Effective June 23, 2002, the Company amended the warehouse
agreement with the Private Company whereby the Private Company
has 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 (subject to an
extension to August 27, 2005 at the option of the Company) and
assumes 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, payable by the Company 85 days after the end of the month,
subject to an adjustment based on the volume of annual sales of
the plans. The Company retains any remaining revenue from the
sales of the plans. In addition, for a payment of $400 (payable
$50 per month beginning three 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 ended August 31, 2002, the
Company has reversed into income $7,404 representing the
F-13
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
remaining balance of deferred revenue related to the fabric
protection plans (see Note 3) together with $167 representing 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.
(b) Previous Agreements
Prior to the Interim Operating Agreement, the following
agreements were in effect through May 26, 2001:
The Private Company provided services to the Company and the
LP's relating to distribution, inventory control reporting and
data processing pursuant to a warehouse agreement, which expired
on May 26, 2001. The Company and LP's, which utilized warehouse
and distribution facilities leased and operated by the Private
Company, paid a monthly warehousing fee based on 5% of the retail
sales prices and a portion of fabric protection revenue collected
from customers, excluding sales from stores opened after July 1,
1999. On February 9, 1999, the Company entered into an amendment
to the warehouse agreement, which reduced the monthly warehousing
fees by $150 through February 26, 2001. In connection therewith,
the Company assumed certain payroll costs previously paid by the
Private Company. Additionally, the Private Company provided
fabric protection and warranty services at pre-determined rates.
The Company has assumed the responsibility from the Private
Company for purchasing merchandise for itself, the LP's, the
Unconsolidated Licensees and the Private Company. During the
years ended August 31, 2002, August 25, 2001 and August 26, 2000,
approximately $11,537, $12,027, and $12,521, respectively, of
inventory at cost was purchased by the Private Company and the
Unconsolidated Licensees through the Company. These transactions
are not reflected in the Consolidated Statements of Operations of
the Company and do not impact the Company's earnings. The
Company receives the benefit of any vendor discounts and
allowances in respect of merchandise purchased by the Company on
behalf of the LP's and certain other licensees. The Private
Company receives the benefit of any discounts refunded or
credited by suppliers in respect of merchandise purchased by the
Private Company through the Company. The Company generally
maintains title to inventory purchased on behalf of the Private
Company until it is sold by the Private Company and the Company
is solely responsible for payment to the merchandise vendors.
The Company has assumed the responsibility of advertising for
itself, the LP's, the Unconsolidated Licensees and the Private
Company. Under the arrangement, the Private Company and
Unconsolidated Licensees are charged a share of advertising
costs. Such charges to unconsolidated licensees aggregated $0,
$0 and $314 for the years ended August 31, 2002, August 25, 2001
and August 26, 2000, respectively. See (c) below for charges to
the Private Company.
Two executive officers of the Company and a relative of one of
the officers, own or owned interests in five Unconsolidated Licensee
stores. In March 2000, three of the stores were acquired by the
Private Company. Royalty income from the three stores amounted
to $121, $134 and $259 for the fiscal years ended 2002, 2001, and
2000, respectively. Such amounts are included in net sales in
the Consolidated Statements of Operations.
(c) Transactions with the Private Company
Included in the Consolidated Statements of Operations are the
following amounts charged by and to the Private Company:
Increase (decrease)
Year Ended Year Ended Year Ended
August 31, August 31, August 31,
2002 2001 2000
Net Sales:
Royalty income $121 $134 $259
Warehouse income 673 148 0
Delivery charges 1,833 1,793 1,282
$2,627 $2,075 $1,541
F-14
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
Revenue from Service Contracts:
Fabric protection fees $103 ($1,515) ($2,300)
Cost of Sales:
Freight* $0 $0 $1,282
Warehouse expense 0 3,338 4,112
$0 $3,338 $5,394
Selling, General and
Administrative Expenses:
Advertising reimbursement $(1,509) ($1,727) ($1,767)
Royalty expense 400 300 0
($1,109) ($1,427) ($1,767)
* The Company had been paying the Private Company for freight
charges based on quoted freight rates for arranging delivery of
the Company's merchandise up until April 2000 at which time the
Company assumed responsibility for freight.
(5) Sales of Receivables
The Company 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, which
amounted to $2,805, $1,887 and $1,515 for the fiscal years ended
August 31, 2002, August 25, 2001 and August 26, 2000,
respectively, are included in selling, general and administrative
expenses. Proceeds received from the sale of the receivables
amounted to $53,093, $41,101 and $35,356 for the fiscal years
ended August 31, 2002, August 25, 2001 and August 26, 2000,
respectively. Accounts receivable in the accompanying balance
sheets represents amounts due from the finance company for
certain sales made in August of each year.
(6) Store Fixtures, Equipment and Leasehold Improvements
8/31/02 08/25/01 Estimated Useful
Lives (years)
Store fixtures and furniture $ 5,481 $ 5,581 5-10
Leasehold improvements 7,973 7,427 1-15
Computer equipment and software 1,633 1,455 3-10
15,087 14,463
Less: Accumulated depreciation
and amortization (10,856) (9,450)
$4,231 $5,013
(7) Transactions with Klaussner:
The Company and Klaussner Furniture Industries Inc.
("Klaussner"), the Company's largest supplier and the owner of
the outstanding shares of the Series A Convertible Preferred
stock, have executed a Credit and Security Agreement that
effectively extends the payment terms for merchandise shipped
from 60 days to 81 days and provides Klaussner with a security
interest in all the Company's assets, including accounts
F-15
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
receivable, inventory, store fixtures and equipment, as well as
the assignment of leaseholds, trademarks and a license agreement
to operate the Company's business in the event of default and non-
payment. The Company has agreed to pay Klaussner a late payment
fee of .67% per month times the sum of all invoices outstanding
for more than 60 days at each month end. As of August 31, 2002
and August 25, 2001, the Company owed Klaussner $8,266 and
$8,180, respectively, no portion of which exceeded the 60 day
payment terms. The Company purchased approximately 67% (2002),
71% (2001) and 77% in 2000 of its inventory from Klaussner.
Purchase allowances of $1,447 (2002), $1,611 (2001) and $2,101
(2000) were obtained from Klaussner, which reduced cost of sales.
On December 11, 1997, the Company sold to Klaussner 10,000
shares of Series A Preferred Stock for $5,000. These shares are
non-voting, have a liquidation preference of $5,000, do not pay
dividends (except if declared on the common stock) and are
convertible into 1,424,500 shares of the Company's common stock.
In addition, as long as Klaussner owns at least 10% of the
Company's outstanding common stock, assuming conversion, it has
the right of first refusal to purchase any common stock or
equivalents sold by the Company at less than $3.51 per share. In
connection therewith and as a result of the Company granting
options to employees to purchase shares of common stock at $2.00
per share, on January 18, 2001, the Company granted Klaussner an
option to purchase 18,730 shares of common stock at an exercise
price of $2.00 per share. The option expires in January 2011.
On December 8, 1999, Klaussner entered into an agreement with
the Company in which it agreed, subject to certain conditions, to
loan $150 for each new store approved by Klaussner. The
agreement provides that the maximum aggregate amount of the loans
will be $1,500 (10 stores). Each such loan will be evidenced by
a three year note, bearing interest at the then LIBOR rate for
three month loans plus 3%. Payment of the notes may be
accelerated under certain conditions, including the closing of
the store funded by the related loan or if the Company is not
purchasing at least 50% by dollar volume of their upholstered
furniture from Klaussner. As additional consideration, the
Company has agreed to pay an additional premium on furniture
purchased from Klaussner to satisfy orders originating from new
stores funded by these loans. Such premium would be 3% of the
customary cost of such merchandise until the note is paid in full
and would decrease to 2% for the 10 years after the note is paid.
Such premium payments would cease after such 10 year period. As
of August 31, 2002, no amounts have been borrowed by the Company
under the agreement.
In addition, on December 8, 1999, Klaussner granted to the
Company's Chief Executive Officer an option to purchase 2,106
shares of preferred stock owned by Klaussner. Such shares are
convertible into 300,000 shares of the Company's common stock.
The exercise price of the option is $5.00 per share of such
underlying common stock. The option is exercisable until August
31, 2004, unless terminated earlier by certain events, including
termination of employment.
(8) Income Taxes
Components of income tax (benefit) expense are as follows:
Years Ended
8/31/02 8/25/01 8/26/00
Current:
Federal $527 $102 $100
State 517 295 609
Deferred
Federal (a)(1,581) (a)(425) -0-
State (a)(156) (a)(199) -0-
($693) ($227) $709
(a)Includes reduction of beginning of the year balance of
the valuation allowance for the deferred tax asset of
$1,380 Federal and $137 State in 2002 and $425 Federal and
$75 State in 2001.
F-16
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
Expected tax expense based on the statutory rate is reconciled
with actual tax expense as follows:
Years Ended
8/31/02 8/25/01 8/26/00
"Expected" tax expense 34.0% 34.0% 34.0%
Increase (reduction) in taxes resulting from:
State and local income tax, net of federal
income tax benefit 3.1% 12.6% 6.7%
Non-deductible items 0.3% 3.0% 2.1%
Other 2.3% 5.1% 0.9%
Utilization of net operating loss carryforwards
and benefit from reversal of (net of
originating) deductible temporary
differences (28.5%) (38.9%) (31.0%)
Reduction of valuation allowance to recognize
estimated future year benefit of
carryforward (2001) and deductible temporary
differences (17.9%) (24.8%)
Actual tax (benefit) expense ( 6.7%) ( 9.0%) 12.7%
The principal components of deferred tax assets, liabilities and the
valuation allowance are as follows:
August 31, 2002 August 25, 2001
Deferred tax assets: (Restated)
Federal net operating loss carryforward $2,346
Reserve for loans and advances $1,770 1,925
Deferred rent expense 1,622 1,934
Deferred fabric protection revenue - 848
Excess of tax over book basis of
leasehold improvements 1,402 1,262
Inventory capitalization 244 283
Other expenses for financial reporting,
not yet deductible for taxes 600 660
Total deferred tax assets, before valuation
allowance 5,638 9,258
Less: Valuation allowance (2,968) (8,179)
Total deferred tax assets 2,670 1,079
Deferred tax liabilities:
Excess of book over tax basis of store
fixtures and equipment 308 455
Net deferred tax asset $2,362 $624
A valuation allowance has been established to offset a portion
of the deferred tax asset to the extent the Company has not
determined that it is more likely than not that the future tax
F-17
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
benefits will be realized. During the years ended August 31,
2002, August 25, 2001 and August 26, 2000, the valuation
allowance decreased by $5,211, $1,110, and $984, respectively.
The reduction of the valuation allowance in fiscal years 2002 and
2001 includes a reduction of $1,517 and $500 respectively of the
beginning of the year balances resulting from a change in
judgment about the realization of tax benefits in future years
due to the Company's operating profits and its anticipation of
future taxable income.
(9) Acquisition
On March 23, 2000, the Company purchased the stock of the
previously Unconsolidated Licensee known as Southeastern Florida
Holding Company, which owned six Jennifer Convertibles stores in
Florida, for the sum of $800. The purchase price was allocated
to the net liabilities assumed, and the balance ($870) has been
charged to goodwill. Had the acquisition taken place as of
August 29, 1999, the pro-forma effect on revenues, net income and
net income per share (unaudited) for fiscal 2000 and 1999 is as
follows:
2000
Revenue $135,938
Net income 4,659
Basic income per share 0.82
Diluted income per share 0.65
(10) Stock Option Plans
In November 1986, the Company adopted an Incentive and Non-
Qualified Stock Option Plan (the "1986 Plan"), under which
150,000 shares of Common Stock were reserved for issuance to
selected management and other key employees of the Company. The
Amended and Restated 1991 Incentive and Non-Qualified Stock
Option Plan (the "1991 Plan" and together with the 1986 and the
1997 Plan described below the "Plans") was adopted by the Company
in September 1991 and amended in April 1992. Under the 1991
Plan, 700,000 shares of Common Stock were reserved for issuance
to selected management and other key employees of the Company.
In May 1997, the Company adopted the 1997 Stock Option Plan,
under which 500,000 shares of Common Stock were reserved for
issuance. As of August 31, 2002, no options have been granted
under the 1997 Plan. The Plans are substantially similar. The
exercise price with respect to qualified incentive options may
not be less than 100% of the fair market value of the Common
Stock at the date of grant.
Additional information with respect to the Company's stock
options granted under and outside the Plans is as follows:
Options Exercisable Options
Weighted Weighted
Average Average
Exercise Exercise
Number of Price Number of Price
Shares Per Share Shares Per Share
Outstanding at 8/28/99 1,304,047 $3.80 970,661 $4.39
Granted 697,047 $2.76
Canceled (396,047) $6.00
Outstanding at 8/26/00 1,605,047 $2.80 998,656 $2.91
Granted 601,730 $3.47
Canceled (15,000) $2.00
Outstanding at 8/25/01 2,191,777 $2.99 1,225,349 $2.89
Expired (40,000) $8.38
Canceled (7,500) $2.00
Outstanding at 8/31/02 2,144,277 $2.89 1,610,773 $2.81
As of August 31, 2002, the number of shares of Common Stock
reserved for options available for grant under the Plans was
566,953 and the weighted average remaining contractual life of
the outstanding options was 6.5 years.
F-18
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
The Company applies Accounting Principles Board Opinion No. 25
and related interpretations in accounting for its stock option
plans, which requires the recognition of compensation expense for
the difference between the quoted market price of the underlying
common stock and the grant price of the option at the grant date.
Had compensation expense been determined based upon the fair
value of the options at the grant date, as prescribed under SFAS
No. 123, the Company's net income would have been as follows:
2002 2001 2000
Net Income:
As reported $10,991 $2,748 $4,875
Pro forma under SFAS 123 $10,835 $2,604 $4,519
Basic income per share:
As reported $1.93 $0.48 $0.85
Pro forma under SFAS 123 $1.90 $0.46 $0.79
Diluted income per share:
As reported $1.50 $0.38 $0.68
Pro forma under SFAS 123 $1.48 $0.36 $0.63
The weighted average fair value on the date of grant of
options granted is estimated at $0.39 and $0.59 in 2001 and 2000,
respectively, using the Black-Scholes option-pricing model with
the following weighted average assumptions:
2001 2000
Risk-free interest rate 4.42-5.86% 5.10%
Expected life of options 5 5
Expected stock price volatility 24-31% 40%
Expected dividend yield 0% 0%
(11) Commitments and other
Leases
The Company and LP's lease retail store locations under
operating leases for varying periods through 2016, which are
generally renewable at the option of the lessee. Certain leases
contain provisions for additional rental payments based on
increases in certain indexes. Future minimum lease payments for
all non-cancelable leases with initial terms of one year or more
consisted of the following at August 31, 2002:
Year Ending August
2003 $16,193
2004 14,420
2005 10,298
2006 8,028
2007 6,757
Thereafter 19,421
$75,117
Rental expense for all operating leases amounted to
approximately $18,520, $17,268, and $15,101, net of sublease
income of $225, $221, and $196, for the years ended August 31,
2002, August 25, 2001 and August 26, 2000, respectively. In
addition, the Company paid rent of $983 and $254 for the years
ended August 31, 2002 and August 25, 2001, respectively, in
connection with bearing the expenses of operating a warehouse
under the Interim Operating Agreement with the Private Company
(see Note 4).
F-19
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
Certain Limited Partnership Agreements
In 1992, the Company entered into three additional Limited
Partnership Agreements (the "Agreements"), which required the
limited partners to invest $1,000 in each partnership. The
Agreements called for the opening of 25 Jennifer Convertible
stores in each partnership. Under the terms of the Agreements,
the Company was to receive a fee of $10 per store, plus a royalty
of 5% of the partnership's sales. The Company has recorded the
operating losses of the LP's in excess of the limited partners'
capital contributions in the Consolidated Statements of
Operations (see Note 1). As part of the Agreements, the Company
received options to purchase the limited partners' interest
commencing January 1999 at a price of five times the
partnership's earnings before income taxes for the prior year, as
defined.
On December 31, 1996, the Private Company acquired the limited
partners' interests in these partnerships. Subject to court
approval of the settlement agreements described in Note 4, the
Company will acquire such interests from the Private Company at
no cost and the LP's will be wholly owned by the Company.
Certain Related Party Fees
A director (and stockholder) of the Company received
approximately $156, $166, and $158 in legal fees in the fiscal
years ended in 2002, 2001, and 2000, respectively.
Employment Agreements
On August 15, 1999, the Chief Executive Officer of the Company
entered into a five-year renewable employment agreement, which
provides for a base salary of $400 per annum subject to certain
cost of living increases, and bonuses based on earnings and
revenues.
On August 15, 1999, the President, Chief Financial Officer and
Chief Operating Officer of the Company entered into a five year
renewable employment agreement which provides for a base salary
of $400 per annum for the first three years and $500 per annum
thereafter, subject to certain cost of living increases and
bonuses based on earnings and revenues. The agreement also
provides for a grant of options to acquire 300,000 shares of
common stock at an exercise price of $3.51 per share (which
exceeded the quoted market price at date of grant) vesting over
three years. Such options were granted during fiscal 2000.
Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current
liabilities are:
8/31/02 8/25/01
Advertising $2,040 $929
Payroll and bonuses 1,151 1,113
Accounting 271 190
Warehouse expenses 183 0
Litigation settlement costs 279 279
Sales tax 990 1,057
Warranty 576 500
Fabric protection 0 273
Income tax 878 68
Other 587 700
$6,955 $5,109
F-20
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
(12) Litigation
(a) Between December 6, 1994 and January 5, 1995, the Company
was served with 11 class action complaints and six derivative
action lawsuits which deal with losses suffered as a result of
the decline in market value of the Company's stock as well as the
Company having "issued false and misleading statements regarding
future growth prospects, sales, revenues and net income". In
addition, the complaints in these actions assert various acts of
wrongdoing by the defendants, including the Private Company and
current and former officers and directors of the Company, as well
as claims of breach of fiduciary duty by such individuals.
On November 30, 1998, the court approved the settlement of
class action litigation. The settlement provided for the payment
to certain members of the class and their attorneys of an
aggregate maximum amount of $7,000 in cash and Preferred Stock
having a value of $370. The cash portion of the settlement was
funded entirely by insurance company proceeds. The Company
issued 26,664 shares of Series B Preferred Stock, convertible
into 18,664 shares of the Company's Common Stock, based on valid
proofs of claims actually filed. These shares are non-voting,
have a liquidation preference of $5.00 per share ($133) and
accrue dividends at the rate of $.35 per share per annum
(cumulative unpaid dividends of $35 at August 31, 2002). The
preferred stock is convertible at the option of the Company at
any time after the Common Stock trades at a price of at least
$7.00 per share.
As described in Note 4, in July 2001 the Company entered into
settlement agreements as to the derivative litigation, subject to
court approval of such settlement and certain other conditions.
Accrued expenses in the accompanying balance sheets include $279
for estimated remaining settlement costs in connection with the
derivative litigation accrued in a prior year.
(b) In December 2001, the State of New Jersey sued the
Company, accusing the Company of false advertising and 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 $200,000, which covers fines, penalties, legal and
administrative costs. Such amount has been charged to expense in
fiscal 2002.
(13) Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of
operations for the years ended August 31, 2002 and August 25,
2001.
As As
Previously Previously
Reported Restated Reported Restated
Thirteen Thirteen Thirteen Thirteen Thirteen Fourteen
Weeks Weeks Weeks Weeks Weeks Weeks
Ended Ended Ended Ended Ended Ended
November November February February May August
24, 2001(b) 24, 2001 23,2002(b) 23, 2002 25, 2002 31,2002
Revenue:
Net sales $33,139 $34,119 $32,227 $30,653 $35,589 $39,476
Revenue from
service contracts 0 318 0 506 715 9,807(a)
33,139 34,437 32,227 31,159 36,304 49,283
Cost of sales,
including store
occupancy,
warehousing,
delivery and
service costs 20,747 23,730 21,636 21,960 24,385 26,384
Operating income
(loss) 1,294 (389) 332 (1,013) 1,365 10,100
Interest income 58 58 38 38 45 69
Interest expense 6 6 1 1 2 5
F-21
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 31, 2002, August 25, 2001 and August 26, 2000
(In thousands except for share amounts)
Income (loss) before
income taxes 1,295 (337) 369 (976) 1,408 10,164
Income tax provision
(beneift) 237 85 92 (34) 122 (905)
Net income (loss) $1,058 ($422) $277 ($942) $1,286 $11,069
Basic income (loss)
per share $0.19 ($0.07) $0.05 ($0.17) $0.23 $1.94
Diluted income (loss)
per share $0.15 ($0.07) $0.04 ($0.17) $0.18 $1.56
(a) Includes $7,404 ($1.30 per share basic and $0.99 per
share diluted) of revenue deferred in prior periods
resulting from amendments of agreements with the Private
Company (see Note 4).
(b) Results for the quarters ended November 24, 2001 and
February 23, 2002, were restated from amounts originally
reported to defer revenue from the sale of fabric and
leather protection plans together with related adjustments
and to reflect reclassifications (see Note 3).
As As As As
Previously Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported Restated
Thirteen Thirteen Thirteen Thirteen Thirteen Thirteen Thirteen Thirteen
Weeks Weeks Weeks Weeks Weeks Weeks Weeks Weeks
Ended Ended Ended Ended Ended Ended Ended Ended
November November February February May May August August
25, 2000 25, 2000 24, 2001 24, 2001 26, 2001 26, 2001 25, 2001 25, 2001
Revenue:
Net sales $32,882 $33,745 $30,736 $31,387 $31,106 $31,863 $34,341 $35,264
Revenue from
service contracts 0 1,434 0 1,388 0 1,398 0 163
32,882 35,179 30,736 32,775 31,106 33,261 34,341 35,427
Cost of sales,
including store
occupancy,
warehousing,
delivery
and service costs 20,787 23,059 19,936 21,955 20,756 22,893 21,810 24,779
Operating income
(loss) 79 98 921 787 417 211 2,735 1,043
Income before
income taxes 216 216 925 925 266 266 2,970 1,114
Income tax
provision (benefit) 133 19 265 102 155 24 (262) (372)
Net income $83 $197 $660 $823 $111 $242 $3,232 $1,486
Basic income per
common share $0.01 $0.03 $0.12 $0.14 $0.02 $0.04 $0.57 $0.26
Diluted income per
common share $0.01 $0.03 $0.11 $0.11 $0.02 $0.03 $0.45 $0.21
common share
(a) Quarterly results for the year ended August 25, 2001 were
restated from amounts originally reported to (a) reduce the tax
provision for state income taxes paid in 2001 which were related
to prior years, (b) defer revenue from sale of fabric and leather
protection plans together with related adjustments in the quarter
ended August 25, 2001 and (c) reflect reclassifications (see Note
3).
F-22