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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended May 31, 2003
or
THE SECURITIES EXCHANGE ACT OF 1934
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9681
JENNIFER CONVERTIBLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2824646
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
419 Crossways Park Drive, Woodbury, New York 11797
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 496-1900
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes __ No _X__
As of July 14, 2003, 5,713,058 shares of the issuer's common
stock, par value $0.01, were outstanding.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index
Part I - Financial Information
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets at May 31, 2003 (Unaudited)
and August 31, 2002..................................... 2
Comparative Consolidated Statements of Operations
(Unaudited) for the thirteen and thirty-nine weeks ended
May 31, 2003 and May 25, 2002 ............................ 3
Comparative Consolidated Statements of Cash Flows
(Unaudited) for the thirty-nine weeks ended
May 31, 2003 and May 25, 2002............................. 4
Notes to Unaudited Consolidated Financial Statements ..... 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 10
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk ......................................... 13
Item 4 - Controls and Procedures.......................... 13
Part II - Other Information.................................... 14
Item 1 - Legal Proceedings................................ 14
Item 2 - Changes in Securities and Use of Proceeds........ 14
Item 3 - Defaults Upon Senior Securities.................. 14
Item 4 - Submission of Matters to a Vote of Security
Holders........................................ 14
Item 5 - Other Information................................ 14
Item 6 - Exhibits and Reports Filed on Form 8-K........... 14
Signatures .................................................... 15
Exhibit Index ................................................ 16
Amendment No. 2 to Management Agreement and License............ 17
Certification of Chief Executive Officer ..................... 21
Certification of Chief Financial Officer ...................... 22
Certification Pursuant to Section 906 ......................... 23
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
ASSETS May 31,
2003 August 31,
(Unaudited) 2002
Current assets:
Cash and cash equivalents $10,767 $15,973
Accounts receivable 347 475
Merchandise inventories 14,002 13,348
Due from private company,
net of reserves of $4,726 and $4,754 at
May 31, 2003 and August 31, 2002, respectively 3,135 3,696
Deferred tax asset 1,993 1,950
Prepaid expenses and other current assets 1,554 801
Total current assets 31,798 36,243
Store fixtures, equipment and leasehold
improvements, at cost, net 4,005 4,231
Deferred lease costs and other intangibles, net 119 195
Goodwill, at cost, net 1,796 1,796
Deferred tax asset 412 412
Other assets (primarily security deposits) 626 748
$38,756 $43,625
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $12,059 $14,037
Customer deposits 8,549 7,689
Accrued expenses and other current liabilities 5,009 6,955
Due to Private Company 500 500
Total current liabilities 26,117 29,181
Deferred rent and allowances 4,236 4,358
Total liabilities 30,353 33,539
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $.01 per share,
authorized 1,000,000 shares
Series A convertible preferred - 10,000
shares issued and outstanding (liquidation
preference $5,000)
Series B convertible preferred - 26,664
shares issued and outstanding (liquidation
preference $133)
Common stock, par value $.01 per share,
authorized 10,000,000 shares; issued and
outstanding, 5,712,058 shares and
5,704,058 shares at May 31, 2003 and
August 31, 2002 57 57
Additional paid in capital 27,497 27,482
Accumulated (deficit) (19,151) (17,453)
8,403 10,086
$38,756 $43,625
See notes to the consolidated financial statements.
2
JENNIFER CONVERTIBLES INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
(Unaudited)
Thirteen weeks ended Thirty-nine weeks ended
May 31, May 25, May 31, May 25,
2003 2002 2003 2002
Revenue:
Net sales $27,787 $35,589 $89,904 $100,360
Revenue from service contracts 2,206 715 6,526 1,540
29,993 36,304 96,430 101,900
Cost of sales, including store
occupancy, warehousing,
delivery and service costs 20,811 24,385 65,511 70,076
Selling, general and
administrative expenses 10,213 10,142 31,584 30,651
Depreciation and amortization 435 412 1,292 1,240
31,459 34,939 98,387 101,967
Operating (loss) income (1,466) 1,365 (1,957) (67)
Interest income 29 45 112 141
Interest expense 4 2 4 9
(Loss) income before income taxes (1,441) 1,408 (1,849) 65
Income tax (benefit) expense (61) 122 (151) 150
Net (loss) income ($1,380) $1,286 ($1,698) ($85)
Basic (loss) income per common
share ($0.24) $0.23 ($0.30) ($0.01)
Diluted (loss) income per
common share ($0.24) $0.18 ($0.30) ($0.01)
Weighted average common shares
outstanding basic income per
share 5,712,058 5,704,058 5,708,847 5,704,058
Effect of potential common
share issuance:
Stock options 0 148,917 0 0
Convertible preferred stock 0 1,443,165 0 0
Weighted average common shares
outstanding diluted income per
share 5,712,058 7,296,140 5,708,847 5,704,058
See notes to the consolidated financial statements.
3
JENNIFER CONVERTIBLES INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Thirty-nine weeks ended
May 31, May 25,
2003 2002
Cash flows from operating activities:
Net loss ($1,698) ($85)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation and amortization 1,292 1,240
Loss on disposal of equipment - 24
Deferred rent (122) (401)
Deferred tax benefit (43) (475)
Recovery of amounts due from
Private Company (27) (44)
Deferred income - 5,283
Changes in operating assets and
liabilities:
Merchandise inventories (654) (992)
Prepaid expenses and other current
assets (753) (99)
Accounts receivable 128 365
Due from Private Company, net 589 (136)
Deferred lease costs and other
intangibles - -
Other assets, net 122 17
Accounts payable trade (1,978) (1,853)
Customer deposits 860 771
Accrued expenses and other
payables (1,947) (146)
Net cash (used in) provided by
operating activities (4,231) 3,469
Cash flows from investing activities:
Capital expenditures (991) (526)
Net cash (used in) investing activities (991) (526)
Cash flows from financing activities:
Proceeds from exercise of stock options 16 -
Net cash provided by financing activites 16 -
Net (decrease) increase in cash and
cash equivalents (5,206) 2,943
Cash and cash equivalents at beginning
of period 15,973 11,155
Cash and cash equivalents at end of
period $10,767 $14,098
Supplemental disclosure of cash flow
information:
Income taxes paid $933 $659
Interest paid - $9
See notes to consolidated financial statements.
4
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 31, 2003
(In thousands except for share amount)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Jennifer Convertibles, Inc. and its subsidiaries (the "Company")
have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The
operating results for the thirteen and thirty-nine week periods
ended May 31, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending August 30, 2003.
The balance sheet as of August 31, 2002 has been derived from the
audited financial statements at such date, but does not include
all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements.
For further information, please refer to the consolidated
financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K/A for the fiscal year ended
August 31, 2002.
NOTE 2: MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost
(determined on the first-in, first-out method) or market and are
physically located, as follows:
5/31/03 8/31/02
Showrooms $ 6,845 $ 6,553
Warehouses 7,157 6,795
$14,002 $13,348
Vendor discounts and allowances in respect of merchandise purchased
by the Company are included as a reduction of inventory and cost of
sales.
5
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 31, 2003
(In thousands except for share amount)
NOTE 3: REVENUE RECOGNITION
Sales are recognized upon delivery of the merchandise to the
customer. A minimum deposit of 50% is typically required upon
placing a non-financed sales order. The Company also finances
sales and sells financed receivables on a non-recourse basis to a
finance company. The Company neither retains any interest in nor
services the sold receivables. The selling price of the
receivables represents the amount due from the customer less a
fee. Fees paid to the finance company are included in selling,
general and administrative expenses.
The Company also derives revenues from the sale of service
contracts related to lifetime protection plans. Prior to an
amendment to the Company's Warehouse Agreement with a related
private company (the "Private Company"), as described below, the
Company was responsible for providing services related to
separately priced fabric protection plans. Accordingly, in the
Consolidated Statement of Operations for the thirteen and thirty-
nine weeks ended May 25, 2002, fabric protection revenue was
deferred and amortized into income in proportion to the costs
expected to be incurred.
The Company has amended its Warehouse Agreement with the Private
Company, whereby, effective June 23, 2002, the Private Company
became the sole obligor on all lifetime fabric and leather
protection plans sold by the Company or the Private Company on
and after such date through August 28, 2004, and assumed all
performance obligations and risk of loss there under. The Company
has no obligation with respect to such plans. The Private
Company receives a monthly payment of $50 subject to an
adjustment based on the volume of 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 also assumed 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 has no obligations for any claims filed under such plans
after June 23, 2002 and revenue from the sale of fabric
protection plans after such date is recognized upon delivery of
the merchandise.
NOTE 4: GOODWILL
Goodwill consists of the excess of cost of the Company's
investments in certain subsidiaries over the fair value of net
assets acquired. The Company has performed the required impairment
test and has determined that there is no impairment of the Company's
goodwill.
6
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 31, 2003
(In thousands except for share amount)
NOTE 5: CONTINGENCIES
The Derivative Litigation
Beginning in December 1994, a series of six actions was commenced
as derivative actions on the Company's behalf against certain
present and former officers and directors of the Company, the
Private Company and others.
The complaints in each of these actions assert various acts of
wrongdoing by the defendants, as well as claims of breach of
fiduciary duty by the Company's present and former officers and
directors. The Company had entered into settlement agreements
with respect to the derivative litigation, subject, in the case
of certain of those agreements, to court approval of the
settlement by a certain date. Such court approval was not
obtained by such date, and in July 1998, the Private Company
exercised its option to withdraw from the settlement.
On July 6, 2001, the Private Company and the Company entered into
a series of agreements designed to settle the derivative action
among the Private Company, certain of our current and former
officers and directors and [certain of] our former accounting
firm[s] and the Company. Effectiveness of the agreements is
subject to certain conditions, including court approval. The
Company 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. Please see the Company's Annual Report on
Form 10-K/A for the year ended August 31, 2002 for a more
complete description of the terms of the proposed settlement.
7
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 31, 2003
(In thousands except for share amount)
NOTE 6: TRANSACTIONS WITH THE PRIVATE COMPANY
Included in the Consolidated Statements of Operations are the
following amounts charged by and to the Private Company. The
amounts listed under "Net sales" show the amounts charged to the
Private Company that are included in such Statements of
Operations under the caption "Net sales". The amounts listed
under "Revenue from service contracts", for the thirteen and
thirty-nine week period ended May 31, 2003, show net amounts
charged by the Private Company to the Company that are included
in such Statements of Operations under the caption, "Revenue from
service contracts". The amounts listed under "Revenue from
service contracts", for the thirteen and thirty-nine week period
ended May 25, 2002 show net amounts charged to the Private
Company that are included in such Statements of Operations under
the caption, "Revenue from service contracts". The amounts listed
under "Selling, general and administrative expenses" show the net
amounts charged to the Private Company (except for "Royalty
expense", which shows amounts charged by the Private Company)
that are included in such Statements of Operations under the
caption, "Selling, general and administrative expenses".
Thirteen weeks Thirty-nine
ended weeks ended
May 31, May 25, May 31, May 25,
2003 2002 2003 2002
Net sales:
Royalty income $26 $29 $79 $87
Warehouse income, net 17 141 288 422
Delivery charges 435 499 1,284 1,339
Total charged to the $478 $669 $1,651 $1,848
Private Company
Revenue from service
contracts:
Fabric protection fees, net $195 $44 $130 $93
Net charged to the Private
Company $195 $44 $130 $93
Selling, general and
administrative expenses:
Advertising reimbursement
paid (to) by the Private
Company ($279) $162 $295 $764
Royalty expense ( 100) ( 100) (300) (300)
Net charged (by) to the
Private Company ($379) $62 ($5) $464
Net charged to Private
Company $294 $775 $1,776 $2,405
8
JENNIFER CONVERTIBLES, INC.
For the Thirty-Nine Weeks Ended May 31, 2003
(In thousands except for share amount)
NOTE 7: STOCK OPTION PLANS
The Company accounts for stock-based employee compensation under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. The
Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", which was
released in December 2002 as an amendment of SFAS No. 123. No
stock-based employee compensation cost is reflected in net income
(loss), as all options granted under the plans had an exercise
price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on
net income (loss) and earnings (loss) per share if the company
had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation.
Thirteen weeks Thirty-nine
ended weeks ended
May 31, May 25, May 31, May 25,
2003 2002 2003 2002
Net income (loss), as reported ($1,380) $1,286 ($1,698) ($85)
Deduct: Total stock-based
employee compensation expense
determined under the fair value
based method, net of related
tax effects (151) (39) (325) (117)
Pro forma net income (loss) ($1,531) $1,247 ($2,023) ($202)
Basic income (loss) per share:
As reported ($0.24) $0.23 ($0.30) ($0.01)
Pro forma ($0.27) $0.22 ($0.35) ($0.04)
Diluted income (loss) per share:
As reported ($0.24) $0.18 ($0.30) ($0.01)
Pro forma ($0.27) $0.17 ($0.35) ($0.04)
The fair value of each option grant on the date of grant is
estimated using the Black-Scholes option-pricing model with a
volatility of 30-50%, expected life of options of 5 years, risk
free interest rate of approximately 2.70-3.13% and a dividend
yield of 0%. The weighted average fair value of options granted
during 2003 was $1.80. No options were granted in 2002.
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and
accompanying notes filed as part of this report.
Forward-Looking Information
Except for historical information contained herein, this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements within
the meaning of the U.S. Private Securities Litigation Reform Act
of 1995, as amended. These statements involve known and unknown
risks and uncertainties that may cause our actual results or
outcome to be materially different from any future results,
performance or achievements expressed or implied by such forward
looking statements. Factors that might cause such differences
include, but are not limited to, the risk factors set forth under
the caption "Risk Factors" in our Annual Report on Form 10-K/A
for the fiscal year ended August 31, 2002. In addition to
statements, that explicitly describe such risks and
uncertainties, investors are urged to consider statements labeled
with the terms "believes," "belief," "expects," "intends,"
"plans" or "anticipates" to be uncertain and forward-looking.
Results of Operations
Prior to an amendment to our Warehouse Agreement with a related
private company, we were responsible for providing services
related to separately priced fabric protection plans.
Accordingly, in the Consolidated Statements of Operations for the
thirteen and thirty-nine weeks ended May 23, 2002, fabric
protection revenue was deferred and amortized into income in
proportion to the costs expected to be incurred.
We have amended our warehouse agreement with the private company
whereby, effective June 23, 2002, the private company became the
sole obligor on all lifetime fabric and leather protection plans
sold by us or the private company on or after such date through
August 28, 2004 and assumed all performance obligations and risk
of loss thereunder. We have no obligation with respect to such
plans. The private company receives a monthly payment of $50,000,
subject to an adjustment based on the volume of sales of the
plans. In addition, for a payment of $400,000 (payable $50,000
per month beginning three months after the date of the agreement)
to be made by us, the private company also assumed responsibility
to service and pay any claims related to sales made by us or the
private company prior to June 23, 2002. Accordingly, we have no
obligations for any claims filed under such plans after June 23,
2002 and revenue from the sale of fabric protection plans after
such date is recognized upon delivery of the merchandise.
Net sales inclusive of merchandise sales and home delivery
income, were $27,310,000 and $34,920,000 for the thirteen weeks
ended May 31, 2003 and May 25, 2002, respectively. Revenue from
the private company was $477,000 and $669,000 for the same
thirteen-week periods, respectively. Net sales of merchandise and
home delivery income decreased by 21.8%, or $7,610,000, in the
current thirteen-week period, compared to the thirteen-week
period ended May
10
period ended May 25, 2002, primarily due to overall softness of the
economy. Revenue from service contracts increased 194.5% in the thirteen-
week period ended May 31, 2003 to $2,106,000, from $715,000 for
the thirteen-week period ended May 25, 2002 due to the Warehouse
Agreement amendmen.t
Net sales for the thirty-nine weeks ended May 31, 2003, inclusive
of merchandise sales and home delivery income were $88,253,000, a
decrease of 10.4% compared to $98,512,000 for the thirty-nine
weeks ended May 25, 2002. Revenue from the private company was
$1,651,000 for the current period, compared to $1,848,000 for the
same period one year ago. Such decreases were principally due to
the overall softness in the economy and the poor weather in the
Northeast that had adversely affected retailers generally.
Decreased store sales were partially offset by revenue from 16
stores opened since May 25, 2002.
Cost of sales, as a percentage of revenue for the thirteen week
and thirty-nine week periods ended May 31, 2003, was 69.4% and
67.9%, respectively, compared to 67.2% and 68.8% for those
periods ended May 25, 2002. The increase during the current
thirteen week period is primarily due to the increase in store
rent expenses as a result of the opening of 16 new stores which
coincided with a decrease in overall sales. This was partially
offset by the change in recognition of fabric protection revenue
as a result of the warehouse agreement amendment. The decrease
for the current thirty-nine week period is attributable to the
same factors, with the change in recognition of fabric protection
revenue having a greater impact on the resulting cost of sales
percentage.
Selling, general and administrative expenses were $10,213,000 and
$31,584,000, respectively, for the thirteen and thirty-nine
week periods ended May 31, 2003, as compared to $10,142,000 and
$30,651,000, respectively, for the thirteen and thirty-nine week
periods ended May 25, 2002. Selling, general and administrative
expenses as a percentage of revenue were 34.1% and 32.8%,
respectively, for the thirteen and thirty-nine week periods ended
May 31, 2003, compared to 27.9% and 30.1%, respectively, for the
thirteen and thirty-nine week periods ended May 25, 2002. The
increase is primarily attributable to an increase in advertising
expenses, an increase in legal fees attributable to the Interim
Operating Agreement and an increase in promotional costs
associated with our private label card business. The percentage
increase can also be attributed to the decrease in sales revenue
compared to the sales revenue for the respective periods one year
earlier as fixed costs were spread over a lower sales revenue
base.
Net loss for the thirteen-week period ended May 31, 2003 was
$1,380,000, compared to net income of $1,286,000 for the thirteen-
week period ended May 25, 2002. Net loss for the thirty-nine week
period ended May 31, 2003 was $1,698,000, compared to a net loss
of $85,000 for the thirty-nine week period ended May 25, 2002.
Revenue from service contracts was positively impacted in
the current period as a result of the change in how we recognize
revenue from the sale of fabric protection as described above.
However, such benefit was offset by a decrease in net sales.
We believe that concerns over the economy, the equity markets and
current world affairs, including the war in Iraq, have adversely
affected retail sales and currently continue to materially
adversely affect our business, operating results and financial
condition.
11
Liquidity and Capital Resources
As of May 31, 2003, we had an aggregate working capital of
$5,681,000, compared to an aggregate working capital of
$7,062,000 as of August 31, 2002, and had available cash and cash
equivalents of $10,767,000 compared to $15,973,000 as of August
31, 2002. The 32.6% decrease in cash and cash equivalents is a
result of $4,231,000 used in operating activities and $991,000 in
capital expenditures. This is partially offset by $16,000
provided by financing activities
We continue to fund the operations of certain of our limited
partnership licensees whose results are included in our
consolidated financial statements, some of which continue to
generate operating losses. Any such losses have been consolidated
in our consolidated financial statements. It is our intention to
continue to fund these operations in the future and, if the new
settlement agreements discussed in our Annual Report on Form 10-
K/A for the year ended August 31, 2002, are approved by the
court, we will acquire 100% of these limited partnerships. Our
receivables from the private company and the unconsolidated
licensees had been substantially reserved in prior years and
continue to be reserved. There can be no assurance that the
reserved amount of such receivables, a total of $4,726,000 as of
May 31, 2003, will be collected.
Starting in 1995, we entered into agreements with the private
company that permit us to offset our current monthly obligations
to one another in an amount 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 May 31, 2003, were paid.
Additionally, as part of such agreements in November 1995, the
private company 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.
In March 1996, we executed a Credit and Security Agreement with
our principal supplier, Klaussner Furniture Industries, Inc.,
which extended the payment terms for merchandise shipped from 60
days to 81 days. Since February 1999, we have not exceeded these
81-day payment terms. As of May 31, 2003, there were no amounts
owed to Klaussner that violated these extended terms. On December
11, 1997, the Credit and Security Agreement was modified to
include a late fee of .67% per month for invoices paid by us
beyond the normal 60-day terms. This provision became effective
in January 1998. As part of the Credit and Security Agreement,
we granted to Klaussner a security interest in all of our assets
including the collateral assignment of our leasehold interests,
our trademarks and a licensee agreement to operate our business
in the event of our default. In May 2003, as a result of out
improved financial condition, we executed a Termination Agreement
and Release whereby Klaussner released the liens on our assets.
On June 6, 2003 we announced that we were approved for listing on
the American Stock Exchange. Trading began on the exchange on
June 10, 2003 under the symbol "JEN."
The receivable from the Private Company as of May 31, 2003,
represents current charges aggregating $2,453,000, 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. The Company has received
$834,000 of that amount subsequent to the balance sheet date. In
addition to the above, the receivables from the private company
12
include $4,726,000 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 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 $2,400,000 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.
We opened 14 stores, and had no store closings during the thirty-
nine weeks ended May 31, 2003. We spent $991,000 for capital
expenditures during the thirty-nine week period and we anticipate
capital expenditures approximating $300,000 during the balance of
fiscal 2003 to support the opening of new stores. In March 1996,
as part of the aforementioned Credit and Security Agreement,
Klaussner agreed to lend us up to $150,000 per new store, for up
to 10 new stores. We have never borrowed pursuant to this
arrangement and, as a result, of the Termination Agreement and
Release signed in May 2003 have terminated this arrangement
Although general trends in the economy have adversely affected
retail sales and our operating cash flow, in the opinion of
management, cash flow will be adequate to fund operations during
the current and next fiscal year.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Not applicable.
Item 4. Controls and Procedures.
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)) within 90 days prior to the filing of this report, have
concluded that, based on such evaluation, our disclosure controls
and procedures were adequate and effective to ensure that
material information relating to us, including our consolidated
subsidiaries, was made known to them by others within those
entities, particularly during the period in which this Quarterly
Report on Form 10-Q was being prepared.
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.
13
JENNIFER CONVERTIBLES, INC.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits filed with this report:
10.49 Amendment No. 2 to Management Agreement and License
99.1 Certifications pursuant to Rule 13a-14 of the Securities and
Exchange Act of 1934 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 for the quarterly period ended May 31, 2003.
99.2 Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
for the quarterly period ended May 31, 2003.
(b) Reports on Form 8-K:
(1)On May 13, 2003, we filed a current report on Form 8-K
announcing the election of Mark Berman to our board of directors.
We also reported both the signing of the Termination Agreement
and Release by Klaussner Furniture Industries, Inc. and us and
the signing of Amendment No. 2 to the Warehousing Agreement
between Jara Enterprises, Inc. and us.
14
JENNIFER CONVERTIBLES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JENNIFER CONVERTIBLES, INC.
July 15, 2003 By: /s/ Harley J. Greenfield
Harley J. Greenfield, Chairman of
the Board and Chief Executive
Officer
July 15, 2003 By: /s/ Rami Abada
Rami Abada, Chief Financial Officer
And Chief Operating Officer
15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.49 Amendment No.2 to Management Agreement and License
99.1
Certifications pursuant to Rule 13(a-)14
of the Securities and Exchange Act of 1934 as
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 for the quarterly period ended May
31, 2003.
99.2 Certifications pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for the quarterly period
ended May 31, 2003.
16
AMENDMENT NO. 2 TO
MANAGEMENT AGREEMENT AND LICENSE
This Amendment No. 2 to Management Agreement and License is
made as of July 10, 2003 by and among JARA ENTERPRISES, INC., a
New York corporation ("Jara"), FRED LOVE, the sole stockholder of
Jara (the "Shareholder"), JENNIFER CONVERTIBLES, INC., a Delaware
Corporation ("JCI") and JENNIFER ACQUISITION CORP., a Delaware
Corporation ("JAC"), a wholly owned subsidiary of JCI.
RECITALS:
Reference is made to that certain Management Agreement and
License, executed as of July 6, 2001 between Jara, the
Shareholder, JCI and JAC, as amended by Amendment No. 1 to
Management and Agreement and License dated as of April 30, 2002
(the "Agreement").
The parties to the Agreement desire to amend the Agreement
as set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
AMENDMENTS
Section 1.01 The first sentence of Section 1.01 is hereby
deleted in its entirety and replaced with the following:
Jara hereby appoints and employs JCI as
Jara's exclusive agent to supervise, direct
and manage the sales of Jara's retail stores
(collectively, with any New Stores as defined
in Section 1.4(a) hereof, the "Jara Stores"
and each a "Jara Store") for the term set
forth in Article III hereof.
Section 1.02 Section 1.4(a) is hereby deleted in its entirety
and replaced with the following:
Jara, after consultation with JCI, may open a
new Jara Store (a "New Store") anywhere in
the Counties, provided that the total number
of Jara Stores at any one time shall not
exceed thirty (30) stores, which stores may
include one (1) clearance store that offers
for sale damaged or discontinued merchandise
or floor samples.
Section 1.03 The third sentence of Section 1.11 of the
Agreement is hereby deleted in its entirety and replaced with the
following:
For the purposes of this Agreement, the
"Initial Period" shall mean the period from
January 1, 2002 through August 30, 2003. For
the "Initial Period", Jara's share of
advertising costs shall be reduced (each such
reduction and any other similar reduction for
a subsequent period hereinafter referred to
an "Additional Reduction") by the an amount
17
equal to $0.50 multiplied by total of the
amount, if any, by which Jara's Net Delivered
Sales for the Initial Period are less than
$45,358,000, provided, that in no event shall
such Additional Reduction, together with
amounts paid pursuant to Section 2.1(c)
during such Initial Period exceed an
aggregate of $4,500,000 (any such excess
shall be eliminated and shall not be carried
over). Thereafter, for the twelve (12) month
period commencing on August 31, 2003 (the
"Initial 12 Month Period") and for each
twelve (12) month period thereafter, Jara's
share of advertising costs shall be reduced
by an amount equal to $0.50 multiplied by the
amount, if any, by which Jara's Net Delivered
Sales for such twelve (12) month period are
less than $27,640,000, provided, that in no
event shall such Additional Reduction,
together with amounts paid pursuant to
Section 2.1(c) during such period exceed an
aggregate of $2,700,000 (any such excess
shall be eliminated and shall not be carried
over).
Section 1.04 Section 2.1(b) of the Agreement is hereby deleted
in its entirety and replaced with the following:
For the Initial Period, Jara will also pay to
JCI an amount equal to forty-eight percent
(48%) of the total of the amount by which
Jara Stores Net Delivered Sales exceed
$45,358,000. If, during any annual period
commencing on or after August 31, 2003, Jara
Stores Net Delivered Sales (i) exceed
$27,640,000 but do not surpass $29,640,000,
then Jara will pay to JCI an amount equal to
ten percent (10%) of the Jara Stores Net
Delivered Sales in excess of $27,640,000 but
below $29,640,000 for such period and (ii)
exceed $29,640,000, then Jara will pay to
JCI, in addition to any amounts payable
pursuant to (i) above, an amount equal to
forty-eight percent (48%) of the Jara Stores
Net Delivered Sales in excess of $29,640,000
for such period. Amounts owed for periods of
less than one year occurring (i) after the
fifth anniversary of the Closing Date and
prior to the next succeeding June 1 or (ii)
from June 1 after such fifth anniversary and
up to the termination of this Agreement (if
prior to May 30) shall be as set forth in
Section 2.1(f).
Section 1.05 Section 2.1(c) of the Agreement is hereby deleted
in its entirety and replaced with the following:
For the Initial Period, JCI will pay to Jara
an amount equal to 10% of the total of the
amount by which the Jara Stores Net Delivered
Sales for the Initial Period are less than
$45,358,000; provided, however, that if, the
Jara Stores Net Delivered Sales for the
Initial Period are $42,667,000 or less, then
JCI will pay to Jara an amount equal to 15%
of the amount by which the Jara Stores Net
Delivered Sales are less than $42,667,000 (in
18
lieu of the 10% referred to above).
Notwithstanding the foregoing, in no event
shall the total of the Additional Reduction
for the "Initial Period" and amounts payable
pursuant to this Section 2.1(c) for such
period exceed $4,500,000 (any such excess
shall be eliminated and shall not be carried
over to other periods). Thereafter, for the
twelve (12) month period commencing August
31, 2003, and for each twelve (12) month
period thereafter, JCI will pay to Jara an
amount equal to 10% of the amount by which
the Jara Stores Net Delivered Sales for such
twelve (12) month period are less than
$27,640,000; provided, however, that if the
Jara Net Delivered Sales for any such period
are $26,000,000 or less, then JCI will pay to
Jara an amount equal to 15% (in lieu of the
10% referred to above) of the amount by which
the Jara Stores Net Delivered Sales for any
such period are less than $27,640,000.
Notwithstanding the foregoing, in no event
shall the total of the Additional Reduction
for any twelve (12) month period and amounts
payable pursuant to this Section 2.1(c) for
such period exceed $2,700,000 (any such
excess shall be eliminated and shall not be
carried over to other periods).
ARTICLE II
MISCELLANEOUS
Section 2.01 This Amendment shall be governed by and construed
in accordance with the laws of the State of New York.
Section 2.02 This Amendment may be executed in one or more
counterparts, each of which shall constitute an original, and all
of which, taken together, shall be deemed to constitute one and
the same agreement.
Section 2.03 Except as amended hereby, the Agreement
remains in full force and effect.
* * * * *
19
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their duly authorized officers
as of the day and year above written.
JARA ENTERPRISES, INC.
By: /s/ Fred J. Love
Name: Fred J. Love
Title: President
JENNIFER ACQUISITION CORP.
By: /s/ Harley J. Greenfield
Name: Harley J. Greenfield
Title: Chief Executive Officer
JENNIFER CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
Name: Harley J. Greenfield
Title: Chief Executive Officer
20
Exhibit 99.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Harley J. Greenfield, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Jennifer Convertibles, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly report.
4. The registrant's other certifying officer 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 quarterly 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 quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly 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 officer 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 officer and I have
indicated in this quarterly 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.
July 15, 2003 /s/ Harley J. Greenfield
Harley J. Greenfield, Chief Executive Officer
21
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Rami Abada, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Jennifer Convertibles, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly report.
4. The registrant's other certifying officer 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 quarterly 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 quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly 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 officer 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 officer and I have
indicated in this quarterly 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.
July 15, 2003 /s/ Rami Abada
Rami Abada, Chief Financial Officer
and Chief Operating Officer
22
Exhibit 99.2
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,
United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of section 1350, chapter 63 of title 18,
United States Code), each of the undersigned officers of Jennifer
Convertibles, Inc. (the "Company"), does hereby certify, to such
officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarterly period ended
May 31, 2003 (the "Form 10-Q") of the Company fully complies with
the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and the information contained in the Form
10-Q fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: July 15, 2003 /s/ Harley J.Greenfield
Chief Executive Officer
Dated: July 15, 2003 /s/ Rami Abada
Chief Financial Officer
A signed original of this written statement required by Section
906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission
or its staff upon request.
23