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UNITED STATES
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 30, 2003
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:
Common Stock, Par Value $0.01
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: NONE
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 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. The aggregate
market value of the common stock held by non-affiliates as of November
21, 2003 was $15,439,554.
The number of shares outstanding of common stock, as of November
21, 2003 was 5,713,058.
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 30,
2003, our stores include 197 Jennifer Convertibles stores and 17
Jennifer Leather stores. Of these 214 stores, we owned 138 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. Mr. Love is currently one of our
principal stockholders. 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" in our Proxy Statement to be
furnished in connection with our Annual Meeting of Stockholders to be
held February 10, 2004, which is hereby incorporated by reference.
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.
2
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 our Proxy
Statement to be furnished in connection with our Annual Meeting of
Stockholders to be held February 10, 2004, which is hereby
incorporated by reference.
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 also 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 generally
range in size from approximately 1,900 square feet to a little over
10,000 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 2003, we opened eighteen new stores. We did not close
any stores in fiscal 2003 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 six to eight additional stores and not closing
any stores during fiscal 2004.
3
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" in our Proxy Statement to be
furnished in connection with our Annual Meeting of Stockholders to be
held February 10, 2004, which is hereby incorporated by reference.
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 30, 2003, we purchased
approximately 60% of our merchandise from Klaussner. Leather
furniture is purchased primarily from Klaussner, 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. In May 2003, we
executed a Termination Agreement and Release whereby Klaussner
released the liens on our assets. In connection with the release, a
$1.5 million credit line which Klaussner had made available to us in
1999 was also terminated. The credit line had never been drawn upon.
In addition, in December 1997, Klaussner purchased $5,000,000 of our
convertible preferred stock. In fiscal 2001, 2002, and 2003,
Klaussner gave us certain vendor credits for repairs. See "Certain
Relationships and Related Transactions" in our Proxy Statement to be
furnished in connection with our Annual Meeting of Stockholders to be
held February 10, 2004, which is hereby incorporated by reference 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" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held February
10, 2004, which is hereby incorporated by reference. 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 warehousing services to the private
company. Pursuant to an Interim Operating Agreement effective as of
May 27, 2001, 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
4
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
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" in our Proxy Statement to be furnished in connection
with our Annual Meeting of Stockholders to be held February 10, 2004,
which is hereby incorporated by reference 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, and Jennifer Sofas, 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" in our Proxy Statement to be
furnished in connection with our Annual Meeting of Stockholders to be
held February 10, 2004, which is hereby incorporated by reference.
Employees
As of August 30, 2003, we employed 448 people, including five
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
5
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 advertise more
extensively than many of our competitors and also offer fast delivery
on most of our items.
Item 2. Properties.
We maintain our executive offices in Woodbury, New York pursuant to
a lease, which expires in the year 2008.
As of August 30, 2003, the LP's and we lease all of our store
locations pursuant to leases, which expire between 2003 and 2017.
During fiscal 2004, 33 leases will expire, although we, as lessee,
have the option to renew 21 of those leases. We anticipate remaining
in most, if not all, of these locations, subject, in the case of the
12 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 9
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" in our Proxy Statement to be furnished in connection
with our Annual Meeting of Stockholders to be held February 10, 2004,
which is hereby incorporated by reference, 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.
1 Each of these individuals and entities is named as a defendant in
at least one action.
Other Matters
On August 6, 2003, Lucy Lantan, one of our former employees
filed a lawsuit alleging sexual harassment, discrimination,
retaliation, mental infliction of emotional distress, false
imprisonment and collateral claims under California law in the
Superior Court of California, Marin County and has demanded an
unspecified amount of monetary damages. We believe this suit is
without merit, deny liability and are vigorously defending against the
claims.
6
On June 11, 2003, Lauren Bisk filed a lawsuit against us in the
Supreme Court of the State of New York in New York county alleging
assault and battery, conversion of identity, defamation, consumer
fraud and infliction of emotional distress. The plaintiff has demanded
monetary damages in the amount of $10 million. Certain of our former
and present employees who are also defendants in the lawsuit and who
were involved in the alleged incident have denied committing any
wrongdoing against the plaintiff. The action is being defended by
counsel appointed by the claims representative of our insurance
carrier. The insurance carrier has agreed to defend the plaintiff's
claims with full reservation of rights. We believe this suit is
without merit, deny liability and are vigorously defending against the
claims.
Item 4. Submission of Matters to a Vote of Security Holders.
At our annual meeting of stockholders, which was held on September
9, 2003, our stockholders:
(1) Elected seven nominees for directors to serve for a term
ending in 2004;
(2) Ratified the appointment of Eisner LLP as our independent
auditors and public accountants for the fiscal year ended August 30,
2003;
(3) Approved an amendment to our certificate of incorporation to
increase the number of authorized shares of common stock from
10,000,000 to 12,000,000; and
(4) Adopted the Jennifer Convertibles, Inc. 2003 Stock Option
Plan.
The following tables show the common stock votes cast with respect to
the proposals identified above:
Election of Directors: For Withheld
Authority
Harley J. Greenfield 4,752,716 151,755
Rami Abada 4,752,716 151,755
Edward Seidner 4,752,716 151,755
Edward Bohn 4,878,716 25,755
Bernard Wincig 4,850,716 53,755
Kevin Coyle 4,878,716 25,755
Mark Berman 4,878,716 25,755
Proposals 2-4: For Against Abstentions
Proposal 2 4,814,671 88,400 1,400
Proposal 3 4,633,508 260,588 10,375
Proposal 4 1,421,594 494,068 13,700
Our Executive Officers
Our executive officers are as follows:
Harley J. Greenfield
Mr. Greenfield, age 59, 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
7
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 B. Seidner
Mr. Seidner, age 51, 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.
Rami Abada
Mr. Abada, age 44, 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.
Leslie Falchook
Mr. Falchook, age 43, 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.
Kevin Mattler
Mr. Mattler, age 45, 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.
The officers serve at the discretion of the Board of Directors and
there are no family relationships among the officers listed and any of
our directors.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder
Matters.
The principal market for our common stock, which was traded under
the symbol JENN, through June 9, 2003 was the Over the Counter
Bulletin Board. On June 10, 2003, during the fourth quarter of fiscal
2003, trading for our common stock began on the American Stock
Exchange under the symbol JEN. The following table sets forth, for the
fiscal periods indicated, the high and low bid quotations of our
common stock on the Bulletin Board and the high and low sales prices
of our common stock on the American Stock Exchange, as applicable.
The bid quotations reflected prior to June 10, 2003 represent the high
and low bid quotations 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. The prices reflected on and after June 10, 2003
represent high and low sales prices of our common stock on the
American Stock Exchange.
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
High Low
Fiscal Year 2003:
1st Quarter $5.50 $3.50
2nd Quarter 5.80 4.12
3rd Quarter 4.25 3.38
4th Quarter 4.85 3.60
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As of November 21, 2003, there were approximately 200 holders of
record and approximately 1,000 beneficial owners of our common stock.
On November 21, 2003, the closing sales price of our common stock as
reported on the American Stock Exchange was $3.68.
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.
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 30, 2003.
Number of Weighted- Number of
securities to average securities
be issued upon exercise price remaining
exercise of of outstanding available for
outstanding options, future
options, warrants and issuance under
warrants and rights equity
rights compensation
plans
(excluding
securities
reflected in
column (a))
Plan category (a) (b) (c)
Equity 780,047 $ 2.21 -
compensation
plans approved
by security
holders (1)
Equity 2,158,730 $ 3.37 -
compensation
plans not
approved by
security
holders (2)
Total 2,938,777 $ 3.06 -
(1) Reflects aggregate options outstanding 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.
On February 7, 1995, we issued options to purchase an aggregate of
25,000 shares of our common stock at an exercise price of $2.94 per
share to one of our directors.
On May 6, 1997, we issued options to purchase an aggregate of 252,500
shares of our common stock at an exercise price of $2.00 per share to
certain of our consultants and employees.
On June 25, 1998, we issued options to purchase an aggregate of 38,000
shares of our common stock at an exercise price of $2.00 per share to
certain of our employees.
On August 15, 1999, we issued options to purchase an aggregate of
300,000 shares of our common stock at an exercise price of $3.52 per
share to one of our officers.
On January 10, 2000, we issued options to purchase an aggregate of
5,000 shares of our common stock at an exercise price of $2.00 per
share to a consultant and to one of our directors.
9
On June 14, 2000, we issued options to purchase an aggregate of 95,000
shares of our common stock at an exercise price of $2.00 per share to
certain of our directors and employees.
On January 12, 2001, we issued options to purchase an aggregate of
550,000 shares of our common stock at an exercise price of $3.52 per
share to certain of our officers.
On January 18, 2001, we issued options to purchase an aggregate of
18,730 shares of our common stock at an exercise price of $2.00 per
share to one of our consultants.
On June 14, 2001, we issued options to purchase an aggregate of 30,000
shares of our common stock at an exercise price of $3.52 per share to
one of our employees.
On November 25, 2002, we issued options to purchase an aggregate of
819,500 shares of our common stock at an exercise price of $3.90 per
share to certain of our directors, officers, employees and
consultants.
On May 8, 2003, we issued options to purchase an aggregate of 25,000
shares of our common stock at an exercise price of $3.60 per share to
one of our directors.
10
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
8/30/2003 8/31/2002 8/25/2001 8/26/2000 8/28/1999
Revenue $126,577 $151,183 $136,642 $133,701 $114,919
Cost of sales, including store
occupancy, warehousing,
delivery and service costs 87,061 96,459 92,686 88,087 76,855
Selling, general and
administrative expenses 41,846 42,962 39,963 38,615 35,688
Depreciation and amortization 1,738 1,660 1,854 1,691 1,668
130,645 141,081 134,503 128,393 114,211
Operating income (4,068) 10,102 2,139 5,308 708
Interest income 136 210 466 358 171
Interest expense (11) (14) (84) (82) (106)
Income before income taxes (3,943) 10,298 2,521 5,584 773
Income tax (benefit) expense (566) (693) (227) 709 537
Net income (loss) ($3,377) $10,991 $2,748 $4,875 $236
Basic income (loss) per share ($0.60) $1.93 $0.48 $0.85 $0.04
Diluted income (loss) per share ($0.60) $1.50 $0.38 $0.68 $0.03
Weighted average common shares
outstanding basic income (loss)
per share 5,709,900 5,704,058 5,704,058 5,704,058 5,701,559
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
diluted income (loss) per share 5,709,900 7,325,090 7,198,600 7,210,522 7,154,358
Cash Dividends on Series B
Preferred Stock 71 - - - -
Store data: 8/30/2003 8/31/2002 8/25/2001 8/26/2000 8/28/1999
Company-owned stores open
at the end of period 138 120 112 102 84
at the end of period 48 48 48 46 62
open at end of period 3 3 3 3 9
Total stores open at end of period 189 171 163 151 155
Balance Sheet Date: 8/30/2003 8/31/2002 8/25/2001 8/26/2000 8/28/1999
Working capital (deficiency) $3,625 $5,891 ($3,939) ($6,842) ($11,073)
Total assets 39,707 43,625 36,774 30,992 26,145
Long-term obligations - - - - 63
Total liabilities 32,863 33,539 37,679 34,645 34,673
Stockholders equity (Capital
deficiency) 6,844 10,086 (905) (3,653) (8,528)
Stockholders equity (Capital
deficiency) per outstanding
shares $1.20 $1.77 ($0.16) ($0.64) ($1.50)
11
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 a related private company that
currently operates 28 Jennifer Convertibles stores, which
significantly affect the way we operate with the private company.
Results of Operations
Fiscal year ended August 30, 2003 compared to fiscal year ended August
31, 2002:
Net sales includes merchandise sales of $115,550,000 and
$137,209,000 and revenue from the related private company of
$3,027,000 and $3,231,000 for the fiscal years ended August 30, 2003
and August 31, 2002, respectively. Net sales of merchandise decreased
15.8%, or $21,659,000, for the fiscal year ended August 30, 2003
primarily due to the overall softness in the economy and the poor
weather conditions in the Northeast that had adversely affected
retailers generally. Decreased same store sales were partially offset
by revenue from the 18 new stores opened during the year.
Revenue from service contracts decreased 25.5% to $8,000,000 for
the fiscal year ended August 30, 2003, as compared to $10,743,000 for
the fiscal year ended August 31, 2002. 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 entered into an amendment to 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 became 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 is 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. As a result of this amendment
during fiscal 2002, $2,121,000 of revenue which had been deferred as
of August 25, 2001 was recognized in fiscal 2002. Service contract
revenue for 2003 was lower than the 2002 fiscal year primarily due to
the favorable impact of this amendment on 2002 results and as a direct
result of reduced merchandise sales in fiscal 2003 compared to fiscal
2002.
Cost of sales decreased to $87,061,000 for the fiscal year ended
August 30, 2003, from $96,459,000 for the fiscal year ended August 31,
2002. However, cost of sales as a percentage of revenue was 68.8% in
fiscal 2003, an increase of 5.0% over the prior year. The increase is
attributable to several factors, including the increase of occupancy
costs as a percentage of revenue in 2003, the recognition in 2002 of
the $2,121,000 of fabric protection revenue, as a result of the
amendment described above and the decrease in revenue from service
12
contracts which has a very high gross margin compared to furniture
sales.
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 $597,000 in fiscal 2003 compared
to $673,000 in fiscal 2002. We also bear the expenses of operating
the warehouse system. We reduced such expenses by $656,000 to
$3,592,000 in fiscal 2003, a 15.4% reduction compared to $4,248,000 in
fiscal 2002. Such reduction was accomplished primarily by reducing
payroll.
Selling, general and administrative expenses were $41,846,000
(33.1% as a percentage of revenue) for the fiscal year ended August
30, 2003, as compared to $42,962,000 (28.4% as a percentage of
revenue) for the fiscal year ended August 31, 2002, an increase of
4.7% as a percentage of revenue. Although costs decreased by
approximately $1,116,000, selling, general and administrative expenses
as a percentage of revenue increased due to the reduction in revenue.
The most significant reason for the decrease in overall expenses can
be attributed to a reduction in compensation to officers and sales
staff of $1,798,000 and a reduction in advertising expense of
$719,000. This was partially offset by the $1,326,000 charged to us
by the private company pursuant to the Interim Operating Agreement,
which includes a requirement that we pay the private company specified
amounts based on decreases in its sales volume. We also experienced
an increase in legal fees due to increased litigation.
Our net receivables from the private company of $3,150,000
decreased in the aggregate by $546,000 as of August 30, 2003, compared
to the prior year end. We have fully reserved uncollected amounts,
which totaled $4,722,000 as of August 30, 2003 and 4,754,000 as of
August 31, 2002. The collectibility of these amounts is uncertain.
Interest income decreased by $74,000 to $136,000 for the fiscal
year ended August 30, 2003, as compared to $210,000 during the prior
year. The decrease is due to less funds available for investing and
lower returns on investments.
We reported income tax benefits of $566,000 and $693,000 in 2003
and 2002, respectively. The 2002 benefit results primarily from
decreases in the valuation allowance on our deferred tax asset, net of
current tax expense. The 2003 tax benefit results from the tax effect
of the loss for the year, net of an increase in the valuation
allowance on the deferred tax asset.
The net loss in the fiscal year ended August 30, 2003 was
$3,377,000 compared to net income of $10,991,000 in the fiscal year
ended August 31, 2002, resulting in a decrease of income of
$14,368,000 in fiscal 2003. The principal reasons for the decrease are
the overall softness of the economy, current world affairs, the
extremely inclement weather in the Northeast, the increase in the
amount charged to us by the private company pursuant to the Interim
Operating Agreement and $2,121,000 of deferred revenue from fiscal
2001 which was recognized as revenue in the year ended August 31,
2002.
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 of $3,231,000
and $2,082,000 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 were
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 145.5% to $10,743,000 for
the fiscal year ended August 31, 2002, as compared to $4,376,000 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 discussed above, in accordance with the amendment to the Interim
Operating Agreement, the private company is 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
13
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
from service contracts includes $103,000 received from the private
company.
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, a decrease of 4.0% from 67.8% in the prior year. The decrease
was 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.
As discussed above, pursuant to the Interim Operating Agreement, 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 to
$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 principal reason
for the increase is (1) increased sales resulting from financing
programs, (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.
Liquidity and Capital Resources
As of August 30, 2003, we had aggregate working capital of
$3,625,000 compared to aggregate working capital of $5,891,000 as of
August 31, 2002, and had available cash and cash equivalents of
$12,761,000 compared to cash and cash equivalents of $15,973,000 as of
August 31, 2002. The decrease in cash and cash equivalents results
from $1,895,000 of net cash used for operating activities, $1,264,000
14
of net cash used for investment activities attributable to the
purchase of fixtures and equipment and $53,000 of net cash used for
financing activities as a result of dividends paid on preferred stock
which were partially offset by the proceeds received from the exercise
of stock options. Although general trends in the economy have
adversely affected retail sales and our operating cash flow, in the
opinion of management, cash flows, together with available working
capital will be adequate to fund operations during fiscal 2004.
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.
Starting in 1995, the private company entered into offset
agreements with us that permit us to offset our current monthly
obligations to one another 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 30, 2003, 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 30, 2003,
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" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held February
10, 2004, which is hereby incorporated by reference. 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. In May 2003, we executed a
Termination Agreement and Release whereby Klaussner released the liens
on our assets.
In fiscal 2003, we opened 18 new stores. We have not closed a
store in the last three fiscal years.
For the fiscal years ended August 30, 2003 and August 31, 2002, we
spent $1,264,000 and $767,000, respectively, in capital expenditures.
We currently anticipate capital expenditures of approximately $500,000
during fiscal 2004 to support the opening of new stores during the
next fiscal year. We do not anticipate needing outside financing for
such expansion. In connection with the Termination Agreement and
Release executed by Klaussner and us in May 2003, a credit line which
Klaussner had made available to us in December 1999, whereby Klaussner
agreed to lend us $150,000 per new store for up to 10 new stores was
also terminated. The credit line had never been drawn upon.
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 based on all fabric protection and warranty
services sold in their stores plus 7.5% of their yearly net sales.
. We have 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 $45,358,000 for the initial period from January 1,
2002 through August 30, 2003 and less than
$27,640,000 for each succeeding twelve (12) month period commencing
August 31, 2003, we must reimburse the private company $0.50 for every
dollar of sales under those amounts subject to the $4,500,000 and
$2,700,000 caps described in the paragraph below. We were obligated to
pay the private company $1,105,000 under this provision in fiscal
2003.
15
. 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 its net sales for
the initial period from January 1, 2002 through August 30, 2003 were
less than $45,358,000, provided that if its sales fell below
$42,667,000 for that initial period, we were obligated to pay the
private company 15% of such shortfall amount, provided further that
such amounts, together with amounts we were required to pay for
advertising if the private company's sales had dropped below
$45,358,000 during such initial period, shall not have, in the
aggregate, exceeded $4,500,000 for such initial period. Upon the
expiration of the initial period, if the private company's sales
during any 12-month period commencing on August 31, 2003 are less than
$27,640,000, we are obligated to pay the private company 10% of such
shortfall amount, provided that if its 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 during in any 12-month period, shall not, in the
aggregate, exceed $2,700,000 during such 12-month period. We were
obligated to pay the private company $221,000 under this provision in
fiscal 2003.
. Messrs. Greenfield and Seidner, officers, directors and principal
stockholders of the Company, had agreed to be responsible for up to an
aggregate of $300,000 of amounts due under these provisions in each
year. The agreement with Messrs. Greenfield and Seidner was terminated
effective July 16, 2003 and they were not required to pay a
contribution of $188,000 for the year ended August 30, 2003. The
Company recorded $188,000 of compensation expense and a corresponding
increase to additional paid in capital representing the benefit
received by Messrs. Greenfield and Seidner as a result of the
termination of the agreement.
. In settlement of certain disputes for amounts due us from the
private company, the private company has agreed to 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.
. The effect of these agreements with the private company, including
our assumption of the warehousing responsibilities, decreased our
operations by $931,000 in fiscal 2003 and improved our operations by
$1,190,000 for fiscal 2002, compared to the results we would have
achieved based on the same sales levels under the agreements effective
prior to the Initial Operating Agreement. There is no assurance that
the agreement will improve our future operating results in the future.
For a more detailed discussion of the proposed settlement agreement
and the Interim Operating Agreement, see "Certain Relationships and
Related Transactions" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held February
10, 2004, which is hereby incorporated by reference.
The following table sets forth our future contractual obligations
in total, for each of the next five years and thereafter, as of August
30, 2003. 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) 2004 2005 2006 2007 2008 Thereafter Total
Operating leases for
retail stores and
executive office (1) $17,174 $13,247 $11,697 $10,513 $8,523 $20,092 $81,246
Royalty payments to the
private company (2) 400 - - - - - 400
Employment contracts 900 900 - - - - 1,800
Fabric protection fees to
the private company 550 - - - - - 550
Total contractual
obligations (3) $19,024 $14,147 $11,697 $10,513 $8,523 $20,092 $83,996
(1) While we pay the private company, pursuant to the Interim
Operating Agreement, for 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) and is not included in the table
above.
(2) Continued payment of the royalty and other obligations may be
based on the approval of the proposed settlement agreement.
16
(3) The table does not include a commitment to pay the private
company a maximum of $2.7 million annually (see discussion
above) 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 $476,000.
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, we elected to adopt this
standard as of the beginning of our fiscal year ended August 31, 2002.
During fiscal 2003, 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:
(Dollars in thousands, except for share amounts)
2001
Reported net (loss) income $2,748
Goodwill amortization 174
Adjusted net (loss) income $2,922
Basic (loss) income per share:
Reported net (loss) income $0.48
Goodwill amortization 0.03
Adjusted net (loss) income $0.51
Diluted (loss) income per share:
Reported net (loss) income $0.38
Goodwill amortization 0.02
Adjusted net (loss) income $0.40
Significant Accounting Policies
The receivable from the private company as of August 30, 2003
represents current charges aggregating $3,150,000, 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. Such amount has been fully paid subsequent to
the balance sheet date. In addition to the above, the receivables
from the private company include $4,722,000, 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 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 $2,400,000 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
17
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.
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. A minimum deposit of 50% is
typically required upon placing a non-financed sales order with the
balance payable upon delivery.
Commencing June 23, 2002, and prior to May 27, 2001, a subsidiary
of the private company assumed all performance obligations and risks
of any loss under the lifetime protection plans and accordingly, we
recognized revenue from the sale of service contracts related to the
plans during such periods at the time of sale to the customer. During
the period from May 27, 2001 through June 22, 2002 as part of the
Interim Operating Agreement entered into with the private company, we
agreed to assume responsibility and risk of loss under the plans for
sales of service contracts during such period and accordingly revenue
from sales of the service contracts was deferred and amortized into
income in proportion to the costs expected to be incurred in
performing services under the plans.
Inflation
There was no significant impact on our operations as a result of
inflation during the three fiscal years ended August 26, 2001, August
31, 2002 and August 30, 2003.
18
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 incurred a net loss of ($3,377,000) in the fiscal year ended
August 30, 2003 and achieved net income of $10,991,000 and $2,748,000
in the fiscal years ended August 31, 2002 and August 25, 2001
respectively. The furniture business is cyclical and we have been
impacted and will continue to be affected by changes in such cycles,
by losses from new stores, the overall economic and political climate,
changes in consumer preferences or demographics or unknown risks and
uncertainties that may cause us to continue to incur losses from
operations.
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 which we
expect will soon be presented to the court for its approval,
effectiveness of such agreements is subject to such court approval and
other conditions and there can be no assurance that such conditions
will be met. In addition to the derivative litigation, as described
under "Legal Proceedings", there are several other actions in which we
are involved. There is no assurance that we will prevail in these
actions and to the extent that any recovery is not covered by
insurance, it could adversely affect our cash position.
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 $4,500,000 for the initial period
beginning January 1, 2002 and ended August 30, 2003 and $2,700,000 per
year thereafter, if its sales drop below specified levels. For the
initial period, which ended August 30, 2003, the amount of "short-
fall" payments we paid to the private company was $1,326,000. The
provisions of the proposed settlement are currently in effect as a
result of the Interim Operating Agreement.
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, 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" in our Proxy
Statement to be furnished in connection with our Annual Meeting of
Stockholders to be held February 10, 2004, which is hereby
incorporated by reference.
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 30, 2003, we purchased
approximately 60% of our merchandise from Klaussner. Since a large
19
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. 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 "Certain Relationships and
Related Transactions" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held February
10, 2004, which is hereby incorporated by reference. Also, we
purchase a significant percentage of our merchandise from Natale, our
principal leather supplier. During the fiscal year ended August 30,
2003, we purchased approximately 33% of our merchandise from Natale.
It is the Company's intent to reduce its dependency on Natale and it
has begun purchasing its leather merchandise from other suppliers.
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 and political
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. Until May 2003, when we executed the
Termination and Release Agreement, all of our assets were 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 21, 2003, Harley J. Greenfield, our Chairman of the
Board and Chief Executive Officer and principal stockholder,
beneficially owns approximately 28.2% of our outstanding shares of
common stock. Approximately 65.7% 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 do not have key man insurance on the lives of such
individuals.
We are not likely to declare dividends on common stock.
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.
20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
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.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. In response
to the requirements of the Sarbanes-Oxley Act of 2002, as of the end
of the period covering this report, the evaluation date, our Chief
Executive Officer and Chief Financial Officer carried out an
evaluation of the effectiveness of our "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules
13a-15(e) and 15d-15(e)). Based on that evaluation, these officers
concluded that, as of the evaluation date, our disclosure controls and
procedures were adequate and effective to ensure that material
information relating to us and our consolidated subsidiaries was made
known to them by others within those entities, particularly during the
period in which this report was being prepared.
Changes in Internal Controls. There were no changes in our
internal controls over financial reporting, identified in connection
with the evaluation of such internal controls that occurred during our
last fiscal quarter, that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
PART III
Item 10. Our Directors and Executive Officers.
The information set forth under the caption "Election of Directors"
in our Proxy Statement to be furnished in connection with our Annual
Meeting of Stockholders to be held February 10, 2004 is hereby
incorporated by reference.
Item 11. Executive Compensation.
The information set forth under the caption "Executive Compensation"
in our Proxy Statement to be furnished in connection with our Annual
Meeting of Stockholders to be held February 10, 2004 is hereby
incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in our Proxy Statement to be
furnished in connection with our Annual Meeting of Stockholders to be
held February 10, 2004 is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Relationships and
Related Transactions" in our Proxy Statement to be furnished in
connection with our Annual Meeting of Stockholders to be held February
10, 2004 is hereby incorporated by reference.
Item 14. Principal Accountant Fees and Services
The information set forth under the caption "Principal Accounting Fees
and Services" in our Proxy Statement to be furnished in connection
with our Annual Meeting of Stockholders to be held February 10, 2004
is hereby incorporated by reference.
21
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.
22
(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.
4.1 Form of Non-Qualified Stock Option Agreement with certain
directors and officers of Jennifer Convertibles, Inc.
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended March 1, 2003.
4.2 Form of Non-Qualified Stock Option Agreement with certain
employees and consultants of Jennifer Convertibles, Inc.
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended March 1, 2003.
4.4 Jennifer Convertibles, Inc. 2003 Stock Option Plan,
incorporated herein by reference to our Proxy Statement on
Schedule 14A filed on August 11, 2003.
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.
23
(3) Exhibits
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.
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.
24
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.
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.
25
(3) Exhibits
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.
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 regarding 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 by and
among Jara Enterprises, Inc., Jennifer Convertibles, Inc.,
Fred Love and Jennifer Acquisition Corp. incorporated
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 by and between Jara
Enterprises, Inc. and Jennifer Convertibles, Inc.
incorporated herein by reference to our Quarterly Report
on Form 10-Q for the quarterly period ended May 25, 2002.
10.49 Termination Agreement and Release, by and among Klaussner
Furniture Industries, Inc., Jennifer Convertibles, Inc.
and the other signatories thereto incorporated herein by
reference to our Current Report on Form 8-K filed on May
13, 2003 reporting as an Item 5 event.
10.50 Amendment No. 2 to Warehousing Agreement, by and between
Jara Enterprises, Inc. and Jennifer Convertibles, Inc.
incorporated herein by reference to our Current Report on
Form 8-K filed on May 13, 2003 reporting as an Item 5
event..
10.51 Amendment No. 2 to Management Agreement and License, by
and among between Jara Enterprises, Inc., Jennifer
Convertibles, Inc., Fred Love and Jennifer Acquisition
Corp., incorporated herein by reference to our Quarterly
Report on Form 10-Q for the quarterly period ended May 31,
2003.
10.52 Termination Agreement by and between Jennifer
Convertibles, Inc., Harley Greenfield and Edward Seidner.*
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. *
31.1 Certification of Chief Executive Officer.*
31.2 Certification of Chief Financial Officer.*
32.1 Certification of Principal Executive Officer pursuant to
U.S.C. Section 1350.*
32.2 Certification of Principal Financial Officer pursuant to
U.S.C. Section 1350.*
* Filed herewith.
26
(b) Reports on Form 8-K.
(1) On June 9, 2003 we filed a current report on Form 8-K
announcing that we had been accepted for listing on the American
Stock Exchange.
(c) Exhibits.
See (a) (3) above.
(d) Financial Statement Schedules.
See (a)(2) above.
27
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 November 26, 2003
Harley J. Greenfield and Chief Executive
Officer (Principal
Executive Officer)
/s/Edward B. Seidner Director November 26, 2003
Edward B. Seidner
/s/Bernard Wincig Director November 26, 2003
Bernard Wincig
/s/Edward Bohn Director November 26, 2003
Edward Bohn
/s/Kevin J. Coyle Director November 26, 2003
Kevin J. Coyle
/s/Mark Berman Director November 26, 2003
Mark Berman
/s/Rami Abada President, Director, November 26, 2003
Rami Abada Chief Operating
Officer And Chief
Financial Officer
28
Exhibit 10.52
TERMINATION AGREEMENT
This Termination Agreement (this "Termination Agreement") is
dated as of October 8, 2003 by and among Harley J.
Greenfield, an individual having an address of c/o Jennifer
Convertibles, Inc., 419 Crossways Park Drive, Woodbury, NY
11797 ("Greenfield"), Edward B. Seidner, an individual
having an address of c/o Jennifer Convertibles, Inc., 419
Crossways Park Drive, Woodbury, NY 11797 ("Seidner") and
Jennifer Convertibles, Inc., a Delaware Corporation ("JCI").
Collectively, Greenfield, Seidner and JCI are referred to
herein as the "Parties" and, individually, each shall be
referred to as a "Party".
RECITALS:
WHEREAS, the Parties have entered into that certain
Agreement dated as of July 6, 2001 (the "Agreement") wherein
Greenfield and Seidner have agreed to pay to JCI a portion
of certain contingent amounts pursuant to the terms of the
Management Agreement (as defined in the Agreement);
WHEREAS, in order to eliminate certain conflicts and for
other good and valuable consideration the Parties have
agreed to terminate the Agreement; and
WHEREAS, the independent directors of the board of directors
of JCI have concluded that the termination of the Agreement
is prudent and in the best interests of the shareholders of
JCI.
NOW, THEREFORE, the Parties hereto agree as follows:
TERMINATION
The Agreement is hereby terminated as of July 16, 2003 and
all provisions therein, including those that expressly or
implicitly survive termination, are of no further force or
effect.
MISCELLANEOUS
This Termination Agreement shall be governed by and
construed in accordance with the laws of the State of New
York.
This Termination Agreement 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.
* * * * *
Exhibit 10.52
IN WITNESS WHEREOF, the parties hereto have caused this
Termination Agreement to be duly executed by their duly
authorized officers as of the day and year above written.
By: /s/ Harley J. Greenfield
Name: Harley J. Greenfield
an individual
By: /s/ Edward B. Seidner
Name: Edward B. Seidner
an individual
JENNIFER CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
Name: Harley J. Greenfield
Title: Chief Executive 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 11, 2003 with
respect to the consolidated financial statements of Jennifer Convertibles,
Inc. and subsidiaries included in this Annual Report (Form 10-K) for
fiscal year ended August 30, 2003.
Eisner LLP
New York, New York
November 25, 2003
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE 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 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 report;
3. Based on my knowledge, the financial statements, and
other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: November 26, 2003
/s/ Harley J. Greenfield
Harley J. Greenfield, Chief Executive Officer
29
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL 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 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 report;
3. Based on my knowledge, the financial statements, and
other financial information included in this 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 report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: November 26, 2003
/s/ Rami Abada
Rami Abada, Chief Financial Officer
30
EXHIBIT 32.1
Certification of Principal Executive Officer
Pursuant to U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
I, Harley J. Greenfield, Chief Executive Officer of Jennifer
Convertibles, Inc., hereby certify, to my knowledge, that
the annual report on Form 10-K for the period ending August
30, 2003 of Jennifer Convertibles, Inc. (the "Form 10-K")
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-K fairly presents, in
all material respects, the financial condition and results
of operations of Jennifer Convertibles, Inc.
Dated: November 26, 2003 /s/ Harley J. Greenfield
Harley J. Greenfield
Chief Executive Officer
(Principal Executive Officer)
31
EXHIBIT 32.2
Certification of Principal Financial Officer
Pursuant to U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Rami Abada, Chief Financial Officer of Jennifer Convertibles, Inc.,
hereby certify, to my knowledge, that the annual report on Form 10-K
for the period ending August 30, 2003 of Jennifer Convertibles, Inc.
(the "Form 10-K") 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-K fairly presents, in all
material respects, the financial condition and results of operations
of Jennifer Convertibles, Inc.
Dated: November 26, 2003 /s/ Rami Abada
Rami Abada
Chief Financial Officer
(Principal Financial Officer)
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index to Financial Statements
Independent Auditors' Report...............................................F1
Consolidated Balance Sheets at August 30, 2003 and August 31,
2002...................................................................F2
Consolidated Statements of Operations for the years ended
August 30, 2003, August 31, 2002 and August 25, 2001...................F3
Consolidated Statements of Stockholders' Equity (Capital
Deficiency) for the years ended August 30, 2003, August 31, 2002,
and August 25, 2001....................................................F4
Consolidated Statements of Cash Flows for the years ended
August 30, 2003, August 31, 2002 and August 25, 2001...................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 30, 2003 and August 31, 2002, 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 30, 2003. 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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Jennifer Convertibles, Inc. and
subsidiaries as of August 30, 2003 and August 31, 2002, and
the consolidated results of their operations and their cash
flows for each of the three years in the period ended
August 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.
As described in Note 3, the Company has significant
transactions with a company owned by a related party.
Eisner LLP
New York, New York
November 11, 2003
F1
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except for share data)
ASSETS
August 30, August 31,
2003 2002
Current assets:
Cash and cash equivalents $12,761 $15,973
Accounts receivable 408 475
Merchandise inventories, net 12,721 13,348
Due from Private Company, net
of reserves of $4,722 and $4,754 at
August 30, 2003 and August 31, 2002,
respectively 3,150 3,696
Deferred tax asset 2,895 1,950
Prepaid expenses and other current assets 1,398 801
Total current assets 33,333 36,243
Store fixtures, equipment and leasehold
improvements at cost, net 3,854 4,231
Deferred lease costs and other
intangibles, net 98 195
Goodwill, at cost, net 1,796 1,796
Deferred tax asset - 412
Other assets (primarily security deposits) 626 748
$39,707 $43,625
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $15,049 $14,037
Customer deposits 9,203 7,689
Accrued expenses and other current
liabilities 4,135 6,955
Due to Private Company 500 500
Deferred rent and allowances current portion 821 1,171
Total current liabilities 29,708 30,352
Deferred rent and allowances, net of
current portion 3,155 3,187
Total liabilities 32,863 33,539
Commitments and contingencies (Notes 9 and 10)
Stockholders' Equity
Preferred stock, par value $.01 per share
Authorized 1,000,000 shares
Series A Convertible Preferred-
10,000 shares issued
and outstanding at August 30, 2003
and August 31, 2002
(liquidation preference $5,000)
Series B Convertible Preferred-
26,664 shares issued
and outstanding at August 30, 2003
and August 31, 2002
(liquidation preference $133)
Common stock, par value $.01 per share
Authorized 10,000,000 shares;
issued and outstanding 5,713,058
shares at August 30, 2003 and
5,704,058 shares at August 31, 2002 57 57
Additional paid-in capital 27,617 27,482
Accumulated deficit (20,830) (17,453)
6,844 10,086
$39,707 $43,625
2916:
2917:
See Notes to Consolidated Financial Statements.
F2
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
Year ended Year ended Year ended
August 30, 2003 August 31, 2002 August 25, 2001
(52 weeks) (53 weeks) (52 weeks)
Revenue:
Net sales $118,577 $140,440 $132,266
Revenue from service
contracts 8,000 10,743 4,376
126,577 151,183 136,642
Cost of sales, including
store occupancy,
warehousing, delivery
and services costs 87,061 96,459 92,686
Selling, general and
administrative expenses 41,846 42,962 39,963
Depreciation and
amortization 1,738 1,660 1,854
130,645 141,081 134,503
Operating (loss) income (4,068) 10,102 2,139
Interest income 136 210 466
Interest expense (11) (14) (84)
(Loss) income before
income taxes (3,943) 10,298 2,521
Income tax benefit (566) (693) (227)
Net (loss) income $(3,377) $10,991 $2,748
Basic (loss) income per
common share ($0.60) $1.93 $0.48
Diluted (loss) income per
common share ($0.60) $1.50 $0.38
Weighted average common shares
outstanding basic income
per share 5,709,900 5,704,058 5,704,058
Effect of potential common
share issuance:
Stock options - 177,868 51,378
Convertible preferred
stock - 1,443,164 1,443,164
Weighted average common
shares outstanding diluted
income per share 5,709,900 7,325,090 7,198,600
See Notes to the Consolidated Financial Statements.
F3
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Capital Deficiency)
Years Ended August 30, 2003, August 31, 2002, and August 25, 2001
(In thousands, except share data)
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
26, 2000 10,000 - 26,664 - 5,704,058 $57 $27,482 $(31,192) $(3,653)
Net income 2,748 2,748
Balances at August
25, 2001 10,000 - 26,664 - 5,704,058 $57 $27,482 $(28,444) $(905)
Net income 10,991 10,991
Balances at August
31, 2002 10,000 - 26,664 - 5,704,058 57 $27,482 (17,453) 10,086
Exercise of stock
options 9,000 - 18 18
Dividends on Series B
Preferred Stock (71) (71)
Other 188 188
Net loss (3,377) (3,377)
Balances at August
30, 2003 10,000 - 26,664 - 5,713,058 $57 $27,617 ($20,830) $6,844
See Notes to Consolidated Financial Statements.
F4
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Year Ended Year Ended Year Ended
August 30, August 31, August 25,
2003 2002 2001
(52 weeks) (53 weeks) (52 weeks)
Cash flows from operating activities:
Net (loss) income ($3,377) $10,991 $2,748
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation and amortization 1,738 1,660 1,854
Loss on disposal of equipment - 24 -
Provision for warranty costs (23) 76 50
Provision for fabric protection costs - (273) 273
Income from prior store closings - - (80)
Deferred rent (382) (478) (222)
Deferred tax benefit (533) (1,737) (624)
Recovery of amounts due from
Private Company (33) (58) (15)
Non-cash compensation to 188 - -
stockholders
Deferred income - (2,121) 2,121
Changes in operating assets and
liabilities
Merchandise inventories 627 (688) (1,596)
Prepaid expenses and other current
assets (597) (318) (107)
Accounts receivable 67 282 (429)
Due from Private Company -net 579 86 (1,716)
Other assets, net 122 (16) (64)
Accounts payable trade 1,012 (2,882) 1,884
Customer deposits 1,514 (1,004) (262)
Accrued expenses and other current
liabilities (2,797) 2,041 (489)
Net cash (used in) provided by
operating activities (1,895) 5,585 3,326
Cash flows from investing activities:
Capital expenditures (1,264) (767) (1,362)
Deferred lease costs and other
intangibles - - 21
Payments of amounts payable under
acquisition agreement - - (239)
Proceeds from commercial paper - - 3,025
Net cash (used in) provided by
investing activities (1,264) (767) 1,445
Cash flows from financing activities:
Proceeds from exercise of stock options 18 - -
Dividends on Series B preferred stock (71) - -
Net cash (used in) financing activities (53) - -
Net (decrease) increase in cash and
cash equivalents (3,212) 4,818 4,771
Cash and cash equivalents at
beginning of year 15,973 11,155 6,384
Cash and cash equivalents at end of year $12,761 $15,973 $11,155
Supplemental disclosure of cash flow
information:
Income taxes paid $962 $699 $1,146
Interest paid $11 $14 $84
See Notes to Consolidated Financial Statements.
F5
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(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 30, 2003 and August 31, 2002, respectively, 138 and
120 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 30, 2003 and
August 31, 2002, 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"). As of
August 30, 2003 and August 31, 2002, respectively, three 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. The
Company receives a royalty of 5% of sales from one Unconsolidated
Licensee and two stores owned 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 3, 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.
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
F-6
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
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 Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure
about Segments of an Enterprise and Related Information", which
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 a 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:
8/30/03 8/31/02
Showrooms $6,811 $6,553
Warehouses 5,910 6,795
$12,721 $13,348
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
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 was effective for fiscal years beginning after December 15,
2001; however, the Company elected to adopt this standard as of
the beginning of its fiscal year ended August 31, 2002. During
fiscal 2002 and fiscal 2003, 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 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
Net income and related per share amounts for the year ended
August 25, 2001 adjusted to exclude amortization of goodwill are
as follows:
Reported net income $2,748
Goodwill 174
amortization
Adjusted net income $2,922
Basic income per share:
Reported net income $0.48
Goodwill amortization 0.03
Adjusted net income $0.51
Diluted income per share:
Reported net income $0.38
Goodwill amortization 0.02
Adjusted net income $0.40
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
assets and liabilities.
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 $3,976 and $4,358
at August 30, 2003 and August 31, 2002, 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 4).
A minimum deposit of 50% is typically required upon placing a non-
financed sales order with the balance payable upon delivery.
Commencing June 23, 2002, and prior to May 27, 2001, a
subsidiary of the Private Company assumed all performance
obligations and risks of any loss under the lifetime protection
plans and accordingly, the Company recognized revenue from the
sale of service contracts related to the plans during such
F-8
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
periods at the time of sale to the customer. During the period
from May 27, 2001 through June 22, 2002, as part of the Interim
Operating Agreement entered into with the Private Company, the
Company agreed to assume the responsibility and risk of loss
under the plans for sales of service contracts during such period
and, accordingly revenue from sales of the service contracts was
deferred and amortized into income in proportion to the costs
expected to be incurred in performing services under the plans.
(See last paragraph note 3(a).)
Warehousing and management fee income from the Private Company
is recognized when earned.
Income Per Share
Basic net (loss) income per common share is computed by
dividing the net (loss) income after adjustment for preferred
stock dividends of $43, in 2003 and $9 in each of 2002 and 2001,
by the weighted average number of shares of common stock
outstanding during each period. Diluted income per share for
2002 and 2001 reflects the dilutive effect of the assumed
conversion of preferred stock and the exercise of options.
Potentially dilutive shares, (4,381,941) related to exercise of
stock options and conversion of preferred stock were excluded
from the diluted loss per share calculation for the fiscal year
ended August 30, 2003, because their effects would have been anti-
dilutive. For the fiscal year ended August 31, 2002, options for
603,333 shares, which were anti-dilutive, were 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 30, 2003, August
31, 2002 and August 25, 2001 aggregated $13,384, $14,103 and
$14,094, respectively, net of amounts charged to the Private
Company and Unconsolidated Licensees (see Note 3).
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.
Concentration of Risks
The receivable from the Private Company as of August 30, 2003,
represents current charges aggregating $3,150, 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 $4,722,
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 3, as
part of a proposed settlement, the disputed balance will be
settled by the Private Company executing 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 60% and 33% of
inventory purchases during fiscal 2003, 67% and 28% of inventory
purchases during fiscal 2002, and 71% and 18% of inventory
purchases during fiscal 2001, 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 30, 2003 and August 31, 2002, amounts on
F-9
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
deposit with this one bank totaled 63% and 96% of total cash and
cash equivalents, respectively.
Stock Options
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 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:
2003 2002 2001
Net (Loss) Income:
As reported ($3,377) $10,991 $2,748
Pro forma under SFAS 123 ($3,855) $10,835 $2,604
Basic (loss) income per share:
As reported ($0.60) $1.93 $0.48
Pro forma under SFAS 123 ($0.69) $1.90 $0.46
Diluted (loss) income per share:
As reported ($0.60) $1.50 $0.38
Pro forma under SFAS 123 ($0.69) $1.48 $0.36
The weighted average fair value on the date of grant of
options granted is estimated at $1.80 and $0.39 in 2003 and 2001,
respectively, using the Black-Scholes option-pricing model with
the following weighted average assumptions:
2003 2001
Risk-free interest rate 3.12% 4.72%
Expected life of options 5 5
Expected stock price volatility 49.4% 28.8%
Expected dividend yield 0% 0%
No options were granted in 2002.
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.
Reclassifications
Certain reclassifications have been made to the 2001 and 2002
amounts to conform with the 2003 presentation.
(3) Agreements and Transactions with Private Company
(a) Interim Operating Agreement
F-10
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
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 10). 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.
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 the Private Company 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 net delivered sales and 5% on net delivered sales over
$27,640. After five years, the Company will receive a
warehousing fee of 7.5% of all net delivered sales by the Private
Company. In addition, during the full term of the agreement, the
Company will receive a fee based on fabric protection and
warranty services sold by the Private Company at the rate the
Company was being charged, subject to increase for documented
cost increases. For the fiscal years ended August 30, 2003,
August 31, 2002 and August 25, 2001, respectively, charges
(included in net sales) to the Private Company for warehousing
fees amounted to $597, $673 and $148, based on net delivered
sales and $579, $603 and $7, based on sales of fabric protection
and warranty services.
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. For
the "initial period," which commenced January 1, 2002 and ended
August 30, 2003, the Private Company was required to pay to the
Company an amount equal to 48% of the total of the amount by
which the Private Company's net delivered sales exceed $45,358.
If during any annual period commencing on August 31, 2003, the
Private Company's net delivered sales exceed $27,640 but do not
surpass $29,640, then the Private Company will pay to the Company
an amount equal to ten percent (10%) of such excess 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
initial period ended August 30, 2003, no such 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 30, 2003 and August 31, 2002, the Company paid the
Private Company a royalty of $400 and $400 respectively. In the
fiscal year ended August 25, 2001, the Company paid $300 (which
F-11
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
included $100 as a prorated fee for the balance of the year and a
one time fee of $200 for opening four additional stores in New
York).
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 delivered sales for the
period January 1, 2002 through August 30, 2003 and for any 12
month period commencing August 31, 2003 are below $45,358 and
$27,640 respectively, provided that if such net delivered sales
fall below $42,667 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 net delivered sales drop below $45,358 and
$27,640 as described below, shall not, in the aggregate, exceed
$4,500 for the initial period or $2,700 in any 12 month period
thereafter. As Private Company sales did not meet the threshold
amount, the Company paid $221 to the Private Company during the
initial period ended August 30, 2003. Messrs. Greenfield and
Seidner, officers, directors and principal stockholders of the
Company, had agreed to be responsible for up to an aggregate of
$300 of amounts due under these provisions in each year. The
agreement with Messrs. Greenfield and Seidner was terminated
effective July 16, 2003 and they were not required to pay a
contribution of $188 for the year ended August 30, 2003. For
fiscal 2003, the Company recorded $188 of compensation expense
and a corresponding increase to additional paid in capital
representing the benefit received by Messrs. Greenfield and
Seidner as a result of the termination of the agreement.
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 (estimated at 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 initial period ended August 30, 2003 were less than $45,358
and are less than $27,640 in any subsequent 12 month period
commencing August 31, 2003, 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 such amount
plus any payments of the 10-15% with respect to sales shortfalls
as described above, had not exceeded $4,500 (for the initial
period) or will not exceed $2,700 (any12 month period) in the
aggregate. For the fiscal years ended August 30, 2003, August
31, 2002 and August 25, 2001, contributions from the Private
Company for advertising under the Interim Operating Agreement,
which reduced selling, general and administrative expenses,
amounted to $1,468, $1,470 and $368, respectively. In addition,
as the Private Company's sales did not meet the threshold amount
during the initial period, the Company was required to pay $1,105
to the Private Company which was charged to selling, general and
administrative expenses for the year ended August 30, 2003.
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 unable 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.
F-12
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
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 was 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
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 (subject to an
extension to August 27, 2005 at the option of the Company) and
assumed all performance obligations and risk of loss thereunder.
The Company has no obligation with respect to such plans. The
Private Company is entitled to 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. Payments to the Private Company amounted to
$450 and $500 for the fiscal years ended in 2003 and 2002,
respectively. In addition, for a payment of $400 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 after June 23, 2002. As
a result thereof, in the fourth quarter of its fiscal year ended
August 31, 2002, the Company reversed into income $7,404
(included in revenue from service contracts) representing the
remaining balance of deferred revenue related to the fabric
protection plans 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 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.
See (c) below for charges to the Company in fiscal 2001.
The Company has the responsibility of advertising for itself,
the LP's, the Unconsolidated Licensees and the Private Company.
Under the prior arrangement, the Private Company and
Unconsolidated Licensees were charged a share of advertising
costs. No such costs were charged to unconsolidated licensees
for the fiscal years 2003, 2002 and 2001, respectively. See (c)
below for charges to the Private Company.
(c) Transactions with the Private Company
The Company purchased merchandise for itself, the LP's, the
Unconsolidated Licensees and the Private Company. During the
years ended August 30, 2003, August 31, 2002 and August 25, 2001,
approximately $10,232, $11,537 and $12,027, 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.
F-13
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
The Company is entitled to Royalty income from two stores
owned by the Private Company and one store owned by an
Unconsolidated Licensee that is managed by the Private Company.
Royalty income from the three stores amounted to $105, $121 and
$134 for the fiscal years ended 2003, 2002, and 2001,
respectively. Such amounts are included in net sales in the
Consolidated Statements of Operations.
Included in the Consolidated Statements of Operations are the
following amounts charged by and to the Private Company:
Increase (decrease)
Year Year Year
Ended Ended Ended
August August August
30, 31, 25,
2003 2002 2001
Net Sales:
Royalty income $105 $121 $134
Warehouse fees 1,176 1,276 155
Delivery charges 1,746 1,833 1,793
Total charged to the Private
Company $3,027 $3,230 $2,082
Revenue from Service Contracts:
Fabric protection fees charged
by the Private Company ($450) ($500) ($1,638)
Cost of Sales:
Warehouse expenses charged by
the Private Company $0 $0 $3,338
Selling, General and
Administrative Expenses:
Advertising reimbursement paid
by the Private Company ($1,468) ($1,470) ($1,727)
Royalty expense paid to the
Private Company 400 400 300
Expense related to shortfall
payments charged by
the Private Company 1,326 0 0
Total charged (by) to the
Private Company $258 ($1,070) ($1,427)
(4) 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 $2,633, $2,805 and $1,887 for the fiscal years ended
August 30, 2003, August 31, 2002 and August 25, 2001,
respectively, are included in selling, general and administrative
expenses. Proceeds received from the sale of the receivables
amounted to $43,111, $53,093 and $41,101, for the fiscal years
ended August 30, 2003, August 31, 2002 and August 25, 2001,
respectively. Accounts receivable in the accompanying balance
sheets represents amounts due from the finance company for
certain sales made in August of each year.
F-14
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
(5) Store Fixtures, Equipment and Leasehold Improvements
8/30/03 8/31/02 Estimated Useful Lives (years)
Store fixtures and
furniture $5,699 $ 5,481 5-10
Leasehold improvements 8,872 7,973 1-15
Computer equipment
and software 1,769 1,633 3-10
16,340 15,087
Less: Accumulated
depreciation and
amortization (12,486) (10,856)
$3,854 $4,231
(6) 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 Company's Series A Convertible
Preferred stock, executed a Credit and Security Agreement in
March 1996 that effectively extended the payment terms for
merchandise shipped from 60 days to 81 days and provided
Klaussner with a security interest in all the Company's assets,
including accounts 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 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.
In May 2003, the Company executed a Termination Agreement and
Release whereby Klaussner released the liens on the Company's
assets. As of August 30, 2003 and August 31, 2002, the Company
owed Klaussner $8,399 and $8,266, respectively. The Company
purchased approximately 60% (2003), 67% (2002) and 71% in 2001 of
its inventory from Klaussner.
Purchase allowances of $1,162 (2003), $1,447 (2002) and $1,611
(2001) 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 provided that the maximum aggregate amount of the loans
would be $1,500 (10 stores). Each such loan would have been
evidenced by a three year note, bearing interest at the then
LIBOR rate for three month loans plus 3%. Payment of the notes
may have been 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 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. The Company had never drawn upon this loan facility and
the agreement was terminated as a result of the execution of the
Termination Agreement and Release in May 2003.
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
F-15
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
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.
(7) Income Taxes
Components of income tax (benefit) expense are as follows:
Years Ended
8/30/03 8/31/02 8/25/01
Current:
Federal ($214) $527 $102
State 181 517 295
Deferred
Federal (418) (a)(1,581) (a)(425)
State (115) (a) (156) (a)(199)
($566) ($693) $(227)
(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.
Expected tax (benefit) expense based on the statutory rate is
reconciled with actual tax (benefit) as follows:
Years Ended
8/30/03 8/31/02 8/25/01
"Expected" tax (benefit) expense (34.0%) 34.0% 34.0%
Increase (reduction) in taxes resulting from:
State and local income tax, net of federal
income tax effect 1.1% 3.1% 12.6%
Non-deductible items 1.6% 0.3% 3.0%
Other (5.2%) 2.3% 5.1%
Utilization of net operating loss
carryforwards and benefit
from reversal of (net of
originating), deductible
temporary differences (8.1%) (28.5%) (38.9%)
(Reduction) of valuation
allowance to recognize
estimated future year
benefit of carryforward
and deductible
temporary differences 0% (17.9%) (24.8%)
Increase in valuation allowance 30.1% 0% 0%
Actual tax (benefit) (14.5%) (6.7%) (9.0%)
The principal components of deferred tax assets, liabilities
and the valuation allowance are as follows:
August 30, 2003 August 31, 2002
Deferred tax assets:
Net operating loss carryforward $1,519 $0
Reserve for loans and advances 1,818 1,770
Deferred rent expense 1,536 1,622
Excess of tax over book basis of
leasehold improvements 1,728 1,402
F-16
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
August 30, 2003 August 31, 2002
Inventory capitalization 236 244
Other expenses for financial
reporting, not yet deductible
for taxes 424 600
Total deferred tax assets,
before valuation allowance 7,261 5,638
Less: Valuation allowance (4,149) (2,968)
Total deferred tax assets 3,112 2,670
Deferred tax liabilities:
Excess of book over tax basis of
store fixtures and equipment 217 308
Net deferred tax asset $2,895 $2,362
The Company intends to elect not to carry back the net
operating loss incurred during the year ended August 30, 2003 and
accordingly as of such date has a net operating loss carryforward
of $3,756, which expires in 2023.
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
benefits will be realized. During the years ended August 30,
2003, August 31, 2002 and August 25, 2001, the valuation
allowance increased by $1,181 and decreased by $5,211 and $1,110,
respectively. The reduction of the valuation allowance in fiscal
years 2002 and 2001 includes a reduction of $1,517 and $550,
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.
(8) 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. As
of August 30, 2003, the 1986 Plan and the 1991 Plan have expired.
In May 1997, the Board of Directors of the Company adopted the
1997 Stock Option Plan, under which 500,000 shares of Common
Stock were reserved for issuance. Such plan has not been
presented to the stockholders for approval. As of August 30,
2003, 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:
F-17
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
Options Exercisable Options
Number of Weighted Number of Weighted
Shares Average Shares Average
Exercise Exercise
Price Price Per
Per Share Share
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
Granted 844,500 $3.89
Exercised (9,000) $2.00
Expired (35,000) $13.13
Canceled (6,000) $2.00
Outstanding at 8/30/03 2,938,777 $3.06 1,894,699 $2.65
The options granted in 2001 and 2003 were outside of the Plans.
As of August 30, 2003, the weighted average remaining
contractual life of the outstanding options was 6.69 years.
At the Company's annual meeting of stockholders, which was
held on September 9, 2003, the 2003 Stock Option Plan was
adopted, under which 700,000 common shares were reserved for
issuance for grants of incentive and non-qualified options to
selected employees, officers, directors, agents, consultants and
independent contractors of the Company.
As of the grant date of the options granted in 2003, the
Company's outstanding common stock and other convertible
securities exceeded the 10,000,000 shares of common stock, which
were authorized. Accordingly, for financial reporting purposes,
94,999 options are deemed to be granted effective September 9,
2003, the date the stockholders approved an increase in the
authorized common shares to 12,000,000.
(9) Commitments and other
Leases
The Company and LP's lease retail store locations under
operating leases for varying periods through 2017, 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 30, 2003:
Year Ending August
2004 $17,174
2005 13,247
2006 11,697
2007 10,513
2008 8,523
Thereafter 20,092
$81,246
Rental expense for all operating leases amounted to
approximately $20,199, $18,305 and $17,047, net of sublease
income of $150, $225 and $221, for the years ended August 30,
2003, August 31, 2002 and August 25, 2001, respectively. In
addition, the Company paid rent of $965, $983 and $254 for the
F-18
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
years ended August 30, 2003, 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 3).
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
set forth in the Agreements.
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 3, 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 Transactions
The Company incurred approximately $154, $156 and $166 of
legal fees payable to a director (and stockholder) of the Company
in the fiscal years ended in 2003, 2002, and 2001, respectively.
For fiscal 2003, the Company paid $22 in rent on a month to
month basis for a retail store to the father of an officer,
director and stockholder of the Company.
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.
Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities are:
8/30/03 8/31/02
Advertising $1,307 $2,040
Payroll and bonuses 411 1,151
Accounting 2 271
Warehouse expenses 81 183
Litigation settlement costs 279 279
Sales tax 527 990
Warranty 554 576
Fabric protection 0 0
Income tax 0 878
Other 974 587
$4,135 $6,955
F-19
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
Common Stock
On September 9, 2003, the stockholders approved an amendment
to the Company's certificate of incorporation to increase the
authorized common stock to 12,000,000 shares.
Warranties
The aggregate changes in the liability for accruals relating
to the product warranties issued during the reporting period are
as follows:
Warranty payable as of August 31, 2002 $576
Amount paid during fiscal 2003 (854)
Amount expensed during fiscal 2003 832
Ending warranty payable as of August 30, 2003 $554
(10) Litigation
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.
(a) 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, and in November
2003 issued an additional 30,717 shares of Series B Preferred
Stock, convertible into 21,501 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 ($287) and accrue dividends at the rate of $.35 per share
per annum. In June 2003, the Company paid accrued dividends,
through April 30, 2003 amounting to $71 including dividends
applicable to shares to be issued in November 2003. Accumulated
unpaid dividends for the period May 1, 2003 through August 30,
2003 amounted to $7. 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 3, 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,
were 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.
(c) The Company is also subject to other litigation including
a claim for $10,000,000 for assault and battery, conversion of
identity, defamation, consumer fraud, and infliction of emotional
distress, and another claim for unspecified damages for sexual
harassment, discrimination, retaliation, mental infliction of
emotional stress, false imprisonment and collateral claims. The
matters are in early stages and the Company denies liability and
does not believe that these matters will have significant impact
on its financial position or results of operations.
F-20
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
(12) Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of
operations for the years ended August 30, 2003, and August 31,
2002.
Thirteen Thirteen Thirteen Thirteen
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
November 30, March 1, May 31, August 30,
2002 2003 2003 2003
Revenue:
Net sales $34,865 $27,570 $28,061 $28,081
Revenue from service
contracts 2,210 1,825 2,061 1,904
37,075 29,395 30,122 29,985
Cost of sales,
including store
occupancy,
warehousing,
delivery,
service costs 24,555 20,145 20,810 21,551
Operating income (loss) 556 (1,047) (1,466) (2,111)
Interest income 41 42 29 24
Interest expense 0 0 4 7
Income (loss) before
income taxes 597 (1,005) (1,441) (2,094)
Income tax provision
(benefit) 94 (184) (61) (415)
Net income (loss) $503 ($821) ($1,380) ($1,679)
Basic income (loss)
per share $0.09 ($0.14) ($0.24) ($0.31)
Diluted income
(loss) per share $0.06 ($0.14) ($0.24) ($0.31)
Thirteen Thirteen Thirteen Fourteen
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
November 24, February 23, May 25, August 31,
2001 2002 2002 2002
Revenue:
Net sales $34,252 $30,807 $35,808 $39,573
Revenue from
service contracts 185 379 537 9,642(a)
34,437 31,186 36,345 49,215
Cost of sales,
including store
occupancy,
warehousing,
delivery,
service costs 23,730 21,960 24,385 26,384
Operating income (loss) (389) (1,013) 1,365 10,139
Interest income 58 38 45 69
Interest expense 6 1 2 5
Income (loss) before
income taxes (337) (976) 1,408 10,203
Income tax provision
(benefit) 85 (34) 122 (866)
Net income (loss) ($422) ($942) $1,286 $11,069
Basic income (loss)
per share ($0.07) ($0.17) $0.23 $1.94
Diluted income
(loss) per share ($0.07) ($0.17) $0.18 $1.48
F-21
JENNIFER CONVERTIBLES, INC.
Notes to Consolidated Financial Statements
August 30, 2003, August 31, 2002 and August 25, 2001
(In thousands except for share amounts)
(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 3).
F-22