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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended May 29, 2004
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9681
JENNIFER CONVERTIBLES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2824646
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
419 Crossways Park Drive, Woodbury, New York 11797
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 496-1900
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
As of July 12, 2004 5,713,058 shares of the issuer's common
stock, par value $.01, were outstanding.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index
Part I - Financial Information
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets at May 29, 2004 (Unaudited)
and August 30, 2003 2
Consolidated Statements of Operations
(Unaudited) for the thirteen and thirty-nine weeks ended
May 29, 2004 and May 31, 2003 3
Consolidated Statements of Cash Flows
(Unaudited) for the thirty-nine weeks ended
May 29, 2004 and May 31, 2003 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. - Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4. - Controls and Procedures 15
Part II - Other Information 16
Item 1. - Legal Proceedings 16
Item 2. - Changes in Securities and Use of Proceeds 16
Item 3. - Defaults Upon Senior Securities 16
Item 4. - Submission of Matters to a Vote of Security
Holders 16
Item 5. - Other Information 16
Item 6. - Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
Purchase Administration Fee Agreement 19
Customer Service Administration Fee Agreement 21
Certification of Chief Executive Officer 23
Certification of Chief Financial Officer 24
Certification of Chief Executive Officer 25
Certification of Chief Financial Officer 26
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
May 29, 2004
ASSETS (Unaudited) August 30, 2003
Current assets:
Cash and cash equivalents $4,480 $12,761
Restricted cash 110 -
Accounts receivable 723 408
Nerchandise inventories, net 15,469 12,721
Due from private company, net of reserves of
$4,722 at May 29, 2004 and August 30, 2003 3,960 3,150
Deferred tax asset 2,895 2,895
Prepaid expenses and other current assets 1,218 1,398
Total current assets 28,855 33,333
Store fixtures, equipment and leasehold
improvements, at cost, net 3,100 3,854
Annuity contract 1,080 -
Deferred lease costs and other intangibles, net 50 98
Goodwill, at cost, net 1,796 1,796
Other assets (primarily security deposits) 624 626
$35,505 $39,707
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $12,342 $15,049
Customer deposits 8,550 9,203
Accrued expenses and other current liabilities 4,967 4,135
Due to Private Company 500 500
Deferred rent and allowances - current portion 533 821
Total current liabilities 26,892 29,708
Deferred rent and allowances, net of current
portion 3,192 3,155
Total liabilities 30,084 32,863
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $.01 per share,
authorized 1,000,000 shares
Series A convertible preferred - 10,000 shares
issued and outstanding at May 29, 2004 and
August 30, 2003 (liquidation preference $5,000)
Series B convertible preferred - 57,381 shares
issued and outstanding at May 29, 2004
(liquidation preference $287) and 26,664 shares
issued and outstanding at August 30, 2003
(liquidation preference $133) 1 -
Common stock, par value $.01 per share, authorized
12,000,000 shares at May 29, 2004 and 10,000,000
shares at August 30, 2003; issued and outstanding
5,713,058 shares at May 29, 2004 and August 30,
2003 57 57
Additional paid in capital 27,728 27,617
Accumulated deficit (22,365) (20,830)
5,421 6,844
$35,505 $39,707
See Notes to the Consolidated Financial Statements.
2
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
(Unaudited)
Thirteen weeks ended Thirty-nine weeks ended
May 29, May 31, May 29, May 31,
2004 2003 2004 2003
Revenue:
Net sales $32,698 $28,061 $94,745 $90,496
Revenue from service contracts 2,323 2,061 6,710 6,095
35,021 30,122 101,455 96,591
Cost of sales, including store
occupancy, warehousing, delivery
and service costs 24,032 20,810 71,638 65,510
Selling, general and administrative
expenses 9,319 10,343 30,090 31,746
Depreciation and amortization 376 435 1,236 1,292
33,727 31,588 102,964 98,548
Operating income (loss) 1,294 (1,466) (1,509) (1,957)
Interest income 19 29 67 112
Interest expense 1 4 2 4
Income (loss) before income taxes 1,312 (1,441) (1,444) (1,849)
Income tax expense (benefit) 29 (61) 91 (151)
Net income (loss) $1,283 ($1,380) ($1,535) ($1,698)
Basic income (loss) per common share $0.22 ( $0.24) ( $0.27) ($ 0.30)
Diluted income (loss) per common share $0.17 ( $0.24) ( $0.27) ( $0.30)
Weighted average common shares
outstanding basic income (loss)
per share 5,713,058 5,712,058 5,713,058 5,708,847
Effect of potential common share
issuance:
Stock options 468,427 - - -
Convertible preferred stock 1,464,667 - - -
Weighted average common shares
outstanding diluted income (loss)
per share 7,646,152 5,712,058 5,713,058 5,708,847
See Notes to the Consolidated Financial Statements.
3
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Thirty-nine weeks ended
May 29, May 31,
2004 2003
Cash flows from operating activities:
Net loss $(1,535) $(1,698)
Adjustments to reconcile net loss to
net cash (used in) operating
activities:
Depreciation and amortization 1,236 1,292
Loss on disposal of equipment 54 -
Deferred rent (251) (122)
Deferred tax benefit - (43)
Allowance for inventory valuation 4 -
Recovery of amounts due from
Private Company - (27)
Changes in operating assets and
liabilities:
Merchandise inventories (2,752) (654)
Prepaid expenses and other current
assets 180 (753)
Accounts receivable (315) 128
Due from Private Company, net (810) 589
Other assets 2 122
Accounts payable, trade (2,707) (1,978)
Customer deposits (653) 860
Accrued expenses and other current
liabilities 832 (1,947)
Net cash (used in) operating activities (6,715) (4,231)
Cash flows from investing activities:
Purchase of annuity contract (1,080) -
Restricted cash (110) -
Capital expenditures (487) (991)
Net cash (used in) investing activities (1,677) (991)
Cash flows from financing activities:
Proceeds from exercise of stock options - 16
Proceeds from issuance of preferred stock 128 -
Preferred stock dividends paid (17) -
Net cash provided by financing activities 111 16
Net (decrease) in cash and cash equivalents (8,281) (5,206)
Cash and cash equivalents at beginning
of period 12,761 15,973
Cash and cash equivalents at end of period $4,480 $10,767
Supplemental disclosure of cash flow
information:
Income taxes paid during the period $ 79 $ 933
Interest $ 2 $ -
See Notes to the Consolidated Financial Statements.
4
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2004
(In thousands, except for share amount)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Jennifer Convertibles, Inc. and its subsidiaries (the "Company")
have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting
principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals plus other
adjustments referred to in Note 3) considered necessary for a
fair presentation have been included. The operating results for
the thirty-nine week period ended May 29, 2004 are not
necessarily indicative of the results that may be expected for
the fiscal year ending August 28, 2004.
The balance sheet as of August 30, 2003 has been derived from the
audited consolidated financial statements as of such date, but
does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of
America for complete financial statements.
For further information, please refer to the consolidated
financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended August
30, 2003, as filed with the Securities and Exchange Commission.
Certain reclassifications have been made to prior period
financial statements to conform to the current year presentation.
NOTE 2: MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost
(determined on the first-in, first-out method) or market and are
physically located, as follows:
5/29/04 8/30/03
Showrooms $ 7,120 $ 6,811
Warehouses 8,349 5,910
$15,469 $12,721
Vendor discounts and allowances in respect of merchandise
purchased by the Company are included as a reduction of inventory
and cost of sales.
5
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2004
(In thousands, except for share amount)
NOTE 3: REVENUE RECOGNITION
Sales are recognized upon delivery of the merchandise to the
customer. A minimum deposit of 50% is typically required when a
non-financed sales order is placed. The Company also finances
sales and sells financed receivables on a non-recourse basis to a
finance company. The Company neither retains any interests in
nor services the sold receivables. The selling price of the
receivables represents the amount due from the customer less a
fee. Fees paid to the finance company are included in selling,
general and administrative expenses.
The Company also derives revenues from the sale of service
contracts related to lifetime protection plans. Prior to an
amendment to the Company's Warehouse Agreement with a related
private company (the "Private Company"), as described below, the
Company was responsible for providing services related to
separately priced fabric protection plans.
The Company amended its warehouse agreement with the Private
Company, whereby, effective June 23, 2002, the Private Company
became the sole obligor on all lifetime fabric and leather
protection plans sold by the Company or the Private Company on or
after such date through August 28, 2004 and assumed all
performance obligations and risk of loss thereunder (see Note 9).
The Company has no obligation with respect to such plans. The
Private Company receives a monthly payment of $50, subject to an
adjustment based on the annual volume of sales of the plans. In
addition, for a payment of $400 (payable $50 per month beginning
three months after the date of the agreement) to be made by the
Company, the Private Company also assumed responsibility to
service and pay any claims related to sales made by the Company
or the Private Company prior to June 23, 2002. Accordingly, the
Company has no obligations for any claims filed after June 23,
2002 and revenue from the sale of fabric protection plans is
recognized upon delivery of the merchandise.
NOTE 4: GOODWILL
Goodwill consists of the excess of cost of the Company's
investments in certain subsidiaries over the fair value of net
assets acquired. The Company has performed the required
impairment tests and has determined that there is no impairment
of the Company's goodwill.
NOTE 5: LETTER OF CREDIT
In February 2004, the Company entered into a standby letter of
credit in the amount of $110, as required by the
Company's new workers' compensation insurance provider. The
Company has purchased a certificate of deposit for the same
amount from a financial institution as collateral for the letter
of credit and has classified this cash as restricted.
6
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2004
(In thousands, except for share amount)
NOTE 6: CONTINGENCIES
The Derivative Litigation
Beginning in December 1994, a series of six actions were
commenced as derivative actions on the Company's behalf against
certain present and former officers and directors of the Company,
the Private Company and others.
The complaints in each of these actions assert various acts of
wrongdoing by the defendants, as well as claims of breach of
fiduciary duty by the Company's present and former officers and
directors. The Company had entered into settlement agreements
with respect to the derivative litigation, subject, in the case
of certain of those agreements, to court approval of the
settlement by a certain date. Such court approval was not
obtained by such date, and in July 1998, the Private Company
exercised its option to withdraw from the settlement.
On July 6, 2001, the Private Company and the Company entered into
a series of agreements designed to settle the derivative action
among the Private Company, certain of our current and former
officers and directors and certain of our former accounting firms
and the Company. Effectiveness of the agreements is subject to
certain conditions, including court approval and receipt by the
Company of a fairness opinion or appraisal. The Company also
entered into an Interim Operating Agreement designed to implement
certain of the provisions of the settlement agreement prior to
court approval. While the Company presented the proposed
settlement to the court in May 2004, there can be no assurance
that the court will approve the settlement or that a settlement
will occur. Please see the Company's Annual Report on Form 10-K
for the year ended August 30, 2003, as filed with the Securities
and Exchange Commission, for a more complete description of the
terms of the proposed settlement.
In connection with the class action litigation, on November 7,
2003, the Company 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. The Series B
Preferred Stock shares are non-voting, have a liquidation value
of $5.00 per share and accrue dividends at a rate of $.35 per
share per annum. Accumulated unpaid dividends for the period
from May 1, 2003 through May 29, 2004 on the 57,381 Series B
Preferred Stock outstanding amounted to $22. 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.
Other Matters
The Company is also subject to other litigation, including a
claim for $10 million 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 believes these suits
are without merit, denies liability, is vigorously defending
against the claims and does not believe that they will have a
significant impact on its financial position or results of
operations.
7
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2004
(In thousands, except for share amount)
On April 5, 2004, the Attorney General of the State of New York
filed a motion for contempt under New York law in the Supreme
Court of the State of New York, County of Albany, alleging non-
compliance with an order of the Attorney General's Office
obtained in 1998 which enjoined the Company from engaging in
certain alleged deceptive business practices. In the motion, the
Attorney General seeks a court order holding the Company in civil
and criminal contempt for violations of the 1998 order and a fine
in the amount of $5 per day for each day it has allegedly
disobeyed the 1998 order and certain other fees, as well as an
unspecified amount of monetary damages to the petitioners. The
case is being handled by the Nassau Regional Office of the
Attorney General. The Company has accrued $138 for this
litigation as of May 29, 2004 representing its half of a proposed
settlement, with the other half to be paid by the Private
Company.
NOTE 7: TRANSACTIONS WITH THE PRIVATE COMPANY
Included in the Consolidated Statements of Operations are the
following amounts charged by and to the Private Company:
Increase (decrease)
Thirteen weeks Thirty-nine weeks
ended ended
May 29, May 31, May 29, May 31,
2004 2003 2004 2003
Net Sales:
Royalty income $ 28 $ 26 $ 83 $ 79
Warehouse fees 388 290 1,046 879
Delivery charges 669 435 1,827 1,284
$1,085 $751 $2,956 $2,242
Revenue from Service Contracts:
Fabric protection fees
charged (by)/to the Private
Company $ (150) $ 50 $ (400) $ (300)
Selling, General and
Administrative Expenses:
Purchase administration fees
paid by the Private Company $ (2) $ - $ (2) $ -
Advertising reimbursement
paid by the Private Company (364) (366) (1,095) (1,101)
Royalty expense paid to the
Private Company 100 100 300 300
Expenses related to
shortfall payments charged
by the Private Company 151 773 663 967
$ (115) $507 $(134) $ 166
8
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2004
(In thousands, except for share amount)
NOTE 8: STOCK OPTION PLANS
In December 2002, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure," which amends the disclosure requirements of SFAS No.
123, "Accounting for Stock-Based Compensation" and provides
alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee
compensation. As permitted by SFAS No. 148, the Company has
elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options.
Under APB 25, in the event that the exercise price of the
Company's employee stock options is less than the market price of
the underlying stock on the date of the grant, compensation
expense is recognized. No stock-based employee compensation cost
is reflected in net income (loss), as all options granted under
the Company's employee stock option plans had an exercise price
equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net
income (loss) and earnings (loss) per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation.
Thirteen weeks Thirty-nine weeks
ended ended
May 29, May 31, May 29, May 31,
2004 2003 2004 2003
Net income (loss) as reported $1,283 $(1,380) $(1,535) $(1,698)
Deduct:Total stock-based employee
compensation expense determined
under the fair value based method,
net of related tax effects 134 151 402 325
Pro forma net income (loss) $1,149 $(1,531) $(1,937) $(2,023)
Basic income (loss) per share:
As reported $0.22 $ (0.24) $(0.27) $ (0.30)
Pro forma $0.20 $ (0.27) $(0.34) $ (0.35)
Diluted income (loss) per share
As reported $0.17 $ (0.24) $(0.27) $(0.30)
Pro forma 0.15 (0.27) (0.34) (0.35)
9
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2004
(In thousands, except for share amount)
The fair value of each option grant on the date of grant is
estimated using the Black-Scholes option-pricing model based on a
weighted average volatility of 49.4% for the thirty-nine week
period ended May 31, 2003, expected life of options of five
years, weighted average risk free interest rate of 3.12% and a
dividend yield of 0%. The weighted average fair value of options
granted during the thirty-nine week period ended May 31, 2003 was
$1.80. No options were granted during the thirty-nine week
period ended May 29, 2004.
NOTE 9: SUBSEQUENT EVENTS
On May 30, 2004, the Company entered into a Customer Service
Administration Fee Agreement with the Private Company pursuant to
which the Private Company shall pay the Company $70 per annum for
administrative services rendered to it in connection with
customer service.
The Company delivered to the Private Company a Notice of
Extension on June 24, 2004 whereby the Company exercised its
option under the Warehouse Agreement, as amended, to extend the
period of time for which the Private Company will be responsible
for all fabric protection or breach of warranty claims with
respect to sales of merchandise by the Private Company's stores
and its stores for a period of one year, until August 27, 2005.
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and accompanying notes
filed as part of this report.
Forward-Looking Information
Except for historical information contained herein, this
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements within
the meaning of the U.S. Private Securities Litigation Reform Act
of 1995, as amended. These statements involve known and unknown
risks and uncertainties that may cause our actual results or
outcome to be materially different from any future results,
performance or achievements expressed or implied by such forward
looking statements. Factors that might cause such differences
include, but are not limited to the risk factors set forth under
the caption "Risk Factors" in our Annual Report on Form 10-K for
the fiscal year ended August 30, 2003, as filed with the
Securities and Exchange Commission. In addition to statements
that explicitly describe such risks and uncertainties, investors
are urged to consider statements labeled with the terms
"believes," "belief," "expects," "intends," "plans" or
"anticipates" to be uncertain and forward-looking.
Results of Operations
Net sales include merchandise sales and home delivery income of
$31,613,000 and $27,310,000 for the thirteen-week periods ended
May 29, 2004 and May 31, 2003, respectively. Net sales of
merchandise and home delivery income increased by 15.8% in the
thirteen-week period ended May 29, 2004, up $4,303,000 from the
thirteen-week period ended May 31, 2003. Revenue from service
contracts increased by 12.7% in the thirteen-week period ended
May 29, 2004 to $2,323,000, from $2,061,000 for the thirteen-week
period ended May 31, 2003. Such increases during the third
quarter of fiscal 2004, compared to the same quarter in fiscal
2003, are attributable to the delivery of the backlog of
merchandise from an overseas supplier that existed as of the end
of the prior quarter as more fully described below. Revenue from
the private company was $1,085,000 and $751,000 for the thirteen-
week periods ended May 29, 2004 and May 31, 2003, respectively.
The increase in revenue from a related private company is largely
a function of the amount of merchandise purchased by the private
company from us.
Net sales for the thirty-nine weeks ended May 29, 2004, inclusive
of merchandise sales and home delivery income, were $91,789,000,
an increase of 4.0%, compared to $88,254,000 for the thirty-nine
weeks ended May 31, 2003. Revenue from service contracts
increased by 10.1% during the thirty-nine week period ended May
29, 2004 to $6,710,000, from $6,095,000 for the thirty-nine week
period ended May 31, 2003. Such increases during the thirty-nine
weeks ended May 29, 2004, compared to the same period ended May
31, 2003, are attributable to the adverse effects of the overall
softness in the economy and poor weather conditions in the
Northeast during fiscal 2003 and the delivery of the backlog of
merchandise from an overseas supplier that existed as of the end
of the quarter ended February 28, 2004. In addition, we
increased service contract rates and sold more units during the
same period in fiscal 2004. Revenue from the private company was
$2,956,000 and $2,242,000 for the thirty-nine week periods ended
May 29, 2004 and May 31, 2003, respectively. The increase in
revenue from the private company is largely a function of the
amount of merchandise purchased by the private company from us.
11
As discussed in our Quarterly Report on Form 10-Q for the
quarterly period ended February 28, 2004, as filed with the
Securities and Exchange Commission, as of February 28, 2004, we
had $17,180,000 in written sales that had not been delivered,
compared to $10,818,000 as of March 1, 2003. This was
attributable to (1) an increase in sales written during
President's Day this year versus last year due to adverse weather
in the Northeast during 2003 and (2) a delay in the delivery of
sales. Sales were delayed as a result of ordering more products
overseas, which increased the length of time to manufacture and
deliver the products to our customers. During the thirteen week
period ended May 29, 2004, we were able to deliver most of this
backlog of merchandise from an overseas supplier as well as
deliver sales written during President's Day. These deliveries
are a significant reason why our merchandise sales increased for
the thirteen-week period ended May 29, 2004.
Cost of sales as a percentage of revenue for the thirteen-week
and thirty-nine week periods ended May 29, 2004, was 68.6% and
70.6%, respectively, compared to 69.1% and 67.8% for those
periods ended May 31, 2003. The decrease during the current
thirteen-week period was insignificant. The increase for the
current thirty-nine week period is primarily attributable to an
increase in store occupancy costs and lower margins associated
with merchandise imports.
Selling, general and administrative expenses were $9,319,000
(26.6% as a percentage of revenue) and $10,343,000 (34.3% as a
percentage of revenue) during the thirteen-week period ended May
29, 2004 and May 31, 2003, respectively. Selling, general and
administrative expenses were $30,090,000 (29.7% as a percentage
of revenue) and $31,746,000 (32.9% as a percentage of revenue)
during the thirty-nine week period ended May 29, 2004 and May 31,
2003, respectively. These decreases are primarily attributable to
a reduction of fees associated with our private label card
business along with a reduction of expenses related to shortfall
payments charged by the private company. Advertising expense is
down $68,000 during the thirteen-week period ended May 29, 2004
compared to the same period last year, but advertising is up
$809,000 for the thirty-nine week period ended May 29, 2004
compared to the same period last year.
Net income for the thirteen-week period ended May 29, 2004 was
$1,283,000, compared to net loss of $1,380,000 for the thirteen-
week period ended May 31, 2003. Net loss for the thirty-nine
weeks ended May 29, 2004 was $1,535,000 compared to a net loss of
$1,698,000 for the thirty-nine week period ended May 31, 2003.
The adverse effects of the overall softness in the economy and
poor weather conditions in the Northeast during fiscal 2003
combined with the delivery of the backlog of merchandise from an
overseas supplier that existed as of the end of the prior quarter
of 2004 have positively impacted the current thirteen and thirty-
nine week periods.
Liquidity and Capital Resources
As of May 29, 2004, we had an aggregate working capital of
$1,963,000 compared to an aggregate working capital of $3,625,000
at August 30, 2003 and had available cash and cash equivalents of
$4,480,000 compared to $12,761,000 at August 30, 2003. The
decrease in cash and cash equivalents is a result of shorter
payment terms with principal suppliers as well as the purchase of
an annuity contract. We do not anticipate achieving positive
operating cash flow for fiscal 2004.
12
We continue to fund the operations of certain of our limited
partnership licensees whose results are included in our
consolidated financial statements, some of which continue to
generate operating losses. Any such losses have been consolidated
in our consolidated financial statements. It is our intention to
continue to fund these operations in the future and, if the new
settlement agreements discussed in our Annual Report on Form 10-K
for the year ended August 30, 2003, are approved, we will acquire
100% of such limited partnerships. Our receivables from the
private company and the unconsolidated licensees had been
substantially reserved in prior years and continue to be
reserved. There can be no assurance that the reserved amount of
such receivables, a total of $4,722,000 as of May 29, 2004, will
be collected.
Starting in 1995, we entered into agreements with the private
company that permit us to offset our current monthly obligations
to one another for an amount up to $1,000,000. Amounts in excess
of $1,000,000 are paid in cash. Based on the payment terms of
these offset agreements, as of May 29, 2004, current obligations
of the private company and the unconsolidated licensees were
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. As described above,
our receivables from the private company and the unconsolidated
licensees, which arose in fiscal 1996 and prior years, had been
reserved.
In March 1996, we executed a Credit and Security Agreement with
our principal supplier, Klaussner Furniture Industries, Inc.,
which extended the payment terms for merchandise shipped from 60
days to 81 days. Since February 1999, we have not exceeded these
81-day payment terms. As of May 31, 2003, there were no amounts
owed to Klaussner that violated these extended terms. On December
11, 1997, the Credit and Security Agreement was modified to
include a late fee of .67% per month for invoices paid by us
beyond the normal 60-day terms. This provision became effective
in January 1998. As part of the Credit and Security Agreement,
we granted to Klaussner a security interest in all of our assets
including the collateral assignment of our leasehold interests,
our trademarks and a licensee agreement to operate our business
in the event of our default. In May 2003, as a result of our
improved financial condition, 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.
We had five store openings and two store closings during the
thirty-nine weeks ended May 29, 2004. We spent $487,000 for
capital expenditures during such thirty-nine week period and we
anticipate capital expenditures approximating $75,000 during the
balance of fiscal 2004 to support the opening of new stores. We
do not anticipate needing outside financing for such expansion.
On May 1, 2004, we entered into an agreement with the private
company whereby the private company has agreed to pay us $40,000
per annum in weekly installments of $769 commencing on May 7,
2004 as consideration for administrative services relating to
purchases rendered by us. Further, on May 30, 2004, we entered
into a Customer Service Administration Fee Agreement with the
private company pursuant to which the private company shall pay
us $70,200 per annum in weekly installments of $1,350 for
administrative services rendered to it in connection with
customer service. On June 24, 2004, we delivered to the private
company a Notice of Extension whereby we
13
exercised our option under the Warehouse Agreement, as amended,
to extend the period of time for which the private company will
be responsible for all fabric protection or breach of warranty
claims with respect to sales of merchandise by the private
company's stores and our stores for a period of one year, until
August 27, 2005.
We do not anticipate generating positive operating cash flow for
the year ending August 28, 2004. In the opinion of management,
cash on hand will be adequate to fund operations during the
current and next fiscal year.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly
Report on Form 10-Q (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.
15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
On April 5, 2004, the Attorney General of the State of New York
filed a motion for contempt under New York law in the Supreme
Court of the State of New York, County of Albany, alleging non-
compliance with an order of the Attorney General's Office
obtained in 1998 which enjoined Jennifer Convertibles from
engaging in certain alleged deceptive business practices. In the
motion, the Attorney General seeks a court order holding Jennifer
Convertibles in civil and criminal contempt for violations of the
1998 order and a fine in the amount of $5,000 per day for each
day it has allegedly disobeyed the 1998 order and certain other
fees, as well as an unspecified amount of monetary damages to the
petitioners. The case is being handled by the Nassau Regional
Office of the Attorney General. The Company has accrued $138,000
for this litigation as of May 29, 2004 representing its half of a
proposed settlement, with the other half to be paid by a related
private company.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed with this report:
10.1 Purchase Administration Fee Agreement
10.2 Customer Service Administration Fee Agreement
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
(b) Reports on Form 8-K:
None.
16
JENNIFER CONVERTIBLES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JENNIFER CONVERTIBLES, INC.
July 13, 2004 By: /s/ Harley J. Greenfield
Harley J. Greenfield, Chairman of the Board
and Chief Executive Officer
July 13, 2004 By: /s/ Rami Abada
Rami Abada, Chief Financial Officer
and Chief Operating Officer
17
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.1 Purchase Administration Fee Agreement
10.2 Customer Service Administration Fee Agreement
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.
18
EXHIBIT 10.1
PURCHASE ADMINISTRATION FEE AGREEMENT
THIS AGREEMENT is dated as of May 1, 2004 (the "Agreement")
between Jennifer Convertibles, Inc., a Delaware corporation
("JCI"), and Jara Enterprises, Inc., a New York corporation
("Jara").
W I T N E S S E T H:
1. Purchasing Administration Fees:
As consideration for providing administrative functions
relating to purchases, Jara shall pay to JCI a fee of $40,000
p.a.
Payment Terms:
Beginning Friday, May 7, 2004 and every Friday, thereafter, Jara
will remit to JCI $769.23.
2. Entire Agreement.
This Agreement and any documents delivered by the parties in
connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede
all prior agreements and understandings, oral or written, with
respect to all such matters. No addition to or modification of
any provision of this Agreement shall be binding upon any party
hereto unless made in writing and signed by all parties hereto.
3. Governing Law.
This Agreement shall be governed by the law of the State of New
York, without regard to principles of conflicts of law.
4. Counterparts.
This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, and all of which shall
constitute one and the same agreement.
5. Headings.
Headings included in this Agreement are for the convenience of
the parties only and shall be given no substantive or
interpretive effect whatsoever.
6. Interpretation.
In this Agreement, unless the context otherwise requires, words
describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and
partnerships and vice versa.
7. Waivers.
Except as provided in this Agreement, no action taken pursuant to
this Agreement, including, without limitation, any investigation
by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any
representations, warranties, covenants or agreements contained in
this Agreement. The waiver by any party hereto of a breach of
19
any provision hereunder shall not operate or be construed as a
waiver of any prior or subsequent breach of the same or any other
provision hereunder.
8. Severability.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the
remaining terms and provisions of this Agreement or affecting the
validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision
shall be interpreted to be only so broad as is enforceable.
9. Enforcement of Agreement.
The parties hereto agree that irreparable damage would occur in
the event that any of the provisions of this Agreement was not
performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be
entitled to seek an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to
which they are entitled at law or in equity.
IN WITNESS WHEREOF, the parties have executed this Agreement and
caused the same to be duly delivered on their behalf on the day
and year first written above.
JENNIFER CONVERTIBLES, INC.
By:/s/ Harley J. Greenfield
Name: Harley J. Greenfield
Title: Chief Executive Officer
JARA ENTERPRISES, INC.
By:/s/ Fred J. Love
Name: Fred J. Love
Title: President
20
EXHIBIT 10.2
CUSTOMER SERVICE ADMINISTRATION FEE AGREEMENT
THIS AGREEMENT is dated as of May 30, 2004 (the "Agreement")
between Jennifer Convertibles, Inc., a Delaware corporation
("JCI"), and Jara Enterprises, Inc., a New York corporation
("Jara").
W I T N E S S E T H:
1. Customer Service Administration Fees:
As consideration for providing administrative functions
relating to customer service, Jara shall pay to JCI a fee of
$70,200 p.a.
Payment Terms:
Beginning Friday, June 4, 2004 and every Friday, thereafter, Jara
will remit to JCI $1,350.00.
2. Entire Agreement.
This Agreement and any documents delivered by the parties in
connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede
all prior agreements and understandings, oral or written, with
respect to all such matters. No addition to or modification of
any provision of this Agreement shall be binding upon any party
hereto unless made in writing and signed by all parties hereto.
3. Governing Law.
This Agreement shall be governed by the law of the State of New
York, without regard to principles of conflicts of law.
4. Counterparts.
This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, and all of which shall
constitute one and the same agreement.
5. Headings.
Headings included in this Agreement are for the convenience of
the parties only and shall be given no substantive or
interpretive effect whatsoever.
6. Interpretation.
In this Agreement, unless the context otherwise requires, words
describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and
partnerships and vice versa.
7. Waivers.
Except as provided in this Agreement, no action taken pursuant to
this Agreement, including, without limitation, any investigation
by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any
representations, warranties, covenants or agreements contained in
this Agreement. The waiver by any party hereto of a breach of
21
any provision hereunder shall not operate or be construed as a
waiver of any prior or subsequent breach of the same or any other
provision hereunder.
8. Severability.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the
remaining terms and provisions of this Agreement or affecting the
validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision
shall be interpreted to be only so broad as is enforceable.
9. Enforcement of Agreement.
The parties hereto agree that irreparable damage would occur in
the event that any of the provisions of this Agreement was not
performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be
entitled to seek an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to
which they are entitled at law or in equity.
IN WITNESS WHEREOF, the parties have executed this Agreement and
caused the same to be duly delivered on their behalf on the day
and year first written above.
JENNIFER CONVERTIBLES, INC.
By: /s/ Harley J. Greenfield
Name: Harley J. Greenfield
Title: Chief Executive Officer
JARA ENTERPRISES, INC.
By: /s/ Fred J. Love
Name: Fred J. Love
Title: President
22
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Harley J. Greenfield, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jennifer
Convertibles, Inc.;
2. Based on my knowledge, this 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: July 13, 2004 /s/ Harley J. Greenfield
Harley J. Greenfield, Chief Executive Officer
23
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Rami Abada, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jennifer
Convertibles, Inc.;
2. Based on my knowledge, this 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: July 13, 2004 /s/ Rami Abada
Rami Abada, Chief Financial Officer
24
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
quarterly report on Form 10-Q for the period ending May 29, 2004
of Jennifer Convertibles, Inc. (the "Form 10-Q") fully complies
with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and the information contained in the Form 10-
Q fairly presents, in all material respects, the financial
condition and results of operations of Jennifer Convertibles,
Inc.
Dated: July 13, 2004 /s/ Harley J. Greenfield
Harley J. Greenfield
Chief Executive Officer
(Principal Executive Officer)
A signed original of this written statement required by Section
906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission
upon request.
25
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
quarterly report on Form 10-Q for the period ending May 29, 2004
of Jennifer Convertibles, Inc. (the "Form 10-Q") fully complies
with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and the information contained in the Form 10-
Q fairly presents, in all material respects, the financial
condition and results of operations of Jennifer Convertibles,
Inc.
Dated: July 13, 2004 /s/ Rami Abada
Rami Abada
Chief Financial Officer
(Principal Financial Officer)
A signed original of this written statement required by Section
906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission
upon request.
26