Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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.
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly
period ended May 29, 2010
or
[ ]TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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)
(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.) |
417 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 the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes [
] No [
]
Indicate by check
mark whether registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer [ ] | Accelerated Filer [ ] |
Non-Accelerated Filer [X] | Smaller Reporting Company [ ] |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [
] No [X]
Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by Sections 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by the court.
Yes [
] No [
]
As of July 16, 2010, 7,073,466 shares of the
registrant’s common stock, par value $.01 per share, were
outstanding.
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index
Part I - Financial Information | |
Item 1. - Financial Statements (Unaudited) | |
Consolidated Balance Sheets at May 29, 2010 (Unaudited) and August 29, 2009 | 2 |
Consolidated Statements of
Operations (Unaudited) for the thirteen and thirty-nine weeks ended May 29, 2010 and May 30, 2009 |
3 |
Consolidated Statements of Cash Flows (Unaudited) for the thirty-nine weeks ended May 29, 2010 and May 30, 2009 | 4 |
Notes to Unaudited Consolidated Financial Statements | 5 |
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations | 17 |
Item 3. - Quantitative and Qualitative Disclosures About Market Risk | 27 |
Item 4T. - Controls and Procedures | 27 |
Part II - Other Information | |
Item 1. – Legal Proceedings | 29 |
Item 1A. – Risk Factors | 29 |
Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds | 30 |
Item 3. – Defaults Upon Senior Securities | 30 |
Item 4. – (Removed and Reserved) | 30 |
Item 5. – Other Information | 30 |
Item 6. – Exhibits | 30 |
Signatures | 31 |
Exhibit Index | 32 |
Ex. 31.1 Certification of Chief Executive Officer | 33 |
Ex. 31.2 Certification of Chief Financial Officer | 34 |
Ex. 32.1 Certification of Principal Executive Officer | 35 |
Ex. 32.2 Certification of Principal Financial Officer | 36 |
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except for share and per share data)
May 29, 2010 | |||||||
(Unaudited) | August 29, 2009 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 4,361 | $ | 5,609 | |||
Restricted cash | 99 | 99 | |||||
Accounts receivable | 3,322 | 1,816 | |||||
Merchandise inventories, net | 8,713 | 9,076 | |||||
Due from Related Company, net of allowance for losses of $947 | - | 3,147 | |||||
Prepaid expenses and other current assets | 1,631 | 1,214 | |||||
Total current assets | 18,126 | 20,961 | |||||
Store fixtures, equipment and leasehold improvements, at cost, net | 2,397 | 2,355 | |||||
Goodwill | 483 | 483 | |||||
Other assets (primarily security deposits) | 639 | 670 | |||||
$ | 21,645 | $ | 24,469 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | |||||||
Current liabilities: | |||||||
Accounts payable, trade (including $894 and $1,255 to a stockholder) | $ | 22,713 | $ | 14,317 | |||
Customer deposits | 9,523 | 4,976 | |||||
Accrued expenses and other current liabilities | 8,639 | 6,001 | |||||
Due to Related Company | - | 400 | |||||
Deferred rent and allowances - current portion | 572 | 589 | |||||
Total current liabilities | 41,447 | 26,283 | |||||
Deferred rent and allowances, net of current portion | 2,575 | 2,360 | |||||
Obligations under capital leases, net of current portion | 64 | 96 | |||||
Total liabilities | 44,086 | 28,739 | |||||
Contingencies (Notes 2 and 15) | |||||||
Stockholders' Deficiency: | |||||||
Preferred stock, par value $.01 per share | |||||||
Authorized 1,000,000 shares | |||||||
Series A Convertible Preferred - issued and outstanding 6,490 | |||||||
shares at May 29, 2010 and August 29, 2009 | |||||||
(liquidation preference $3,245) | - | - | |||||
Series B Convertible Preferred - issued and outstanding 47,989 | |||||||
shares at May 29, 2010 and August 29, 2009 | |||||||
(liquidation preference $240) | 1 | 1 | |||||
Common stock, par value $.01 per share | |||||||
Authorized 12,000,000 shares; issued and outstanding 7,073,466 | |||||||
shares at May 29, 2010 and August 29, 2009 | 70 | 70 | |||||
Additional paid-in capital | 29,659 | 29,647 | |||||
Treasury stock, at cost, 93,579 common shares at May 29, 2010 | (125 | ) | - | ||||
Accumulated deficit | (52,046 | ) | (33,988 | ) | |||
(22,441 | ) | (4,270 | ) | ||||
$ | 21,645 | $ | 24,469 | ||||
See
Notes to Consolidated Financial Statements
2
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||||
May 29, | May 30, | May 29, | May 30, | ||||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenue: | |||||||||||||||
Net sales | $ | 21,481 | $ | 20,350 | $ | 66,435 | $ | 65,700 | |||||||
Revenue from service contracts | 1,158 | 1,298 | 3,601 | 3,984 | |||||||||||
22,639 | 21,648 | 70,036 | 69,684 | ||||||||||||
Cost of sales, including store occupancy, | |||||||||||||||
warehousing, delivery and service costs | 17,389 | 15,388 | 52,455 | 49,510 | |||||||||||
Loss related to service contracts | - | - | 3,500 | - | |||||||||||
Selling, general and administrative expenses | 9,682 | 7,323 | 28,015 | 24,280 | |||||||||||
Provision for loss on amounts due from Related Company | - | - | 3,128 | - | |||||||||||
Depreciation and amortization | 229 | 226 | 687 | 891 | |||||||||||
27,300 | 22,937 | 87,785 | 74,681 | ||||||||||||
Loss from operations | (4,661 | ) | (1,289 | ) | (17,749 | ) | (4,997 | ) | |||||||
Gain on acquisition of Related Company | - | - | 23 | - | |||||||||||
Interest income | - | 6 | 11 | 80 | |||||||||||
Interest expense | (3 | ) | (4 | ) | (11 | ) | (14 | ) | |||||||
Loss from continuing operations before income taxes | (4,664 | ) | (1,287 | ) | (17,726 | ) | (4,931 | ) | |||||||
Income tax expense | 2 | 5 | 6 | 6 | |||||||||||
Loss from continuing operations | (4,666 | ) | (1,292 | ) | (17,732 | ) | (4,937 | ) | |||||||
Loss from discontinued operations (including loss on store | |||||||||||||||
closings of $1 and $3 for the thirteen week and $5 and $116 for the | |||||||||||||||
thirty-nine week periods ended in fiscal 2010 and 2009, respectively) | (109 | ) | (240 | ) | (326 | ) | (808 | ) | |||||||
Net loss | $ | (4,775 | ) | $ | (1,532 | ) | $ | (18,058 | ) | $ | (5,745 | ) | |||
Basic and diluted loss per common share: | |||||||||||||||
Loss from continuing operations | $ | (0.66 | ) | $ | (0.18 | ) | $ | (2.52 | ) | $ | (0.70 | ) | |||
Loss from discontinued operations | (0.02 | ) | (0.04 | ) | (0.05 | ) | (0.11 | ) | |||||||
Net loss | $ | (0.68 | ) | $ | (0.22 | ) | $ | (2.57 | ) | $ | (0.81 | ) | |||
Basic and diluted weighted average common shares outstanding | 6,979,887 | 7,073,466 | 7,022,548 | 7,073,466 | |||||||||||
See
Notes to Consolidated Financial Statements
3
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Thirty-nine weeks ended | |||||||
May 29, | May 30, | ||||||
2010 | 2009 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (18,058 | ) | $ | (5,745 | ) | |
Adjustments to reconcile net loss to net cash used in operating | |||||||
activities of continuing operations: | |||||||
Depreciation and amortization | 687 | 891 | |||||
Provision for loss on amounts due from Related Company | 3,128 | - | |||||
Provision for loss on service contracts | 3,500 | - | |||||
Gain on acquisition of Related Company | (23 | ) | - | ||||
Non cash compensation to consultant | 12 | 16 | |||||
Loss from discontinued operations | 326 | 808 | |||||
Loss (gain) on disposal of equipment | 9 | (12 | ) | ||||
Deferred rent | 203 | (553 | ) | ||||
Changes in operating assets and liabilities, net of effects of the acquisition in | |||||||
2010 and discontinued operations | |||||||
Merchandise inventories, net | 881 | 1,932 | |||||
Prepaid expenses and other current assets | (238 | ) | (16 | ) | |||
Accounts receivable | (1,506 | ) | (591 | ) | |||
Due from Related Company, net | (682 | ) | 319 | ||||
Other assets | 3 | 14 | |||||
Accounts payable, trade | 8,396 | (437 | ) | ||||
Customer deposits | 4,296 | 90 | |||||
Accrued expenses and other current liabilities | (1,091 | ) | (63 | ) | |||
Net cash used in operating activities of continuing operations | (157 | ) | (3,347 | ) | |||
Cash flows from investing activities: | |||||||
Capital expenditures | (478 | ) | (273 | ) | |||
Purchase of business and assets of Related Company | (525 | ) | - | ||||
Restricted cash | - | 17 | |||||
Sale of marketable auction rate securities | - | 1,400 | |||||
Net cash (used in) provided by investing activities of continuing operations | (1,003 | ) | 1,144 | ||||
Cash flows from financing activities: | |||||||
Principal payments under capital lease obligations | (32 | ) | (30 | ) | |||
Net cash used in financing activities of continuing operations | (32 | ) | (30 | ) | |||
Net decrease in cash and cash equivalents of continuing operations | (1,192 | ) | (2,233 | ) | |||
Net decrease in cash and cash equivalents of operating activities | |||||||
of discontinued operations | (56 | ) | (806 | ) | |||
Cash and cash equivalents at beginning of period | 5,609 | 9,057 | |||||
Cash and cash equivalents at end of period | $ | 4,361 | $ | 6,018 | |||
Supplemental disclosure of cash flow information: | |||||||
Income taxes paid | $ | 42 | $ | 18 | |||
Interest paid | $ | 11 | $ | 14 | |||
See
Notes to Consolidated Financial Statements
4
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the
Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
(In thousands, except for share amounts)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
(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 (“GAAP”) 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 other than the provision for loss on amounts due
from the Related Company (see Note 5) and loss related to service contracts (see
Note 7) in 2009) considered necessary for a fair presentation have been
included. The operating results for the thirty-nine week period ended May 29,
2010 are not necessarily indicative of the results that may be expected for the
fiscal year ending August 28, 2010.
The balance sheet as
of August 29, 2009 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 GAAP 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-KA for the year ended
August 29, 2009, as filed with the Securities and Exchange Commission (“SEC”).
NOTE 2: VOLUNTARY BANKRUPTCY FILING
The Company has
incurred a net loss for the thirty-nine weeks ended May 29, 2010 and for the
years ended August 29, 2009 and August 30, 2008, and has also used cash in its
operating activities during such periods. In addition, the Company has both
working capital and stockholders' deficiencies as of May 29, 2010. Further,
during fiscal 2009, a finance company to which the Company sold receivables on a
non-recourse basis terminated its agreement with the Company, credit card
processors began holding back certain payments due to the Company for credit
card purchases by customers, and the Related Company (see Note 5) failed to make
timely payments to the Company by the required due dates. In November 2009, the
Related Company defaulted on its payment obligations to the Company and the
Company discontinued granting credit to the Related Company and provided an
allowance for loss for the net balance due from the Related Company. In January
2010, the Company acquired the business of the Related Company and in connection
therewith, wrote-off the net balance due from the Related Company and undertook
to pay claims related to previously sold fabric and leather protection services
which was the obligation of the Related Company. These events impacted the
Company's liquidity.
During the thirteen
weeks ended May 29, 2010, the Company experienced a delay in the receipt of
merchandise from its principal supplier, which is located in China, which
negatively impacted the Company’s revenues. This delay has continued subsequent
to such period. In addition, during such period and thereafter, the credit card
processor increased the hold back of certain payments due the Company (see Note
8). As a consequence of such events, as of May 29, 2010 and thereafter, amounts
payable by the Company to its principal supplier were not paid by their extended
due dates. Further, as settlement negotiations have progressed with respect to
the Company’s previously disclosed employment class litigation it has become
apparent that it would be required to make a $1.3 million cash payment as part
of any such settlement (see Note 15).
5
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
Based on the above
and other factors, on July 18, 2010, Jennifer Convertibles, Inc. and all of its
subsidiaries filed voluntary petitions for bankruptcy under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of New York (the “Bankruptcy Court”). Under Chapter 11, the
Company will continue to operate its business as a debtor-in-possession under
court protection from its creditors and claimants, and intends to use Chapter 11
to reduce its liabilities and implement a plan of reorganization.
Upon consummation of
the presently contemplated plan of reorganization agreed to with the
Company’s
principal supplier, which is also the Company’s principal creditor, such
supplier will own 95% of the Company’s outstanding equity securities. In
addition, such supplier has agreed, subject to certain conditions, to continue
supplying merchandise throughout the Chapter 11 proceedings. The remaining 5% is
to be owned by other creditors and the present equity interests will be
cancelled. In exchange for the new equity interests to be issued, certain claims
from the principal supplier, and other creditors will be extinguished. The
ultimate resolution of the Chapter 11 proceedings will be determined by the
Bankruptcy Court and will involve extensive court proceedings. Accordingly,
there is no assurance that the contemplated plan of reorganization will be
implemented.
The above conditions
and events raise substantial doubt as to the Company’s ability to continue as a
going concern. The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern and do not include any
adjustments that may result from the outcome of this uncertainty or as a
consequence of any plan of reorganization.
NOTE 3: RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009, the
Financial Accounting Standards Board (“FASB”) issued guidance relating to
accounting for transfers of financial assets that improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. The pronouncement is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. The Company is
evaluating the impact, if any, the adoption of this pronouncement will have on
its financial statements.
In June 2009, the
FASB issued new accounting guidance that established the FASB Accounting
Standards Codification (“Codification”), as the single source of authoritative
GAAP to be applied by nongovernmental entities, except for the rules and
interpretive releases of the SEC under authority of federal securities laws,
which are sources of authoritative GAAP for SEC registrants. The FASB will no
longer issue new standards in the form of Statements, FASB Staff Positions, or
Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting
Standards Updates. Accounting Standards Updates will not be authoritative in
their own right as they will only serve to update the Codification. These
changes and the Codification itself do not change GAAP. This new guidance became
effective for interim and annual periods ending after September 15, 2009. Other
than the manner in which new accounting guidance is referenced, the Codification
did not have an effect on the Company’s consolidated financial
statements.
6
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
NOTE 4: 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:
May 29, | August 29, | ||||||
2010 | 2009 | ||||||
Showrooms | $ | 5,320 | $ | 5,068 | |||
Warehouses | 3,393 | 4,008 | |||||
$ | 8,713 | $ | 9,076 | ||||
Vendor discounts and
allowances in respect of merchandise purchased by the Company are included as a
reduction to the cost of inventory on hand and cost of sales upon sale of the
merchandise.
NOTE 5: ACQUISITION OF BUSINESS OF RELATED
COMPANY
Until December 31,
2009, 19 stores that were licensed by the Company, 17 of which were located in
New York City and surrounding areas and were on a royalty-free basis, were owned
and operated by a company (the “Related Company”) owned by the estate of a
deceased stockholder of the Company who was also the brother-in-law of the
Company’s Chairman of the Board and Chief Executive Officer. The sister of the
Company’s Chief Executive Officer was the president of the Related
Company.
As of December 31,
2009, after the Related Company defaulted on its payment obligations to the
Company (see Note 6), the Company, in order to protect its brand and its
customers, entered into an agreement (the “Agreement”) with the Related Company,
pursuant to which, effective January 1, 2010, the Related Company ceased
operations at the 19 owned stores, plus one store that it operated but did not
own, and the Company began operating these stores solely for its own benefit and
account. The Company agreed to purchase the inventory in the stores’ showrooms
for $635, payable over five months and subject to offset under certain
circumstances. The Agreement allowed the Company to evaluate each store location
and negotiate with the landlords at such locations for entry into new leases and
endeavor to cancel or defer the rent arrearages, which the Related Company
advised aggregated approximately $300 as of January 1, 2010. The Company agreed
to pay no more than $300 to settle the arrearages at all 20 stores, and if the
arrearages exceeded $300, the Related Company agreed to reimburse the Company
for such excess or such excess would be used to offset the amount the Company
owed the Related Company for the purchase of the inventory. Other than the rent
arrearages, the Company did not assume any liabilities of the Related Company.
The Company also agreed to offer to employ all store employees previously
employed by the Related Company, but agreed not to be responsible for any
commissions, salary, health or other benefits or other compensation owed them
prior to January 1, 2010. The Company agreed to be responsible for the costs of
operating the stores on and after January 1, 2010, except with respect to stores
vacated by the Company.
Pursuant to the
Agreement, the Company agreed to extinguish $301 owed to the Company by the
Related Company at December 31, 2009 under an Interim Agreement (see Note 6). In
addition, the Related Company agreed to surrender to the Company 93,579 shares
of the Company’s common stock owned by the Related Company.
As of July 19, 2010,
the Company has entered into new leases for 18 of the 20 stores and has not
vacated any of the stores.
The purchase price to
acquire the activities and net assets of the Related Company approximated $936,
consisting of $635 in cash, (of which $525 had been paid as of May 29, 2010) and
$301 in receivables due from the Related Company, which was extinguished.
7
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
The
transaction has been accounted for as a business combination. The Company
determined that the fair values of the net assets acquired exceeded the purchase
price by approximately $23, which was recorded as a gain in the consolidated
statement of operations for the thirty-nine weeks ended May 29, 2010. The
Company believes that this bargain purchase resulted from the financial
difficulties of the Related Company and its need for cash. The following table
presents the estimated fair values of the assets acquired and the liabilities
assumed and the gain attributable to the excess of such net assets over the
purchase price:
Inventory | $ | 786 | ||
Store fixtures, equipment and leasehold improvements | 271 | |||
Order backlog | 162 | |||
Treasury stock | 125 | |||
Security deposits | 16 | |||
Liability for rent arrearages | (151 | ) | ||
Customer deposits | (250 | ) | ||
Fair value of net assets acquired | 959 | |||
Purchase price | 936 | |||
Gain on acquisition of Related Company | $ | 23 | ||
The results of
operations of the 20 acquired stores are included in the Company’s results of
operations, commencing on January 1, 2010 and are included in the Jennifer
reportable segment. Five of the 20 stores previously operated by the Related
Company shared a common wall with a Company-owned store and the acquired
operations were combined with the Company’s store for operational purposes. The
results of operations of these five stores (“Combined Stores”) are not
maintained separately, but are combined with the respective Company-owned store.
The following
revenues and earnings of the acquired stores, exclusive of the Combined Stores,
since January 1, 2010 were included in the Company’s consolidated results of
operations for the thirteen and thirty-nine weeks ended May 29,
2010:
May 29, 2010 | |||||||
Thirteen weeks ended | Thirty-nine weeks ended | ||||||
Revenues | $ | 2,820 | $ | 4,054 | |||
Operating income (loss) | $ | (7 | ) | $ | 244 |
Revenues of the
Company from the 20 acquired stores pursuant to an Interim Agreement in effect
for the period from November 27 through December 31, 2009 amounted to $91 and
$1,359 for the thirteen and thirty-nine week periods ended May 29, 2010,
respectively (see Note 6).
Pro forma earnings of
the Company and the acquired stores as though the acquisition date had been as
of the beginning of the fiscal 2010 and 2009 annual reporting periods is
impracticable to present as the Company has been unable to obtain prior
financial information as to the results of operations of the acquired stores
other than revenue. Pro forma revenue, after elimination of Company revenues
from the Related Company, was $25,737 for the thirteen-week period ended May 30,
2009 and $76,106 and $83,594 for the thirty-nine week periods ended May 29, 2010
and May 30, 2009, respectively.
The pro forma
condensed revenues are not necessarily indicative of the revenues that would
have been achieved had the acquisition
been consummated as of the dates indicated or of the revenues that may be
obtained in the future.
8
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
NOTE 6: TRANSACTIONS WITH THE RELATED COMPANY
Included in the
Consolidated Statements of Operations are the following amounts charged by and
to the Related Company pursuant to terms of the agreements prior to their
termination on January 1, 2010:
Increase (decrease) to Related Line Item in the | ||||||||||||||
Consolidated Statements of Operations | ||||||||||||||
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||
May 29, | May 30, | May 29, | May 30, | |||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||
Net Sales: | ||||||||||||||
Royalty income | $ | - | $ | 22 | $ | 22 | $ | 75 | ||||||
Warehouse fees | - | 450 | 455 | 1,097 | ||||||||||
Delivery charges | - | 569 | 540 | 1,983 | ||||||||||
Total charged to the Related Company | $ | - | $ | 1,041 | $ | 1,017 | $ | 3,155 | ||||||
Revenue from Service Contracts: | ||||||||||||||
Fabric protection fees charged by the Related Company | $ | - | $ | - | $ | (100 | ) | $ | (200 | ) | ||||
Increase (decrease) to Related Line Item in the | |||||||||||||||
Consolidated Statements of Operations | |||||||||||||||
Thirteen weeks ended | Thirty-nine weeks ended | ||||||||||||||
May 29, | May 30, | May 29, | May 30, | ||||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||||||
Selling, General and Administrative Expenses: | |||||||||||||||
Administrative fees paid by the Related Company | $ | - | $ | (28 | ) | $ | (30 | ) | $ | (83 | ) | ||||
Advertising reimbursement paid by the Related Company | - | (510 | ) | (450 | ) | (1,433 | ) | ||||||||
Royalty expense paid to the Related Company | - | 100 | 100 | 300 | |||||||||||
Net charged to the Related Company | $ | - | $ | (438 | ) | $ | (380 | ) | $ | (1,216 | ) | ||||
During the thirteen
and thirty-nine weeks ended May 29, 2010, the Related Company, through the
Company, purchased approximately $0 and $2,574, respectively, of inventory, at
cost.
During the year ended
August 29, 2009, the Related Company failed to make payment in full of the
amount due by the required due date in five instances. The shortfalls were paid
off in full within the permitted grace periods no later than 22 days after the
original due date. Any amounts due from the Related Company, that are not paid
when due bear interest at the rate of 9% per annum until paid. In November 2009,
the Related Company defaulted on its payment obligation by not paying the
remaining outstanding balance of the receivable due to the Company as of August
29, 2009 within the 30-day grace period. As a result thereof, the Company
provided an allowance for loss of $947 as of August 29, 2009, representing the
net balance due from the Related Company as of such date after giving effect to
subsequent payments received. In addition, during the thirteen weeks ended
November 28, 2009, the Company provided an additional allowance for loss of
$3,167 related to increases in the receivable from the Related Company
principally resulting from transfers of inventory and charges for delivery
services, warehousing services and advertising costs during such period. During
December 2009, the Company recovered $39 from the Related Company. Further,
effective as of November 27, 2009, as described below, the Company discontinued
granting credit to the Related Company and, as collectability was not reasonably
assured, discontinued recognizing warehousing fee revenue, advertising expense
reimbursements and administration fees from the Related Company. In addition,
the Company ceased paying royalty fees to the Related Company. In connection
with the acquisition described in Note 5, in January 2010, the Company wrote off
the $4,075 net balance due from the Related Company against the allowance for
loss previously provided.
9
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
Pursuant to a
Purchasing Agreement, the Company purchased merchandise for the Company and the
Related Company. The Related Company had 85 days after the end of the month in
which the transactions originated to pay the amounts due. The Purchasing
Agreement provided the Company with the ability to terminate upon written notice
of any material breach of the agreement, which was not cured within 30 days. On
November 18, 2009, the Company received notice from the Related Company that it
would be in default of its obligations with respect to a scheduled payment and
such payment was not made within the related grace period. Consequently, on
November 25, 2009, the Company terminated the Purchasing Agreement. On December
11, 2009, the Company entered into an agreement effective as of November 27,
2009 (the “Interim Agreement”), pursuant to which sales written on or after
November 27, 2009 at the stores owned by the Related Company were made on the
Company’s behalf and the Related Company was entitled to compensation equal to
35% of the sales price of the merchandise (excluding home delivery fees and
taxes) for writing such sales. With respect to sales written by the Related
Company prior to November 27, 2009, the Related Company was obligated to pay the
Company for the cost of the merchandise the day prior to the date the
merchandise was shipped to the customer. The Related Company was obligated to
continue paying for its operational costs, including the costs of its employees
at its stores and its store lease costs, and to remit sales taxes on merchandise
sold by it. The Interim Agreement was terminable by the Company upon 24 hours’
notice. As of December 18, 2009, the Related Company was not in compliance with
the Interim Agreement.
Pursuant to the
Agreement entered into on December 31, 2009, described in Note 5, all existing
agreements between the Related Company and the Company were terminated.
NOTE 7: LOSS RELATED TO SERVICE CONTRACTS
Effective June 23,
2002, the Warehousing Agreement with the Related Company was amended whereby the
Related Company became the sole obligor on all lifetime fabric and leather
protection plans sold by the Company or the Related Company on and after such
date and assumed all performance obligations and risk of loss there under. In
addition, the Related Company also assumed responsibility to service and pay any
claims related to sales made by the Company or the Related Company prior to June
23, 2002. On September 4, 2009, the Company entered into a sixth amendment to
the Warehousing Agreement further extending the terms effective August 30, 2009
through August 28, 2010. The Related Company was 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 retained any remaining revenue from the sales of the plans. During
fiscal 2009, the Company transitioned to an independent outside company, which
assumed all performance obligations and risks of any loss under the protection
plans for all Jennifer segment stores, except for certain stores located in New
York and New Jersey. Effective as of November 29, 2009, the Company transitioned
all of its stores to the independent outside company and no longer sells fabric
and leather protection to be serviced by the Related Company. As described in
Note 5 above, effective as of January 1, 2010, the Related Company ceased
operations and will no longer provide the services previously contracted for by
the Company. The Company, as a matter of customer relations, will likely have to
pay for and arrange to supply services with respect to previously sold
protection services. Accordingly, during the thirteen weeks ended February 27,
2010, the Company, based on a study utilizing historical claims data, recorded a
$3,500 charge to operations for the estimated cost of supplying future services
with respect to the previously sold protection services.
10
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
NOTE 8: ACCOUNTS RECEIVABLE
Accounts receivable
in the accompanying balance sheets represent amounts due from credit card
processors and a finance company. Credit card processors pay the Company shortly
after credit card purchases by customers and before merchandise is delivered.
However, credit card companies have indicated to the Company that, in light of
current economic and credit conditions, they are reexamining their payment
policies. In this connection, in November 2008, the Company was notified by a
credit card company that the credit card processor will, through December 17,
2008, hold back a minimum of $500 as a reserve against delivery by the Company
of merchandise ordered by its credit card customers. During December 2008, the
parties executed an agreement that increased the amount of the holdback to $800,
extended processing services through June 2009 and modified certain other terms
and conditions. During the thirteen week period ended May 29, 2010, the credit
card processor held back an additional $1,137. As of May 29, 2010, the credit
card company has held back approximately $1,937, which is included in accounts
receivable. As of July 19, 2010, the credit card processor has held back
approximately $4,000.
Prior to March 2009,
the Company financed sales and sold financed receivables on a non-recourse basis
to an independent finance company. The Company did not retain any interests in
or service the sold receivables. The selling price of the receivables was
dependent upon the payment terms with the customer and resulted in either a
payment to or receipt from the finance company of a percentage of the receivable
as a fee. In January 2009, the finance company terminated its dealer agreement
with the Company effective March 8, 2009. On February 6, 2009, the parties
executed a termination addendum pursuant to which the finance company may
maintain a reserve equal to any pending disputes or claims. As of May 29, 2010,
reserves held in connection with the termination addendum to cover possible
disputes and claims had been released.
NOTE 9: TRANSACTIONS WITH CAYE AND CHINESE
SUPPLIER
In July 2005, the
Company entered into a Credit Agreement, as amended, (“Credit Agreement”) with
Caye Home Furnishings, LLC and related entities (collectively “Caye”), which is
also a vendor of the Company. Under the Credit Agreement, the Company was able
to draw down up to $13,500 (the “Credit Facility”) for the purchase from Caye of
merchandise subject to a formula based on eligible accounts receivable,
inventory and cash in deposit accounts. The borrowings under the Credit
Agreement were due 105 days from the date goods were received by the Company and
bore interest for the period between 75 and 105 days at prime plus 0.75%. If the
borrowings were not repaid after 105 days, the interest rate increased to prime
plus 2.75%. The Credit Facility, which provided for certain financial covenants,
was collateralized by a security interest in all of the Company’s assets,
excluding restricted cash and required the Company to maintain deposit accounts
of no less than $1,000.
On July 10, 2009, the
Company and Caye entered into a letter agreement pursuant to which the Company
agreed to pay down its debt to Caye by approximately $400 in exchange for Caye
releasing its security interest in all of the Company’s assets and terminating
all obligations under the Credit Agreement and related agreements. In addition,
the amount required to be maintained in deposit accounts of no less than $1,000
became unrestricted and available for operating purposes. Currently, Caye has
provided the Company with approximately $500 of trade credit. Neither the
Company nor Caye incurred any termination costs or penalties as a result of the
termination of the Credit Facility.
As of May 29, 2010
and August 29, 2009, the Company owed Caye approximately $348 and $403,
respectively. Amounts payable to Caye are included in accounts payable, trade in
the respective accompanying consolidated balance sheets.
11
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
During January 2009,
the Company began to transition from Caye to a Chinese supplier. The Chinese
company which currently manufactures approximately 95% of what the Company
historically ordered through Caye, provided a letter agreement in November 2008
to the effect that if Caye stopped supplying the Company prior to November 12,
2009, it would supply goods to the Company without interest and penalty and
provide 75 days to pay for those goods and an additional 30-day grace period on
amounts over 75 days at a per annum rate of 0.75% over prime, provided that in
no event will the amount payable by the Company exceed $10,000. On April 13,
2009, the Company and the Chinese supplier amended and restated the terms of the
letter agreement to provide, that effective August 1, 2009, the Company has up
to 150 days to pay for the goods without interest or penalty. The amended and
restated letter agreement terminates on September 30, 2010, provided that the
parties had an understanding that they would review certain terms on October 31,
2009. After review of the terms, and as of July 19, 2010, the Chinese supplier
has continued to supply the Company goods under the terms of the amended and
restated letter agreement. On December 10, 2009, the Chinese supplier further
amended the terms of the letter agreement extending the terms from 150 days to
180 days. Any amounts due that are not paid within the additional 30-day grace
period will be charged interest at a per annum rate of 2% until payment is made.
During May 2010, the Company exceeded the 180 day terms for which accrued
interest was not significant as of May 29, 2010. Amounts payable to the Chinese
supplier for purchases are denominated in U.S. dollars. As of May 29, 2010 and
August 29, 2009, the Company owed the Chinese supplier approximately $13,121,
and $8,400, respectively. Amounts payable to the Chinese supplier are included
in accounts payable, trade in the respective accompanying consolidated balance
sheets.
NOTE 10: INCOME TAXES
A valuation allowance
has been established to offset the deferred tax asset to the extent that the
Company has not determined that it is more likely than not that the future tax
benefits will be realized.
Minimum and franchise
taxes are included in selling, general and administrative expenses for the
thirteen and thirty-nine week periods ended May 29, 2010 and May 30, 2009.
Income tax expense for the thirteen and thirty-nine week periods ended May 29,
2010 and May 30, 2009 consists principally of state income taxes. The Company’s
annual effective tax rate, which is used for interim reporting purposes, differs
from the federal statutory rate principally due to the anticipated establishment
of a valuation allowance related to deferred tax assets attributable to any net
operating loss incurred in the 2010 and 2009 fiscal years.
The Company files
federal and various state and local income tax returns. The 2007 through 2009
tax years remain open for examination by the federal and certain state and local
taxing authorities under the normal three-year statute of limitations and the
2006 through 2009 tax years remain open for examination by certain state tax
authorities under a four-year statute of limitations.
NOTE 11: STOCK OPTION PLANS
There were no stock
options granted to employees during the thirty-nine week period ended May 29,
2010 or the year ended August 29, 2009, and there was no employee compensation
expense related to stock options or other stock based awards during the periods
ended May 29, 2010 and May 30, 2009.
NOTE 12: DISCONTINUED OPERATIONS
During fiscal year
2010, the Company anticipates closing stores in territories it deems to be
unprofitable to continue to operate. As stores are closed, their results are
reported as discontinued operations in the consolidated statement of operations
for the current and prior periods, except for those stores where in management’s
judgment there will be significant continuing sales to customers of the closed
stores from other stores in the area.
12
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
During the
thirty-nine week period ended May 29, 2010, the Company closed four stores in
New York, three in California (San Diego territory), two in Arizona, two in
Nevada, two in New Hampshire, one in Georgia, one in Maryland, one in
Massachusetts, and one in Illinois. The operating results of the closed stores
in New York, Maryland, Massachusetts, and Illinois are recorded in continuing
operations based on management’s judgment that there will be significant
continuing sales to customers of the closed stores from other stores in their
respective area. The operating results of the ten closed stores in Arizona,
California (San Diego territory), Georgia, New Hampshire, and Nevada are
reported in discontinued operations, and the results of operations for the
periods ended May 30, 2009 have been restated to include these stores as
discontinued operations. During fiscal 2009, the Company closed seven stores
consisting of two in Illinois, two in Missouri, one in Virginia, one in Arizona
and one in New York. The operating results of the ten closed stores in Illinois,
Virginia and New York were recorded in continuing operations based on
management’s judgment that there will be significant continuing sales to
customers of the closed stores from other stores in their respective areas. The
operating results of the two closed stores in Missouri and the one in Arizona
were reported as discontinued operations.
Revenues from the
closed stores reported as discontinued operations amounted to $395 and $505 in
the thirteen week periods ended May 29, 2010 and May 30, 2009, respectively, and
$1,467 and $2,027 in the thirty-nine week periods ended May 29, 2010 and May 30,
2009, respectively.
NOTE 13: SEGMENT INFORMATION
On October 27, 2006,
the Company’s wholly owned subsidiary, Hartsdale Convertibles, Inc.
(“Hartsdale”), entered into the Ashley Homestores, Ltd. Trademark Usage
Agreement (the “Trademark Usage Agreement”) with Ashley Homestores, Ltd.
(“Ashley”), pursuant to which Hartsdale was granted a five-year nonexclusive,
limited sublicense to use the image, technique, design, concept, trademarks and
business methods developed by Ashley for the retail sale of Ashley products and
accessories. During the five-year term of the Trademark Usage Agreement,
Hartsdale will use its best efforts to solicit sales of Ashley products and
accessories at the authorized locations, and in consultation with Ashley,
develop annual sales goals and marketing objectives reasonably designed to
assure maximum sales and market penetration of the Ashley products and
accessories in the licensed territory. The Company has guaranteed the
obligations of Hartsdale under the Trademark Usage Agreement. The Company opened
an Ashley Furniture HomeStore in each of the fiscal years 2007 and 2008. During
the thirty-nine week period ended May 29, 2010, the Company has opened four
additional stores and has opened another store subsequent to May 29,
2010.
Prior to the
Trademark Usage Agreement, the Company operated in a single reportable segment,
the operation of Jennifer specialty furniture retail stores. Subsequent thereto,
the Company has determined that it has two reportable segments organized by
product line: Jennifer (specialty furniture retail stores) and Ashley (a big
box, full line home furniture retail stores). There are no inter-company sales
between segments. The Company does not allocate indirect expenses such as
compensation to executives and corporate personnel, corporate facility costs,
professional fees, information systems, finance, insurance, and certain other
operating costs to the individual segments. These costs apply to all of the
Company’s businesses and are reported and evaluated as corporate expenses for
segment reporting purposes.
13
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
The following tables
present segment level financial information for the thirteen and thirty-nine
week periods ended May 29, 2010 and May 30, 2009:
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
May 29, | May 30, | May 29, | May 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue: | ||||||||||||||||
Jennifer | $ | 17,330 | $ | 18,160 | $ | 56,144 | $ | 60,361 | ||||||||
Ashley | 5,309 | 3,488 | 13,892 | 9,323 | ||||||||||||
Total Consolidated | $ | 22,639 | $ | 21,648 | $ | 70,036 | $ | 69,684 | ||||||||
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
May 29, | May 30, | May 29, | May 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Segment income (loss) | ||||||||||||||||
from continuing operations | ||||||||||||||||
before income taxes | ||||||||||||||||
Jennifer | $ | (2,918 | ) | $ | (170 | ) | $ | (12,836)(a)(b) | $ | (794 | ) | |||||
Ashley | 144 | 424 | 691 | 865 | ||||||||||||
Total for Reportable Segments | $ | (2,774 | ) | $ | 254 | $ | (12,145 | ) | $ | 71 | ||||||
(a) | Includes $3,500 loss related to service contracts (see Note 7). | |
(b) | Includes $3,128 loss related to amounts due from Related Company (see Note 6). |
Reconciliation:
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||||||
May 29, | May 30, | May 29, | May 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Loss from continuing operations | ||||||||||||||||
before income taxes for reportable segments | $ | (2,774 | ) | $ | 254 | $ | (12,145 | ) | $ | 71 | ||||||
Corporate expenses and other | (1,890 | ) | (1,541 | ) | (5,581 | ) | (5,002 | ) | ||||||||
Loss from continuing | ||||||||||||||||
operations before income taxes | $ | (4,664 | ) | $ | (1,287 | ) | $ | (17,726 | ) | $ | (4,931 | ) | ||||
May 29, | August 29, | ||||||
2010 | 2009 | ||||||
Total Assets: | |||||||
Jennifer | $ | 12,568 | $ | 16,034 | |||
Ashley | 4,346 | 2,456 | |||||
Corporate (a) | 4,731 | 5,979 | |||||
Total Consolidated | $ | 21,645 | $ | 24,469 | |||
(a) |
Corporate
assets consist primarily of cash and cash equivalents, restricted cash,
and prepaid expenses and other current
assets.
|
14
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
NOTE 14: ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
The components of
accrued expenses and other current liabilities are as follows:
May 29, | August 29, | |||||
2010 | 2009 | |||||
Estimated claims related to service contracts | $ | 3,050 | $ | - | ||
Advertising | 1,732 | 1,883 | ||||
Litigation | 1,300 | 1,300 | ||||
Payroll and bonuses | 575 | 613 | ||||
Due to Related Company | 110 | - | ||||
Rent (including arrearages related to | ||||||
acquisition of Related Company of $80 in 2010) | 625 | 949 | ||||
Other | 1,247 | 1,256 | ||||
$ | 8,639 | $ | 6,001 | |||
NOTE 15: CONTINGENCIES AND OTHER
On July 16, 2009, a
complaint styled as a putative class action was filed against the Company in the
United States District Court of the Northern District of California by an
individual and on behalf of all others similarly situated. The complaint seeks
unspecified damages for alleged violations of the California Labor Code, the
California Business and Professions Code and the federal Fair Labor Standards
Act. Such alleged violations include, among other things, failure to pay
overtime, failure to reimburse certain expenses, failure to provide adequate
rest and meal periods and other labor related complaints. Before engaging in
discovery and extensive pre-trial proceedings, the parties participated in an
early mediation. The plaintiff offered to settle for 20% of the Company’s
outstanding common stock in an amount guaranteed to be worth at least $2,000 on
the date of distribution. If the value of the stock as of the date of
distribution is less than $2,000 the Company would distribute cash to make up
the difference between the value of the stock and $2,000. In addition, the
Company would pay $400 over a five-year period. During November 2009, the
Company proposed a counter offer for $300 in cash over a five-year period, with
$100 to be paid up front and the balance to be secured by the Company’s assets,
and between 600,000 and 800,000 shares of stock. The number of shares to be
issued would be shares sufficient to reach a value of $1,000 as of the time of
issuance, subject to a cap of 800,000 shares and a minimum distribution of
600,000 shares, regardless of the actual value at the time of issuance. The
plaintiff rejected the Company’s counter offer but made a new proposal, which
included the stock component proposed by the Company, and increased the cash
component to a total of $1,500 paid in equal installments over a five-year
period, with $300 to be paid up front and the balance to be secured. The Company
has determined that it is probable that it has some liability. Based on the
offer and counter offer, the Company estimates the liability ranges between
$1,300 and $2,500, with no amount within that range a better estimate than any
other amount. Accordingly, in accordance with existing GAAP, the Company has
accrued $1,300 as of May 29, 2010 and August 29, 2009. Such amount is included
in accrued expenses and other current liabilities on the respective accompanying
consolidated balance sheets. On June 18, 2010 the parties attended a court
ordered settlement conference and reached a preliminary settlement. The total
classwide settlement was for $1,300 with $300 due in escrow by August 17, 2010
and the remainder due January 15, 2011 or as soon thereafter as the court
approves the final settlement.
The Company is
involved in other litigation in the normal course of business, which management
believes will not have a material adverse effect on the Company’s financial
condition, results of operations or cash flows.
15
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
For the Thirty-Nine Weeks Ended May 29, 2010
(In thousands, except for share amounts)
On January 7, 2010,
the Company received notice from the staff of the NYSE Amex LLC (the “Exchange”)
that, based on the Exchange’s review of the Company’s Annual Report on Form 10-K
for the fiscal year ended August 29, 2009, the Company was not in compliance
with certain conditions of the Exchange’s continued listing standards under
Section 1003(a)(i) of the Exchange’s Company Guide (the “Company Guide”) because
its stockholders’ equity was less than $2,000 and the Company had losses from
continuing operations and net losses in two of its three most recent fiscal
years. Pursuant to Section 1009 of the Company Guide, the Company was offered
the opportunity to submit a plan of compliance by advising the Exchange of
actions that it had taken or would take to bring it in compliance by July 7,
2011. The Company, on February 17, 2010, notified the Exchange that it would not
be submitting such plan. As a result, the Company’s stock ceased trading on the
Exchange effective as of March 8, 2010 and began trading on the Over-The-Counter
Bulletin Board under the symbol “JENN”.
16
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 29, 2009, as filed with the Securities and Exchange Commission
(“SEC”) and Item 1A in Part II of this Quarterly Report. 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.
Overview
We are the owner of
sofabed specialty retail stores that specialize in the sale of a complete line
of sofa beds 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. During fiscal 2008 and 2007, we opened full line home furniture
retail stores that sell products and accessories of Ashley Homestores, Ltd.
(“Ashley”). During the thirty-nine week period ended May 29, 2010, we opened
four additional Ashley stores. We have determined that we have two reportable
segments organized by product line: Jennifer (specialty furniture retail stores)
and Ashley (big box, full line home furniture retail stores).
As discussed
elsewhere herein, during the thirteen weeks ended May 29, 2010, we experienced a
delay in the receipt of merchandise from our principal supplier, which is
located in China, which negatively impacted our revenues. This delay has
continued subsequent to such period. In addition, during such period and
thereafter, the credit card processor increased the hold back of certain
payments due to us. As a consequence of such events, as of May 29, 2010 and
thereafter, amounts payable by us to our principal supplier were not paid by
their extended due dates. Further, as settlement negotiations have progressed
with respect to our previously disclosed employment class litigation it has
become apparent that we would be required to make a $1.3 million cash payment as
part of any such settlement.
Based on the above
and other factors, on July 18, 2010, we filed a voluntary petition for
bankruptcy (the “Bankruptcy Case”) under Chapter 11 of the United States
Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court
for the Southern District of New York (the “Bankruptcy Court”). Under Chapter
11, we will continue to operate our business as a debtor-in-possession under
court protection from our creditors and claimants, and intend to use Chapter 11
to reduce our liabilities and implement a plan of reorganization. In light of
such filing, the information presented in this Management’s Discussion and
Analysis is not necessarily indicative of results that we may achieve in the
future. It is impossible to predict the effect of the filing on our reputation,
customers, vendors and others, but it can be expected to have a material adverse
effect on all of them.
Upon consummation of
the presently contemplated plan of reorganization agreed to with our principal
supplier, which is also our principal creditor, such supplier will own 95% of
our outstanding equity securities. In addition, such supplier has agreed,
subject to certain conditions, to continue supplying merchandise throughout the
Chapter 11 proceedings. The remaining 5% is to be owned by other creditors and
the present equity interests will be cancelled. In exchange for the new equity
interests to be issued, certain claims from the principal supplier, and other
creditors will be extinguished. The ultimate resolution of the Bankruptcy Case
will be determined by the Bankruptcy Court and will involve extensive court
proceedings. Accordingly, there is no assurance that the contemplated plan of
reorganization will be implemented or that the Company will continue as a going
concern.
17
As a result of an
agreement with the formerly affiliated related company (the “related company”)
(as described below) effective January 1, 2010, we operate 20 stores previously
operated by the related company, including one store that it did not own (the
“Acquired Stores”). As part of the acquisition, as more fully described in Note
5 to the Consolidated Financial Statements herein, five of the 20 Acquired
Stores purchased from the related company that shared a common wall with a store
owned by us were combined with our respective stores for operational purposes
(“Combined Stores”). As of January 1, 2010, the results of the operations of the
Acquired Stores are included in our consolidated financial statements, and are
reflected in the Jennifer reportable segment.
Results of Operations
The following table
sets forth, for the periods indicated, the percentage of consolidated revenue
from continuing operations contributed by each class:
Thirteen weeks ended | Thirty-nine weeks ended | |||||||||||
May 29, | May 30, | May 29, | May 30, | |||||||||
2010 | 2009 | 2010 | 2009 | |||||||||
Merchandise Sales – net | 82.5 | % | 78.6 | % | 81.4 | % | 78.9 | % | ||||
Home Delivery Income | 12.4 | % | 10.6 | % | 12.0 | % | 10.9 | % | ||||
Charges to the Related Company | 0.0 | % | 4.8 | % | 1.5 | % | 4.5 | % | ||||
Net Sales | 94.9 | % | 94.0 | % | 94.9 | % | 94.3 | % | ||||
Revenue from Service Contracts | 5.1 | % | 6.0 | % | 5.1 | % | 5.7 | % | ||||
Total Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Thirteen Weeks Ended May 29, 2010 Compared to
Thirteen Weeks Ended May 30, 2009
Revenue
Jennifer Segment
Sales and delivery
fees paid by customers are recognized as revenue upon delivery of the
merchandise to the customer. Net sales from continuing operations were
$16,375,000 and $16,987,000 for the thirteen-week periods ended May 29, 2010 and
May 30, 2009, respectively. Net sales from continuing operations decreased by
3.6%, or $612,000 for the thirteen-week period ended May 29, 2010 compared to
the thirteen-week period ended May 30, 2009. The decrease is attributable to the
decline in overall demand within the furniture industry sector due to the
prevailing conditions of the U.S. economy. In addition, there have been store
closings, delays in receipt of merchandise from our Chinese supplier and a major
domestic supplier began closing its upholstered furniture manufacturing plant.
Further, the lack of private label customer financing has negatively impacted
the Company’s written sales in a time during which personal credit lines and
limits have been tightened. Net sales from continuing operations for the
thirteen-week period ended May 29, 2010 included net sales from the Acquired
Stores, exclusive of the Combined Stores, of $2,678,000. Net sales from
continuing operations for the Combined Stores was $1,690,000 and $1,048,000 for
the thirteen-week periods ended May 29, 2010 and May 30, 2009, respectively. In
addition, net sales from continuing operations for the thirteen-week period
ended May 29, 2010 included $87,000 in connection with an interim agreement
between us and the related company prior to our acquisition of the Acquired
Stores (the “Interim Agreement”).
Revenue from service
contracts from continuing operations decreased by 18.6% in the thirteen-week
period ended May 29, 2010 to $955,000 from $1,173,000 for the thirteen-week
period ended May 30, 2009. The decrease is primarily attributable to fewer
merchandise sales during the thirteen-week period ended May 29, 2010, compared
to the same period ended May 30, 2009. Revenue from service contracts from
continuing operations for the thirteen-week period ended May 29, 2010 included
revenues from the Acquired Stores, exclusive of the Combined Stores, of
$142,000. Revenue from service contracts from continuing operations for the
Combined Stores was $91,000 and $68,000
for the thirteen-week periods ended May 29, 2010 and May 30, 2009, respectively.
In addition, revenue from service contracts from continuing operations for the
thirteen-week period ended May 29, 2010 included $4,000 in connection with the
Interim Agreement.
18
Ashley Segment
Net sales from
continuing operations were $5,106,000 and $3,363,000 for the thirteen-week
periods ended May 29, 2010 and May 30, 2009, respectively. Net sales from
continuing operations increased by 51.8%, or $1,743,000 for the thirteen-week
period ended May 29, 2010 compared to the thirteen-week period ended May 30,
2009. The increase is largely attributable to four new Ashley locations open
during the thirteen-week period ended May 29, 2010, that were not open during
the same thirteen week period last year, as well as positive results of
increased promotional efforts.
Revenue from service
contracts from continuing operations increased by 62.4% in the thirteen-week
period ended May 29, 2010 to $203,000 from $125,000 for the thirteen-week period
ended May 30, 2009. The increase was primarily attributable to four new Ashley
locations open during the thirteen-week period ended May 29, 2010, that were not
open during the same thirteen week period last year, compared to the same period
ended May 30, 2009.
Consolidated
Consolidated same
store sales from continuing operations (sales at those stores open for the
entire current and prior comparable periods) decreased 19.6% for the thirteen
weeks ended May 29, 2010, compared to the same period ended May 30, 2009. During
the thirteen weeks ended May 29, 2010 the Jennifer segment closed 12 stores, of
which five are reported in continuing operations and seven are reported in
discontinued operations. Total square footage from continuing operations leased
for the Jennifer segment decreased by 22,500 square feet or 3.5% as a result of
the store closings. Total square footage leased for the Ashley segment increased
by 7,200 square feet or 6.4% during the thirteen weeks ended May 29, 2010 due to
the opening of one store.
Cost of Sales
Cost of sales, as a
percentage of revenue for the thirteen-week period ended May 29, 2010, was 76.8%
compared to 71.1% for the same period ended May 30, 2009. Cost of sales from
continuing operations increased to $17,389,000 for the thirteen weeks ended May
29, 2010 from $15,388,000 for the thirteen weeks ended May 30,
2009.
Cost of sales is
comprised of five categories: cost of merchandise, occupancy costs, warehouse
expenses, home delivery expenses and warranty costs.
The increase in the
percentage of cost of sales is due mainly to an increase in fixed costs . Cost
of sales for the thirteen-week period ended May 29, 2010 includes an increase in
occupancy costs of $1,039,000, which is mainly attributable to four new Ashley
store open during the thirteen weeks ended May 29, 2010 and the operation of the
Acquired Stores.
Selling, general and administrative expenses
Selling, general and
administrative expenses from continuing operations were $9,682,000 (42.8% as a
percentage of revenue) and $7,323,000 (33.8% as a percentage of revenue) during
the thirteen-week periods ended May 29, 2010 and May 30, 2009,
respectively.
Selling, general and
administrative expenses for the thirteen-week period ended May 29, 2010 includes
an increase of $717,000 for the Ashley segment, an increase of $1,306,000 for
the Jennifer segment and an increase of $336,000 related to corporate
activities, consisting of compensation, advertising, finance fees and other
administrative costs.
19
Selling, general and
administrative expenses are comprised of four categories: compensation,
advertising, finance fees and other administrative costs. Compensation is
primarily comprised of compensation of executives, finance, customer service, information systems,
merchandising, sales associates and sales management. Advertising expenses are
primarily comprised of newspaper/magazines, circulars, television and other soft
costs. Finance fees are comprised of fees paid to credit card companies.
Administrative expenses are comprised of professional fees, utilities,
insurance, supplies, permits and licenses, property taxes, repairs and
maintenance, and other general administrative costs.
Compensation expense
increased $647,000 during the thirteen-week period ended May 29, 2010 compared
to the same period ended May 30, 2009. Compensation expense increased by $96,000
for the Jennifer segment, increased $364,000 for the Ashley segment and
increased by $187,000 for corporate activities. The increase in the Jennifer
segment was primarily attributable to revised compensation arrangements with
salespersons. The increase for the Ashley segment is largely due to the opening
of four new stores. Corporate compensation increased due to the termination of
the voluntary salary reductions by the Chief Executive Officer and Executive
Vice President as of December 31, 2009.
Advertising expense
increased $1,393,000 during the thirteen-week period ended May 29, 2010 compared
to the same period ended May 30, 2009. Advertising expense increased by
$1,193,000 for the Jennifer segment and increased by $200,000 for the Ashley
segment. The increase for the Jennifer segment is due to $377,000 of advertising
expense reimbursements that would have been charged to the related company if
the management agreement and license were not terminated as of December 31, 2009
and an increase in television and print promotional efforts for the
thirteen-week period ended May 29, 2010 compared to the same period ended May
30, 2009. The increase for the Ashley segment is largely due to the opening of
four new stores.
Finance fees
increased $58,000 during the thirteen-week period ended May 29, 2010 compared to
the same period ended May 30, 2009. The increases for the Jennifer and Ashley
segments in the amount of $17,000 and $41,000, respectively, are primarily
attributable to the termination of private label customer financing during March
2009, as well as increased transaction rates charged by our credit card
processors that became effective February 2009. The increase for the Ashley
segment can also be attributed to the opening of four new stores and the
corresponding increase in the number of credit card transactions for this
segment.
Other administrative
costs increased $261,000 during the thirteen-week period ended May 29, 2010
compared to the same period ended May 30, 2009. The Jennifer segment
administrative costs were comparable period to period. The Ashley segment
increased in the amount of $112,000 largely due to the opening of four new
stores during the thirty-nine weeks ended May 29, 2010. Corporate activities
increased $149,000 due to an increase in professional fees.
Loss from Continuing Operations
The loss from
continuing operations was $4,666,000 and $1,292,000 for the thirteen-week
periods ended May 29, 2010 and May 30, 2009, respectively. The loss from
continuing operations for the thirteen-week periods ended May 29, 2010 and May
30, 2009 includes income of $144,000 and $419,000, respectively, related to our
Ashley segment.
Loss from Discontinued Operations
During the thirteen
week period ended May 29, 2010, the Company closed two stores in New York, two
in California (San Diego territory), two in Nevada, two in New Hampshire, one in
Illinois, one in Maryland, one in Massachusetts, and one in Georgia. The
operating results of the closed stores in Illinois, New York, Maryland and
Massachusetts are recorded in continuing operations based on management’s
judgment that there will be significant continuing sales to customers of the
closed store from other stores in their respective area. The operating results
of the closed stores in Georgia, New Hampshire, California (San Diego
territory), and Nevada, along with Arizona stores closed during the prior
quarters, are reported in discontinued operations, and the results of operations
for the thirteen-week period ended May 30, 2009 has been restated to include
these stores as discontinued operations. During fiscal 2009, the Company closed
seven stores consisting of two in Illinois, two in Missouri, one in Virginia,
one in Arizona and one in New York. The operating results of the closed stores
in Illinois, Virginia and New York were recorded in continuing operations based on management’s judgment that
there will be significant continuing sales to customers of the closed stores
from other stores in their respective areas. The operating results of the two
closed stores in Missouri and the one in Arizona were reported as discontinued
operations. Loss from discontinued operations amounted to $109,000 and $240,000
for the thirteen-week periods ended May 29, 2010 and May 30, 2009, respectively.
20
Revenues from the
closed stores reported as discontinued operations amounted to $395,000 and
$505,000 in the thirteen-week periods ended May 29, 2010 and May 30, 2009,
respectively.
Net Loss
Net loss for the
thirteen-week period ended May 29, 2010 was $4,775,000, compared to net loss of
$1,532,000 for the thirteen-week period ended May 30, 2009. This change is
primarily attributable to delays in receipt of merchandise from our Chinese
supplier and the closing of the upholstered furniture manufacturing plant of a
major domestic supplier and the impact of such changes on the Jennifer segment
revenues. In addition, there has been an increase in certain fixed costs mainly
attributable to the operation of the Acquired Stores.
Thirty-nine Weeks Ended May 29, 2010 Compared
to Thirty-nine Weeks Ended May 30, 2009
Revenue
Jennifer Segment
Sales and delivery
fees paid by customers are recognized as revenue upon delivery of the
merchandise to the customer. Net sales from continuing operations were
$53,084,000 and $56,700,000 for the thirty-nine week periods ended May 29, 2010
and May 30, 2009, respectively. Net sales from continuing operations decreased
by 6.4%, or $3,616,000 for the thirty-nine week period ended May 29, 2010
compared to the thirty-nine-week period ended May 30, 2009. The decrease is
attributable to the decline in overall demand within the furniture industry
sector due to the prevailing conditions of the U.S. economy. In addition, there
have been store closings and delays in receipt of merchandise from our Chinese
supplier and a major domestic supplier began closing its upholstered furniture
manufacturing plant. Further, the lack of private label customer financing has
negatively impacted the Company’s written sales in a time during which personal
credit lines and limits have been tightened. Net sales from continuing
operations for the thirty-nine week period ended May 29, 2010 included net sales
from the Acquired Stores, exclusive of the Combined Stores, of $3,847,000. Net
sales from continuing operations for the Combined Stores was $4,167,000 and
$3,546,000 for the thirty-nine week periods ended May 29, 2010 and May 30, 2009,
respectively. In addition, net sales from continuing operations for the
thirty-nine week period ended May 29, 2010 included $1,283,000 in connection
with the Interim Agreement.
Revenue from service
contracts from continuing operations decreased by 16.4% in the thirty-nine week
period ended May 29, 2010 to $3,060,000, from $3,661,000 for the thirty-nine
week period ended May 30, 2009. The decrease is primarily attributable to fewer
merchandise sales during the thirty-nine week period ended May 29, 2010,
compared to the same period ended May 30, 2009. Revenue from service contracts
from continuing operations for the thirty-nine week period ended May 29, 2010
included revenues from the Acquired Stores, exclusive of the Combined Stores, of
$207,000. Revenue from service contracts from continuing operations for the
Combined Stores was $243,000 and $226,000 for the thirty-nine week periods ended
May 29, 2010 and May 30, 2009, respectively. In addition, revenue from service
contracts from continuing operations for the thirty-nine week period ended May
29, 2010 included $76,000 in connection with the Interim Agreement.
21
Ashley Segment
Net sales from
continuing operations were $13,351,000 and $9,000,000 for the thirty-nine week
periods ended May 29, 2010 and May 30, 2009, respectively. Net sales from
continuing operations increased by 48.3%, or $4,351,000, for the thirty-nine
week period ended May 29, 2010 compared to the thirty-nine week period ended May
30, 2009. The increase is largely attributable to four new Ashley locations
opened during the thirty-nine weeks ended May 29, 2010, as well as positive
results of increased promotional efforts.
Revenue from service
contracts from continuing operations increased by 67.5% in the thirty-nine week
period ended May 29, 2010 to $541,000 from $323,000 for the thirty-nine week
period ended May 30, 2009. The increase was primarily attributable to the
opening of four new Ashley locations and greater merchandise sales during the
thirty-nine week period ended May 29, 2010, compared to the same period ended
May 30, 2009.
Consolidated
Consolidated same
store sales from continuing operations (sales at those stores open for the
entire current and prior comparable periods) decreased 11.7% for the thirty-nine
weeks ended May 29, 2010, compared to the same period ended May 30, 2009. During
the thirty-nine weeks ended May 29, 2010, 17 stores closed, of which seven are
reported in continuing operations and 10 are reported in discontinued
operations, and another store relocated. Total square footage from continuing
operations leased for the Jennifer segment increased by 44,357 square feet, or
7.7%, as a result of the Acquired Stores, net of store closings. Total square
footage leased for the Ashley segment increased by 59,700 square feet, or 99.5%,
during the thirty-nine weeks ended May 29, 2010 due to the opening of four
stores.
Cost of Sales
Cost of sales, as a
percentage of revenue for the thirty-nine week period ended May 29, 2010, was
74.9% compared to 71.0% for the same period ended May 30, 2009. Cost of sales
from continuing operations increased to $52,455,000 for the thirty-nine weeks
ended May 29, 2010 from $49,510,000 for the thirty-nine weeks ended May 30,
2009.
Cost of sales is
comprised of five categories: cost of merchandise, occupancy costs, warehouse
expenses, home delivery expenses and warranty costs.
The increase in the
percentage of cost of sales is due mainly to an increase in fixed. Cost of sales
for the thirty-nine week period ended May 29, 2010 includes an increase in
occupancy costs of $1,606,000, which is mainly attributable to the opening of
four new Ashley stores and the operation of the Acquired Stores. This increase
was partially offset by decreases in certain leases for the Jennifer segment as
result of lease modifications negotiated on an on-going basis.
Loss related to service contracts
Effective January 1,
2010, the related company ceased operations and will no longer provide the
services previously contracted for by us. As a matter of customer relations, we
will likely have to pay for and arrange to supply services with respect to
previously sold protection services. Accordingly, during the thirty-nine weeks
ended May 29, 2010, we recorded a $3,500,000 charge to operations for the
estimated cost of supplying future services with respect to the previously sold
protection services.
Selling, general and administrative expenses
Selling, general and
administrative expenses from continuing operations were $28,015,000 (40.0% as a
percentage of revenue) and $24,280,000 (34.8% as a percentage of revenue) during
the thirty-nine week periods ended May 29, 2010 and May 30, 2009,
respectively.
Selling, general and
administrative expenses for the thirty-nine week period ended May 29, 2010
includes an increase of $1,456,000 for the Ashley segment, an increase of
$1,815,000 for the Jennifer segment and an increase of $464,000 related to
corporate activities, consisting of compensation, advertising, finance fees and
other administrative costs.
22
Selling, general and
administrative expenses are comprised of four categories: compensation,
advertising, finance fees and other administrative costs. Compensation is
primarily comprised of compensation of executives, finance, customer service,
information systems, merchandising, sales associates and sales management.
Advertising expenses are primarily comprised of newspaper/magazines, circulars,
television and other soft costs. Finance fees are comprised of fees paid to
credit card companies. Administrative expenses are comprised of professional
fees, utilities, insurance, supplies, permits and licenses, property taxes,
repairs and maintenance, and other general administrative costs.
Compensation expense
increased $591,000 during the thirty-nine week period ended May 29, 2010
compared to the same period ended May 30, 2009. Compensation expense decreased
by $346,000 for the Jennifer segment, increased $740,000 for the Ashley segment
and increased by $197,000 for corporate activities. The decrease in the Jennifer
segment was primarily attributable to lower sales volume, which resulted in
lower compensation expense to salespersons and the closing of 17 stores. These
decreases are net of the increase resulting from the hiring of salespersons at
the Acquired Stores. The increase for the Ashley segment is largely due to the
opening of four new stores during the thirty-nine weeks ended May 29, 2010.
Corporate compensation increased due to the termination of voluntary salary
reductions by the Chief Executive Officer and Executive Vice President as of
December 31, 2009.
Advertising expense
increased $2,335,000 during the thirty-nine week period ended May 29, 2010
compared to the same period ended May 30, 2009. Advertising expense increased by
$2,013,000 for the Jennifer segment and increased by $322,000 for the Ashley
segment. The increases for the Jennifer and Ashley segments are due to
advertising expenses relating to our Labor Day promotion incurred during the
thirty-nine week period ended May 29, 2010, which were not incurred during the
thirty-nine week period ended May 30, 2009. Furthermore, the increase for the
Jennifer segment reflects $779,000 of advertising expense reimbursements that
would have been charged to the related company if the management agreement and
license had not been terminated as of December 31, 2009 and an increase in
television and print promotional efforts for the thirty-nine week period ended
May 29, 2010 compared to the same period in the prior year. The increase for the
Ashley segment is largely due to the opening of four new stores during the
thirty-nine weeks ended May 29, 2010.
Finance fees
increased $486,000 during the thirty-nine week period ended May 29, 2010
compared to the same period ended May 30, 2009. The increases for the Jennifer
and Ashley segments in the amount of $336,000 and $150,000, respectively, are
primarily attributable to the termination of private label customer financing
during March 2009, as well as increased transaction rates charged by our credit
card processors that became effective February 2009. Additionally, the Jennifer
increase includes $98,000 of fees related to the Acquired Stores. The increase
for the Ashley segment can also be attributed to the opening of four new stores
and the corresponding increase in the number of credit card transactions for
this segment during the thirty-nine week period ended May 29, 2010.
Other administrative
costs increased $323,000 during the thirty-nine week period ended May 29, 2010
compared to the same period ended May 30, 2009. The Jennifer segment decreased
in the amount of $188,000 as a result of cost reductions at the store levels.
The Ashley segment increased in the amount of $244,000 largely due to the
opening of four new stores. Corporate activities increased $267,000 due to an
increase in professional fees.
Provision for Loss on Amounts Due From the
Related Company
During the year ended
August 29, 2009, the related company failed to make payment in full of the
amount due by the required due date in five instances. The shortfalls were paid
off in full during the permitted grace period no later than 22 days after the
original due date, including interest at the rate of 9% per annum. In November
2009, the related company defaulted on its payment obligation by not paying the
remaining outstanding balance of the receivable due to us as of August 29, 2009
within the 30-day grace period. As a result thereof, we provided an allowance
for loss of $947,000 as of August 29, 2009, representing the net balance due
from the related company as of such date after giving effect to subsequent
payments received. During the thirty-nine week period ended November 28, 2009,
we provided an additional allowance for loss of $3,167,000 related to increases
in the receivable from the related company principally resulting from transfers of inventory and charges for
delivery services, warehousing services and advertising costs during such
period. During December 2009, we recovered $39,000 from the related company.
23
Loss from Continuing Operations
The loss from
continuing operations was $17,732,000 and $4,937,000 for the thirty-nine week
periods ended May 29, 2010 and May 30, 2009, respectively. The loss from
continuing operations for the thirty-nine week periods ended May 29, 2010 and
May 30, 2009 includes income of $691,000 and $858,000, respectively, related to
our Ashley segment.
Loss from Discontinued Operations
During the
thirty-nine week period ended May 29, 2010, the Company closed four stores in
New York, three in California (San Diego territory), two in Nevada, two in New
Hampshire, two in Arizona, one in Illinois, one in Massachusetts, one in
Maryland, and one in Georgia. The operating results of the closed stores in New
York, Maryland, Massachusetts and Illinois are recorded in continuing operations
based on management’s judgment that there will be significant continuing sales
to customers of the closed store from other stores in their respective areas.
The operating results of the closed stores in Arizona, California (San Diego
territory), Georgia, New Hampshire, and Nevada are reported in discontinued
operations, and the results of operations for the thirty-nine week period ended
May 30, 2009 has been restated to include these stores as discontinued
operations. During fiscal 2009, the Company closed seven stores consisting of
two in Illinois, two in Missouri, one in Virginia, one in Arizona and one in New
York. The operating results of the closed stores in Illinois, Virginia and New
York were recorded in continuing operations based on management’s judgment that
there will be significant continuing sales to customers of the closed stores
from other stores in their respective areas. The operating results of the two
closed stores in Missouri and the one in Arizona were reported as discontinued
operations. Loss from discontinued operations amounted to $326,000 and $808,000
for the thirty-nine week periods ended May 29, 2010 and May 30, 2009,
respectively.
Revenues from the
closed stores reported as discontinued operations amounted to $1,467,000 and
$2,027,000 in the thirty-nine week periods ended May 29, 2010 and May 30, 2009,
respectively.
Net Loss
Net loss for the
thirty-nine week period ended May 29, 2010 was $18,058,000, compared to net loss
of $5,745,000 for the thirty-nine week period ended May 30, 2009. This change is
primarily attributable to the decrease in revenues for the Jennifer segment due
to the prevailing economic conditions, the delays in receipt of merchandise from
our Chinese supplier and the closing of the upholstered furniture manufacturing
plant of a major domestic supplier, a $3,128,000 provision for loss on amounts
due from the related company, a $3,500,000 charge to operations for the
estimated cost of supplying future services with respect to the previously sold
protection services and increases in certain fixed costs mainly due to the
operation of the Acquired Stores.
Liquidity and Capital Resources
The Company filed for
voluntary bankruptcy on July 18, 2010 as discussed more fully below.
As of May 29, 2010,
we had a working capital deficiency of $23,321,000 compared to a deficiency of
$5,322,000 at August 29, 2009 and had available cash and cash equivalents of
$4,361,000 compared to $5,609,000 at August 29, 2009. The increase in working
capital deficiency is a result of losses from operations, including a provision
for loss on amounts due from the related company in the amount of $3,128,000 and
a $3,500,000 reserve for the estimated cost of supplying future services with
respect to the previously sold protection services. The losses from operations
are attributable to the collective effects of several events that occurred
during the thirty-nine weeks ended May 29, 2010. We experienced a delay in the
receipt of merchandise from its Chinese supplier and a major domestic supplier
began closing its upholstered furniture manufacturing plant, which impacted our
revenues. Further, the lack of private label customer financing has negatively
impacted our sales in a time during which personal credit lines and limits have
been tightened. The stores acquired from the Related Company generated lower
than anticipated profits during the thirteen weeks ended May 29, 2010 and
shipping costs increased worldwide thereby effecting our margins.
24
During the fiscal
year ended August 29, 2009, the related company failed to make payment in full
in five instances. The shortfalls were paid off in full within the permitted
grace periods no more than 22 days after the original due date, including
interest at a rate of 9% per annum. Subsequent to year end, the related company
continued to make late payments. In November 2009, the related company defaulted
on its payment obligation by not paying the remaining outstanding balance of the
receivable due to us as of August 29, 2009 within the 30-day grace period. As a
result thereof, we provided an allowance for loss of $947,000 as of August 29,
2009, representing the net balance due from the related company as of such date
after giving effect to subsequent payments received. In addition, in the quarter
ended November 28, 2009, we provided an additional allowance for loss of
$3,167,000 related to increases in the receivable from the related company
principally resulting from transfers of inventory and charges for delivery
services, warehousing services and advertising costs in the quarter then ended.
During December 2009, we recovered $39,000 from the related
company.
As of December 31,
2009, we entered into an agreement with the related company, pursuant to which,
effective January 1, 2010, the related company ceased operations at the Acquired
Stores and we began operating the Acquired Stores solely for our benefit and
account (the “Agreement”) in order to protect our brand and our customers. The
Agreement allowed us to evaluate each Acquired Store location and negotiate with
the landlords at such locations for entry into new leases at such Acquired
Stores and endeavor to cancel or defer the rent arrearages, which the related
company advised aggregated approximately $300,000 as of January 1, 2010. We
agreed to pay no more than $300,000 to settle the arrearages at all 20 Acquired
Stores and if the arrearages exceed $300,000 the related company would reimburse
us for such excess or such excess would be used to offset the amount we owe the
related company for the purchase of the inventory. Other than the rent
arrearages, we did not assume any liabilities of the related company. We also
agreed to offer to employ all Acquired Store employees employed by the related
company but agreed not to be responsible for any commissions, salary, health or
other benefits or other compensation owed them prior to January 1, 2010. We
agreed to be responsible for the costs of operating the Acquired Stores on and
after January 1, 2010, except with respect to Acquired Stores vacated by
us.
We agreed to purchase
the inventory in the showrooms of the Acquired Stores for $635,000, payable over
five months and subject to offset under certain circumstances. Pursuant to the
Agreement, the $301,000 owed to us by the related company under the interim
agreement was extinguished. In addition, the related company agreed to surrender
to us 93,579 shares of our common stock owned by the related
company.
With the exception of
the Agreement, all agreements between the related company and us were terminated
and are of no further force and effect.
Effective as of
November 29, 2009, we transitioned all of our stores to an alternative provider
of fabric and leather protection and no longer sell fabric and leather
protection to be serviced by the related company. As described above, effective
January 1, 2010, the related company ceased operations. Accordingly, during the
thirty-nine week period ended May 29, 2010, we incurred a $3,500,000 charge to
operations for the estimated cost of supplying future services with respect to
the previously sold protection services.
On July 11, 2005, we
entered into a Credit Agreement, as amended, (the “Credit Agreement”) and a
Security Agreement (the “Security Agreement”) with Caye Home Furnishings, LLC,
Caye Upholstery, LLC and Caye International Furnishings, LLC (collectively,
“Caye”). Under the Credit Agreement, Caye agreed to make available to us a
credit facility (the “Credit Facility”) of up to $13,500,000, effectively
extending Caye’s payment terms for merchandise shipped to us from 75 days to 105
days after receipt of goods. The borrowings under the Credit Agreement were due
105 days from the date goods were received by us and bore interest for the
period between 75 and 105 days at prime plus 0.75%. If the borrowings were not
repaid after 105 days, the interest rate increased to prime plus 2.75%. The
Credit Facility was collateralized by a security interest in all of our assets,
excluding restricted cash and required us to maintain deposit accounts of no
less than $1 million.
25
On July 10, 2009, we
entered into a letter agreement with Caye pursuant to which we agreed to pay
down our debt to Caye by approximately $400,000 in exchange for Caye releasing
its security interest in all of our assets and terminating all obligations under
the Credit Agreement and the Security Agreement. In addition, the amount
required to be maintained in deposit accounts of no less than $1 million became
unrestricted and available for operating purposes. Currently, Caye has provided
us with approximately $500,000 of trade credit. Neither Caye nor we incurred any
termination costs or penalties as a result of the termination of the Credit
Facility.
During January 2009,
we began to transition from Caye to a Chinese supplier. The Chinese company,
which currently manufactures approximately 95% of what we historically ordered
through Caye, provided a letter agreement in November 2008 to the effect that if
Caye stopped supplying us prior to November 12, 2009, it would supply us goods
without interest and penalty and provide 75 days to pay for those goods and an
additional 30-day grace period on amounts over 75 days at a per annum rate of
0.75% over prime, provided that in no event will the amount payable by us exceed
$10,000,000. On April 13, 2009, the Chinese supplier and we amended and restated
the terms of the letter agreement to provide, that effective August 1, 2009, we
have up to 150 days to pay for the goods without interest or penalty. The
amended and restated letter agreement terminates on September 30, 2010, provided
that the parties had an understanding that they would review certain terms on
October 31, 2009. As of the current date, after review of the terms, the Chinese
supplier continues to supply us goods under the terms of the amended and
restated letter agreement. On December 10, 2009, the Chinese supplier further
amended the terms of the letter agreement extending the terms from 150 days to
180 days. Any amounts due that are not paid within the additional 30 day grace
period will be charged interest at a per annum rate of 2% until payment is made.
During May 2010, the Company exceeded the 180 day terms for which accrued
interest was not significant as of May 29, 2010. In addition, there has been a
slow down in the supply of goods from the Chinese supplier. As of May 29, 2010,
we owed the Chinese supplier approximately $13,121,000.
The credit card
companies have, for the past several years, paid us shortly after credit card
purchases by our customers. However, they have indicated to us that in light of
current economic and credit conditions they are reexamining their payment
policies. Extensions of the time they take to pay us would adversely affect our
cash flow. In this connection, we entered into an agreement with one of our
credit card companies for the interim period ended December 17, 2008, pursuant
to which a $500,000 reserve was established as, in effect, a performance bond
against delivery by us of the merchandise ordered by its credit card customers.
During December 2008, the parties executed an agreement that increased the
amount of the reserve to $800,000, extended processing services through June
2009 and modified certain other terms and conditions. During the quarter ended
May 29, 2010, the credit card processor held back an additional $1,137,000,
increasing the amount of the reserve to $1,937,000. As of July 19, 2010, the
credit card processor has held back approximately $4,000,000.
As more fully
described in Note 15 to the Consolidated Financial Statements contained herein,
the proposed settlement of a pending litigation could require us to pay cash of
$1,300,000.
We acquired 20 stores
from the related company, opened four additional Ashley stores, closed seventeen
Jennifer stores and relocated one Jennifer store during the thirty-nine weeks
ended May 29, 2010. We disbursed $525,000 of the $635,000 cash portion of the
purchase price for the acquired stores and spent $478,000 for capital
expenditures of continuing operations during such thirty-nine week period.
Subsequent to May 29, 2010 the Company incurred capital expenditures of
approximately $184,000.
During the thirteen
weeks ended May 29, 2010, we experienced a delay in the receipt of merchandise
from our principal supplier, which is located in China, which negatively
impacted our revenues. This delay has continued subsequent to such period. In
addition, during such period and thereafter, the credit card processor increased
the hold back of certain payments due to us. As a consequence of such events, as
of May 29, 2010 and thereafter, amounts payable by us to our principal supplier
were not paid by their extended due dates. Further, as settlement negotiations
have progressed with respect to our previously disclosed employment class
litigation it has become apparent that we would be required to make a $1.3
million cash payment as part of any such settlement.
26
Based on the above
and other factors, on July 18, 2010, we filed a voluntary petition for
bankruptcy (the “Bankruptcy Case”) under Chapter 11 of the United States
Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court
for the Southern District of New York (the “Bankruptcy Court”). Under Chapter
11, we will continue to operate our business as a debtor-in-possession under
court protection from our creditors and claimants, and intend to use Chapter 11
to reduce our liabilities and implement a plan of reorganization.
The decision to file
for Chapter 11 protection was driven primarily by the lack of financing
available to the Company given the state of the credit markets. We have been
seeking financing alternatives that would allow us to continue operating outside
of bankruptcy, however, the Board of Directors determined that a Chapter 11
reorganization, was in the best interests of the Company, its customers,
creditors, employees, and other interested parties.
We fully intend to
continue all business operations throughout the administration of the bankruptcy
cases and to honor all of our existing customer commitments without
interruption, post-petition.
We have filed a
series of first-day motions in the Bankruptcy Court seeking to ensure that we
will not have any interruption in maintaining and honoring our commitments
during the reorganization process. Although Chapter 11 law prohibits payments
for any invoices that were outstanding at the time of the filing without prior
court approval, it does provide greater protection to those providers of goods
and services who conduct business with us from this point forward. Approval of
the restructuring and all principal steps related thereto, will be subject to
numerous preconditions, including, but not limited to, preparation of definitive
documentation and approval by the Bankruptcy Court.
Upon consummation of
the presently contemplated plan of reorganization agreed to with our principal
supplier, which is also our principal creditor, such supplier will own 95% of
our outstanding equity securities. In addition, such supplier has agreed,
subject to certain conditions, to continue supplying merchandise throughout the
Chapter 11 proceedings. The remaining 5% is to be owned by other creditors and
the present equity interests will be cancelled. In exchange for the new equity
interests to be issued, certain claims from the principal supplier, and other
creditors will be extinguished. The ultimate resolution of the Bankruptcy Case
will be determined by the Bankruptcy Court and will involve extensive court
proceedings. Accordingly, there is no assurance that the contemplated plan of
reorganization will be implemented or that the Company will continue as a going
concern.
Off Balance Sheet
Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
Not
applicable.
Item 4T. Controls and Procedures.
Disclosure Controls and
Procedures
Our management,
including our Principal Executive Officer (“PEO”) and Principal Financial
Officer (“PFO”), conducted an evaluation of the effectiveness of disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the PEO and PFO have concluded that, as of May 29, 2010, our
disclosure controls and procedures were effective in ensuring that information
relating to us (including our consolidated subsidiaries), which is required to
be disclosed by us in the reports that we file or submit under the Exchange Act
is (i) recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and (ii) accumulated and communicated to
our management, including the PEO and PFO, or persons performing similar
functions as appropriate, to allow timely decisions regarding required
disclosure.
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Changes in Internal Controls
over Financial Reporting
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 fiscal quarter
ended May 29, 2010, that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
28
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Except as described
below, there have been no material changes to the Legal Proceedings disclosed in
Part I, Item 3 of our Annual Report on Form 10-K for the year ended August 29,
2009. With respect to the class action described in the Annual Report on Form
10-K, on June 18, 2010 the parties attended a court ordered settlement
conference and reached a preliminary settlement. The total classwide settlement
was for $1.3 million with $300,000 due in escrow by August 17, 2010 and the
remainder due January 15, 2011 or as soon thereafter as the court approves the
final settlement.
Item 1A. Risk Factors.
In addition to risk
factors set forth below and the other information set forth in this Quarterly
Report, you should carefully consider the factors discussed in Part I, Item 1A.
Risk Factors in our Annual Report on Form 10-K for the year ended August 29,
2009, which could materially affect our business, financial condition or future
results. The risks described below and in our Annual Report on Form 10-K are not
the only risks we may face. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial conditions and/or operating results.
The information below amends, updates and should be read in conjunction with the
risk factors and information disclosed in our Annual Report on Form 10-K for the
year ended August 29, 2009.
A long period of operations under the Bankruptcy Case may harm our
business.
During the Bankruptcy
Case, our senior management will be required to spend a significant amount of
time and effort working on the reorganization instead of focusing exclusively on
our business operations. A prolonged period of operating under Chapter 11
protection may also make it more difficult to attract and retain management and
other key personnel necessary to the success and growth of our business. In
addition, the longer the Bankruptcy Case continues, the more likely it is that
our contractors and suppliers will lose confidence in our ability to
successfully reorganize our businesses and seek to establish alternative
commercial relationships. Furthermore, so long as the Bankruptcy Case continues,
we will be required to incur substantial costs for professional fees and other
expenses associated with the administration of the Bankruptcy Case. A prolonged
continuation of the Bankruptcy Case may also require us to seek financing. If we
require financing during the Bankruptcy Case and we are unable to obtain the
financing on favorable terms or at all, our chances of successfully reorganizing
our businesses may be seriously jeopardized, and as a result, our liabilities
and securities could become further devalued or worthless.
Adverse publicity in connection with the Bankruptcy Case or otherwise
could adversely our results of operations and our
business.
Adverse publicity or
news coverage relating to us, including publicity or news coverage in connection
with the Bankruptcy Case, may negatively impact our revenues and results of
operations.
Operating under the Bankruptcy Code may restrict our ability to pursue
our business strategies and strategic alternatives.
Under the Bankruptcy
Code, we must obtain Bankruptcy Court approval to engage in actions outside the
ordinary course of business, including with respect to any consolidation,
merger, sale or other disposition of all or substantially all of our assets. Any
agreement we enter into with respect to a strategic transaction will be subject
to Bankruptcy Court approval. In addition, if a trustee is appointed to operate
our business while we are in bankruptcy, the trustee would assume control of our
assets.
29
The amount of creditor claims in the Bankruptcy Case could be more than
projected.
The date for filing
proofs of claims has not yet passed. The allowed amount of claims could be
significantly more than projected, which could significantly dilute the value of
distributions to the holders of claims.
While the Bankruptcy Case is pending, our financial results may be
volatile and any disposition of assets could materially change the amounts we
reported in our historical financial statements.
During the Bankruptcy
Case, we expect our financial results to continue to be volatile as asset
impairments, asset dispositions, restructuring activities, contract terminations
and rejections and claims assessments may significantly impact our consolidated
financial statements. Further, we may sell or otherwise dispose of assets and
liquidate or settle liabilities, with Bankruptcy Court approval, for amounts
other than those reflected in our historical financial statements. Any such sale
or disposition and any plan of reorganization could materially change the
amounts and classifications reported in our historical condensed financial
statements, which do not give effect to any adjustments to the carrying value of
assets or amounts of liabilities that might be necessary as a consequence of a
plan of reorganization.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.
None.
Item 3. Defaults Upon Senior
Securities.
None.
Item 4. (Removed and Reserved).
Item 5. Other Information.
None.
Item 6. Exhibits.
(a) | Exhibits filed with this report: | |
31.1 | Certification of Chief Executive Officer pursuant to Securities and Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Securities and Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
30
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 19, 2010 | By: | /s/ | Harley J. Greenfield |
Harley J. Greenfield, Chairman of the Board and | |||
Chief Executive Officer (Principal Executive Officer) | |||
July 19, 2010 | By: | /s/ | Rami Abada |
Rami Abada, Chief Financial Officer and Chief Operating Officer | |||
(Principal Financial Officer) |
31
EXHIBIT INDEX
EXHIBIT | ||
NUMBER | DESCRIPTION | |
31.1 | Certification of Chief Executive Officer pursuant to Securities and Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | |
31.2 | Certification of Chief Financial Officer pursuant to Securities and Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | |
32.1 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * | |
32.2 | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * |
* Filed herewith.
32