UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 24, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9681
JENNIFER CONVERTIBLES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2824646
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
419 Crossways Park Drive, Woodbury, New York 11797
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 496-1900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of the issuer's common stock
as of February 24, 1996: 5,700,725
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Part I - Financial Information
Item I - Financial Statements
Recent Developments............................................... 2
Consolidated Balance Sheets - February 24, 1996
(Unaudited) and August 26, 1995................................. 3
Comparative Consolidated Statements of Operations
(Unaudited) for the twenty-six weeks and thirteen
weeks ended February 24, 1996 and February 25, 1995............... 4
Comparative Consolidated Statements of Cash Flows
(Unaudited) for the twenty-six weeks and thirteen
weeks ended February 24, 1996 and February 25, 1995............... 5
Notes to Unaudited Consolidated Financial
Statements ..................................................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................15
Part II - Other Information........................................19
<PAGE>
Recent Developments
-------------------
In late November 1994, the Company was advised by KPMG Peat Marwick
("Peat"), its independent auditors at the time, that its method of accounting
for certain of its licensees should be changed and would likely require a
restatement of previously announced financial results. The financial statements
included herein consolidate the operating losses for certain limited
partnership licensees (the "LP's"), to the extent such losses exceed the
capital contributions of the limited partners. In addition, on December 2,
1994, a special committee of the Company's Board of Directors delivered a
summary report which concluded that the Company had meritorious claims against
three members of its management, an affiliated private company (the "Private
Company")and others. The Company announced these matters publicly in a press
release on December 2, 1994. In March 1995, the Company received a response to
such report prepared on behalf of one of the members of its management which
concluded that there were no valid claims. The Company and certain of its
management became involved in class action and derivative litigations relating
to the matters referred to above and, on May 3, 1995, the Securities and
Exchange Commission commenced an investigation relating to such matters. On May
2, 1995, BDO Seidman, the Company's auditors for the 1993 fiscal year, advised
the Company that BDO Seidman, had withdrawn its opinion with respect to the
Company's financial statements for the fiscal year ended August 31, 1993. In
March 1996, the Company announced that it had entered into memoranda of
understanding ("MOUS") with the other parties in the class action and
derivative litigations (other than Selig Zises, Peat and BDO Seidman) for the
purpose of settling such litigations. The transactions set forth in the MOUS
and the settlement of such litigation are subject, among other things, to
execution of definitive documentation and Court approval.
The Company is simultaneously filing its Annual Report on Form 10-K for
the fiscal year ended August 27, 1994, its Annual Report on Form 10-K for the
fiscal year ended August 26, 1995 (collectively, the "Annual Reports") and its
Quarterly Reports on Form 10-Q for the quarters ended November 26, 1994,
February 25, 1995, May 27, 1995, November 25, 1995, February 24, 1996 and May
25, 1996 (the "Quarterly Reports"). Certain of the information contained in
this Quarterly Report is out of date and, accordingly, this Quarterly Report
should be read in conjunction with the Annual Reports and the other Quarterly
Reports. Unless otherwise set forth herein, the term the "Company" includes
Jennifer Convertibles, Inc., a Delaware corporation, and its direct or indirect
subsidiaries.
2
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
February 24, 1996 August 26, 1995
----------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 927 $ 7,729
Merchandise inventories 8,611 9,432
Refundable income taxes 26 131
Prepaid expenses 1,036 761
Accounts receivable 969 2,504
Other current assets 29 101
------------ -----------
Total current assets 11,598 20,658
Store fixtures, equipment and leasehold improvements
at cost, net 9,379 9,771
Due from Private Company and Unconsolidated Licensees, net
of reserves of $6,315 and $6,372 at February 24, 1996
and August 26, 1995. -- --
Deferred lease costs and other intangibles, net 1,496 1,839
Goodwill, at cost, net 577 586
Other assets (primarily security deposits) 954 1,017
------------ -----------
$ 24,004 $ 33,871
============ ===========
LIABILITIES AND (CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable, trade $ 12,167 $ 16,108
Customer deposits 9,181 9,017
Accrued expenses and other current liabilities 5,604 6,521
------------ -----------
Total current liabilities 26,952 31,646
Deferred rent and allowances 6,025 6,171
Long-term obligations under capital leases 281 337
------------ -----------
Total liabilities 33,258 38,154
------------ -----------
Commitments and contingencies
(Capital Deficiency):
Preferred stock, par value $.01 per
share. Authorized 1,000,000 shares;
no shares issued -- --
Common stock, par value $.01 per share.
Authorized 10,000,000 shares; issued and
outstanding 5,700,725 shares at February 24, 1996
and August 26, 1995 57 57
Additional paid in capital 22,911 22,911
Notes receivable from warrant holders (300) (300)
Accumulated (deficit) (31,922) (26,951)
------------ -----------
(9,254) (4,283)
------------ -----------
$ 24,004 $ 33,871
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Thirteen weeks Thirteen weeks Twenty-six weeks Twenty-six weeks
ended ended ended ended
February 24, 1996 February 25, 1995 February 24, 1996 February 25, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $22,652 $28,195 $53,558 $64,596
---------- ---------- ---------- ----------
Cost of sales, including store occupancy,
warehousing, delivery and fabric protection 16,091 20,275 36,559 44,990
Selling, general and administrative expenses 9,832 11,321 20,666 22,417
Reduction in reserve for amounts due from
Private Company and Unconsolidated Licensees (288) - (57) -
Loss from store closings 181 615 206 615
Depreciation and amortization 525 492 956 942
---------- ---------- ---------- ----------
26,341 32,703 58,330 68,964
---------- ---------- ---------- ----------
Operating (loss) (3,689) (4,508) (4,772) (4,368)
---------- ---------- ---------- ----------
Other income (expense):
Royalty income 93 132 158 267
Interest income 40 73 132 149
Interest expense (11) (10) (27) (25)
Other income, net (329) 165 (378) 329
---------- ---------- ---------- ----------
(207) 360 (115) 720
---------- ---------- ---------- ----------
(Loss) before income taxes (3,896) (4,148) (4,887) (3,648)
Income taxes 21 26 84 86
---------- ---------- ---------- ----------
Net (loss) ($3,917) ($4,174) ($4,971) ($3,734)
========== ========== ========== ==========
Net (loss) per common and common
equivalent share ($0.69) ($0.73) ($0.87) ($0.66)
========== ========== ========== ==========
Weighted average number of common
and common equivalent shares 5,700,725 5,700,725 5,700,725 5,700,725
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands) (unaudited)
<TABLE>
<CAPTION>
Thirteen weeks Thirteen weeks Twenty-six weeks Twenty-six weeks
ended ended ended ended
February 24, 1996 February 25, 1995 February 24, 1996 February 25, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ($3,917) ($4,174) ($4,971) ($3,734)
Adjustments to reconcile net (loss)
to net cash provided by operating activities:
Depreciation and amortization 525 492 956 942
Loss from store closings 181 615 206 615
Deferred rent (231) 627 (146) (726)
Provision for losses on amounts due from
Private Company and Unconsolidated Licensees (288) - (57) -
Other (5) - (9) -
Changes in operating assets and liabilities:
(Increase) decrease in merchandise inventories (569) 83 821 (346)
Decrease (increase) in refundable income taxes 105 - 105 -
(Increase) decrease in prepaid expenses (526) (250) (275) (339)
Decrease (increase) in accounts receivable 1,125 (181) 1,535 (1,506)
Decrease (increase) in other current assets 76 (56) 72 971
Decrease (increase) in due from Private Company
and Unconsolidated Licensees 288 2,168 57 (1,806)
Decrease (increase) in deferred lease costs
and other intangibles 224 (72) 343 (595)
Decrease (increase) in other assets, net 4 3 63 (360)
(Decrease) increase in accounts payable trade (1,285) (1,735) (3,941) (472)
(Decrease) increase in customer deposits (443) 2,564 164 1,434
(Decrease) increase in accrued expenses
and other payables (422) 2,344 (1,123) 905
----------- ----------- ----------- -----------
Net cash (used in) provided by operating activities (5,158) 2,428 (6,200) (3,565)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures - (1,502) (546) (2,597)
Decrease in due from limited partners - - - 1,000
----------- ----------- ----------- -----------
Net cash (used in) investing activities - (1,502) (546) (1,597)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Payments of obligations under capital leases (11) (414) (56) (90)
----------- ----------- ----------- -----------
Net cash (used in) financing activities (11) (414) (56) (90)
----------- ----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (5,169) 512 (6,802) (5,252)
Cash and cash equivalents at beginning of period 6,096 7,325 7,729 13,089
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $927 $7,837 $927 $7,837
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Income taxes paid during the period $21 $26 $84 $86
=========== =========== =========== ===========
Interest paid $11 $10 $27 $25
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Jennifer
Convertibles, Inc. and subsidiaries (the "Company") and certain licensees have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Due to many factors inherent in the
retail industry and the matters described in "Recent Developments" above,
operating results for the interim period ended February 24, 1996 are not
necessarily indicative of the results that may be expected for the year ending
August 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended August 26, 1995 and the Report of Management.
(2) Merchandise Inventories
Merchandise inventories are stated at the lower of cost (determined on
the first-in, first-out method) or market and are physically located, as
follows:
2/24/96 8/26/95
-------- -------
Showrooms $ 4,144 $ 4,421
Warehouses 4,467 5,011
-------- -------
$ 8,611 $ 9,432
======== =======
Vendor discounts and allowances in respect to merchandise purchased by
the Company are included as a reduction of inventory and cost of sales.
(3) Commitments, Contingencies and Other Matters
Conclusions of the Independent Committee
A draft complaint ("Complaint") on behalf of an unnamed plaintiff was
delivered to the Company in March 1994. The Complaint raised certain issues and
potential causes of action that may exist in favor of the Company against the
Private Company and others. The Company's President advised the Board of
Directors that, in his view, the Complaint was without merit. The Board
appointed an independent committee (the "Committee") consisting of one director
to investigate the allegations in the Complaint and certain other matters.
6
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
On November 22, 1994, the same director who was on the Committee
submitted a letter to the President of the Company which contained information
relevant to the (1) Funding of a licensee ("S.F.H.C.") and (2) the funding of
Limited Partnerships (L.P.'s) III through V. The letter essentially detailed
the flow of funds from the Private Company, certain Unconsolidated Licensees
and the Company to S.F.H.C. and its subsidiary ("Summit") regarding these
transactions. Additionally, it disclosed that as of August 26, 1995, S.F.H.C.
has a receivable from officers of $1,861. It asserted "that neither (a) the
payment to fund S.F.H.C.'s purchase of the stock of Summit nor (b) the capital
contributions to L.P.'s III through V were obtained from sources outside the
Company or the Private Company".
On December 2, 1994, the Board of Directors of the Company received the
Summary Report of Counsel to the Independent Committee which, amongst other
matters, concluded that it "has reviewed many significant related party
transactions and recommends to the Board that the Company assert claims to
recover damages for harm caused the Company". On January 26, 1995, the Board of
Directors received the "Final Report of Counsel to the Independent Committee of
the Board of Directors" which reached the same conclusions and recommendations.
On March 10, 1995, the Board of Directors received the "Response of
Harley Greenfield to the January 26, 1995 Final Report of Counsel to the
Independent Committee" that asserted that there were no valid claims. On April
3, 1995 it received a similar response from a financial consultant to the
Company to the letter dated November 22, 1994 from Michael Colnes to Harley
Greenfield" that asserted that there was nothing improper.
Class Action and Derivative Action Lawsuits
Between December 6, 1994 and January 5, 1995, the Company was served
with eleven class action complaints and six derivative action lawsuits which
deal with losses suffered as a result of the decline in market value of the
Company's stock as well as the Company having "issued false and misleading
statements regarding future growth prospects, sales, revenues and net income".
The Company and its counsel are attempting to resolve the lawsuits but
they can not presently determine the ultimate outcome of such resolutions and
its impact on the Company's financial condition and results of operations.
7
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
Securities and Exchange Commission Investigation
On December 9, 1994, the Company was advised that the Securities and
Exchange Commission (SEC) was conducting an inquiry of the Company's affairs
"to determine whether there have been violations of the federal securities
laws". The SEC requested that the Company voluntarily provide certain documents
in connection with its December 2, 1994 press release "concerning the
adjustment in the valuation of certain subsidiaries on the Company's balance
sheet". Since that date, the SEC has also requested the Final Report of Counsel
to the Independent Committee of the Board of Directors and the November 22,
1994 letter from a director of the Company to the President (as more fully
described above). Additionally, the SEC requested the "responses" to these
documents and the Company furnished them with the "Response of Harley
Greenfield to the January 26, 1995 Final Report of Counsel to the Independent
Committee" dated March 10, 1995 and the "Response of Jerome I. Silverman to the
letter dated November 22, 1994 from Michael Colnes to Harley Greenfield" dated
April 3, 1995.
On May 3, 1995 the SEC commenced a formal investigation into the
affairs of the Company. Subpoenas have been issued to the Company and certain
of its current and former management to furnish various contracts and
accounting records which have been complied with. The outcome of the SEC
investigation is not presently determinable.
NASDAQ Suspension
Effective April 17, 1995, the NASDAQ Listing Qualifications Committee
(the "Qualifications Committee") reviewed the request of the Company for an
extension of its current exception to the filing requirements for continued
listing on the NASDAQ National Market. The Qualifications Committee determined
to deny the Company's request and accordingly, the Company's Common Stock was
delisted from the NASDAQ stock market.
(4) Subsequent Events
Settlement of Derivative Litigation:
In March 1996, the Company signed a Memorandum of Understanding
("Derivative Memorandum") for the purpose of settling all of the claims
involving those parties in the derivative litigation. The Derivative Memorandum
is subject to a settlement of all claims against the Company, its present
and/or former officers, directors, certain accountants, consultants
8
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
and representatives, the Private Company, its present and/or former officers,
directors, employees, accountants, consultants and/or representatives and the
discontinuance of the class action litigation presently pending. It also is
conditioned upon mutual releases between the Company and the Private Company.
Attorney's fees will be funded by an insurance carrier for one of the
defendants other than the Company for $500. The Private Company will pay $165
in cash and the Company will pay the remaining portion of fees and expenses in
("Preferred Stock"). The Preferred Stock will have an aggregate value of $130,
paying an annual dividend of 7% and convertible into Common Stock (at such time
as the Company's Common Stock trades at $7.00 per share or higher) at $7.00 per
share. This settlement is subject to execution of definitive documents and
final court approval. In accordance with FASB Statement No. 5, the $130 value
of the Preferred Stock has been accrued at August 26, 1995 as part of estimated
settlement costs.
Settlement of Class Action Litigation:
In March 1996, the Company and the parties in the class action
litigation signed a Memorandum of Understanding ("Class Memorandum") which is
subject to a Stipulation of Settlement to be submitted to the court for final
approval.
The Class Memorandum provides for the payment to certain members of the
class and their attorneys of an aggregate maximum amount of $7,000 in cash and
Preferred Stock having a value of $370. (Terms and conditions of such Preferred
Stock are described above.) The cash portion of the settlement will be funded
entirely by insurance company proceeds. In accordance with FASB Statement No.
5, the $370 value of the Preferred Stock has been accrued at August 26, 1995.
The proposed settlement of the class action litigation is a claims made
settlement. All claimants who purchased the Company's Common Stock during the
period from December 9, 1992 through December 2, 1994 and who held their stock
through December 2, 1994, will be entitled to participate in the settlement.
Settlement with the Private Company:
The Company signed an agreement ("Settlement Agreement") with the
Private Company subject to execution of definitive agreements and court
approval and settlement of the derivative and class action litigation. The
Settlement Agreement restructures the relationship between the Private Company
and the Company in order to reduce and eliminate any alleged actual or
potential conflicts of interest.
9
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
A) (Warehouse Services):
The Settlement Agreement contemplates that until December 31, 1997, the
Company will pay the Private Company for all services under the warehousing
agreement 8.3% of the retail sales prices, less the costs of certain services
that will be assumed by the Company previously provided by the Private Company,
but no lower than 7.2% of sales. For 1998, the fee will be 7.2%. Upon the
effective date, the Company will no longer pay the Private Company separately
for "fabric protection" services. The Company has also agreed to pay an
additional warehouse fee during the calendar year 1996 if the total retail
sales of the Company are less than $135 million. The Company will pay the
Private Company $65 for each million dollar shortfall in annual sales, adjusted
quarterly based upon current sales projections, up to $650. The Company has
also agreed to pay a re-delivery fee to the Private Company of 3% of selling
price for customer deliveries that have to be redelivered to customers under
certain circumstances. In 1997 and 1998, if an annual sales level of $140
million is achieved, the Private Company will pay back 50% of previous
shortfall payments in each of such years. To the extent the shortfall is not so
repaid in full, starting on January 1, 1999, the Private Company will repay the
balance of the shortfall over seven years without interest.
B) (Assignment of Real Property Interests of Warehouses):
The Settlement Agreement contemplates that, effective January 1, 1999,
the Company will receive all real property interests in the various warehouses
serving the business along with the leasehold interests subject to mortgages
and other security agreements. Such mortgage obligations will not exceed $2,850
at December 31, 1998. To the extent that the aggregate of all such mortgages is
less than this amount as of that date, the Company will pay the Private Company
the difference between $2,850 and the actual amount of such mortgages by way of
set-off against the Private Company's obligation to the Company for warehousing
services.
C) (Warehouse Services to the Private Company):
Commencing January 1, 1999, the Company will provide the Private
Company all warehousing services for 2% of the Private Company's delivered
retail selling prices, plus a fee for "fabric protection" services.
D) (Freight Charges):
The Company will continue to pay all freight charges (for inventory
delivered to warehouses) through December 31, 1998, based upon an agreed
schedule with the Private Company.
10
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
E) (Assignment of Interest in Certain Limited Partnerships and
Other Corporate Licensee):
The Private Company will purchase the interests of the limited
partnerships known as LP III, LP IV, LP V, LP VI, LP VII and LP VIII and the
equity interest of the shareholders of S.F.H.C. and assign these interests to
the Company. The Company, in turn, will release the limited partners and the
shareholders, officers and directors of S.F.H.C. from all claims and/or
obligations owed to the Company.
Although it is not reflected in the Settlement Agreement, it is
currently contemplated that the limited partners of the Partnerships will
receive new ten year warrants to purchase an aggregate of 180,000 shares of
Common Stock at $7.00 per share. It is also contemplated that the limited
partners will also retain the Original Warrants. There is no signed agreement
with the limited partners as to the transfer of the Partnerships and S.F.H.C.
described above and there can be no assurance that the Private Company will be
able to obtain such agreements. If the Private Company is unable to obtain such
agreements and to make the transfer, the settlement will not be consummated on
the various terms outlined herein or possibly, at all.
F) (Inter-Company Accounts):
The Private Company will pay the Company under the offset agreement
(described in J, below) $1,400 in resolution of certain inter-company account
balances as of August 26, 1995 at $17 per month to be applied toward principal
and interest at 6%, until repaid.
G) (License of Computer Programs):
Commencing January 1, 1999, the Private Company will license the
Company to use and change the Private Company's computer programs without fee.
The Company will also assume the obligations and personnel of the Computer
Department, presently maintained by the Private Company.
H) (Warranty and Fabric Protection):
Upon execution of the Settlement Agreement, the Company will be
responsible for any claims for breach of warranty relating to "fabric
protection" in connection with sales by both the Company and the Private
Company.
11
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
I) (Amounts Due From Officers of S.F.H.C. of $1,200):
The Private Company will assume and pay $1,200 of the debt of the
officers of S.F.H.C. owed to S.F.H.C. This amount will be paid to the Company
in 84 equal monthly installments, without interest, beginning January 1, 1999.
J) (Offset Agreements):
On November 1, 1995 and March 1, 1996, the Company and the Private
Company entered into offset agreements. Such offset agreements permit the two
companies to offset their current obligations to each other for merchandise
purchases, warehouses fees, fabric protection fees and freight. The agreement
contemplates that amounts owing in excess of $1,000 at any time will be paid in
cash. As part of the offset agreement, the Private Company agreed to assume
certain liabilities owed to the Company by the Unconsolidated Licensees.
K) (Royalties):
The Unconsolidated Licensees will pay to the Company any royalties owed
under the offset agreement. The Private Company will pay royalties owed of $100
for stores that the Unconsolidated Licensees have closed commencing January 1,
1999 in 84 equal monthly installments without interest.
Credit and Security Agreement with Klaussner:
On March 5, 1996, the Company and Klaussner executed a Credit and
Security Agreement that provides the following:
A) Klaussner effectively extended the payment terms for merchandise
shipped from 60 days to 81 days and was provided with the following:
1) A security interest in all the Company's assets including accounts
receivable, inventory, store fixtures and equipment, as well as the
assignment of leaseholds, trademarks and a licensee agreement to operate
the Company's business in the event of default and non-payment of the
Company's guaranty.
2) The common stock holdings of Harley Greenfield, Edward Seidner and
Fred Love, President of the Private Company have been pledged along with
the pledge of the Private Company's stock interest in the Company.
12
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
B) In addition, Klaussner agreed to lend $1,440 to the Private Company. The
$1,440 was used to pay down the mortgage obligation of the warehouse
corporation. In this connection, the Company's guarantee to the mortgagor was
reduced to the lesser of 60% of the mortgage or $1,440 and the Company's bank
revolving credit agreement was terminated. The mortgage obligation has a new
maturity date of June 30, 1996. The $1,440 is in addition to $3,500 due from
the Private Company to Klaussner outstanding at August 26, 1995, which
liability was incurred by the Private Company prior to January 1, 1994.
Agreement of Sale of Inwood, New York Warehouse:
On March 7, 1996, the Private Company entered into an agreement
("Agreement") of sale for the Inwood, New York warehouse which has been the
principal warehouse in the distribution system. The Agreement contemplates
that, if consummated, the Company will receive from the Private Company
payments of $25 per month for 84 months commencing January 1, 1999. The
Agreement also contemplates that, effective December 1, 1996, the warehouse fee
will be reduced to 7.2% of the retail sales prices and fabric protection
revenue collected from customers. The Company's guarantee will be extinguished
upon full payment of the related mortgage.
On June 30, 1996, the Private Company completed the sale of the Inwood,
New York warehouse and the Company's guarantee was terminated.
Partnership Restructuring Agreements
On September 26, 1996, a Partnership Restructuring Agreement ("PRA")
was signed which had an effective date of November 1994. This PRA eliminated
the Agreements for LP's VI, VII and VIII and took $50 of the original capital
contributions for these LP's (total $150) and applied such funds as a payment
towards the original Warrants received by the limited partners in connection
with LP's III, IV and V. This transaction has been reflected in the financial
statements at August 27, 1994 and August 26, 1995. In addition, the warrant
notes aggregating $300 for the remaining 180,000 original Warrants have been
extended for ten years (with 10% of principal due annually) and will bear
interest at 7.12% per annum. For each annual principal payment which is not
made, 10,564 of the outstanding original Warrants shall be cancelled.
13
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
Subordination of Private Company Indebtedness to Harley Greenfield
and Edward Seidner
Subject to court approval of the Settlement Agreement, Messrs.
Greenfield and Seidner have agreed to subordinate, until January 1, 1999 their
right to receive payments in respect of the $10,273 owed to them by the Private
Company, if the Private Company is in default in the payment of any cash
obligation to the Company arising after August 7, 1996 after giving effect to
any offsets as between Messrs. Greenfield and Seidner and the Private Company.
Such subordination does not apply to any distribution in respect of a
disposition of substantially all of the assets of the Private Company.
14
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations:
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve certain risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements.
Net Sales:
The Company's sales decreased by 17.1% to $53,558 for the twenty-six
weeks ended February 24, 1996 as compared to $64,596 for the same period in the
prior year. Sales for the thirteen weeks ended February 24, 1996 decreased by
19.7% to $22,652 from $28,195 for the same period in the prior year. Comparable
store sales (those open for the entire period in the current and prior year
periods) declined by 20.2% and 20.0%, respectively, for the twenty-six and
thirteen weeks ended February 24, 1996. These sales declines are mainly
attributable to the closing of eight stores since the prior year period, a
reduction in the number of credit promotions that the Company has been able to
offer customers to stimulate business and an industry-wide softness.
Cost of Sales:
Twenty-Six Weeks Ended February 24, 1996:
Cost of sales decreased by 18.7% to $36,559, 68.3% as a percentage of
sales, as compared to $44,990, 69.6% as a percentage of sales, for the same
period in the prior year. The dollar decline of $8,431 is primarily
attributable to the lower sales volume, lower costs of merchandise (as a
percentage of sales), lower occupancy costs due to the closed stores and higher
delivery income collected on delivered sales. Warehouse expenses of $2,678,
fabric protection services of $1,542 and freight of $1,561 provided by the
Private Company declined from $3,231, $2,072 and $2,010, respectively, from the
previous year due to lower sales volume in the current period.
15
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
Thirteen Weeks Ended February 24, 1996:
Cost of sales decreased by 20.6% to $16,091, 71.0% as a percentage of
sales, as compared to $20,275, 71.9% as a percentage of sales, for the same
period in the prior year. The dollar decline of $4,184 is primarily
attributable to the lower sales volume, lower costs of merchandise (as a
percentage of sales), lower occupancy costs due to the closed stores and higher
delivery income collected on delivered sales. Warehouse expenses of $1,132,
fabric protection services of $648 and freight of $655 provided by the Private
Company declined from $1,412, $910 and $903, respectively, from the previous
year due to lower sales volume in the current period.
Selling, General and Administrative and Other Expenses:
Twenty-Six Weeks Ended February 24, 1996:
Selling, general and administrative expenses were $20,666, 38.6% as a
percentage of sales, as compared to $22,417, 34.7% as a percentage of sales,
for the prior period, a decrease of $1,751 or 7.8%. The decline in expenses was
caused primarily by a reduction in salaries of $1,364 principally because of
the lower sales volume (which generated lower commissions) and lower
advertising expenses of $984. Legal and accounting fees continued to be high
and were $1,124 as compared with $251 in the prior year period primarily
because of the new Credit and Security Agreement signed with the Company's
principal supplier, Klaussner Furniture Industries, Inc. (see Liquidity and
Capital Resources below) as well as other costs in connection with the proposed
settlement of the Company's litigation matters. This higher level of
expenditure was partially offset by savings in other operating expenses due to
the implementation of the Company's cost reduction programs.
The Company closed four stores in the twenty-six weeks ended February
24, 1996 compared to closing five and, opening twenty in the prior year period,
and wrote off various store fixed assets, reversed the deferred rent liability
previously established for these stores and incurred settlement costs to
eliminate the leasehold liabilities for these stores. These costs aggregated
$206 as compared to $615 in the prior year period.
Thirteen Weeks Ended February 24, 1996:
Selling, general and administrative expenses were $9,832, 43.4% as a
percentage of sales, as compared to $11,321, 40.2% as a percentage of sales,
for the prior period, a decrease of $1,489 or 13.2%. The decline in expenses
was caused primarily by a reduction in salaries of $740 principally because of
the lower sales volume (which generated lower commissions) and lower
advertising expenses of $1,503. These reductions were offset by an increase of
$797 for legal and accounting fees for reasons discussed above.
16
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
The Company's receivables from the Private Company, the Unconsolidated
Licensees and S.F.H.C. decreased to $6,315 as of February 24, 1996. At August
26, 1995, the Company had provided a reserve for the full amount due from these
entities of $6,372. These entities have losses and capital deficiencies. There
can be no assurance that the total receivables will be collected. It is the
Company's intention to continue to fund these operations in the future.
On November 1, 1995, the Company signed an Offset Agreement with the
Private Company whereby it assumed $1,866 of indebtedness to the Company
previously owed by certain licensees whose acounts are not included in the
Company's financial statements, (the "Unconsolidated Licensees"). In connection
with the uncertainty of collectibility and the relationship between the Private
Company, the Unconsolidated Licensees and the Company, the Company will account
for subsequent transactions with these entities on an offset basis. However, if
the result of the offset is a receivable due from them, then such net amount
will be generally recognized only at the time when cash is received from these
entities. The decrease in these receivables of $57 for the twenty-six weeks
ended February 24, 1996 has been recognized in the Statement of Operations as
income because the reserve established at August 26, 1995 of $6,372 is higher
than the current receivable.
Liquidity and Capital Resources
At February 24, 1996, the Company had an aggregate working capital
deficiency of $(15,354) compared to a deficiency of $(10,988) at August 26,
1995. At February 24, 1996, the Company had available cash and cash equivalents
of $927 compared to cash and cash equivalents of $7,729 at August 26, 1995. The
decrease in cash equivalents since August 26, 1995 is due principally to the
net (loss) and other operating activity changes totalling $(6,200) and capital
expenditures of $546 for the twenty-six weeks ended February 24, 1996.
Effective January 1, 1994, the Company assumed the responsibility of
purchasing inventory which responsibility was previously performed by the
Private Company. Accordingly, the Company acquires inventory for resale to its
affiliates and licensees. A portion of the inventory acquired for resale is
financed by normal trade credit terms. In March 1996, the Company executed a
Credit and Security Agreement ("Credit Agreement") with its principal supplier,
Klaussner Furniture Industries, Inc. ("Klaussner") which effectively extended
the payment terms for merchandise shipped from 60 days to 81 days. As part of
the Credit Agreement, the Company granted a security interest in all of its
assets as well as assigning leasehold interests, trademarks and a license
agreement to operate the Company's business in the
17
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Twenty-Six Weeks Ended February 24, 1996
(In thousands except for share amounts)
event of a default. In connection with the Credit Agreement, the Company's
credit line from IBJ Schroder Bank & Trust Company was terminated. The Company
does not currently have any traditional bank financing and there can be no
assurance such financing will be available in the future. Although the Company
currently has credit card financing, there can be no assurance that such
financing will continue to be available. Klaussner also lent $1,440 to the
Private Company to be used to pay down the mortgage balance on the warehouse
property. This paydown also reduced the Company's potential exposure under a
guarantee to the mortgagor. Such exposure was subsequently extinguished by the
sale in June 1996 of the warehouse property and the payment in full of the
related debt.
The cash portion of the proposed settlement of the derivative and class
action litigations (as described elsewhere) will come from insurance company
payments and the issuance of new Preferred Stock by the Company. There will be
no cash outlays by the Company other than for legal costs (a substantial
portion of which has already been paid). Additionally, the proposed Settlement
Agreement with the Private Company (as described in the Notes to the
Consolidated Financial Statements) contemplates significant changes to the
operating relationship between the companies.
In fiscal 1995, the Company and the LP's closed an aggregate of 37
stores and in the twenty-six weeks ended February 24, 1996, the Company and
LP's closed four additional stores. Several were closed for non-performance,
but a number of such closings were due to the Company's decision to combine
separate Jennifer Convertibles and Jennifer Leather stores located in the same
demographic areas into one store. The primary benefit of combining both
operations into one store was an elimination of the real estate expenses and
other expenses associated with the closed showroom. Additional benefits
realized included reductions of personnel and, in a number of cases,
elimination of duplicate office equipment and telephone lines. Although
combining two stores into one store generally reduces sales, management
believes that sales at the combined store will generate more profit due to the
elimination or reduction of expenses described above.
Management feels that with the above noted Credit Agreement, available
funds, funds derived from store operations and significant cost cutting
measures undertaken subsequent to August 26, 1995, including, but not limited
to, the closing of approximately five stores and the reduction in salaries of
certain management personnel, the Company will have adequate cash flow to fund
its operations and meet its capital and liquidity requirements in the near
future.
18
<PAGE>
JENNIFER CONVERTIBLES, INC.
PART II
OTHER INFORMATION
ITEMS 1. through 5. NOT APPLICABLE.
ITEM 6. (a) EXHIBIT 11.1 - STATEMENT RE: COMPUTATION OF
NET (LOSS) PER SHARE
(b) REPORTS ON FORM 8-K - NONE
During the quarter ended February 24, 1996 the Company filed no Current
Reports on Form 8-K.
19
<PAGE>
JENNIFER CONVERTIBLES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JENNIFER CONVERTIBLES, INC.
October 31, 1996 By: /s/ Harley J. Greenfield
------------------------
Harley J. Greenfield, Chairman
of the Board, President and
Chief Executive Officer
October 31, 1996 By: /s/ George J. Nadel
-------------------
George J. Nadel, Executive Vice President
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
20
EXHIBIT 11.1
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF NET (LOSS) PER SHARE
THIRTEEN AND TWENTY-SIX WEEKS ENDED FEBRUARY 24, 1996 AND FEBRUARY 25, 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
Primary Primary
----------------- ----------------
Thirteen weeks ended Twenty-six weeks ended
February 24, 1996 February 25, 1995 February 24, 1996 February 25, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net (loss) ($3,917) ($4,174) ($4,971) ($3,734)
Interest adjustments -- -- -- --
----------------- ----------------- ----------------- -----------------
Adjusted net (loss) ($3,917) ($4,174) ($4,971) ($3,734)
================= ================= ================= =================
Weighted average common and
common equivalent shares outstanding:
Weighted average common shares outstanding 5,701 5,701 5,701 5,701
Weighted average common equivalents - - - -
----------------- ----------------- ----------------- -----------------
Weighted average common and
common equivalent shares outstanding 5,701 5,701 5,701 5,701
================= ================= ================= =================
Net (loss) per common and
common equivalent shares ($0.69) ($0.73) ($0.87) ($0.66)
================= ================= ================= =================
</TABLE>
