UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended May 30, 1998
------------
or
THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 1-9681
------
JENNIFER CONVERTIBLES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2824646
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
419 Crossways Park Drive, Woodbury, New York 11797
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 496-1900
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of the issuer's common stock as of May
30, 1998: 5,700,725
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Part I - Financial Information
Item I - Financial Statements
Consolidated Balance Sheets - May 30, 1998
(Unaudited) and August 30, 1997.............................. 2
Comparative Consolidated Statements of Operations
(Unaudited) for the thirty-nine weeks and thirteen
weeks ended May 30, 1998 and May 31, 1997 ................... 3
Comparative Consolidated Statements of Cash Flows
(Unaudited) for the thirty-nine weeks and thirteen
weeks ended May 30, 1998 and May 31, 1997 .................... 4
Notes to Unaudited Consolidated Financial Statements........... 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations....................9
Part II - Other Information....................................13
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except for share data)
ASSETS
<TABLE>
<CAPTION>
May 30, 1998 August 30, 1997
------------ ---------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,808 $ 3,405
Merchandise inventories 10,240 7,943
Accounts receivable 361 1,149
Due from Private Company and Unconsolidated Licensees, net
of reserves of $7,494 and $6,898 at May 30, 1998
and August 30, 1997 670
Prepaid expenses and other current assets 491 477
-------- --------
Total current assets 14,570 12,974
Store fixtures, equipment and leasehold improvements
at cost, net 6,533 7,669
Deferred lease costs and other intangibles, net 828 1,001
Goodwill, at cost, net 540 553
Other assets (primarily security deposits) 769 801
-------- --------
$ 23,240 $ 22,998
======== ========
LIABILITIES AND (CAPITAL DEFICIENCY)
------------------------------------
Current liabilities:
Accounts payable, trade $ 13,893 $ 16,614
Customer deposits 7,964 8,841
Accrued expenses and other current liabilities 4,313 4,777
-------- --------
Total current liabilities 26,170 30,232
Deferred rent and allowances 5,569 5,712
Long-term obligations under capital leases 362 421
-------- --------
Total liabilities 32,101 36,365
-------- --------
Commitments and contingencies
(Capital Deficiency):
Preferred stock, par value $.01 per share
Authorized 1,000,000 shares; 10,000 shares
Series A Convertible Preferred issued and outstanding
at May 30, 1998, none outstanding at August 30, 1997 -- --
Common stock, par value $.01 per share
Authorized 10,000,000 shares; issued and
outstanding 5,700,725 shares at May 30,1998
and August 30, 1997 57 57
Additional paid in capital 27,881 22,911
Notes receivable from warrant holders (270) (300)
Accumulated (deficit) (36,529) (36,035)
-------- --------
(8,861) (13,367)
-------- --------
$ 23,240 $ 22,998
======== ========
See accompanying notes to unaudited consolidated financial statements.
2
</TABLE>
<PAGE>
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Thirteen Thirteen Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
May 30, 1998 May 31, 1997 May 30, 1998 May 31, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 29,254 $ 23,743 $ 82,442 $ 73,588
----------- ----------- ----------- -----------
Cost of sales, including store occupancy,
warehousing, delivery and fabric protection 19,479 16,692 55,510 51,080
Selling, general and administrative expenses 8,363 8,077 25,519 23,756
Provision (recovery) for amounts due from
Private Company and Unconsolidated Licensees 352 (304) 596 (304)
Loss from store closings 153 3 178 35
Depreciation and amortization 428 482 1,310 1,414
----------- ----------- ----------- -----------
28,775 24,950 83,113 75,981
----------- ----------- ----------- -----------
Operating income (loss) 479 (1,207) (671) (2,393)
----------- ----------- ----------- -----------
Other income (expense):
Royalty income 95 90 289 278
Interest income 24 15 62 55
Interest expense (116) (8) (129) (25)
Other income, net 44 101 160 295
----------- ----------- ----------- -----------
47 198 382 603
----------- ----------- ----------- -----------
Income (loss) before income taxes 526 (1,009) (289) (1,790)
Income taxes 62 45 205 157
----------- ----------- ----------- -----------
Net income (loss) $ 464 ($ 1,054) ($ 494) ($ 1,947)
=========== =========== =========== ===========
Basic income (loss) per common share $ 0.08 ($ 0.18) ($ 0.09) ($ 0.34)
=========== =========== =========== ===========
Weighted average number of common shares 5,700,725 5,700,725 5,700,725 5,700,725
=========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands) (unaudited)
Thirteen Thirteen Thirty-nine Thirty-nine
weeks ended weeks ended weeks ended weeks ended
May 30, 1998 May 31, 1997 May 30, 1998 May 31, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 464 ($1,054) ($ 494) ($1,947)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 428 482 1,310 1,414
Loss from store closings 153 3 178 35
Deferred rent (78) -- (130) 96
Provision (recovery) for losses on amounts due from
Private Company and Unconsolidated Licensees 352 (304) 596 (304)
Changes in operating assets and liabilities:
(Increase) in merchandise inventories (1,030) 805 (2,297) 688
Decrease in refundable income taxes -- -- -- 23
Decrease (increase) in prepaid expenses
and other current assets 178 372 (14) (106)
Decrease in accounts receivable 211 76 788 913
(Increase) in due from Private Company
and Unconsolidated Licensees (789) -- (1,266) --
Decrease in deferred lease costs
and other intangibles -- 8 16 144
Decrease in other assets, net 7 7 28 128
Increase (decrease) in accounts payable trade 2,314 1,426 (2,721) 1,151
(Decrease) in customer deposits (668) (634) (877) (1,452)
(Decrease) in accrued expenses
and other payables (433) (1,179) (560) (1,619)
------- ------- ------- -------
Net cash provided by (used in) operating activities 1,109 8 (5,443) (836)
------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures (27) (176) (95) (528)
------- ------- ------- -------
Net cash (used in) investing activities (27) (176) (95) (528)
------- ------- ------- -------
Cash flows from financing activities:
Payments of obligations under capital leases 38 20 (59) 203
Sale of Series A Preferred Stock -- -- 5,000 --
------- ------- ------- -------
Net cash provided by financing activities 38 20 4,941 203
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,120 (148) (597) (1,161)
Cash and cash equivalents at beginning of period 1,688 2,587 3,405 3,600
------- ------- ------- -------
Cash and cash equivalents at end of period $ 2,808 $ 2,439 $ 2,808 $ 2,439
======= ======= ======= =======
Supplemental disclosure of cash flow information:
Income taxes paid during the period $ 62 $ 45 $ 205 $ 157
======= ======= ======= =======
Interest paid $ 116 $ 8 $ 129 $ 25
======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
4
</TABLE>
<PAGE>
JENNIFER CONVERTIBLES, INC.
Notes to Unaudited Consolidated Financial Statements
For the Thirty-Nine Weeks Ended May 30, 1998
(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, the operating results for the interim period ended May 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ending August 29, 1998. 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 30, 1997.
(2) Merchandise Inventories
-----------------------
Merchandise inventories are stated at the lower of cost (determined on
the first-in, first-out method) or market and are physically located, as
follows:
5/30/98 8/30/97
------- -------
Showrooms $4,038 $4,271
Warehouses 6,202 3,672
------- ------
$10,240 $7,943
======= ======
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
--------------------------------------------
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 ultimate outcome of these matters is not presently determinable (see below).
5
<PAGE>
JENNIFER CONVERTIBLES, INC.
Notes to Unaudited Consolidated Financial Statements
For the Thirty-Nine Weeks Ended May 30, 1998
(In thousands except for share amounts)
Proposed 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 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 final court approval. In accordance with FASB
Statement No. 5, the $130 value of the Preferred Stock had been accrued in the
fiscal year ended August 26, 1995 as part of estimated settlement costs.
A group of shareholders claiming to own approximately 8.5% of the
outstanding shares of the Company have filed (as a group) objections to the
fairness of the settlement in the Derivative Memorandum. The group has requested
deposition and document discovery in advance of any hearing on the fairness of
the settlement, and the Company has provided some document and deposition
discovery voluntarily. However, the group of objectors has made a motion for
additional discovery which the Company has opposed. The motion is still pending.
Proposed 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 that settlement of the class action
litigation is contingent upon final court approval of the proposed settlement of
the derivative litigation referred to above.
6
<PAGE>
JENNIFER CONVERTIBLES, INC.
Notes to Unaudited Consolidated Financial Statements
For the Thirty-Nine Weeks Ended May 30, 1998
(In thousands except for share amounts)
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 had been accrued in the fiscal year ended
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.
Proposed Settlement with the Private Company
--------------------------------------------
The Company signed an agreement ("Settlement Agreement") with the
Private Company subject to 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. The Settlement Agreement may
be terminated upon written notice by the Private Company if not previously
approved by the Court. Although the Company disputes the Private Company's
position that the agreements are so terminable, there can be no assurance that
the Company will prevail in such dispute. Although the Private Company has not
terminated the Settlement Agreement, the Company and the Private Company are
currently discussing restructuring the Settlement Agreement. As part of the
negotiations for a new settlement, Harley Greenfield and Edward Seidner have
agreed to repay personal indebtedness in the amount of $1,300 each to the
Private Company. There can be no assurance as to the terms of any such
restructuring or that the parties will enter into a revised settlement agreement
at all. Any such settlement would be subject to a number of conditions,
including court approval.
The Settlement Agreement provides, among other things, for (i) certain
changes in the billing rates and arrangements with respect to warehousing,
fabric protection and freight, (ii) the turnover of the warehouse to the Company
in January 1999, (iii) the assignment by the Private Company to the Company, for
no consideration, of limited partnership interests and stock of licensees owning
55 licensed Jennifer Convertibles stores, and (iv) for the payment, or offset,
of certain amounts owing (a) by the Company to the Private Company and (b) by
the Private Company and certain licensees for which the Private Company has
assumed responsibility to the Company. The Company believes the effective date
of such changes will be the date court approval is obtained. The Private Company
has stated that the effective date is March 1996. The Company believes this
claim is without merit and has not provided for any losses that may accrue as a
result of this assertion which approximates $1,500 at May 30, 1998. For a more
complete description of the contemplated Settlement Agreement, see the Company's
Annual Report on Form 10-K for the fiscal year ended August 30, 1997 under the
caption "Legal Proceedings."
7
<PAGE>
JENNIFER CONVERTIBLES, INC.
Notes to Unaudited Consolidated Financial Statements
For the Thirty-Nine Weeks Ended May 30, 1998
(In thousands except for share amounts)
In addition, the Company has received a demand letter from an attorney
for the Private Company requesting repayment of approximately $2,000 paid by the
Private Company during the period November 1995 to December 1997. The Private
Company considers this amount a loan while the Company has treated these
payments as a reduction of payroll expenses. During this time period, employees
of the Private Company were transferred to the payroll of the Company as
operating responsibilities for the businesses were shifted. There was no
corresponding reduction in the 5% warehousing fees during this period to offset
this increased payroll expense. The Company disputes this demand from the
Private Company and has not provided for any losses that may accrue. The Company
believes that Private Company's demand is an alternative to the $1,500 claim
referred to in the preceding paragraph as the two claims are internally
inconsistent.
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. 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 provide testimony and to furnish various
contracts and accounting records which have been complied with. The outcome of
the SEC investigation is not presently determinable.
8
<PAGE>
JENNIFER CONVERTIBLES, INC.
Notes to Unaudited Consolidated Financial Statements
For the Thirty-Nine Weeks Ended May 30, 1998
(In thousands except for share amounts)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
-----------------------------------------------------------------------
Results of Operations:
---------------------
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE U. S. PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED. THESE STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S 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 RISK FACTORS SUCH AS UNCERTAINTY AS TO THE OUTCOME OF THE LITIGATION
CONCERNING THE COMPANY, FACTORS AFFECTING THE FURNITURE INDUSTRY GENERALLY, SUCH
AS THE COMPETITIVE AND MARKET ENVIRONMENT, AND MATTERS WHICH MAY AFFECT THE
COMPANY'S SUPPLIERS OR THE PRIVATE COMPANY. IN ADDITION TO STATEMENTS WHICH
EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, INVESTORS ARE URGED TO
CONSIDER STATEMENTS LABELED WITH THE TERMS "BELIEVES," "BELIEF," "EXPECTS,"
"INTENDS," "PLANS" OR "ANTICIPATES" TO BE UNCERTAIN AND FORWARD-LOOKING.
Net Sales:
---------
The Company's sales increased by 12.0% to $82,442 for the thirty-nine
weeks ended May 30, 1998 as compared to $73,588 for the same period in the prior
year. Sales for the thirteen weeks ended May 30, 1998 increased by 23.2% to
$29,254 from $23,743 for the same period in the prior year. There were 145
stores in operation as of May 30, 1998 compared to 149 stores at the end of the
prior year fiscal quarter. Comparable store sales (those open for the entire
period in the current and prior year periods) increased by 13.1% and 24.3%,
respectively. These sales increases are mainly attributable to the Jennifer
Leather division which increased sales on a comparable basis by 30.8% and 53.2%,
respectively. This increase is primarily attributable to the introduction of the
new Bellissimo line. The Jennifer Convertibles division also increased sales on
a comparable basis by 6.8% and 14.1%, respectively. All sales increases were
favorably impacted by the expansion of the Company's finance programs.
9
<PAGE>
JENNIFER CONVERTIBLES, INC.
Notes to Unaudited Consolidated Financial Statements
For the Thirty-Nine Weeks Ended May 30, 1998
(In thousands except for share amounts)
Cost of Sales:
-------------
Thirty-nine Weeks Ended May 30, 1998:
------------------------------------
Cost of sales increased by 8.7% to $55,510 (67.3% as a percentage of
sales) as compared to $51,080 (69.4% as a percentage of sales) for the same
period in the prior year. The dollar increase of $4,430 is primarily
attributable to the higher sales volume. Higher costs of merchandise of .6% as a
percentage of sales was offset by lower freight costs and fabric protection
charges as a percentage of sales from the Private Company of .4% and .3%,
respectively. Total occupancy costs did not change, but declined as a percentage
of sales by 1.6% due to the higher sales volume. Net home delivery income
increased by $211 but remained the same as a percentage of sales because of the
higher sales volume. Higher costs for customer repairs were offset by vendor
allowances from the Company's principal supplier of $1,310 as compared to $758
in the prior year period. Warehouse expenses of $4,126, fabric protection
services of $1,928 and freight of $2,141 provided by the Private Company
compared to $3,812, $1,909 and $2,184, respectively, from the previous year.
Thirteen Weeks Ended May 30, 1998:
---------------------------------
Cost of sales increased by 16.7% to $19,479 (66.6% as a percentage of
sales) as compared to $16,692 (70.3% as a percentage of sales) for the same
period in the prior year. The dollar increase of $2,787 is primarily
attributable to the higher sales volume. Costs of merchandise declined by .4% as
a percentage of sales along with lower freight costs and fabric protection
charges as a percentage of sales from the Private Company of .3% and .3%,
respectively. Total occupancy costs did not change, but declined as a percentage
of sales by 3.0% due to the higher sales volume. Warehouse expenses of $1,411,
fabric protection services of $667 and freight of $740 provided by the Private
Company compared to $1,184, $601 and $661, respectively, from the previous year.
Selling, General and Administrative and Other Expenses:
------------------------------------------------------
Thirty-nine Weeks Ended May 30, 1998:
------------------------------------
Selling, general and administrative expenses were $25,519 (31.0% as a
percentage of sales) as compared to $23,756 (32.3% as a percentage of sales) for
the prior period, an increase of $1,763 or 7.4%. Part of the increase in
expenses was caused by: A) an increase in salaries of $546 principally because
of the higher sales volume which generated higher commissions, B) an increase in
legal expenses of $69, C) advertising expenses increased by $138 as the prior
year amount included a credit from Klaussner Furniture Industries, Inc. that
totaled $1,075, D) adjustments related to cancelled customer orders of $842
which declined by $440 from the prior year and E) new costs of $677 in
connection with an enhanced private label credit card program started in the
current fiscal year.
10
<PAGE>
JENNIFER CONVERTIBLES, INC.
Notes to Unaudited Consolidated Financial Statements
For the Thirty-Nine Weeks Ended May 30, 1998
(In thousands except for share amounts)
Thirteen Weeks Ended May 30, 1998:
---------------------------------
Selling, general and administrative expenses were $8,363 (28.6% as a
percentage of sales) as compared to $8,077 (34.0% as a percentage of sales) for
the prior period, an increase of $286 or 3.5%. The decreased percentage of sales
is primarily due to increased sales and a relatively low corresponding
incremental increase in selling, general and administrative costs, a portion of
which are fixed. The components of the dollar increase include salaries that
were higher by $387 principally because of the higher sales volume which
generated higher commissions and new costs of $190 in connection with an
enhanced private label credit card program. This was partially offset by a
reduction in advertising expenses of $202.
The Company's receivables from the Private Company, the Unconsolidated
Licensees and S.F.H.C. were $8,164 as of May 30, 1998 which had increased by
$1,266 from August 30, 1997. At August 30, 1997, the Company had provided a
reserve for the full amount due from these entities of $6,898. This was
increased in the thirty-nine weeks ended May 30, 1998 by $596 to $7,494.
Commencing January 1, 1998, the Private Company discontinued reimbursing the
Company for the payroll of employees that were transferred to the Company
starting in November 1995. In the thirty-nine weeks ended May 30, 1998, this
resulted in an increase in the reserve for amounts billed to the Private Company
of $596 for the period January 1998 through May 1998.
The Private Company, the Unconsolidated Licensees and S.F.H.C. have
losses and/or capital deficiencies and there can be no assurance that the gross
receivables will be collected. It is the Company's intention to continue to fund
these operations. The Company has accounted for transactions with these entities
on an offset basis. If the result of the offset is a receivable due from them,
then such net amount will be generally recognized as income only at the time
when cash is received from these entities. As of July 14, 1998, the unreserved
receivables of $670 as of May 30, 1998 have been paid.
Liquidity and Capital Resources:
-------------------------------
At May 30, 1998, the Company had an aggregate working capital
deficiency of $(11,600) compared to a deficiency of $(17,258) at August 30, 1997
and had available cash and cash equivalents of $2,808 compared to $3,405 at
August 30, 1997. This decrease since August 30, 1997 is due principally to the
net (loss) of $(494) and higher inventory levels.
11
<PAGE>
JENNIFER CONVERTIBLES, INC.
Notes to Unaudited Consolidated Financial Statements
For the Thirty-Nine Weeks Ended May 30, 1998
(In thousands except for share amounts)
The Company is continuing to fund the operations of the LP's which, as
described above, continue to generate operating losses. All such losses have
been consolidated in the Company's consolidated financial statements. The
Company's receivables from the Private Company, the Unconsolidated Licensees
(other than S.F.H.C.), and S.F.H.C., which had been fully reserved for in prior
years, increased by $1,266 and $670 of this amount has been fully paid by July
14, 1998. It is the Company's intention to continue to fund these operations in
the future. The Company and the Private Company have entered into offset
agreements that permit the two companies to offset their current obligations to
each other. As part of such agreements, the Private Company agreed to assume
certain liabilities owed to the Company by the Unconsolidated Licensees, other
than S.F.H.C..
In March 1996, the Company executed a Credit and Security Agreement
("Agreement") with its principal supplier, Klaussner which gives the Company the
right to extend payment terms for merchandise shipped from 60 days to 81 days.
As of May 30, 1998 there were no past due amounts. As part of the Agreement, the
Company granted a security interest in all of its assets as well as assigning
leasehold interests, trademarks and a licensee agreement to operate the
Company's business in the event of default.
On December 11, 1997, the Company sold to Klaussner 10,000 shares of
Series A Convertible Preferred Stock ("Preferred Stock"), convertible into
1,424,500 shares of the Company's Common Stock for $5,000. These shares are
non-voting, have a liquidation preference of $5,000 and do not pay dividends
(except if declared on the Common Stock). The Preferred Stock is not convertible
until September 1, 1999, or earlier under certain circumstances (e.g. if another
person or group acquires 12.5% or more of the Common Stock or there are certain
changes in management or the Board of Directors), and has other rights
associated with it. In addition, the Credit and Security Agreement with
Klaussner was modified to include a late fee of .67% per month for invoices the
Company pays beyond the normal 60 day terms.
In September and November 1997, the Company opened letters of credit in
favor of an Italian supplier of leather furniture aggregating $1,350 by
depositing these funds into an interest bearing money market account. The
supplier can draw down on these letters of credit as shipments are made. These
letters of credit, which total $500 at May 30, 1998, expire on December 31,
1998.
The Company does not currently have any traditional bank financing and
there can be no assurance such financing will be available in the future.
12
<PAGE>
JENNIFER CONVERTIBLES, INC.
Notes to Unaudited Consolidated Financial Statements
For the Thirty-Nine Weeks Ended May 30, 1998
(In thousands except for share amounts)
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. If approved, there will be no
cash outlays by the Company other than legal costs. The settlement agreement is
terminable upon written notice from the Private Company since it was not
previously approved by the court. Although the Private Company has not
terminated the settlement agreement, the Company and the Private Company are
currently discussing restructuring the settlement agreement. There can be no
assurance as to the terms of any such restructuring or that the parties will
enter into a revised settlement agreement at all. Any such settlement would be
subject to a number of conditions, including court approval.
In fiscal 1997, 1996 and 1995, the Company and the LP's closed an
aggregate of 43 stores. In fiscal 1998, two additional stores were closed.
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.
The Company anticipates losses for fiscal 1998. However, as a result of
the Credit and Security Agreement with Klaussner and the $5,000 sale of
Preferred Stock to Klaussner on December 11, 1997, the Company, in the opinion
of management, will have adequate cash flow to fund its operations for the
current fiscal year.
13
<PAGE>
JENNIFER CONVERTIBLES, INC.
PART II
OTHER INFORMATION
ITEMS 1. through 5. NOT APPLICABLE.
ITEM 6. (a) EXHIBIT 11.1 - STATEMENT RE: COMPUTATION OF BASIC INCOME (LOSS)
PER SHARE
During the quarter ended May 30, 1998, the Company filed no current
reports on Form 8-K.
14
<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.
July 14, 1998 By: /s/ HARLEY J. GREENFIELD
-------------------------------------------
Harley J. Greenfield,
Chairman of the Board and
Chief Executive Officer
July 14, 1998 By: /s/ GEORGE J. NADEL
-------------------------------------------
George J. Nadel,
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
15
<TABLE>
<CAPTION>
EXHIBIT 11.1
JENNIFER CONVERTIBLES INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF BASIC INCOME (LOSS) PER SHARE
THIRTEEN AND THIRTY-NINE WEEKS ENDED MAY 30, 1998 AND MAY 31, 1997
(in thousands, except per share data)
Primary Primary
------------ -------------
Thirteen weeks ended Thirty-nine weeks ended
May 30, 1998 May 31, 1997 May 30, 1998 May 31, 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $464 ($1,054) ($494) ($1,947)
============ ============ ============== ============
Common shares outstanding 5,701 5,701 5,701 5,701
============ ============ ============== ============
Basic income (loss) per common share $0.08 ($0.18) ($0.09) ($0.34)
============ ============ ============== ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000806817
<NAME> JENNIFER CONVERTIBLES, INC.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,808,000
<SECURITIES> 0
<RECEIVABLES> 361,000
<ALLOWANCES> 0
<INVENTORY> 10,240,000
<CURRENT-ASSETS> 14,570,000
<PP&E> 13,898,000
<DEPRECIATION> 7,365,000
<TOTAL-ASSETS> 23,240,000
<CURRENT-LIABILITIES> 26,170,000
<BONDS> 0
0
100
<COMMON> 57,000
<OTHER-SE> (8,918,000)
<TOTAL-LIABILITY-AND-EQUITY> 23,240,000
<SALES> 29,254,000
<TOTAL-REVENUES> 29,254,000
<CGS> 19,479,000
<TOTAL-COSTS> 28,775,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116,000
<INCOME-PRETAX> 526,000
<INCOME-TAX> 62,000
<INCOME-CONTINUING> 464,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 464,000
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
