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 November 28, 2009
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) |
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]
As of January 11,
2010, 7,073,466 shares of the registrant’s common stock, par value $.01 per
share, were outstanding.
2
JENNIFER CONVERTIBLES, INC. AND SUBSIDIARIES
Index
Part I - Financial Information | ||
Item 1. - Financial Statements (Unaudited) | ||
Consolidated Balance Sheets at November 28, 2009 (Unaudited) and August 29, 2009 | 2 | |
Consolidated Statements of Operations (Unaudited) for the thirteen weeks ended November 28, 2009 and November 29, 2008 | 3 | |
Consolidated Statements of Cash Flows (Unaudited) for the thirteen weeks ended November 28, 2009 and November 29, 2008 | 4 | |
Notes to Unaudited Consolidated Financial Statements | 5 | |
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations | 15 | |
Item 3. - Quantitative and Qualitative Disclosures About Market Risk | 21 | |
Item 4. - Controls and Procedures | 21 | |
Part II - Other Information | ||
Item 1. – Legal Proceedings | 22 | |
Item 1A. – Risk Factors | 22 | |
Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds | 22 | |
Item 3. – Defaults Upon Senior Securities | 22 | |
Item 4. – Submission of Matters to a Vote of Security Holders | 22 | |
Item 5. – Other Information | 22 | |
Item 6. – Exhibits | 22 | |
Signatures | 23 | |
Exhibit Index | 24 | |
Ex. 31.1 Certification of Chief Executive Officer | 25 | |
Ex. 31.2 Certification of Chief Financial Officer | 26 | |
Ex. 32.1 Certification of Principal Executive Officer | 27 | |
Ex. 32.2 Certification of Principal Financial Officer | 28 |
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except for share and per share data)
Consolidated Balance Sheets
(In thousands, except for share and per share data)
November 28, 2009 | |||||||
(Unaudited) | August 29, 2009 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 7,001 | $ | 5,609 | |||
Restricted cash | 99 | 99 | |||||
Accounts receivable | 2,634 | 1,816 | |||||
Merchandise inventories, net | 8,232 | 9,076 | |||||
Due from Related Company, net of allowance for losses of $4,114 | |||||||
at November 28, 2009 and $947 at August 29, 2009 | 563 | 3,147 | |||||
Prepaid expenses and other current assets | 1,098 | 1,214 | |||||
Total current assets | 19,627 | 20,961 | |||||
Store fixtures, equipment and leasehold improvements, at cost, net | 2,264 | 2,355 | |||||
Goodwill | 483 | 483 | |||||
Other assets (primarily security deposits) | 568 | 670 | |||||
$ | 22,942 | $ | 24,469 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | |||||||
Current liabilities: | |||||||
Accounts payable, trade (including $957 and $1,255 to a stockholder) | $ | 16,942 | $ | 14,317 | |||
Customer deposits | 8,247 | 4,976 | |||||
Accrued expenses and other current liabilities | 5,437 | 6,001 | |||||
Due to Related Company | 500 | 400 | |||||
Deferred rent and allowances - current portion | 629 | 589 | |||||
Total current liabilities | 31,755 | 26,283 | |||||
Deferred rent and allowances, net of current portion | 2,238 | 2,360 | |||||
Obligations under capital leases, net of current portion | 84 | 96 | |||||
Total liabilities | 34,077 | 28,739 | |||||
Contingencies (Note 12) | |||||||
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 November 28, 2009 and August 29, 2009 | |||||||
(liquidation preference $3,245) | - | - | |||||
Series B Convertible Preferred - issued and outstanding 47,989 | |||||||
shares at November 28, 2009 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 November 28, 2009 and August 29, 2009 | 70 | 70 | |||||
Additional paid-in capital | 29,652 | 29,647 | |||||
Accumulated deficit | (40,858 | ) | (33,988 | ) | |||
(11,135 | ) | (4,270 | ) | ||||
$ | 22,942 | $ | 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)
Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Thirteen weeks ended | |||||||
November 28, | November 29, | ||||||
2009 | 2008 | ||||||
Revenue: | |||||||
Net sales | $ | 22,041 | $ | 24,980 | |||
Revenue from service contracts | 1,138 | 1,473 | |||||
23,179 | 26,453 | ||||||
Cost of sales, including store occupancy, | |||||||
warehousing, delivery and service costs | 16,996 | 18,764 | |||||
Selling, general and administrative expenses | 9,649 | 9,308 | |||||
Provision for loss on amounts due from Related Company | 3,167 | - | |||||
Depreciation and amortization | 222 | 244 | |||||
30,034 | 28,316 | ||||||
Loss from operations | (6,855 | ) | (1,863 | ) | |||
Interest income | 9 | 54 | |||||
Interest expense | (4 | ) | (5 | ) | |||
Loss from continuing operations before income taxes | (6,850 | ) | (1,814 | ) | |||
Income tax expense | 2 | 1 | |||||
Loss from continuing operations | (6,852 | ) | (1,815 | ) | |||
Loss from discontinued operations (including loss on store | |||||||
closings of $2 in 2009) | (18 | ) | (54 | ) | |||
Net loss | $ | (6,870 | ) | $ | (1,869 | ) | |
Basic and diluted loss per common share: | |||||||
Loss from continuing operations | $ | (0.97 | ) | $ | (0.26 | ) | |
Loss from discontinued operations | - | - | |||||
Net loss | $ | (0.97 | ) | $ | (0.26 | ) | |
Basic and diluted weighted average common shares outstanding | 7,073,466 | 7,073,466 |
See Notes to
Consolidated Financial Statements
3
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Thirteen weeks ended | |||||||
November 28, | November 29, | ||||||
2009 | 2008 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (6,870 | ) | $ | (1,869 | ) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating | |||||||
activities of continuing operations: | |||||||
Depreciation and amortization | 222 | 244 | |||||
Provision for loss on amounts due from Related Company | 3,167 | - | |||||
Non cash compensation to consultant | 5 | 5 | |||||
Loss from discontinued operations | 18 | 54 | |||||
Deferred rent | (82 | ) | (350 | ) | |||
Changes in operating assets and liabilities, net of effects from discontinued operations: | |||||||
Merchandise inventories, net | 823 | 479 | |||||
Prepaid expenses and other current assets | 115 | 332 | |||||
Accounts receivable | (818 | ) | (1,041 | ) | |||
Due from Related Company, net | (482 | ) | 369 | ||||
Other assets | 101 | 9 | |||||
Accounts payable, trade | 2,624 | 1,055 | |||||
Customer deposits | 3,275 | (1,171 | ) | ||||
Accrued expenses and other current liabilities | (560 | ) | (11 | ) | |||
Net cash provided by (used in) operating activities of continuing operations | 1,538 | (1,895 | ) | ||||
Cash flows from investing activities: | |||||||
Sale of marketable auction rate securities | - | 1,350 | |||||
Restricted cash | - | (6 | ) | ||||
Capital expenditures | (130 | ) | (72 | ) | |||
Net cash (used in) provided by investing activities from continuing operations | (130 | ) | 1,272 | ||||
Cash flows from financing activities: | |||||||
Principal payments under capital lease obligations | (11 | ) | (10 | ) | |||
Net cash used in financing activities from continuing operations | (11 | ) | (10 | ) | |||
Net increase (decrease) in cash and cash equivalents from continuing operations | 1,397 | (633 | ) | ||||
Net decrease in cash and cash equivalents from operating activities | |||||||
of discontinued operations | (5 | ) | (110 | ) | |||
Cash and cash equivalents at beginning of period | 5,609 | 9,057 | |||||
Cash and cash equivalents at end of period | $ | 7,001 | $ | 8,314 | |||
Supplemental disclosure of cash flow information: | |||||||
Income taxes paid | $ | 15 | $ | 5 | |||
Interest paid | $ | 4 | $ | 5 |
See Notes to
Consolidated Financial Statements
4
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
For the Thirteen Weeks Ended November 28, 2009
(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 (as defined in Note 5) in 2009) considered necessary
for a fair presentation have been included. The operating results for the
thirteen-week period ended November 28, 2009 are not necessarily indicative of
the results that may be expected for the fiscal year ending August 28,
2010.
The Company has
evaluated subsequent events through January 12, 2010, the date the financial
statements were issued.
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 accounting principles generally accepted in the United
States of America for complete financial statements.
For further
information, please refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
August 29, 2009, as filed with the Securities and Exchange Commission (“SEC”).
NOTE 2: LIQUIDITY
The Company has
incurred a net loss for the thirteen weeks ended November 28, 2009 and for the
years ended August 29, 2009 and August 30, 2008, and has also used cash in its
operating activities during such fiscal years. In addition, the Company has both
working capital and stockholders' deficiencies as of November 28, 2009. 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
purchases by customers (see Note 6) and the Related Company 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. These
events impact the Company's liquidity. The Company has implemented cost cutting
programs, including store closings, termination of personnel, salary reductions
for certain executive officers and renegotiations of lease agreements.
Additionally, the credit agreement with Caye, the Company's then principal
supplier was terminated in July 2009, and, in connection therewith, Caye
released its security interest in the Company's assets. Further, the Company and
a Chinese supplier who replaced Caye, amended and restated the terms of their
letter agreement to provide the Company up to 180 days to pay for goods without
interest or penalty effective August 1, 2009 through September 30, 2010. Based
on the current level of store operations and available cash, and after giving
effect to cost cutting programs that have been implemented and the extended
credit terms received from its Chinese supplier, management anticipates that the
Company will have sufficient available cash to operate for at least the next 12
months.
5
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
Further deterioration
of the current economy could have a material adverse effect on the Company's
liquidity and results of operations. In the event that current economic
conditions deteriorate further, or continue beyond the next 12 months, with a
resultant continued adverse effect on the Company's revenue, the Company may
require additional debt or equity financing to continue operations. The Company
has engaged an investment-banking firm to assist it with raising additional
capital, but there can be no assurance that such efforts will be successful.
NOTE 3: RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009, the
Financial Accounting Standards Board (“FASB”) issued guidance to improve
financial reporting by enterprises involved with variable interest entities and
addresses, among other matters, constituent concerns about the application of
certain key provisions of former guidance, including those in which the
accounting and disclosures do not always provide timely and useful information
about an enterprise’s involvement in a variable interest entity. 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 does not anticipate that the adoption of this
pronouncement will have any effect on its financial statements.
In June 2009, the
FASB issued guidance relating to accounting for transfers of financial assets
which 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.
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:
November 28, | August 29, | ||||||
2009 | 2009 | ||||||
Showrooms | $ | 4,846 | $ | 5,068 | |||
Warehouses | 3,386 | 4,008 | |||||
$ | 8,232 | $ | 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.
6
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
NOTE 5: TRANSACTIONS WITH THE RELATED COMPANY
The consolidated
financial statements do not include the results of operations of 21
stores which up until December 31, 2009 were licensed by the Company,
19 of which were owned and operated by a company (the “Related Company”), which
was 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. Seventeen of the 19 stores are located in New York City
and surrounding areas and were on a royalty-free basis. In December 2009, the
Related Company closed one of these stores.
Included in the
Consolidated Statements of Operations are the following amounts charged by and
to the Related Company:
Increase (decrease) to related line | |||||||
item in the Consolidated Statements | |||||||
of Operations | |||||||
Thirteen weeks ended | |||||||
November 28, | November 29, | ||||||
2009 | 2008 | ||||||
Net Sales: | |||||||
Royalty income | $ | 22 | $ | 30 | |||
Warehouse fees | 455 | 286 | |||||
Delivery charges | 540 | 819 | |||||
Total charged to the Related Company | $ | 1,017 | $ | 1,135 | |||
Revenue from Service Contracts: | |||||||
Fabric protection fees charged by the Related Company | $ | (100 | ) | $ | (100 | ) | |
Selling, General and Administrative Expenses: | |||||||
Administration fees charged to the Related Company | $ | (28 | ) | $ | (28 | ) | |
Advertising reimbursement charged to the Related Company | (450 | ) | (377 | ) | |||
Royalty expense charged by the Related Company | 100 | 100 | |||||
Net charged to the Related Company | $ | (378 | ) | $ | (305 | ) |
During the thirteen
weeks ended November 28, 2009, the Related Company, through the Company,
purchased approximately $2,035 of inventory, at cost.
7
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
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. Further, effective as of November 27,
2009, as described below, the Company discontinued granting credit to the
Related Company and as collectibility is 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.
Pursuant to a
Purchasing Agreement, the Company purchases merchandise for the Company and the
Related Company. The Related Company has 85 days after the end of the month in
which the transactions originate to pay the amounts due. The Purchasing
Agreement provides the Company with the ability to terminate upon written notice
of any material breach of the agreement, which is not cured within thirty 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 will be on
the Company’s behalf and the Related Company will be 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 is shipped to the customer. The Related Company is 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 agreement is terminable by the Company upon 24 hours notice. As
of December 18, 2009, the Related Company was not in compliance with the
arrangement.
As of December 31,
2009, the Company entered into an agreement with the Related Company, pursuant
to which, effective January 1, 2010, the Related Company ceased operations at
the 20 stores formerly operated by it, including one store which it did not
own (the “Stores”) and the Company began operating the Stores solely for
its own benefit and account (the “Agreement”) in order to protect its brand and
its customers. The Company has agreed to purchase the inventory in the showrooms
of the Stores for $635, payable over five months and subject to offset under
certain circumstances. The Agreement allows the Company to evaluate each Store
location and negotiate with the landlords at such locations for entry into new
leases at such Stores and endeavor to cancel or defer the rent arrearages, which
the Related Company has advised aggregates approximately $300 as of January 1,
2010. The Company has agreed to pay no more than $300 to settle the arrearages
at all 20 Stores and if the arrearages exceed $300 the Related Company will
reimburse the Company for such excess or such excess will be used to offset the
amount the Company owes the Related Company for the purchase of the inventory.
Other than the rent arrearages, the Company has not assumed any liabilities of
the Related Company. The Company has also agreed to offer to employ all Store
location based employees currently employed by the Related Company and will not
be responsible for any commissions, salary, health or other benefits or other
compensation owed them prior to January 1, 2010. The Company will be responsible
for the costs of operating the Stores on and after January 1, 2010, except with
respect to Stores vacated by the Company.
As noted above, the
Related Company was in default under the Interim Agreement. Pursuant to the
Agreement, the $300 owed to the Company by the Related Company under the
Interim Agreement at December 31, 2009 was extinguished. In addition, the
Related Company will surrender to the Company 93,579 shares of the
Company’s common stock, owned by the Related Company.
8
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
As described above,
the consideration transferred to acquire the assets of the Related Company
approximated $1,235 consisting of $635 in cash, $300 in receivables due from the
Related Company which was extinguished and $300 of liabilities assumed for rent
arrearages. As the initial accounting for the acquisition of the assets of the
Related Company is incomplete as of January 12, 2010, the disclosures with
respect to the amounts to be recognized for inventory and any other assets
acquired could not be made. The results of the operations of the Stores will be
included in the consolidated financial statements as of January 1, 2010 and will
be included in the Company’s Jennifer segment.
The Company has
agreed to ship to customers merchandise for sales written at the Stores (“Old
Sales”) on or prior to November 27, 2009 but not yet delivered as of December
31, 2009. The Related Company will not be required to make any further payment
as to the merchandise to be delivered to fulfill Old Sales. The Related Company
will be responsible for and pay all sales taxes and commissions on Old Sales.
The Company shall be entitled to any additional deposits or other payments
received by the Related Company after December 21, 2009, for Old
Sales.
The Related Company
agreed to pay the Company all amounts collected by it which exceed 35% of the
collected sales price (excluding delivery costs and applicable sales taxes) for
all sales subsequent to December 21, 2009 and prior to January 1, 2010, whether
as part of an initial deposit or any payments received by the Related Company
with respect to sales after an initial deposit. Any amounts in excess of the
35%, which the Related Company does not pay to the Company shall be offset
against amounts due to the Related Company.
Pursuant to the
Agreement, all existing agreements between the Related Company and the Company
were terminated.
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 Company has no obligation with respect to such
plans. 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 assumes 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 protection
to be serviced by the Related Company. If the Related Company were no longer
able to provide the services previously contracted for, the Company would, as a
matter of customer relations, likely have to pay for and arrange to supply
services with respect to such previously sold fabric protection services. As
described above, effective as of January 1, 2010, the Related Company ceased
operations; accordingly in the quarter ending February 27, 2010, the Company
will incur a charge to operations for the estimated cost of supplying future
services with respect to the previously sold protection services, the amount of
which has not yet been determined.
NOTE 6: 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, which increased the amount of the holdback to
$800, extended processing services through June 2009 and modified certain other
terms and conditions. As of January 12, 2010, the agreement has not been
extended, however, the credit card processor is continuing to provide services
to the Company. As of November 28, 2009, the credit card company has held back
approximately $800, which is included in accounts receivable.
9
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
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. During 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 November
28, 2009, the finance company has reserved $26, which is included in accounts
receivable.
NOTE 7: TRANSACTIONS WITH CAYE AND CHINESE
SUPPLIER
In July 2005, the
Company entered into a Credit Agreement, as amended, (“Agreement”) with Caye
Home Furnishings, LLC and its affiliates (“Caye”) who is also a vendor of the
Company. Under the Agreement, the Company was able to draw down up to $13.5
million 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 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 million.
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 their security interest in all of the Company’s assets and terminating
all obligations under the 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 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 November 28,
2009 and August 29, 2009, the Company owed Caye approximately $480 and $582,
respectively. Such amounts are included in accounts payable, trade on the
respective accompanying consolidated balance sheets.
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 the Company goods without interest and penalty and provide
75 days to pay for those goods and an additional 30 days 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 million. 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 January 12, 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. Amounts payable to the Chinese supplier for purchases
are denominated in U.S. dollars. As of November 28, 2009 and August 29, 2009,
the Company owed the Chinese supplier approximately $10,178 and $8,426,
respectively. Such amounts are included in accounts payable, trade on the
respective accompanying consolidated balance sheets.
10
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
NOTE 8: 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 week periods ended November 28, 2009 and November 29, 2008. Income tax
expense for the thirteen-week periods ended November 28, 2009 and November 29,
2008 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 fiscal year.
The Company files
income tax returns in the U.S. federal jurisdiction and various states. For
federal and state income tax purposes, the 2006 through 2009 tax years remain
open for examination by the taxing authorities under the normal three-year
statute of limitations. For state income tax purposes, the 2005 through 2009 tax
years remain open for examination by the tax authorities of certain states under
a four-year statute of limitations.
NOTE 9: STOCK OPTION PLANS
There were no stock
options granted to employees during the thirteen week period ended November 28,
2009 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 November 28, 2009 and November 29, 2008.
NOTE 10: DISCONTINUED
OPERATIONS
During fiscal year
2010, the Company anticipates closing three to seven stores. 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.
During the thirteen
week period ended November 28, 2009, the Company closed one store in Arizona.
The operating results of the closed store in Arizona are reported in
discontinued operations, and the results of operations for the periods ended
November 29, 2008 have been restated to include this store 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.
11
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
Revenues from the
closed stores reported as discontinued operations amounted to $20 and $223 in
the thirteen week periods ended November 28, 2009 and November 29, 2008,
respectively.
NOTE 11: 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 thirteen week period ended November 28, 2009, the Company has opened two
additional stores and executed a lease agreement to open an additional
store.
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 store. 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.
The following tables
present segment level financial information for the thirteen week periods ended
November 28, 2009 and November 29, 2008:
Thirteen weeks ended | ||||||||
November 28, | November 29, | |||||||
2009 | 2008 | |||||||
Revenue: | ||||||||
Jennifer | $ | 19,364 | $ | 23,552 | ||||
Ashley | 3,815 | 2,901 | ||||||
Total Consolidated | $ | 23,179 | $ | 26,453 | ||||
Segment income (loss) from continuing | ||||||||
operations before income taxes: | ||||||||
Jennifer | $ | (5,329 | ) | $ | (204 | ) | ||
Ashley | 168 | 111 | ||||||
Total for Reportable Segments | $ | (5,161 | ) | $ | (93 | ) |
12
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
Reconciliation: | ||||||||
Thirteen Weeks Ended | ||||||||
November 28, | November 29, | |||||||
2009 | 2008 | |||||||
Profit or loss | ||||||||
Loss from continuing operations | ||||||||
before income taxes for reportable segments | $ | (5,161 | ) | $ | (93 | ) | ||
Corporate expenses and other | (1,689 | ) | (1,721 | ) | ||||
Consolidated loss from continuing | ||||||||
operations before income taxes | $ | (6,850 | ) | $ | (1,814 | ) | ||
November 28, | August 29, | |||||||
2009 | 2009 | |||||||
Total Assets: | ||||||||
Jennifer | $ | 12,513 | $ | 16,034 | ||||
Ashley | 4,345 | 2,456 | ||||||
Corporate (a) | 6,084 | 5,979 | ||||||
Total Consolidated | $ | 22,942 | $ | 24,469 |
(a) Corporate assets
consist primarily of cash and cash equivalents, restricted cash, and prepaid
expenses and other current assets.
NOTE 12: 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 November 28, 2009 and August 29, 2009. Such amount is
included in accrued expenses and other current liabilities on the respective
accompanying consolidated balance sheets. In the event the litigation is not
settled, the Company intends to defend the matter vigorously.
13
JENNIFER CONVERTIBLES, INC. AND
SUBSIDIARIES
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
For the Thirteen Weeks Ended November 28, 2009
(In thousands, except for share amounts)
In addition, the
Company is not subject to any litigation that it believes will have a material
adverse effect on its financial condition, results of operations or cash
flows.
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 its Annual Report on Form 10-K for the
fiscal year ended August 29, 2009, the Company is not in compliance with certain
conditions of the Exchange’s continued listing standards under Section
1003(a)(i) of the Exchange’s Company Guide because its stockholders’ equity is
less than $2,000 and the Company had losses from continuing operations and net
losses in two of its three most recent fiscal years.
The Company has until
February 12, 2010, to advise the Exchange on how it intends to regain compliance
with Section 1003(a)(i) by July 7, 2011. The Company’s common stock continues to
trade on the Exchange.
14
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 and
licensor 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.
During the thirteen week period ended November 28, 2009, we opened two
additional stores. We have determined that we have two reportable segments
organized by product line: Jennifer–sofabed specialty retail stores– and
Ashley–big box, full line home furniture retail stores.
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 | ||||||
November 28, | November 29, | |||||
2009 | 2008 | |||||
Merchandise Sales – net | 79.8 | % | 79.1 | % | ||
Home Delivery Income | 10.9 | % | 11.0 | % | ||
Charges to the Related Company | 4.4 | % | 4.3 | % | ||
Net Sales | 95.1 | % | 94.4 | % | ||
Revenue from Service Contracts | 4.9 | % | 5.6 | % | ||
Consolidated Revenue | 100.0 | % | 100.0 | % |
15
Thirteen Weeks Ended
November 28, 2009 Compared to Thirteen Weeks Ended November 29,
2008
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
$18,376,000 and $22,178,000 for the thirteen-week periods ended November 28,
2009 and November 29, 2008, respectively. Net sales from continuing operations
decreased by 17.1%, or $3,802,000 for the thirteen-week period ended November
28, 2009 compared to the thirteen-week period ended November 29, 2008. The
decrease is attributable to a delay by our Chinese supplier shipping us certain
merchandise in connection with the integration of a new line during the
thirteen-week period ended November 28, 2009 as compared to the same period last
year. In addition, there was a decrease in the written sales during July and
August 2009 that impacted our delivered sales during the thirteen-week period
ended November 28, 2009.
Revenue from service
contracts from continuing operations decreased by 28.1% in the thirteen-week
period ended November 28, 2009 to $988,000, from $1,374,000 for the
thirteen-week period ended November 29, 2008. The decrease was primarily
attributable to fewer merchandise sales during the thirteen-week period ended
November 28, 2009, compared to the same period ended November 29,
2008.
Ashley Segment
Net sales from
continuing operations were $3,665,000 and $2,802,000 for the thirteen-week
periods ended November 28, 2009 and November 29, 2008, respectively. Net sales
from continuing operations increased by 30.8%, or $863,000 for the thirteen-week
period ended November 28, 2009 compared to the thirteen-week period ended
November 29, 2008. The increase is largely attributable to the opening of two
new Ashley locations as well as positive results of increased promotional
efforts.
Revenue from service
contracts from continuing operations increased by 51.5% in the thirteen-week
period ended November 28, 2009 to $150,000, from $99,000 for the thirteen-week
period ended November 29, 2008. The increase was primarily attributable to the
opening of two new Ashley locations.
As a result of an
agreement with the affiliated related company (the “related company”) (as
described below) effective January 1, 2010, we will operate 20 stores formerly
operated by the related company. As a result, we expect that revenues will
increase, and cost of sales and selling, general and administrative expenses
related to the operations of the additional stores will increase. We anticipate
that the net effect to income from continuing operations will be nominal or
slightly positive for the fiscal year ending August 28, 2010.
Consolidated same
store sales from continuing operations (sales at those stores open for the
entire current and prior comparable periods) decreased 12.8% for the thirteen
weeks ended November 28, 2009, compared to the same period ended November 29,
2008. During the thirteen weeks ended November 28, 2009 one store closed and
another relocated. The change in total square footage leased for the Jennifer
segment was not significant. Total square footage leased for the Ashley segment
increased by 32,500 square feet or 54.17% during the thirteen weeks ended
November 28, 2009 due to the opening of two stores. The increase in the square
footage leased for the Ashley segment will not have a significant impact on our
revenues until our second fiscal quarter.
Cost of Sales
Cost of sales, as a
percentage of revenue for the thirteen-week period ended November 28, 2009, was
73.3% compared to 70.9% for the same period ended November 29, 2008. Cost of
sales from continuing operations decreased to $16,996,000 for the thirteen weeks
ended November 28, 2009, from $18,764,000 for the thirteen weeks ended November
29, 2008.
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 to fixed costs being spread over a decreased
revenue base.
16
Cost of sales for the
thirteen-week period ended November 28, 2009 includes an increase of $74,000 in
occupancy costs related to our Ashley operating segment, a decrease of $253,000
in occupancy costs related to our Jennifer operating segment and a decrease of
$18,000 for corporate activities. Occupancy costs have decreased for the
Jennifer segment and corporate activities as a result of lease modifications
negotiated on an on-going basis since the thirteen-week period ended November
29, 2008. The increase for the Ashley segment is a result of two store openings
during the thirteen weeks ended November 28, 2009.
Selling, general and administrative
expenses
Selling, general and
administrative expenses from continuing operations were $9,649,000 (41.6% as a
percentage of revenue) and $9,308,000 (35.2% as a percentage of revenue) during
the thirteen-week periods ended November 28, 2009 and November 29, 2008,
respectively.
Selling, general and
administrative expenses for the thirteen-week period ended November 28, 2009
includes an increase of $260,000 for the Ashley segment, an increase of $126,000
for the Jennifer segment and a decrease of $45,000 related to corporate
activities, consisting of compensation, advertising, finance fees and other
administrative costs.
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
decreased $355,000 during the thirteen-week period ended November 28, 2009
compared to the same period ended November 29, 2008. Compensation expense
decreased by $387,000 for the Jennifer segment, increased $105,000 for the
Ashley segment and decreased by $73,000 for corporate activities. The decrease
in the Jennifer segment was primarily attributable to lower sales volume, which
resulted in lower compensation expense to salespersons in the form of
commissions and bonuses. The increase for the Ashley segment is largely due to
the opening of two new stores during the thirteen weeks ended November 28, 2009.
Corporate compensation decreased due to voluntary salary reductions by the Chief
Executive Officer and Executive Vice President.
Advertising expense
increased $443,000 during the thirteen-week period ended November 28, 2009
compared to the same period ended November 29, 2008. Advertising expense
increased by $400,000 for the Jennifer segment and increased by $43,000 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
thirteen-week period ended November 28, 2009, which were not incurred during the
thirteen-week period ended November 29, 2008. In addition, in an effort to
capitalize on the softness in the advertising marketplace we augmented our
regularly scheduled marketing on television and the marketing of our Black
Friday promotions during the thirteen-week period ended November 28, 2009.
Furthermore, the increase for the Jennifer segment is net of $73,000 charged to
the related company pursuant to the terms of the fifth amendment to the
management agreement and license.
Finance fees
increased $190,000 during the thirteen-week period ended November 28, 2009
compared to the same period ended November 29, 2008. The increases for the
Jennifer and Ashley segments in the amount of $155,000 and $35,000, 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.
Other administrative
costs increased $63,000 during the thirteen-week period ended November 28, 2009
compared to the same period ended November 29, 2008. The Jennifer segment
decreased in the amount of $42,000 as a result of cost reductions at the store
levels. The Ashley segment increased in the amount of $77,000 largely due to the
opening of two new stores in October 2009. Corporate activities increased
$28,000 due to an increase in professional fees.
17
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 thirteen 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.
Loss from Continuing
Operations
The loss from
continuing operations was $6,852,000 and $1,815,000 for the thirteen-week
periods ended November 28, 2009 and November 29, 2008, respectively. The loss
from continuing operations for the thirteen-week periods ended November 28, 2009
and November 29, 2008 includes income of $168,000 and $110,000, respectively,
related to our Ashley segment.
Loss from Discontinued
Operations
During the thirteen
week period ended November 28, 2009, the Company closed one store in Arizona.
The operating results of the closed store in Arizona are reported in
discontinued operations, and the results of operations for the period ended
November 29, 2008 has been restated to include this store 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 $18,000 and $54,000
for the thirteen-week periods ended November 28, 2009 and November 29, 2008,
respectively.
Revenues from the
closed stores reported as discontinued operations amounted to $20,000 and
$223,000 in the thirteen-week periods ended November 28, 2009 and November 29,
2008, respectively.
Net Loss
Net loss for the
thirteen-week period ended November 28, 2009 was $6,870,000, compared to net
loss of $1,869,000 for the thirteen-week period ended November 29, 2008. This
change is primarily attributable to the decrease in revenues due to the current
economic conditions and a provision for loss on amounts due from the related
company.
Liquidity and Capital Resources
As of November 28,
2009, we had a working capital deficiency of $12,128,000 compared to $5,322,000
at August 29, 2009 and had available cash and cash equivalents of $7,001,000
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 related company in the amount of $3,167,000.
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.
18
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 20 stores formerly operated by it (the “Stores”) and we began
operating the Stores solely for our benefit and account (the “Agreement”) in
order to protect our brand and our customers. The Agreement allows us to
evaluate each Store location and negotiate with the landlords at such locations
for entry into new leases at such Stores and endeavor
to cancel or defer the rent arrearages, which the related company has advised
aggregates approximately $300,000 as of January 1, 2010. We have agreed to pay
no more than $300,000 to settle the arrearages at all 20 Stores and if the
arrearages exceed $300,000 the related company will reimburse us for such excess
or such excess will be used to offset the amount we owe the related company for
the purchase of the inventory. Other then the rent arrearages, we have not
assumed any other liabilities of the related company. We have agreed
to offer to employ all Store location based employees currently employed by the
related company and will not be responsible for any commissions, salary, health
or other benefits or other compensation owed them prior to such
date. We will be responsible for the costs of operating the Stores on
and after January 1, 2010, except with respect to Stores vacated by
us.
We agreed to
ship to customers merchandise for sales written at the Stores (“Old Sales”) on
or prior to November 27, 2009 but not yet delivered. The related
company will not be required to make any further payment as to the merchandise
to be delivered to fulfill Old Sales. The related company will be responsible
for and pay all sales taxes and commissions on Old Sales. We will be entitled to
any additional deposits or other payments received by the related company after
December 21, 2009, for Old Sales.
The related company
has agreed to pay us all amounts collected by it which exceed 35% of the
collected sales price (excluding delivery costs and applicable sales taxes) for
all sales subsequent to December 21, 2009 and prior to January 1, 2010, whether
as part of an initial deposit or any payments received by the related company
with respect to sales after an initial deposit. Any amounts in excess of the
35%, which the related company does not pay to us shall be offset against
amounts due to the related company.
We
agreed to purchase the inventory in the showrooms of the Stores for $635,000,
payable over five months and subject to offset under certain circumstances.
Pursuant to the Agreement, the $300,000 owed to us by the related company under
that certain interim agreement between us and the related company dated December
11, 2009, was extinguished. In addition, the related company will 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 have been 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 protection and no longer sell fabric
protection to be serviced by the related company. As described above effective
January 1, 2010, the related company ceased operations; accordingly in the
quarter ending February 27, 2010, we will incur a charge to operations for the
estimated cost of supplying future services with respect to the previously sold
protection services, the amount of which has not yet been determined.
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 (“Agent”), 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 “Caye 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
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 .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.
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 their security interest in all of our assets and terminating all
obligations under the 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.
We are a party to a
letter agreement with our Chinese supplier pursuant to which they agree to
provide us with $10,000,000 of debt financing. 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. 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. As of November 28, 2009, we owed the Chinese supplier
approximately $10,178,000.
19
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 there was a $500,000 reserve established as, in effect, a performance
bond against delivery by us of the merchandise ordered by their credit card
customers. During December 2008, the parties executed an agreement, which
increased the amount of the reserve to $800,000, extended processing services
through June 2009 and modified certain other terms and conditions. As of
November 28, 2009, the agreement has not been extended, however, the credit card
processor is continuing to provide services to us.
Prior to January
2009, we offered a private label customer financing pursuant to which we
financed sales and sold financed receivables on a non-recourse basis to an
independent finance company. We 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. During
January 2009, the finance company terminated its dealer agreement with us
effective March 8, 2009. We believe that this termination had little impact on
our net sales, however it increased our transaction fees due to the fact that
traditional credit card transactions have higher transaction fees.
As more fully
described in Note 2 herein and Note 15 to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended August
29, 2009, as filed with the Securities and Exchange Commission, the proposed
settlement of a pending litigation could require us to pay cash of $300,000 to
$1,500,000 over a five-year period.
We closed one store
and relocated one store during the thirteen weeks ended November 28, 2009. We
spent $130,000 for capital expenditures of continuing operations during such
thirteen-week period and we anticipate capital expenditures approximating
$870,000 during the remainder of fiscal 2010 to support existing facilities.
Based on the current
level of operations at our stores, and after giving effect to cost cutting
programs we have implemented, we anticipate that we will have the capital
resources to operate for at least the next 12 months. However, if current
economic and credit conditions prevail beyond the next year or worsen, there
would be significant doubt as to whether we could continue to operate
significantly beyond that time without an infusion of capital or other measures,
the availability of which there can be no assurance.
20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Management’s Report on 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 November 28, 2009, 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.
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 November 28, 2009, that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.
21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
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.
Item 1A. Risk Factors.
There have been no
material changes to the risk factors disclosed in our Annual Report on Form 10-K
for the year ended August 29, 2009.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.
None.
Item 3. Defaults Upon Senior
Securities.
None.
Item 4. Submission of Matters to a Vote of Security
Holders.
None.
Item 5. Other Information.
On January 7, 2010,
we received notice from the staff of the NYSE Amex LLC (the “Exchange”) that,
based on the Exchange’s review of our Annual Report on Form 10-K for the fiscal
year ended August 29, 2009, we are 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 our stockholders’ equity
is less than $2,000,000 and we have losses from continuing operations and net
losses in two of our three most recent fiscal years.
We have until
February 12, 2010, to advise the Exchange on how we intend to regain compliance
with Section 1003(a)(i) by July 7, 2011. Our common stock continues to trade on
the Exchange.
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.
|
22
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. | |||
January 12, 2010 | By: | /s/ Harley J. Greenfield | |
Harley J. Greenfield, Chairman of the Board and | |||
Chief Executive Officer (Principal Executive Officer) | |||
January 12, 2010 | By: | /s/ Rami Abada | |
Rami Abada, Chief Financial Officer | |||
and Chief Operating Officer | |||
(Principal Financial Officer) |
23
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.
24