PART I
Item 1. Business.
Unless otherwise set forth herein, when we use the term ‘we’ or any derivation thereof, we mean Jennifer Convertibles Inc., a Delaware corporation, and its direct or indirect subsidiaries.
Business Overview
Jennifer Convertibles, Inc. was incorporated in 1986 and began operations with a single retail store in Paramus, New Jersey.
Currently, we are the owner and licensor of the largest group of sofabed specialty retail stores and leather specialty retail stores in the United States, with stores located throughout the Eastern seaboard, in the Midwest, on the West Coast and in the Southwest. As of August 25, 2007, our stores included 168 Jennifer Convertibles® stores and 16 Jennifer Leather stores. Of these 184 stores, we owned 160 and licensed 24, including 23 owned and operated by a related private company, “the related company”, and one owned by other third parties operated by the related company. In addition, we opened a full line home furnishings store under a licensing agreement, as Ashley Furniture Homestore®.
Our operations are classified into two operating segments organized by product line: Jennifer and Ashley. The Jennifer segment owns and licenses the sofabed specialty retail stores. The Ashley segment is a big box, full line home furniture retail store. These operating segments enable us to more effectively offer diverse home furnishings and accessories and expand our reach to a broader consumer base. For certain financial information regarding our operating segments, see Note 14 to the Consolidated Financial Statements included under Item 8 of this Annual Report and incorporated herein by reference.
Operating Segments
Jennifer
General
Jennifer Convertibles® stores specialize in the retail sale of a complete line of sofabeds. The stores also sell companion pieces such as sofas, loveseats, chairs and ottomans. In most cases they are accessorized with tables, lamps and rugs, which we also sell. Jennifer Leather® stores specialize in the sale of leather livingroom furniture and offer the same compliment of companion pieces and accessories. Our products are manufactured by several manufacturers and range from med-high end to relatively inexpensive models. We are the largest dealer of Sealy® sofabeds as well as the largest dealer of Simmons® sofabeds. In order to generate sales, our licensees and we rely on aggressive pricing, the attractive image of our stores, extensive advertising and prompt delivery.
We believe that the image presented by our stores is an important factor in our overall marketing strategy. Accordingly, stores are designed to display our merchandise in an attractive setting designed to show the merchandise, as it would appear in a customer’s home. All of our stores have a similar clearly defined style, are designed as showrooms for the merchandise and are carpeted, well lit and well maintained. Inventories for delivery are maintained in separate warehouses. We display a variety of sofabeds, sofas and companion pieces at each Jennifer Convertibles and Jennifer Leather retail location with tables and lamps. In contrast to certain of our competitors that primarily target particular segments of the market, we attempt to attract customers covering the broadest socio-economic range of the market and, accordingly, offer a complete line of sofabeds and sofas made by a number of manufacturers in a variety of styles at prices currently ranging from approximately $299 to $2,200.
Although each style of sofabed, loveseat, sofa, chair and recliner is generally displayed at Jennifer Convertibles stores in one color and fabric, samples of the other available colors and fabrics or leathers are available on selected merchandise. Up to 2,000 different colors and fabrics are available for an additional charge. To maximize the use of our real estate and offer customers greater selection and value, we, as is common in the mattress industry, sell various sizes of sofabeds with various sizes of mattresses but display only one size of sofabed at our stores. We
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display leather furniture in a number of different grades of leathers as well as offer a selection in various high fashion blended leathers and constructions. We generate additional revenue by selling tables and offering related services, such as lifetime fabric protection.
The related company, operates 24 Jennifer Convertibles stores, 23 of which it owns and one of which it licenses or manages. We do not own or collect any royalties from the 21 related company owned stores, which are located in New York. However, the related company operates these stores in substantially the same way as we operate our stores and we are currently managing certain aspects of such stores. Fred Love, who passed away in October 2004, co-founded the related company. Mr. Love was one of our principal stockholders and also the brother-in-law of Harley J. Greenfield, our Chairman of the Board, Chief Executive Officer, director and principal stockholder. Jane Love, Mr. Greenfield’s sister, is currently acting as the interim President of the related company. Jonathan Warner has been appointed as the trustee of Mr. Love’s estate. See “Agreements and Transactions with Related Company (Note 4)” and “Certain Relationships and Related Transactions” in our Proxy Statement to be furnished in connection with our Annual Meeting of Stockholders to be held February 5, 2008, which is hereby incorporated by reference.
Merchandise ordered from inventory is generally available to be delivered within two weeks. Customers who place special orders for items, colors or fabrics not in inventory must generally wait four to six weeks for delivery, except for leather merchandise which may take up to 20 weeks. We believe that our ability to offer quick delivery of merchandise represents a competitive advantage.
Operations
Generally, our stores are open seven days per week. They are typically staffed by a manager, one full-time salesperson and in some cases, one or more part-time salespersons, as dictated by the sales volume and customer traffic of each particular store. In some cases, where sales volume and customer traffic so warrant, stores may be staffed with one to three additional full-time salespersons. Our licensed stores are substantially similar in appearance and operation to our other stores.
Our licensees and we have district managers throughout the United States. The district managers supervise store management and monitor stores within their assigned district to ensure compliance with operating procedures. District managers report to and coordinate operations in their district with our executive management.
An inventory of approximately 70% of the items displayed in the stores, in the colors and fabrics displayed, is usually stocked at our warehouse facilities, which are described below. Our licensees and we typically, except in the case of financed sales, require a minimum cash, check or credit card deposit of 50% of the purchase price when a sales order is given, with the balance, if any, payable in cash or by bank check, certified or official check, upon delivery of the merchandise. The independent trucker making the delivery collects the balance of the purchase price.
Marketing
We advertise in newspapers and on television in an attempt to capitalize on our marketplaces. Our approach to advertising requires us to establish a number of stores in each area in which we enter. This concentration of stores enables area-advertising expenses to be spread over a larger revenue base and to increase the prominence of the local advertising program.
We create advertising campaigns for use by our stores, which also may be used by the related company stores. The related company bears a share of advertisement costs in New York. However, we also advertise independently of the related company outside of the New York metropolitan area. We are entitled to reimbursement from most of our licensees, which are responsible for their respective costs of advertising; however, the approach and format of such advertising is usually substantially the same for our licensees and us. We also have the right to approve the content of all licensees advertising. See “Certain Relationships and Related Transactions” in our Proxy Statement to be furnished in connection with our Annual Meeting of Stockholders to be held February 5, 2008, which is hereby incorporated by reference.
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In order to further understand our markets, we carefully monitor our sales and obtain other information reflecting trends in the furniture industry and changes in customer preferences. We also review industry publications, attend trade shows and maintain close contact with our suppliers to aid in identifying trends and changes in the industry.
Leasing Strategy and Current Locations
Obtaining attractive, high-traffic store locations is critical to the success of our stores. We also select sites and negotiate leases on behalf of our licensees. The site selection process involves numerous steps, beginning with the identification of territories capable of sustaining a number of stores sufficient to enable such stores to enjoy significant economies of scale, particularly in advertising, management and distribution. Significant factors in choosing a territory include market demographics and the availability of newspapers and other advertising media to efficiently provide an advertising umbrella in the new territory.
Once a territory is selected, we choose the specific locations within such territory. Although a real estate broker typically screens sites within a territory and engages in preliminary lease negotiations, we are responsible for selection of each location. The leased locations are generally in close proximity to heavily populated areas, shopping malls, and other competing retail operations which are on or near major highways or major thoroughfares, are easily accessible by car or other forms of transportation and provide convenient parking.
The locations currently leased by our licensees and us generally range in size from approximately 2,000 square feet to a little over 13,000 square feet. We anticipate that stores opened in the future will range from approximately 2,000 square feet to 4,000 square feet. Stores may be freestanding or part of a strip shopping center.
In fiscal 2007, we closed eight stores and opened one new store. We plan to open additional stores when attractive opportunities present themselves and we will selectively close stores where economics so dictate. We do not anticipate opening any additional Jennifer Convertibles® or Jennifer Leather stores during fiscal 2008. We closed one store as of October 30, 2007 and anticipate closing five to ten additional stores during fiscal 2008.
Sources of Supply
We currently purchase merchandise for our stores, and the stores of our licensees and the related company, from a variety of domestic manufacturers generally on 60 to 75 day terms. We also purchase from overseas manufacturers on similar terms. Our purchasing power combined with the purchasing power of our licensees and of the related company enables us to receive the right, in some instances, to exclusively market certain products, fabrics and styles. See “Certain Relationships and Related Transactions” in our Proxy Statement to be furnished in connection with our Annual Meeting of Stockholders to be held February 5, 2008, which is hereby incorporated by reference.
Our principal suppliers of sofabeds and sofas are Caye Upholstery LLC and Klaussner Furniture Industries, Inc. Caye manufactures furniture under the Simmons® brand name. Klaussner manufactures sofabeds under the Sealy® brand name. Both the Sealy and Simmons names are by far the most recognized mattress brands. We are the largest retailer of both Sealy® sofabeds and Simmons® sofabeds in the United States. Our leather furniture is purchased primarily from Caye, Klaussner, DeCoro and Ashley.
In December 1997, Klaussner purchased $5,000,000 of our convertible preferred stock. During May 2006, Klaussner voluntarily converted 3,510 shares of Series A Preferred Stock into 500,000 shares of the Company’s common stock. The remaining 6,490 shares of Series A Preferred Stock are convertible into 924,500 shares of the Company’s common stock. In fiscal 2005, 2006, and 2007, Klaussner gave us certain vendor credits for repairs. See “Certain Relationships and Related Transactions” in our Proxy Statement to be furnished in connection with our Annual Meeting of Stockholders to be held February 5, 2008, which is hereby incorporated by reference and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed description of these transactions, Klaussner’s $5,000,000 investment and other transactions with Klaussner.
On July 11, 2005, we entered into a Credit Agreement and a Security Agreement with Caye. Under the amended Credit Agreement, Caye agrees to makes available to us a credit facility of up to $13.5 million, effectively extending Caye’s payment terms for merchandise shipped to us from 75 days to 105 days after receipt of goods.
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Effective August 25, 2007 through September 22, 2007, Caye consented to temporarily increase the credit facility from $13.5 million to $14.8 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed description of these transactions.
Warehousing and Related Services
Our warehousing and distribution facilities consist of warehouses in North Carolina, New Jersey and California. We also maintain satellite warehouses in California, Florida, Georgia, Massachusetts, Washington D.C, Michigan, Missouri, Illinois, Indiana and Ohio. These warehouse facilities service both our stores and related company’s stores.
Competition
We compete with other furniture specialty stores, major department stores, individual furniture stores and regional furniture chains, some of which have been established for a long time in the same geographic areas as our stores (or areas where we or our licensees may open stores). We believe that the principal areas of competition with respect to our business are store image, price, delivery time, selection and service. We believe that we compete effectively with such retailers because our stores offer a broader assortment of convertible sofabeds and leather upholstery than most of our competitors and, as a result of volume purchasing, we are able to offer our merchandise at attractive prices.
Ashley
General
On May 26, 2007, we opened our first Ashley Furniture HomeStore. The aim of the Ashley Furniture HomeStore, is to make beautiful home furnishings affordable. Our showroom features one of the most complete home furnishing lines available, including furniture and accessories for the living / family room, bedroom, dining room (both casual and formal), home theater and home office. The location also has an Ashley Sleep Center, which offers a complete line of Sealy mattresses at exceptional prices.
Operations
Our store is open seven days per week. A manager, full-time salespersons, part-time salespersons and cashiers staff it.
Selling only furniture that is made by Ashley Furniture Industries, (“Ashley Furniture”), the largest home furnishings manufacturer in the United States and the #1 selling brand in North America, we are able to deliver quality and value everyday. Due to the large quantity of furniture produced by Ashley Furniture, we do not take custom orders. However, we do have a wide variety of styles in our dynamic product line. The merchandise displayed at the store, in the colors and fabrics displayed, is not stocked at our warehouse facility, which is described below. Merchandise is ordered from Ashley Furniture at point of sale.
We typically, except in the case of financed sales, require 100% of the purchase price when the sales order is written.
Marketing
We advertise in newspapers and on television in an attempt to capitalize on our marketplace. In addition, we participate in a co-op advertising program with Ashley Furniture. In order to further understand our market, we carefully monitor our sales and obtain other information reflecting trends in the furniture industry and changes in customer preferences. We also review industry publications, attend trade shows and maintain close contact with our supplier to aid in identifying trends and changes in the industry.
We can be located on the worldwide web at www.ashleyhomestores.com. The website is designed to showcase a wide variety of the Ashley Furniture dynamic product line, provides customers decorating tips, a room planner and the ability to apply for financing.
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Leasing Strategy and Current Locations
Obtaining attractive, high-traffic store locations is critical to the success of our store. Although a real estate broker typically screens sites and engages in preliminary lease negotiations, we are responsible for selection of each location. The leased locations are generally in close proximity to heavily populated areas, shopping malls, and other competing retail operations which are on or near major highways or major thoroughfares, are easily accessible by car or other forms of transportation and provide convenient parking.
The current location is a freestanding, 40,000 square foot building and is located in Carle Place, New York. We plan to open at least one additional store in fiscal 2008.
Sources of Supply
Under a Trademark Usage Agreement, more fully described below, Ashley Furniture is the exclusive supplier of product, except for accessories and mattresses. The Ashley Furniture team includes a full time design group that is dedicated to creating furniture styles that will complement any decorating style for any room. Ashley Furniture production teams then carefully build each piece, ensuring quality construction and workmanship, in one of six manufacturing facilities in the United States. The furniture is then carefully shipped to Ashley Furniture HomeStore locations using its own transportation fleet.
Licensing Arrangements
On October 27, 2006, our 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 5-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 5-year term of the agreement, Hartsdale will use its best efforts to solicit sales of Ashley products and accessories at the authorized location, 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. We have guaranteed the obligations of Hartsdale under the Trademark Usage Agreement.
Warehousing and Related Services
We contract with an independent trucking company that provides warehouse and distribution services. The warehouse is located in Syosset, New York.
Competition
We believe that the principal areas of competition with respect to our business are store image, price, delivery time, selection and service. We further believe that we effectively compete on the basis of each of these factors, particularly in selection by providing our consumers with complete home furnishing lines, including furniture and accessories. In addition, because the Ashley Furniture Industries team controls all processes from design to delivery, we are able to reduce our costs and pass these savings on to our customers with exclusive Ashley Furniture HomeStore pricing and merchandise.
Trademarks
The trademarks, Jennifer Convertibles®, Jennifer Leather®, Jennifer House®, With a Jennifer Sofabed, There’s Always a Place to Stay®, Jenni-Pedic®, Elegant Living®, Jennifer’s Worryfree Guarantee®, Jennifer Living Rooms®, Bellissimo Collection®, and Jennifer Sofas®, are registered with the U.S. Patent and Trademark Office and are now owned by us. The related company, as licensee, was granted a perpetual royalty-free license to use and sublicense these proprietary marks (other than the ones related to Jennifer Leather) in the State of New York, subject to certain exceptions, including six stores currently owned by us and operating in New York and 12 more which the related company agreed we may open on a royalty-free basis. Pursuant to the Settlement Agreement, we now have the right to open an unlimited number of stores in New York for a royalty of $400,000 per year, provided however, that on November 18, 2004, the Management Agreement and License pursuant to which we are required to make such royalty payments to the related company was amended such that the related company agreed to
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waive its rights to receive from us such annual royalty payment during the period commencing January 1, 2005 through April 30, 2005, the date on which court approval was granted. See “Certain Relationships and Related Transactions” in our Proxy Statement to be furnished in connection with our Annual Meeting of Stockholders to be held February 5, 2008, which is hereby incorporated by reference.
Employees
As of August 25, 2007, we employed 493 people, including five executive officers. We have 419 employees in our Jennifer segment, 23 employees in our Ashley segment and 51 corporate employees. We train personnel to meet our expansion needs by having our most effective managers and salespersons train others and evaluate their progress and potential for us. We believe that our employee relations are satisfactory. None of our employees are represented by a collective bargaining unit. We have never experienced a strike or other material labor dispute.
Available Information
We make available, free of charge via our website, all Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information filed with, or furnished to, the Securities and Exchange Commission (the “SEC” or the “Commission”), including amendments to such reports. This information is available at www.investors.jenniferfurniture.com as soon as reasonably practicable after it is electronically filed with, or furnished to, the SEC. In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding companies that file electronically with the Commission. This information is available at www.sec.gov.
Item 1A. Risk Factors.
Cautionary Statements Regarding Forward-Looking Statements.
This annual report contains certain forward-looking statements based on current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including the risk factors set forth below and elsewhere in this report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occur, our business, financial condition and operating results could be materially adversely affected. The cautionary statements made in this Annual Report on Form 10-K should be read as being applicable to all forward-looking statements wherever they appear in this Annual Report on Form 10-K.
There is no assurance we will operate profitably.
We incurred a net income (loss) of $3,971,000, $5,220,000 and ($3,870,000), in the fiscal years ended August 25, 2007, August 26, 2006 and August 27, 2005, respectively. While we were profitable in the most recent fiscal year, the furniture business is cyclical and we have been impacted in the past and will continue to be affected by changes in such cycles, by losses from new stores, the overall economic and political climate, by changes in consumer preferences or demographics or unknown risks and uncertainties that may cause us to incur losses from operations.
Our company could suffer from potential conflicts of interest.
Potential conflicts of interest exist since Harley J. Greenfield, our Chairman of the Board and Chief Executive Officer, and Edward B. Seidner, our Executive Vice President, and a former director, are owed over $10 million by the related company, which owns, controls or licenses the related company stores. Accordingly, such persons derive substantial economic benefits from the related company. In addition, Fred Love, the co-founder of the related company, was Mr. Greenfield’s brother-in-law. Mr. Love passed away in October 2004 and Jane Love, Mr. Greenfield’s sister, is currently acting as the interim President of the related company. Circumstances may arise in which the interest of the related company stores, of the related company or of Mr. Greenfield and Mr. Seidner will conflict with our interests. There are also numerous relationships, and have been numerous transactions, between us and the related company, including an agreement under which we warehouse and purchase merchandise for
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the related company, manage its stores and provide it other services. See “Certain Relationships and Related Transactions” in our Proxy Statement to be furnished in connection with our Annual Meeting of Stockholders to be held February 5, 2008, which is hereby incorporated by reference.
We heavily depend on two suppliers.
We purchase a significant percentage of our merchandise from Klaussner, which also manufactures furniture under the Sealy® brand name. During the fiscal year ended August 25, 2007, we purchased approximately 14% of our merchandise from Klaussner and 72% of our merchandise from Caye. Since a large portion of our revenues have been derived from sales of Klaussner and Caye products, the loss of these suppliers could have a material adverse impact on us until alternative sources of supply are established. Our obligations to Caye are secured by substantially all of our assets. Klaussner is also a principal stockholder and creditor of ours. Klaussner’s and Caye’s position as significant creditors could potentially result in a temporary or permanent loss of our principal supply of merchandise, if, for example, Klaussner and Caye halted supply because we defaulted on or were late in making our payments to them. See “Certain Relationships and Related Transactions” in our Proxy Statement to be furnished in connection with our Annual Meeting of Stockholders to be held February 5, 2008, which is hereby incorporated by reference.
The cyclical nature of the furniture industry poses risks to us from prolonged economic downturn.
The furniture industry has been historically cyclical, fluctuating with general economic cycles. During economic downturns, the furniture industry tends to experience longer periods of recession and greater declines than the general economy.
Competition in the furniture industry could cost us sales and cause us to reduce prices.
The retail specialty furniture business is highly competitive and includes competition from traditional furniture retailers and department stores as well as numerous discount furniture outlets. Our stores may face sharp price-cutting, as well as imitation and other forms of competition, and we cannot prevent or restrain others from utilizing a similar marketing format. Although we are the largest sofabed specialty retail dealer and specialty leather retailer in the United States, many of our competitors have considerably greater financial resources.
A number of our store leases are month-to-month and accordingly the stores may need to halt operations on short notice.
A number of our store leases are month-to-month. Accordingly, if, at the end of a monthly lease period, we are unable to negotiate favorable terms for the new lease period or unable to renew such lease, we may need to halt operations at such location on short notice, which may have a material adverse effect on our results of operations.
We may have difficulty obtaining additional financing.
Our ability to expand and support our business may depend upon our ability to obtain additional financing. We may have difficulty obtaining debt or equity financing. We are currently a party to an amended Credit Agreement and a Security Agreement with Caye (the “Caye Credit Facility”), pursuant to which Caye agreed to provide us with $13.5 million of debt financing.
Effective August 25, 2007 through September 22, 2007, Caye consented to temporarily increase the credit facility from $13.5 million to $14.8 million. As of August 25, 2007, we owed Caye approximately $14,759,000. Most of our assets are pledged to Caye as security for the amounts we owe under the Caye Credit Facility. From time to time, our financial position has made it difficult for us to obtain third party consumer financing. Inability to secure such financing may adversely affect sales.
Substantially all of our assets have been pledged to Caye pursuant to our credit facility.
Pursuant to the terms of the Caye Credit Facility, substantially all of our assets have been pledged to Caye as security for any amounts we owe under the Caye Credit Facility. In the event of any bankruptcy, liquidation, dissolution, reorganization or similar proceeding against us, the assets that are pledged as collateral securing any
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unpaid amounts must first be used to pay such amounts, as well as any other obligation secured by the pledged assets pursuant to the terms of the Caye Credit Facility, in full, before making any distributions to stockholders. In such event, you could lose all or a part of your investment.
On July 7, 2007, the Company entered into the Third Amendment to the Credit Agreement and Second Amendment to Security Agreement (the “Amendment to Credit Agreement and Security Agreement”) with Caye, pursuant to which such agreements were amended to (1) increase the Credit Facility from $11.5 million to $13.5 million and (2) reduce the amount required to be maintained in deposit accounts to no less than $1 million.
Harley J. Greenfield and current management are likely to retain control.
As of November 16, 2007, Harley J. Greenfield, our Chairman of the Board and Chief Executive Officer and principal stockholder, beneficially owns approximately 19.1% of our outstanding shares of common stock. Approximately 37.2% of the outstanding common stock is beneficially owned by all officers and directors as a group, including Messrs. Greenfield and Seidner. Since the holders of our common stock do not have cumulative voting rights, such officers’ and directors’ ownership of our common stock will likely enable them to exercise significant influence in matters such as the election of our directors and other matters submitted for stockholder approval. Also, the relationship of such persons to the related company could serve to perpetuate management’s control in light of the related company’s relationship to us.
Our future success depends heavily on two executives.
Our future success will depend substantially upon the abilities of Harley J. Greenfield, our Chairman of the Board and Chief Executive Officer and one of our principal stockholders, as well as Rami Abada, our President, Chief Operating Officer and Chief Financial Officer. The loss of Mr. Greenfield’s and/or Mr. Abada’s services could materially adversely affect our business and our prospects for the future. We do not have key man insurance on the lives of such individuals.
We are prohibited from paying dividends on common stock.
Under the terms of the Caye Credit Facility, we are prohibited from paying any dividends on our common stock. We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We currently anticipate that we will retain any earnings for use in the operation and expansion of our business.
The American Stock Exchange may delist our securities from quotation on its exchange, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
Although we expect to continue to meet the minimum listing standards of the American Stock Exchange, which only requires that we meet certain requirements relating to shareholders’ equity, market capitalization, aggregate market value of publicly held shares and distribution requirements, we cannot assure you that our securities will continue to be listed on the American Stock Exchange in the future. If the American Stock Exchange delists our securities from trading on its exchange, we could face significant material adverse consequences, including:
- a limited availability of market quotations for our securities;
- a determination that our ordinary shares are a ‘‘penny stock’’ which will require brokers trading in our ordinary shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our ordinary shares;
- a limited amount of news and analyst coverage for our company; and
- a decreased ability to issue additional securities or obtain additional financing in the future.
Item 1B. Unresolved Staff Comments.
Not applicable.
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Item 2. Properties.
We maintain our executive offices in Woodbury, New York pursuant to a lease, which expires in the year 2018.
As of August 25, 2007, we lease substantially all of our store and warehouse locations pursuant to leases, which expire between 2007 and 2017. During fiscal 2008, 31 leases will expire, although we, as lessee, have the option to renew 14 of those leases. We also have eight leases that are month-to-month. We anticipate remaining in most of these locations, subject, in the case of the leases that expire, to negotiating acceptable renewals with the landlords. The leases are usually for a base term of at least five years. For additional information concerning the leases, see Note 15 of “Notes to Consolidated Financial Statements.”
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The principal market for our common stock, which was traded under the symbol JENN, through June 9, 2003 was the Over the Counter Bulletin Board. On June 10, 2003, during the fourth quarter of fiscal 2003, trading for our common stock began on the American Stock Exchange under the symbol JEN. The following table sets forth, for the fiscal periods indicated, the high and low sales prices of our common stock on the American Stock Exchange.
| High | Low | ||
| Fiscal Year 2006: | |||
| 1st Quarter | $4.10 | $1.95 | |
| 2nd Quarter | 5.89 | 3.51 | |
| 3rd Quarter | 6.47 | 4.70 | |
| 4th Quarter | 7.00 | 5.01 | |
| High | Low | ||
| Fiscal Year 2007: | |||
| 1st Quarter | $7.44 | $5.25 | |
| 2nd Quarter | 5.57 | 4.42 | |
| 3rd Quarter | 5.37 | 4.44 | |
| 4th Quarter | 5.25 | 4.14 | |
As of November 19, 2007, there were approximately 292 holders of record and approximately 1,000 beneficial owners of our common stock. On November 19, 2007, the closing sales price of our common stock as reported on the American Stock Exchange was $3.80.
Dividend Policy
We have never paid a dividend on our common stock and we do not anticipate paying dividends on the common stock at the present time. We currently intend to retain earnings, if any, for use in our business. There can be no assurance that we will ever pay dividends on our common stock. Our dividend policy with respect to the common stock is within the discretion of the Board of Directors and its policy with respect to dividends in the future will depend on numerous factors, including our earnings, financial requirements and general business conditions. In addition, under the terms of the Caye Credit Facility, we are prohibited from paying dividends on our common stock.
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Equity Compensation Plan Information
The following table provides information about shares of our common stock that may be issued upon the exercise of options under all of our existing compensation plans as of August 25, 2007.
| Number of securities | |||||||
| remaining available for | |||||||
| Number of securities to | Weighted-average | future issuance under | |||||
| be issued upon exercise | exercise price of | equity compensation plans | |||||
| of outstanding options, | outstanding options, | (excluding securities | |||||
| warrants and rights | warrants and rights | reflected in column (a)) | |||||
| Plan category | (a) | (b) | (c) | ||||
| Equity compensation plans approved | |||||||
| by security holders (1) | 550,995 | $3.13 | 600,000 | ||||
| Equity compensation plans not | |||||||
| approved by security holders (2) | 1,838,730 | $3.58 | — | ||||
| Totals | 2,389,725 | $3.47 | 600,000 | ||||
____________________
| (1) | Reflects aggregate options outstanding under our 1986, 1991 and 2003 Incentive and Non-Qualified Stock Option Plans and 2006 Equity Incentive Plan. Although the 1986 and 1991 plans have expired, there are issued and unexercised stock options that remain outstanding pursuant to those plans. | |
| (2) | Reflects aggregate options outstanding outside our Incentive and Non-Qualified Stock Option Plans that were issued pursuant to individual stock option agreements. |
On November 11, 2004, we issued options to purchase an aggregate of 233,333 shares of our common stock at an exercise price of $3.52 per share to one of our directors.
On February 9, 2005, we issued options to purchase an aggregate of 150,000 shares of our common stock at an exercise price of $3.52 per share to certain of our directors.
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Performance Graph
The following graph compares the cumulative 5-year total return provided shareholders on Jennifer Convertibles, Inc.’s common stock relative to the cumulative total returns of the NASDAQ Composite index, and a customized peer group of six companies that includes: Bassett Furniture, Ethan Allen Interiors Corp., Furniture Brands International Inc, La-Z-Boy Chair Inc, Leggett & Platt Inc and Mohawk Industries. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in the peer group, and the index on 8/31/2002 and its relative performance is tracked through 8/31/2007.
| 8/02 | 8/03 | 8/04 | 8/05 | 8/06 | 8/07 | ||||||
| Jennifer Convertibles, Inc. | 100.00 | 99.27 | 70.73 | 55.61 | 148.78 | 106.59 | |||||
| NASDAQ Composite | 100.00 | 136.85 | 141.42 | 164.86 | 170.90 | 203.00 | |||||
| Peer Group | 100.00 | 116.05 | 120.56 | 119.17 | 110.59 | 111.98 |
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
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Item 6. Selected Financial Data
The following table presents certain selected financial data for Jennifer Convertibles, Inc. and subsidiaries.
| (In thousands, except for share data) | ||||||||||||||||||||
| Operations Data: | Year Ended | Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||||
| 8/25/2007 | 8/26/2006 | 8/27/2005 | 8/28/2004 | 8/30/2003 | ||||||||||||||||
| (a) | (a) | (a) | ||||||||||||||||||
| Revenue | $ | 136,621 | $ | 139,754 | $ | 120,528 | $ | 126,950 | $ | 120,380 | ||||||||||
| Cost of sales, including store occupancy, | ||||||||||||||||||||
| warehousing, delivery and service costs | 93,948 | 95,585 | 86,055 | 89,662 | 82,050 | |||||||||||||||
| Selling, general and administrative expenses | 38,288 | 38,304 | 37,203 | 38,847 | 40,096 | |||||||||||||||
| Impairment of goodwill | — | — | 146 | — | — | |||||||||||||||
| Depreciation and amortization | 933 | 839 | 893 | 1,451 | 1,641 | |||||||||||||||
| Recovery of prior year receivables and other | ||||||||||||||||||||
| amounts due from Related Company | — | — | (2,600 | ) | — | — | ||||||||||||||
| 133,169 | 134,728 | 121,697 | 129,960 | 123,787 | ||||||||||||||||
| Operating (loss) income | 3,452 | 5,026 | (1,169 | ) | (3,010 | ) | (3,407 | ) | ||||||||||||
| Gain on sale of lease | — | — | — | 220 | — | |||||||||||||||
| Interest income | 736 | 402 | 136 | 111 | 136 | |||||||||||||||
| Interest expense | (14 | ) | (26 | ) | (2 | ) | (3 | ) | (11 | ) | ||||||||||
| Income (loss) before income taxes | 4,174 | 5,402 | (1,035 | ) | (2,682 | ) | (3,282 | ) | ||||||||||||
| Income tax expense (benefit) | 124 | 321 | 1,869 | 973 | (566 | ) | ||||||||||||||
| Income (loss) from continuing operations | 4,050 | 5,081 | (2,904 | ) | (3,655 | ) | (2,716 | ) | ||||||||||||
| Income (loss) from discontinued operations | (79 | ) | 139 | (966 | ) | (487 | ) | (661 | ) | |||||||||||
| Net income (loss) | $ | 3,971 | $ | 5,220 | $ | (3,870 | ) | $ | (4,142 | ) | $ | (3,377 | ) | |||||||
| Basic income (loss) per share | ||||||||||||||||||||
| Continuing operations | $ | 0.52 | $ | 0.69 | $ | (0.50 | ) | $ | (0.64 | ) | $ | (0.48 | ) | |||||||
| Discontinued operations | (0.01 | ) | 0.02 | (0.17 | ) | (0.09 | ) | (0.12 | ) | |||||||||||
| Net income (loss) | $ | 0.51 | $ | 0.71 | $ | (0.67 | ) | $ | (0.73 | ) | $ | (0.60 | ) | |||||||
| Diluted income (loss) per share | ||||||||||||||||||||
| Continuing operations | $ | 0.46 | $ | 0.61 | $ | (0.50 | ) | $ | (0.64 | ) | $ | (0.48 | ) | |||||||
| Discontinued operations | (0.01 | ) | 0.01 | (0.17 | ) | (0.09 | ) | (0.12 | ) | |||||||||||
| Net income (loss) | $ | 0.45 | $ | 0.62 | $ | (0.67 | ) | $ | (0.73 | ) | $ | (0.60 | ) | |||||||
| Weighted average common shares outstanding | 6,910,523 | 6,043,157 | 5,773,707 | 5,713,058 | 5,709,900 | |||||||||||||||
| Weighted average common shares issuable | ||||||||||||||||||||
| on conversion of outstanding Series A | ||||||||||||||||||||
| participating preferred stock | 924,500 | 1,292,269 | — | — | — | |||||||||||||||
| Total weighted average common shares | ||||||||||||||||||||
| outstanding basic | 7,835,023 | 7,335,426 | 5,773,707 | 5,713,058 | 5,709,900 | |||||||||||||||
| Effect of potential common shares issuances: | ||||||||||||||||||||
| Stock options | 847,359 | 886,152 | — | — | — | |||||||||||||||
| Warrants | 81,635 | 70,497 | — | — | — | |||||||||||||||
| Series B convertible preferred stock | 54,265 | 57,915 | — | — | — | |||||||||||||||
| Weighted average common shares | ||||||||||||||||||||
| outstanding diluted | 8,818,282 | 8,349,990 | 5,773,707 | 5,713,058 | 5,709,900 | |||||||||||||||
| Cash dividends and other distributions on | ||||||||||||||||||||
| Series B convertible preferred stock | $ | 53 | $ | 50 | $ | — | $ | —< | ||||||||||||