UPDATE: Several factors drove Jennifer Convertibles into Chapter 11

Chinese supplier will own 95% of retailer

Clint Engel -- Furniture Today, July 20, 2010

WOODBURY, N.Y. — Court records show a Jennifer Convertibles on the losing end of a long battle with a poor business climate, tightening credit, pending litigation, shipping delays and a failing former supplier - all playing into the company's decision to seek bankruptcy protection.

The long-struggling Top 100 company filed for Chapter 11 protection Sunday, citing a "lack of liquidity," and said it plans to close some stores in a bid to return to profitability.

In a deal reached prior to the filing, Jennifer's largest creditor, Chinese upholstery producer Haining Mengnu, agreed to "convert a large portion of its pre-petition debt" into a 95% common equity stake in the company, according to court documents and a press release. Other creditors will hold the remaining 5%.

Jennifer failed to secure alternative financing that would have allowed it to continue operating outside of bankruptcy, the documents said. Existing stockholders are expected to be wiped out.

In its petition, Jennifer listed assets of about $26 million and debts of $46.4 million.

Haining Mengnu is listed with a claim of $16.7 million. Ashley is Jennifer's third largest unsecured creditor with a $1.4 million claim. Other industry suppliers listed among the largest unsecured creditors are Klaussner, with a $991,291 claim, and Stratford/Caye, owed $336,752.

Jennifer said it expects to continue operations throughout the reorganization process and doesn't expect the filing to negatively affect the fulfillment of existing or future orders.

"We have negotiated several key agreements with our suppliers and, in order to achieve profitability, are exiting markets in which we previously operated in order to properly realign our business during the reorganization," Jennifer Chairman and CEO Harley Greenfield said.

In an e-mail, Greenfield told Furniture/Today that the company will exit the Atlanta, Chicago, Philadelphia and Boston metro markets and the states of Michigan, Florida and North Carolina. The company operates about 33 stores in and around those markets, according to its website.

A court-filed declaration by Jennifer President and Chief Financial Officer Rami Abada also said the company plans to close eight other stores in "non-exiting territories," but has thus far been unable to get out of the leases - another problem leading up to the bankruptcy. Jennifer owes about $7 million to its landlords, the document said.

Jennifer operated 137 stores, including seven Ashley Furniture HomeStores, as of May 29. Its net loss for the 13-week period ended May 29 was $4.78 million, compared with a $1.5 million loss for the same period a year ago. Same-store sales for the period decreased nearly 20%, despite a strong performance from its Ashley HomeStores division.

Jennifer is ranked No. 48 on Furniture/Today's Top 100 with furniture, bedding and sales of $114 million for its fiscal year ended Aug. 29, 2009, down 22.4% from the year before.

A court document noted that Jennifer implemented cost-cutting moves, including store closings and salary and personnel reductions, but "further deterioration of the current economy, the depressed housing market and sourcing of products from China had a material adverse effect on the debtors' liquidity."

This year, Jennifer experienced a delay in receiving shipments from Mengnu, which "coupled with severe congestion at ports in China ... negatively affected delivery time" to consumers, the declaration document said.

Jennifer also had recently settled class action litigation involving alleged labor law violations and was required to make the first part of a $1.3 million payment soon.

Its credit card sales were severely crimped, too, as one credit card company, Merrick Bank, upped its reserve requirements from the retailer to $800,000 from the initial $500,000 and then raised it again in April to $1.3 million. Since April, the bank has held back 25% of all customer deposits processed through Merrick, and it was a holding about $4 million in total reserves. That increase along with an increased transaction processing fee, significantly damaged Jennifer's cash flow, the retailer said.

Separately, Jennifer had been offering a private label customer financing program through CitiFinancial since 1997, but in 2009, with the downturn in the economy, the lender requested that Jennifer provide a letter of credit to maintain the program. When the retailer was unable to do so, CitiFinancial terminated the program in March of that year.

The demise of a previous key upholstery supplier, Mississippi-based Caye Home Furnishings, also played into Jennifer's troubles.

During its fiscal year ended Aug. 29, 2009, roughly 40% of Jennifer's merchandise was coming from Caye. But the upholstery producer began experiencing financial problems in 2008 and had trouble adequately supplying Jennifer with goods, hurting the retailer's sales until it was able to establish alternative sourcing through Mengnu.

In a statement, Jennifer Chairman Greenfield said he was optimistic about retailer's future.

"Due to the quality of our products and our people, I am confident that we will emerge as a stronger organization that will better satisfy our customers, suppliers and employees," he said.

Greenfield added that reaching an agreement with Mengnu in advance of the filing will put the company "in a great position to proceed with an expeditious restructuring ... and provide us with a viable capital structure as well as additional financing."